Taiwan Defence & Security Report Q1 2008

At first glance, it seems that relations between Taiwan and mainland China continued to deteriorate through Q407. The 2007 National Day (10 October) saw the first full-scale military parade for 16 years in Taiwan. President Chen Shui-bian assumed the leadership of his Democratic Progressive Party (DPP) and, although he will not be standing as a candidate in the elections that will take place in early 2008, made it clear that full independence for Taiwan will be a key part of the DPP's electoral programme.

However, several other aspects are worthy of note. First, President Chen himself did not actually declare independence. He stressed that the proposed referendum in relation to Taiwan's name at the United Nations is only a rejection of unification with China - and not a move towards complete independence.

He also noted that Taiwan's Hsiung Feng II cruise missiles, which were featured at the aforementioned military parade, are second-strike weapons which would not be fired without permission of the US government - which is the ultimate guarantor of Taiwan's de facto independence.

A second aspect is that it remains to be seen how aggressive the DPP will be in its promotion of independence through early 2008. Frank Hsieh, the DPP's candidate to succeed President Chen, has taken a clearly more conciliatory approach to cross-strait relations. Mr Hsieh fears that the robustly confrontational line taken by the President may alienate voters. His reasoning is that voters dislike the political and diplomatic tactics used against Taiwan by the mainland, but they fear the economic consequences of a break with the mainland.

Most other observers (including BMI) agree with Mr Hsieh. The opposition Kuomintang (KMT) party has long been in favour of closer ties (but not outright union) with the mainland. An electoral victory for the KMT's candidate, Ma Ying-jeou, would make possible the full exploitation of the opportunities from cross-strait relations, provided that the KMT can also consolidate the hold on the Legislative Yuan that is held (just) by the coalition which it leads.

Electoral victory for the KMT would be good news for Taiwan's economy and is an outcome hoped for by the authorities in Beijing, who showed some signs of conciliation during Q407. At the Chinese Communist Party's XVII Congress in mid-October, President Hu Jintao advocated a formal peace agreement with Taiwan. However, President Hu made it clear that the mainland would not accept Taiwan's de jure independence.

Other trends and themes remain intact. Spending on and preparation for defence has been constrained by the assumption that the USA will prevent China from initiating an invasion of Taiwan. Taiwan remains a substantial importer of materiel: nonetheless, its air force is estimated to have munitions that are sufficient for just two days of combat. A shortage of recruits has forced Taiwan's defence planners to emphasise a second-strike role (i.e. as guerrillas after a Chinese invasion) for the army. Although Taiwan's indigenous arms companies have had some successes in export markets, they are hampered by structural weaknesses.

It is difficult to envisage the emergence of a dynamic and substantial private sector firm in an industry that continues to be dominated by state-owned enterprises.