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provides medical services, emergency relief, and varioustypes of long-term assistance all over the world. Its membersare typically among the first to reach the scenes of majornatural disasters, such as Hurricane Sandy in the UnitedStates in October 2012, and Typhoon Haiyan 海燕颱風 in thePhilippines in November 2013.Related Websites:• Ministry of Foreign Affairs: http://www.mofa.gov.tw• International Cooperation and Development Fund: http://www.icdf.org.tw• Taipei Overseas Peace Service: http://www.cahr.org.tw/tops• Buddhist Compassion Relief Tzu Chi Foundation: http://www.tzuchi.org• AVRDC – The World Vegetable Center: http://avrdc.org• Food and Fertilizer Technology Center: http://www.agnet.org• Taiwan Fund for Children and Families: http://www.ccf.org.tw 91

Foxconn, the registered trade name of Hon Hai PrecisionIndustry Co. Ltd., is one of the most successful Taiwaneseenterprises operating in mainland China. Pictured here is thecompany’s green industrial park in mainland China’s GuizhouProvince. (Courtesy of Hon Hai Group)

4Cross-Strait Relations

4 Cross-Strait Relations EAvolving Relationshipt the time the Republic of China (ROC) was found- ed in mainland China in 1912, Taiwan was under Japanese colonial rule as a result of the 1895 Treaty of Shimonoseki, by which Qing-dynasty 清朝 China (1644- 1912) ceded the island province to Japan. At the end of World War II in 1945, the ROC government declared Taiwan a province of the Republic. Four years later, a er ghting a civil war with Chinese Communist Party (CCP) rebels, the ROC government led by the Chinese Nationalist Party, or Kuomintang (KMT) 中國國民黨, relocated to the island. e CCP regime, meanwhile, declared the establishment of the People’s Republic of China (PRC). Since then, the ROC government’s e ective jurisdiction has been limited to Taiwan and the Penghu 澎湖, Kinmen 金門 and Matsu 馬祖 archipelagos, in addition to a number of smaller islands. Estrangement and military tension marked relations between the two sides of the Taiwan Strait until the early 1990s, when cross-strait talks were launched and later became institutionalized in mid-2008, moving on to a relationship of extensive economic and people-to-people exchanges. 1949-1987: From Mutual Denial to Initial Opening During the Cold War, the Taipei-based, KMT-led gov- ernment and the Beijing-based, CCP-led government denied each other’s legitimacy. Each claimed sovereignty over all of China inclusive of the mainland and Taiwan and attempted or threatened to use force to resolve the issue. In 1979, Bei- jing’s policy statements began to stress the use of “peaceful” means to achieve uni cation. Taipei 臺北 responded to this with a “three noes” policy no contact, no negotiation and no compromise. Beginning in the 1980s, the ROC underwent political democratization as well as economic liberalization. Since the94

li ing of martial law in 1987, Taipei has adopted progressivelymore open policies toward Beijing, spurring economic,cultural and educational exchanges.1988-2000: Lee Teng-hui Administration e administration of President Lee Teng-hui 李登輝 tooksteps to put the cross-strait relationship on a realistic footing.In 1990, an advisory panel called the National Uni cationCouncil 國家統一委員會 was established under the O ce of thePresident 總統府. In February 1991, the council issued theGuidelines for National Uni cation 國家統一綱領, whicha rmed a “one-China principle” and outlined a three-phaseapproach to uni cation. e rst phase called for the mainlandto democratize and carry out economic reform. In May of the same year, President Lee announced thetermination of the Period of National Mobilization for Sup-pression of the Communist Rebellion 動員戡亂時期, inferringthat the ROC government no longer looked upon the CCPand its mainland government as seditious organizations thatmust be suppressed, and indirectly acknowledging the realitythat the two were on an equal footing. In 1991, the Cabinet-level Mainland A airs Council(MAC) 行政院大陸委員會 was founded to serve as the o cialagency responsible for the nation’s cross-strait policies. Atthe same time, the semi-o cial Straits Exchange Foundation(SEF) 海峽交流基金會 was set up under the direction of theMAC with the mission of negotiating agreements and con-sulting on technical and practical matters with mainlandauthorities. In addition, laws and regulations were enactedor amended to facilitate economic and cultural interactionwith the mainland. e establishment of the SEF and, soon therea er, its main-land Chinese counterpart, the Association for Relations Acrossthe Taiwan Straits (ARATS) 海峽兩岸關係協會, signaled the reali-zation in both Taipei and Beijing that, despite continuing mutual 95

4 Cross-Strait Relations The Straits Ex- change Founda- tion’s new office building, erected in 2012, is an example of green architecture that combines novel design with environmental protection. (Courtesy of the Department of Business Planning, Kedge Construction Co., Ltd.) non-recognition of each other’s legitimacy, it was impera- tive to begin interacting on a basis of mutual respect. e semi-o cial nature of the SEF and ARATS allows the two governments to negotiate practical issues without a rming the sovereign status of the other side. In October 1992, the SEF and ARATS held preparatory talks in Hong Kong the rst time authorized representa- tives of the Taipei and Beijing governments had done so but failed to progress when the mainland raised the issue of “one China.” Ultimately, both sides reached an under- standing via subsequent facsimiles and communication that their talks were premised on the assumption that there exists only one China, while agreeing to di er on its precise political de nition. To Taipei, the “1992 consensus” means that there is only one China and that one China refers to the ROC. Based on the 1992 consensus, institutionalized talks were held in Singapore in 1993, turning a new page on cross-strait relations.96

To protest the United States’ decision to allow PresidentLee to visit the country in June 1995, the mainland inde -nitely postponed further SEF-ARATS negotiations that hadbeen scheduled for July 1995 in Beijing. at same month,tensions escalated when mainland armed forces test- redmissiles into waters o the coast of Taiwan. In the run-up to the ROC’s rst direct presidential election in March1996, Beijing intensi ed military exercises in the TaiwanStrait region, once again shooting missiles into Taiwan’scoastal waters. In October 1998, the SEF and ARATS resumed talks inShanghai but made no progress on substantive issues. In July1999, Beijing once again suspended talks in protest againstPresident Lee’s characterization of cross-strait ties as a“state-to-state relationship or at least a special state-to-staterelationship” during an interview with Deutsche Welle, aGerman radio station. CCP leaders claimed that his assertionof the existence of “two Chinas” was tantamount to a decla-ration of “Taiwan independence.” Despite the failure of cross-strait talks to build on the ini-tial successes of 1992 and 1993, the ROC government grad-ually eased restrictions on the movement of people, goods,capital and technology from Taiwan to mainland China.2000-2008: Chen Shui-bian Administration In 2000, Chen Shui-bian 陳水扁 of the Democratic Pro-gressive Party (DPP) 民主進步黨 was elected president andwas re-elected in 2004. e DPP-led government refused toa rm the existence of a “one China” or the desirability ofpursuing uni cation. It insisted that although any form offuture relationship could be discussed, no advance agree-ment on any speci c future relationship could be a precondi-tion for conducting talks. In his rst inaugural address, however, President Chenpledged not to initiate any move such as pushing to adopt 97

4 Cross-Strait Relations a new o cial name for the nation that might be inter- preted as altering the status quo. On several occasions, he urged Beijing to cooperate in establishing a “peace and stability framework.” e Chen administration took a number of further mea- sures that demonstrated Taiwan’s good will: • Relaxed restrictions on imports from the mainland, mainland-bound investment, and the functions and scope of o shore shipping centers. • Permitted journalists from the mainland to visit Taiwan (although this privilege was later withdrawn). • Opened Taiwan to visits by people of the mainland who lived in, or rst traveled to, a third country. • Negotiated cross-strait charter ights for ROC citizens during holidays and for humanitarian purposes. • Authorized Taiwan-based nancial institutions to open liaison o ces in the mainland. At the time, cross-strait shipments and travelers from Taiwan to the mainland had to make inconvenient, ex- pensive detours through Hong Kong or third countries. With booming growth in cross-strait trade and visits of Taiwanese businesspeople and tourists to the mainland, the Chen administration called for a resumption of cross- strait negotiations, with a priority on signing agreements to open up “three links” 三通 direct transportation of people and goods as well as direct postal service and commercial transactions. Beijing rejected this overture to resume the cross-strait dialogue, however, insisting that this would be possible only if the Chen administration affirmed that Taiwan and the mainland constitute a single China and must eventually be unified. In the face of the impasse in negotiating the establish- ment of direct links, President Chen early in his rst term unilaterally approved the opening of direct seaborne pas- senger transportation for ROC citizens on ROC-registered98

SEF-ARATS Talks and Agreement Topics First Round, June 12, 2008 (Beijing) • Cross-strait charter flights (commenced July 4, 2008) • Direct travel of mainland tourists to Taiwan (started July 18, 2008) Second Round, November 4, 2008 (Taipei) • Direct cross-strait maritime shipping • Direct cross-strait postal service • Mechanism for consultation on food safety • Expansion of charter flights Third Round, April 26, 2009 (Nanjing) • Regularly scheduled passenger and cargo flights • Financial cooperation in currency management, joint supervision of financial industries (three subsequent MOUs came into effect January 16, 2010) • Judicial mutual assistance, combating crime • Joint statement of understanding on allowing mainland investment in Taiwan Fourth Round, December 22, 2009 (Taichung) • Agricultural product inspection, quarantine procedures • Product quality standards (metrology, testing, certification, accreditation) • Labor standards, rules regarding fishing boat crews Fifth Round, June 29, 2010 (Chongqing) • Liberalization, facilitation of cross-strait trade in goods, services (ECFA) • Intellectual property rights protection, cooperation Sixth Round, December 21, 2010 (Taipei) • Medical, health cooperation (control of communicable diseases; medical and pharma- ceutical R&D, safety management; emergency treatment of each other’s citizens)Seventh Round, October 20, 2011 (Tianjin)• Nuclear power safety cooperation (nuclear plant safety exchanges, emergency mechanisms, radiation monitoring) Eighth Round, August 8, 2012 (Taipei) • Investment promotion and protection (fair treatment, loss compensation, dispute mediation, contact mechanisms) • Joint statement on investors’ personal safety protection • Customs cooperation (reduction of non-tariff barriers, compliance with international standards, facilitation of customs clearance)Ninth Round, June 21, 2013 (Shanghai)• Cross-strait trade in services (opening of business, communication, construction, sdeiscttroibrus)t＿ionp,eenndvinirgonlemgeisnlat,tifvineaanpcper,owvaellfare, tourism, recreation, transport and other Tenth Round, February 27, 2014 (Taipei) • Meteorological cooperation • Seismological monitoring cooperation 99

4 Cross-Strait Relations boats between the Kinmen and Matsu islands and a number of mainland seaports. With no objection forthcoming from Beijing, this arrangement known as the “mini three links” 小三通 although it did not involve postal or commercial transactions began on January 1, 2001. e Beijing authorities continued to expand military deployments opposite Taiwan throughout the eight years of the Chen administration. Large-scale military exercises simulating attacks on Taiwan also continued to be held annually. Meanwhile, Beijing maneuvered to block Taipei’s participation in international forums and to hinder its dip- lomatic endeavors. On March 14, 2005, the Beijing government enacted an “anti-secession law,” which authorizes the People’s Liber- ation Army to use “non-peaceful means” to achieve cross- strait uni cation should Taiwan’s people attempt to “secede” from the PRC. In response, President Chen issued a six-point statement, stressing that Taiwan’s sovereignty belongs only to its 23 million people, and that any law calling for violation of the basic rights and interests of others was a setback for human civilization. A year later, in February 2006, President Chen declared that the Guidelines for National Uni cation had “ceased to apply” because they had been drawn up by an ad hoc presi- dential commission in the days before citizens had the right to elect their leader and make their voices e ectively heard. Moreover, the framers of the guidelines had premised them on a “one-China principle” and the presumption of eventual uni cation without consulting the people of Taiwan. 2008-Present: Ma Ying-jeou Administration Relations between Taiwan and mainland China have warmed since President Ma Ying-jeou 馬英九 took o ce in May 2008. In his rst inaugural address, Ma enunciated100

the imperative of maintaining the status quo during histerm of office under the framework of the ROC Constitu-tion. This means no unification talks with the mainland,no pursuit of Taiwan independence and no use of force Cross-Straits Economic Cooperation Framework Agreement Signed by the SEF and ARATS on June 29, 2010, the Cross-Straits Eco- nomic Cooperation Framework Agreement (ECFA) 海峽兩岸經濟合作架構協議 was ratified by the Legislative Yuan (Legislature) 立法院 in August 2010 and came into force the following month. The primary aim of the ECFA is to facilitate systematization and liberal- ization of trade and economic relations across the Taiwan Strait. It calls for the progressive elimination or reduction of tariffs on most goods as well as the opening of the service sector to investment and competition. Under the agreement’s early harvest program, tariffs on 539 Taiwan-made products and 267 mainland goods were reduced in three stages, becoming completely eliminated as of January 2013. In January 2011, the two sides established the Cross-Strait Economic Cooperation Committee (ECC) 兩岸經濟合作委員會 as a platform for conducting follow-up negotiations on the ECFA. Six working groups under the committee handle consultations on trade in goods and services, investment, dispute settlement, industrial cooperation and customs cooperation. As of August 2015, the ECC had met seven times, assessing the progress of the ECFA’s implementation, exploring cooperation in various industries, forming responses to the global economic downturn, discussing strategies for expanding inter- national markets, and laying the groundwork for reciprocal trade offices. 101

4 Cross-Strait Relations to settle sovereignty issues. He also called upon the two governments to “face reality, pioneer a new future, shelve disputes and pursue win-win solutions.” Immediately a er taking o ce, the Ma administration moved to reactivate SEF-ARATS negotiations that had been in hiatus for a decade. e historic rst round of talks, held in June 2008 in Beijing, produced the rst cross-strait agree- ments in 15 years. e second round, held ve months later in Taipei, marked the rst time a mainland Chinese negoti- ating team had come to Taiwan. As of March 2015, 10 rounds of talks had been held, producing 21 formal agreements, three memoranda of understanding (MOU) and two joint statements (see table “SEF-ARATS Talks and Agreement Topics”). e agree- ments address the economic interests and general welfare of people on both sides of the Taiwan Strait without touching on sovereignty issues. Meanwhile, in mid-2010, Taiwan and mainland China’s Hong Kong Special Administrative Region established the Taiwan-Hong Kong Economic and Cultural Cooperation Council 財團法人臺港經濟文化合作策進會 and the Hong Kong- Taiwan Economic and Cultural Cooperation and Promotion Council 港台經濟文化合作協進會 as platforms for fostering closer economic and cultural ties. In July 2011, the ROC representative o ce in Hong Kong, formerly called the Chung Hwa Travel Service 中華旅 行社, was renamed the Taipei Economic and Cultural O ce in Hong Kong, re ecting an enhancement of its functional status and its ROC personnel’s diplomatic privileges. at same month, the name of the ROC representative o ce in Macau was changed from the Taipei Economic and Cul- tural Center to the Taipei Economic and Cultural Office in Macau. Further, the governments of Hong Kong and Macau also established representative offices in Taipei in December 2011.102

MAC Minister Andrew Hsia (right) and TAO Director Zhang Zhijun meet in Taiwan’s offshore island of Kinmen in May 2015. (Courtesy of the Mainland Affairs Council) Cross-strait ties turned a new page on February 11, 2014when MAC Minister Wang Yu-chi 王郁琦 led a delegation toNanjing and met with his mainland counterpart Zhang Zhi-jun 張志軍, director of the Taiwan A airs O ce (TAO) 國務院臺灣事務辦公室, marking the highest-level government-to-government talks between Taiwan and mainland Chinasince 1949. During the meeting, the MAC and TAO agreedto open a regular channel of communication to discuss ma-jor issues deriving from cross-strait interactions. Taiwan andthe mainland also agreed to grant customs clearance priv-ileges to related personnel to facilitate their entry and exitfrom each other’s territory. In reciprocation, TAO Director Zhang led a mainlanddelegation to Taiwan on June 25, 2014. During his meetingwith MAC Minister Wang, the two sides discussed issuesincluding expanding economic cooperation; fast-trackingnegotiations on a trade in goods agreement; enhancingexchanges across the areas of culture, education, media,science and technology; permitting mainland Chinese 103

4 Cross-Strait Relations tourists to transit through Taiwan; establishing reciprocal offices and allowing the Taiwan staff to visit Taiwanese prisoners in mainland China; and strengthening communi- cation channels. At the third MAC-TAO meeting held May 23, 2015 in outlying Kinmen County, new MAC Minister Andrew Hsia 夏立言 and TAO Director Zhang agreed to continue working toward a number of key issues, including extraditing major economic criminals; institutionalizing cross-strait negotiations; reinforcing exchanges between the two sides; and stepping up cooperation on Kinmen-related issues such as the diversion of water from the Chinese mainland to Kinmen. Expanding Exchanges In addition to the negotiation of agreements, since May 2008 central and local governments have implemented a number of measures to expand private, commercial and semi-o cial exchanges across the strait and promote people-to-people interactions, all with an aim to enhance mutual understanding and facilitate regional peace and prosperity. Economic Cooperation On the economic front, the regulatory cap on Taiwan-based companies’ investments in mainland China has been raised from 40 percent to 60 percent of their net worth. Further, a number of new regulations have been promulgated in line with the April 2009 joint statement on allowing mainland investment in Taiwan. On August 31, 2012, Taiwan and mainland China signed the Memorandum on Cross-strait Currency Clearing Cooper- ation 海峽兩岸貨幣清算合作備忘錄 to pave the way for collabora- tion on a currency swap mechanism while allowing Taiwanese institutions to o er yuan-denominated settlement services. Between 2011 and 2013, Taiwan and mainland China established three nancial supervisory platforms based on104

At a seaport in Kinmen County— a popular destina- tion for mainland tourists—Taiwanese banks have set up counters exclu- sively to handle renminbi (Chinese yuan) exchange. (Courtesy of Taiwan Review)an MOU signed on November 16, 2009. Under the Cross-strait Securities and Futures Supervisory CooperationPlatform 兩岸證券期貨監理合作平臺, the Cross-strait BankingSupervisory Cooperation Platform 兩岸銀行監理合作平臺 andthe Cross-strait Insurance Supervisory Cooperation Plat-form 兩岸保險監理合作平臺, the two sides meet regularly toconduct institutionalized consultations on market access, ow of capital, supervisory regulations, maintenance of nancial stability and deeper bilateral cooperation.Cross-strait Movement of People Cross-strait movement of people has increased rapidlysince the ROC government began allowing private visitsto mainland China in 1987. Group tourists from themainland were also allowed to travel directly to Taiwanbeginning 2008. In 2014 alone, ROC citizens made 5.36million visits to the mainland (excluding Hong Kongand Macau) while mainland Chinese made 3.95 millionvisits to Taiwan. 105

4 Cross-Strait Relations e ROC’s semi-o cial Taiwan Strait Tourism Associa- tion (TSTA) 臺灣海峽兩岸觀光旅遊協會 opened an o ce in Bei- jing in May 2010 to expand channels of communication and cooperation with government agencies, private companies, media organizations and Taiwanese business associations on the mainland. at same month, the TSTA’s mainland Chinese counterpart, the Cross-Strait Tourism Exchange Association 海峽兩岸旅遊交流協會, opened an o ce in Taipei. e two openings marked the rst exchange of semi-o cial o ces between the two sides of the Taiwan Strait since they became separately governed more than six decades ago. In June 2011, Taiwan opened its doors to independent tourists from three mainland cities Shanghai, Beijing and Xiamen 廈門 for maximum stays of 15 days per visit. As of March 2015, the total number of eligible cities had been increased to 36. e daily arrival quota had also increased to 4,000 in 2014. During 2014, solo tourists from the mainland made around 1,186,500 visits. Mainland cruise passengers disembark at Taiwan’s Kinmen County—an archipelago less than 2 kilometers from mainland China’s Xiamen City—for sight- seeing. (Courtesy of the Kinmen County Government)106

From 2012 onward, travel for medical checkup and cosmeticsurgery also became permitted, with over 54,400 mainlandChinese visiting Taiwan for such purposes in 2014. Starting January 1, 2015, mainland Chinese visitors toTaiwan’s outlying islands of Kinmen, Matsu and Penghu nolonger have to apply for travel permits in advance. ey willbe given landing visa privileges that allow stays of up to 15days on these islands.Other Liberalization Measures ROC government prohibitions on visits of its high-levelo cials to the mainland have been relaxed, while central-and local-government agencies are now permitted to invitemainland o cials to visit Taiwan. And amendments to theAct Governing Relations between the People of the TaiwanArea and the Mainland Area 臺灣地區與大陸地區人民關係條例have bolstered the employment and inheritance rights ofmainland spouses, and have reduced the waiting period foracquiring ROC identity cards to six years. Ten mainland Chinese media outlets, including XinhuaNews Agency 新華社, People’s Daily 人民日報 and China CentralTelevision 中央電視台, are currently allowed to post cor-respondents in Taiwan. Mainland reporters are allowedto visit for up to three months at a time, extendable fora further three months if necessary, and the number ofvisiting reporters permitted per media organization hasincreased to five. Restrictions on students from mainland China wishingto pursue higher education in Taiwan have been relaxedand their diplomas are now recognized. e rst batch ofmainland students 928 in total began studying at universi-ties in Taiwan in September 2011. In 2013, Taiwan recognizeddiplomas from more mainland colleges and universities,o ered scholarships to bright students, expanded recruit-ment to more provinces, and streamlined the documentsand certi cates required for mainland students to come to 107

4 Cross-Strait Relations Taiwan. As a result, 2,553 mainland students came to Taiwan in September 2014, bringing the total number of such students over the past four years to 6,254. Cross-strait Pacts Monitoring Mechanism Since signing the Cross-Straits Economic Cooperation Framework Agreement in 2010, Taiwan and mainland China have been negotiating follow-up pacts involving trade in goods, services, investment protection and dispute settlement. Among these, the Cross-Strait Agreement on Trade in Services 海峽兩岸服務貿 易協議 was signed in June 2013 to protect service providers on both sides and expand market opportunities. After 16 hearings to help the public understand the agreement, joint committees of the Legislature began reviewing the trade pact on March 12, 2014. However, ruling and opposition caucuses gridlocked over procedural issues, and a chaotic review session on March 17 triggered angry protests from student-led activists. The protestors stormed into the parliament the next day, occupying the legislative floor for 23 days in what became known as the Sunflower Student Movement 太陽花學運. They demanded that the services pact be returned to the Executive Yuan and that a legally binding mechanism be established to monitor cross-strait agreements. In response, the Executive Yuan drafted a bill for closer monitoring of agree- ments between Taiwan and mainland China 兩岸協議監督條例 and sent it to the Legislature in April 2014 for deliberation. Eight versions of the bill have been proposed by the Executive Yuan, various caucuses and civic groups. The Executive Yuan’s version, which integrates a four-stage communication mecha- nism with a national security screening system, seeks to balance the public’s right to know with the government’s ability to conduct negotiations.108

Looking Forward For the near future, the ROC’s top priorities in cross-straitrelations are expanding and deepening exchanges on variouslevels, setting up reciprocal representative o ces, and com-prehensively reviewing and amending the Act GoverningRelations between the People of the Taiwan Area and theMainland Area to suit new developments. With ongoing talks on further agreements, economicand cultural ties between Taiwan and mainland China canbe expected to steadily mature. However, as the mainland’smilitary buildup has continued unabated, Taiwan will con-tinue to make necessary upgrades to its defense capabilities. In view of the impossibility of resolving cross-strait issuesovernight, the ROC government will endeavor to maintainthe status quo while cultivating harmonious relations step bystep through negotiation and cooperation.Related Websites:• Mainland Affairs Council: http://www.mac.gov.tw• Straits Exchange Foundation: http://www.sef.org.tw 109

A Mirage 2000 fighter jet scrambles off on a mission.Capable of intercepting intruding aircraft, the jet playsan important role in the defense of Taiwan’s airspace.(Courtesy of the Ministry of National Defense)

5National Defense

5 National defense TStrategic Importanceaiwan is located between Japan and the Philippines at the center of the nearest chain of archipelagos to the coast of the East Asian continental mainland and sits astride two of the region’s most important sea tra c chan- nels, the Taiwan Strait and the Bashi Channel. e island therefore is key to world maritime geo-strategy and pivotal to stability in the Asia-Paci c. Taiwan aims to take advantage of this strategic importance to cooperate with neighboring countries to prevent regional con icts and pursue mutual economic prosperity. Military Threat Sovereignty disputes between the two sides of the Taiwan Strait have persisted since 1949, when the government of the Republic of China (ROC) moved from mainland China to Taiwan and the Chinese Communist Party established its government in Beijing. Despite the easing of tensions following cross-strait economic talks and various forms of cooperation in recent years, Beijing still constitutes a major military threat to the ROC’s national security. It has not renounced the use of force to settle sovereignty disputes; in 2005, it even enacted the so-called Anti-Secession Law in an attempt to give itself a legal basis to settle the sovereignty issue through non-peaceful means. Mainland China’s military buildup has continued un- abated and poses an imminent threat against the ROC. Over 1,400 of its ballistic and cruise missiles are targeted at Taiwan. Hundreds of combat aircra and warships are routinely deployed along the southeastern coast of mainland China, directly facing the Taiwan Strait. Espionage is also ceaselessly employed against Taiwan through human intelligence and cyberwarfare. ROC author- ities estimate that the mainland has raised an army of over112

180,000 hackers to attack Taiwan’s government and industrialwebsites and steal sensitive information.Defense Posture e ROC Armed Forces maintain strong capabilities asa credible deterrent to defend Taiwan’s democratic societyfrom aggression and to promote peace and prosperity in theAsia-Paci c. To that end, the ROC government is com-mitted to upgrading the nation’s defense capabilities in atimely manner. It does so by making essential purchases ofmilitary hardware and by enhancing the nation’s self-reliance in defense-related research and development (R&D)and manufacturing. International security cooperation is also an importantaspect of ROC defense policy. Forms of collaboration in-clude technical exchanges, sharing of intelligence, trainingof foreign military personnel in Taiwan and training of ROCmilitary personnel in other countries. The Tuo Jiang, the first domesti- cally designed and manufac- tured stealth missile corvette, flexes its muscles during a military drill. (Courtesy of the Ministry of National Defense) 113

5 National defense National Defense Reports In compliance with the National Defense Act 國防法, the Ministry of National Defense (MND) annually publishes the Report on Mainland China’s Military Forces 中共軍力報告書, Five-year Force Construction Plan of the ROC Armed Forces 中華民國五年兵力整建 and Administration Plan 施政計畫報告. The MND submits these three documents, together with its budget proposals, to the Legislative Yuan (Legislature) 立法院 for review. e MND also publishes the National Defense Report (NDR) 國防報告書 biennially and submits a Quadrennial Defense Review (QDR) 四年期國防總檢討 to the Legislature within 10 months a er each presidential inau- guration to inform the public of the government’s defense policies. e latest QDR was published in March 2013, and the latest NDR was released in October of the same year. Command Structure As stipulated by the ROC Constitution and the National Defense Act, the president is the commander-in-chief of the armed forces, empowered to give direct orders to the minis- ter of national defense. e defense minister, in turn, gives orders to the chief of the general sta for execution. e president also serves as the chairman of the National Security Council (NSC) 國家安全會議. e NSC is mandated to make recommendations for the president’s reference in decision-making on matters critical to national interests. e NSC members include the vice president, premier, heads of key ministries, chief of the general sta , NSC secretary- general and director-general of the National Security Bureau 國家安全局, which is under the NSC. For most administrative matters in peacetime, the MND makes recommendations to the Executive Yuan 行政院—headed by the premier—which nalizes decisions and supervises policy implementation. e Legislative Yuan is empowered to request MND o cials to attend committees and plenary114

MND Moves into New Headquarters The MND officially unveiled its new headquarters in Taipei City 臺北市 onDecember 27, 2014, signaling a new era of administrative efficiency andcutting-edge technology for the nation’s armed forces. The 19.5-hectare complex boasts state-of-the-art security on par withthe Pentagon in Washington, including electromagnetic pulse protection,explosive detection and fingerprint scanning in restricted areas. In addition,retractable bollards installed around the complex are capable of preventingaccess by unauthorized vehicles. The complex, comprising four main buildings, was completed over 18 yearsat an estimated cost of NT$15.80 billion (US$520.25 million). It is neighboredby other government buildings and military facilities including the air force andnavy headquarters.sessions, and it can also in uence defense policies by modifyingthe Executive Yuan’s budget proposals.Armed Forces e Army is an agile land-based defense force and safe-guards areas of strategic importance. e Navy conductsmaritime patrols to maintain security in the ROC’s territo-rial waters. It also coordinates with the Army and the AirForce to counter enemy maritime blockades or attacks tosecure Taiwan’s sea lines of communication. e Air Force’sprimary mission is to safeguard the nation’s airspace andprovide early warning and aerial surveillance. ese branch-es have bases around Taiwan and on o shore islands. Additional units of the Armed Forces that play combat rolesinclude the Air Defense Missile Command 防空飛彈指揮部 and theInformation and Electronic Warfare Command 資電作戰指揮部of the General Sta Headquarters 國防部參謀本部. Other military 115

5 National defense organizations that play essential support roles include the Army Logistics Command 陸軍後勤指揮部, the Reserve Command 後備 指揮部 and the Military Police Command 憲兵指揮部. While the Armed Forces’ primary mission is to protect the nation from external aggression, another role entrusted to them, pursuant to amendments to the Disaster Prevention and Protection Act 災害防救法 enacted in August 2010, is to perform rapid-response rescue and relief operations in times of natural disaster. In line with world trends in military environments and technologies, the ROC Armed Forces are scheduled to be streamlined from 215,000 members to 190,000 by the end of 2019. e nation’s defense budget for 2015 was NT$312.80 billion (US$9.90 billion), 16.16 percent of the general budget of the ROC central government. Weapon System Upgrades To maintain military balance of power across the Taiwan Strait, the ROC manufactures its own weapons while purchasing Taiwan’s army operates a fleet of armored vehicles capable of neutralizing a variety of in- coming threats. (Courtesy of the Ministry of National Defense)116

arms from the U.S. and other National Defense Systemcountries. From 2013 to 2018,the nation will take delivery Source: Ministry of National Defenseof 30 AH-64E Apache attackhelicopters, 60 UH-60 BlackHawk utility helicopters and12 P-3C Orion anti-submarineaircra from the U.S. Taiwanalso launched its rst locally de-signed stealth missile corvette,the Tuo Jiang 沱江, in 2014 (seebox “Taiwan’s First Self-madeCorvette”) and a new navalsupply vessel, the Pan Shi 磐石,in 2015. In December 2014, theU.S. approved the sale of up tofour Perry-class guided missilefrigates to Taiwan.Defense Industry e National Defense Act mandates that priority be givento acquisition of domestically manufactured equipment overthe procurement of arms from abroad. It further requiresthat, insofar as possible, procurements from abroad be tiedto technology transfers. Domestic defense-related enter-prises and institutions have a high degree of technologicalsophistication in the areas of aviation, missilery, electronicsand materials technologies. The National Chung-shan Institute of Science andTechnology (CSIST) 國家中山科學研究院 is Taiwan’s leadinginstitution for defense R&D, engaging in the development,management and integration of advanced weapon sys-tems. Among those that have been deployed are Sky BowI and II surface-to-air missiles 天弓飛彈, Sky Sword I and IIair-to-air missiles 天劍飛彈 and Hsiung Feng I, II and III 117

5 National defense anti-ship missiles 雄風反艦飛彈. The CSIST unveiled its first unmanned aerial vehicles in 2012, followed by a lighter, more portable version in December 2014. The state-owned Aerospace Industrial Development Corp. (AIDC) 漢翔航空工業股份有限公司 is internationally recognized as a top-quality manufacturer and is highly re- garded for its R&D in the eld of aviation. It designed and produced the Ching-kuo Indigenous Defense Fighter 經國 號戰鬥機, which has been one of the mainstays of the ROC Air Force’s eet since the late 1990s, as well as other ght- er jets. Prior to the development of the Ching-kuo ghter, the AIDC coproduced the F-5E/F Tiger II with U.S.-based Northrop Grumman Corp. In addition to its military busi- nesses, currently the AIDC is collaborating with Boeing, Airbus and other global major aircra manufacturers on civilian aircra . Personnel and Service System ere are two categories of national defense personnel: civilian and military. Civilian personnel are recruited through national examinations and a more exible open selec- tion process, while military personnel are inducted through conscription or voluntary examination and recruitment. Currently, all healthy male citizens of the ROC who satis- fy the Armed Forces’ physical tness standards are obligated to complete a term of military service at the earliest available opportunity between January 1 of the year a er the calendar year in which they turn 18 years old and December 31 of the year of their 36th birthday. Senior high school and university students can defer military service until graduation. At present, all dra ees are eligible to apply for substitute service positions in lieu of military service, as provided for in the Enforcement Statute for Substitute Services 替代役實施條例 of 2007. Following a short period of basic military training, those admitted to the program are placed in positions according to their interests and skills.118

Substitute service falls into two categories: general andR&D. Dra ees who opt for general substitute service canserve in a wide variety of positions, including security guard,firefighter, social worker, medical personnel and overseashumanitarian project worker. Draftees performing R&Dsubstitute service must have at least a master’s degree andhave to work for three years at Ministry of the Interior-approved government institutions, public or private researchcenters or universities. Since 2008, the period of compulsory military service ofdra ees who were born before 1993 has been 12 months. Be-ginning in 2013, male citizens born in or a er 1994 are onlyrequired to receive four months’ basic military training andthen become reserve forces. In order to build a modern armed force, the MND isgradually increasing the number of volunteer personnel Taiwan’s First Self-made Corvette On December 23, 2014, the ROC Navy marked a milestone in its combat capabilities by launching the Tuo Jiang, a new stealth missile corvette de- signed and manufactured in Taiwan. The fastest and most powerful vessel of its kind in Asia, the Tuo Jiang boasts a range of 2,000 nautical miles (3,704 kilometers) with a top speed exceeding 38 knots per hour. It features a cutting-edge water-jet propul- sion system that makes it exceptionally maneuverable, and is armed with stealth technology and advanced weaponry such as Hsiung Feng II and III anti-ship missiles. Beginning service in March 2015, the twin-hulled, 500-tonne warship is helping to ensure stability in the Taiwan Strait and create a self-sustaining defense for the ROC. 119

5 National defense with the goal of having an all-volunteer military by the end of 2016. Furthermore, the MND is endeavoring to bolster recruitment and retention by o ering a better service envi- ronment, attractive wages, o -the-job training and veteran employment services. For the 2014 recruitment year, 31,374 men and women signed up for the volunteer program, from which the MND recruited 15,024 individuals, exceeding the year’s target of 4,467. Military Education ere are separate education systems for commissioned and noncommissioned o cers. Students who receive under- graduate degrees from college-level academies are on track to become the former, while those who wish to begin active service a er graduating from senior high school-level acade- mies become the latter. Education for commissioned o cers is categorized into three di erent levels basic, intermediate, and advanced with quali cation depending on one’s rank. Throughout their careers, ROC professional soldiers are provided with abundant opportunities and, in some instances, are required to undergo supplementary in-service education and training to hone their skills and leadership capabilities. e MND is striving to improve the military education system and prepares selected o cers from each service to study abroad at strategy institutes, sta and command col- leges, and various think tanks around the world. National Defense University 國防大學 also designs and provides diversified classes on strategic planning, operations, command and disaster relief in order to enhance future commanders’ capabilities. Homeland Security In addition to combat preparedness, the ROC govern- ment attaches great importance to other aspects of homeland120

security. ese include preventing terrorist attacks; gatheringand sharing intelligence with friendly nations; managing thecountry’s borders; protecting critical infrastructure; main-taining operations of essential public- and private-sectorfunctions in times of crisis; safeguarding cybersecurity; andassisting in emergency response and management. Air-raid practice and disaster drills (including the Wan-an萬安 and the Min-an 民安 exercises) have been held annuallyto buttress the abilities of local governments to coordinatewith the military not only in times of war but also in the eventof a natural disaster, nuclear accident or any other incidentimpacting citizens’ security. e Han Kuang exercise 漢光演習,which includes live- re military drills and computer-simulatedwar games, is held annually to enhance training for joint op-erations among the three branches of the Armed Forces andraise their overall ghting capabilities and preparedness. The Executive Yuan’s Office of Disaster Management行政院災害防救辦公室 and O ce of Homeland Security 行政院國土安全辦公室 cooperate closely with the Armed Forcesto integrate emergency responses to man-made and natu-ral disasters, communicable disease and terrorist threats.Meanwhile, the Coast Guard Administration 行政院海岸巡防署,which is independent of the Armed Forces, implements theAn Hai Project 安海專案 to crack down on the smuggling ofgoods and tra cking of arms, drugs and persons. Related Websites: • Ministry of National Defense: http://www.mnd.gov.tw • National Security Bureau: http://www.nsb.gov.tw • National Chung-shan Institute of Science and Technology: http://www.csistdup.org.tw • Aerospace Industrial Development Corp.: http://www.aidc.com.tw • Coast Guard Administration: http://www.cga.gov.tw 121

Set up in 1980, the Hsinchu Science Park in northwesternTaiwan houses more than 500 high-tech companies and isnow one of the world’s leading centers for semiconductormanufacturing. (Courtesy of the Hsinchu Science Park Bureau)

6Economy & Finance

6 Economy & Finance NTational Competitivenessaiwan continued to play a dynamic role in the global economy in 2014. According to World Trade Organi- zation statistics, it was the world’s 20th-largest export- er and 18th-largest importer of merchandise, while ranking No. 23 and No. 29 in the export and import of commercial services, respectively. One of the most powerful players in the global information and communications technology (ICT) industry, it is also a major supplier of other goods across the industrial spectrum, from chlorella health food supplements to powered wheelchairs. A key factor underpinning such performance is the Re- public of China (ROC) government’s formulation of policies to foster development and sustain the nation’s economic competitiveness by promoting investment in human resourc- es, research and development (R&D) and industrial upgrad- ing as well as other initiatives aimed at creating advantages for its economy. For such reasons, and because of its enter- prises’ strong entrepreneurial spirit, Taiwan’s business and investment environments have consistently been ranked as superior by well-regarded economic research organizations (see Appendix I “Global Survey Rankings”). GDP Profile Taiwan’s economy grew at a solid pace in 2014 on the back of stronger export momentum as well as increased pri- vate consumption and investments. Commerce and industry continued to grow, with the industrial production index reaching a record high of 106.80, up 6.37 percent from the previous year. e unemployment rate for the year fell to 3.96 percent, the lowest since 2008. On the whole, the economy grew 3.77 percent, considerably faster than the 2.23 percent posted in 2013 and the fastest in three years. In nominal terms, gross domestic product (GDP) rose to US$529.59 billion, or US$22,635 per capita, in 2014.124

In 2014, export value increased 2.70 percent year-on-year,and import value rose by 1.53 percent. Trade surplus registereda historic high of US$39.67 billion, an increase of 11.61 percentfrom the previous year. Electronic products, machineries andtransportation equipments led exports for much of the year. Strong private spending helped by the improved employ-ment rate and the rise in income growth boosted privateconsumption growth to 2.95 percent for the year. Governmentspending, meanwhile, rose 3.69 percent to mark the greatestgrowth rate in 16 years because of increased expenditure onnational defense. Private xed investment rose 3.46 percent in 2014 main-ly because semiconductor manufacturers increased capital2014 Macroeconomic IndicatorsGDP (nominal) US$529.59 billionGDP per capita (nominal) US$22,635GDP per capita (ppp – IMF) US$45,854GDP growth1 3.77%Labor participation rate 58.54%Unemployment rate (average) 3.96%Unemployment rate (end of year) 3.79%Consumer price index (average change) 1.20%Wholesale price index (average change) -0.57%Exports US$313.70 billion (up 2.70%)Imports US$274.03 billion (up 1.53%)Balance of trade US$39.67 billion surplusForeign exchange reserves (end of year) US$418.98 billionRegistered inward investment2 US$5.77 billionRegistered outward investment3 US$7.29 billionRegistered investment from mainland China US$334.63 millionRegistered mainland China-bound investment US$9.83 billion5th-largest holder of foreign exchange reserves20th-largest exporter of merchandise18th-largest importer of merchandise1 Based on chained (2011) dollars2 Excluding investment from mainland China3 Excluding mainland China-bound investmentSources: D irectorate-General of Budget, Accounting and Statistics, Executive Yuan; Ministry of Finance; Bureau of Foreign Trade, Ministry of Economic Affairs; World Trade Organization 125

6 Economy & Finance investments in response to rising global demand for consum- er electronics. Moreover, local telecommunications operators increased investment in fourth-generation mobile infrastruc- ture, and airline companies spent more to expand their eets. On public investments, government investment declined by 8.04 percent following reduction of the central government’s special budget. Meanwhile, investments made by public enter- prises rose 4.42 percent. Central Government Revenues and Expenditures According to the Directorate-General of Budget, Accounting and Statistics (DGBAS) 主計總處 of the Executive Yuan 行政院, Composition of GDP by Sector in 2014 Sector of Economy Share of Annual Change Annual Change GDP1 (%) in GDP Share in Output Agriculture (percentage point) Value2 (%) Industry 1.88 0.18 15.77 Manufacturing 34.09 Construction 29.10 0.89 7.53 Electricity and gas supply 0.73 7.40 Other 2.73 0.02 5.82 1.54 0.19 18.88 0.72 -0.05 -1.45 Services3 64.03 -1.07 3.02 Wholesale and retail trade 16.48 -0.44 2.03 Public administration and -0.26 0.91 social security 6.79 Finance and insurance 0.16 7.38 Transportation and storage 6.61 0.07 7.54 Other4 2.88 -0.61 2.73 31.27 1 Statistical discrepancy not included 2 Based on New Taiwan dollar data 3 Including import duties and value-added tax 4 Other services include accommodation and food; information and communication; real estate and ownership of dwellings; professional, scientific and technical services; support services; education; human health and social work; arts, entertainment and recreation; and miscellaneous. Source: Directorate-General of Budget, Accounting and Statistics, Executive Yuan126

in the 2014 scal year, central government revenues fell by 0.2percent from the previous year to NT$1.73 trillion (US$56.84billion), and government expenditures decreased by 0.1percent to NT$1.85 trillion (US$61.05 billion). (See pie chart“Final Accounts of FY 2014 Central Government Revenuesand Expenditures.”)Financial ServicesBanking At the end of 2014, there were a total of 407 banking insti-tutions in operation (see table “Structure and NPL Ratiosof Banking Sector in 2014”). As of that time, year-on-year,Taiwan’s 39 domestic banks saw their total assets increase by6.99 percent to NT$41.79 trillion (US$1.38 trillion) and theirnet worth by 10.81 percent to NT$2.89 trillion (US$95.16billion). Over 2014, their deposits expanded 5.70 percent toNT$28.34 trillion (US$933.16 billion), while their loans in-creased 4.02 percent to NT$21.39 trillion (US$704.31 billion). Domestic banks also showed steady improvement inasset quality. At the end of 2014, all had non-performingloan (NPL) ratios of less than 1.5 percent, with a record-lowaverage of 0.25 percent; their average capital adequacy ratio,meanwhile, was 12.38 percent, well above the regulatoryrequirement of 8 percent. As of the end of 2014, domestic banks had established361 branches and representative o ces overseas, mainly inthe United States (63), Vietnam (53), mainland China (42),Japan (41), the Philippines (28), and Hong Kong (27).Insurance According to global reinsurer Swiss Re’s Sigma studyreleased in 2014, Taiwan had the world’s highest insurancepenetration rate of 17.60 percent in 2013, while its insurancedensity or insured amount per capita reached US$3,886,the 12th-highest worldwide and the third-highest in Asia.According to the study, the life insurance income of Taiwan’s 127

6 Economy & Finance industry was the ninth-largest in the world, whereas its total premium income (including non-life insurance) was the 11th-largest, accounting for 2.88 percent and 1.96 percent, respectively, of the global market in 2013. As of March 2015, there were 54 insurance companies oper- ating in Taiwan, including three reinsurers, 29 life insurers ( ve foreign) and 22 non-life insurance rms ( ve foreign). In 2014, insurance industry assets stood at NT$18.94 trillion (US$623.58 billion), or 29.79 percent of the nancial sector’s total assets. Total insurance premium income increased by 7.20 per- cent in 2014 to NT$2.90 trillion (US$95.59 billion), with life insurance accounting for NT$2.77 trillion (US$91.24 billion) and non-life NT$132.22 billion (US$4.35 billion), up by 7.26 Final Accounts of FY 2014 Central Government Revenues and Expenditures Revenue Sources NT$1.73 trillion (US$56.84 billion) Expenditure Allocations NT$1.85 trillion (US$61.05 billion) Source: Directorate-General of Budget, Accounting and Statistics, Executive Yuan128

Structure and NPL Ratios of Banking Sector in 2014Type of Institution No. of No. of Share of Share of NPL Institutions Branches Deposits1 (%) Loans2 (%) Ratio (%)Domestic banks 39 3,460 77.57 91.13 0.25Local branches of foreign 1.12 3.11 0.03and mainland Chinese 30 39 1.65 1.73 0.10banks 4.69 4.04 1.05Credit cooperatives 23 246 ---- ---- ---- 14.97 ---- ----Credit departments offarmers’ and fishermen’s 306 864associationsBills finance companies 8 30Postal savings system 1 1,3231 Total deposits (December 2014): NT$36.53 trillion (US$1.20 trillion)2 Total loans (December 2014): NT$23.47 trillion (US$772.80 billion)Sources: Financial Supervisory Commission; Central Bank of the Republic of China (Taiwan)percent and 5.86 percent, respectively. e insurance premiumincome received by life insurance operations in 2014 was20.96 times greater than that received by non-life insuranceoperations. In 2014, life insurers paid out NT$1.62 trillion(US$53.41 billion) in claims, and non-life insurers NT$64.90billion (US$2.14 billion).Securities As of December 2014, 854 companies were listed on theTaiwan Stock Exchange (TWSE) 臺灣證券交易所, with totalmarket capitalization of NT$26.89 trillion (US$885.45billion). The total value of shares traded on the bourse in2014 grew 15.61 percent from 2013 to NT$21.90 trillion(US$721.04 billion), while trading volume rose 4.39 percentto 566.99 billion shares. e TAIEX, the benchmark index of the TWSE, advancedby 8.08 percent to 9,307.26 points at the end of 2014 from8,611.51 points at the end of 2013. It then uctuated duringthe rst half of 2015 to reach 9,323.02 points at the end of June. e over-the-counter Taipei Exchange (TPEx) 證券櫃檯買賣中心 index, meanwhile, rose 8.34 percent from 129.57 129

6 Economy & Finance points at the end of 2013 to 140.38 points at 2014 year-end, and fell to 136.03 points at the end of June 2015. As of De- cember 2014, the TPEx had 685 companies with market capitalization of NT$2.68 trillion (US$88.24 billion). Foreign institutional and individual investors as well as mainland Chinese QDIIs (quali ed domestic institution- al investors) bought US$192.45 billion worth of shares in Taiwan’s stock market in 2014, accounting for 36.43 per- cent of total stock market value. As of December 2014, 26 TWSE-listed companies issued Taiwan Depositary Receipts 臺灣存託憑證 with market value worth NT$12.05 billion (US$396.64 million). Foreign Trade and Investment Total trade value increased by 2.15 percent year-on-year to US$587.72 billion in 2014. Exports rose by 2.70 percent to Export Value of Merchandise in 2014 Merchandise Category Export Value Annual Change Percentage (US$ billion) (%) of Total All categories (total export value) 313.70 2.70 Export Value Electronic products 99.96 13.44 100.00 Basic metals and articles thereof 28.95 31.86 Plastics/rubber and articles thereof 24.10 4.75 9.23 Chemicals 21.66 -2.76 7.68 Machineries 20.88 1.82 6.91 Mineral products 20.45 5.66 6.66 Optical instruments 19.14 -13.66 6.52 -8.89 6.10 Information and 13.03 communications products -11.21 4.15 11.65 Vehicles, aircraft, vessels and 5.85 3.71 associated transport equipments 11.57 Textile products 10.07 -1.17 3.69 Electric products 32.24 -4.45 3.21 Other goods 3.18 10.28 Source: Department of Statistics, Ministry of Finance130

US$313.70 billion, and imports increased by 1.53 percent toUS$274.03 billion. With a trade surplus of US$39.67 billion,Taiwan ended the year with foreign exchange reserves ofUS$418.98 billion, the h-largest in the world. Mainland China (including Hong Kong) remained Taiwan’slargest export market in 2014, followed by the ASEAN-6(six trading partners of the Association of Southeast AsianNations Indonesia, Malaysia, the Philippines, Singapore, ailand and Vietnam), the United States, Europe and Japan.Taiwan’s top import sources were mainland China (includingHong Kong), Japan, the ASEAN-6, Europe and the UnitedStates. Data on Taiwan’s principal trade partners and the exportvalue of its merchandise by category in 2014 are listed in thepie chart and table so labeled. As for the movement of direct investment capital (ex-cluding that to and from mainland China) in 2014, US$5.77billion in inbound investment to Taiwan and US$7.29 billionin outbound investments were o cially registered. ese gures represented increases of 16.96 percent and 39.40percent, respectively, over the previous year. Of the inboundinvestments, 27.23 percent went to nance and insurance,14.33 percent to electronic component manufacturing and13.60 percent to wholesale and retail businesses. Of the out-bound funds, 49.68 percent were invested in nance andinsurance, 11.70 percent in wholesale and retail businesses,and 11.64 percent in real estate. Regarding investments bound for mainland China, theamount totaled US$9.83 billion in 2014, with 16.14 percentgoing to nance and insurance, 15.70 percent to electroniccomponent manufacturing, and 12.94 percent to man-ufacturing of computer, electronic and optical products.Investments from mainland China amounted to US$334.63million in 2014, or an aggregate of US$1.20 billion sinceTaiwan opened its doors to mainland investors in 2009. Ofthe aggregate total, 24.17 percent was directed to wholesaleand retail businesses, 16.80 percent to banking, and 11.60percent to port businesses. 131

6 Economy & Finance Principal Trade Partners in 2014 Exports (US$313.70 billion) Imports (US$274.03 billion) *A SEAN-6: Six of the 10 member states of the Association of Southeast Asian Nations—Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam Source: Department of Statistics, Ministry of Finance Small and Medium-sized Enterprises Small and medium-sized enterprises (SMEs) continue to make up the backbone of the economy. According to the Ministry of Economic A airs (MOEA), SMEs in Taiwan numbered about 1.35 million at the end of 2014, accounting for 97.61 percent of all enterprises. Considering SMEs’ important role in the upstream value chains supporting larger-scale enterprises’ production and exports, the ROC government is encouraging the develop- ment of new technologies and products by SMEs under the132

Small Business Innovation Research Program 小型企業創新研發計畫, which o ers subsidies covering up to 50 percent oftheir R&D costs. e Small and Medium Enterprise CreditGuarantee Fund of Taiwan 中小企業信用保證基金, which providesguarantees for bank loans to businesses, was also expandedto NT$1.41 trillion (US$46.43 billion) in 2014. As part of government efforts to help small innovativestartups, the TPEx launched the Go Incubation Board forStartup and Acceleration Firms 創櫃板 in January 2014.Nonpublic microenterprises that pass review by the TPExmay list on the board, provided they have capitalization ofno more than NT$50 million (US$1.65 million).Policy InitiativesInvestment Promotion To make Taiwan a more attractive investment destinationfor both foreign and domestic interests, the government hasfocused on removing investment barriers and improving thetax environment. E orts include amendments to the Com-pany Act 公司法 to simplify procedures for starting businessesand to strengthen corporate governance; reduction of the cor-porate income tax rate from 25 to 17 percent to relieve the taxburden on enterprises; and the launch of a one-stop servicefor online application for business registration in 2011. The InvesTaiwan Service Center 行政院全球招商聯合服務中心 was set up in 2010 to match investors with businessopportunities, address overseas businesses’ operational andinvestment concerns, and provide customized services. Asof April 2015, the center had handled 970 investment caseswith capital totaling NT$173.57 billion (US$5.49 billion),generating 28,429 jobs.Trade EnhancementPromoting Green Trade In 2014, the MOEA implemented a second three-yearphase of the Green Trade Promotion Project 綠色貿易推動方案 133

6 Economy & Finance to assist Taiwanese companies in responding to the rising global trend toward green business, speci cally by helping them grasp green business opportunities and comply with international green standards, recycling regulations and green procurement standards. In addition, to create new markets for domestic manufacturers, Taiwan is joining near- ly 20 other WTO members in negotiating the Environmental Goods Agreement an effort to remove trade barriers for products that make the world cleaner and greener. Promoting Most-valued Products in Emerging Markets In emerging markets around the world, the number of new middle-class consumers is growing faster than ever. To take advantage of the burgeoning opportunities, the MOEA in 2013 implemented a second phase of the Project to Promote Most-valued Products in Emerging Markets 優質平價新興市場推 動方案. is three-year project surveys the needs of nal goods in emerging markets and helps Taiwanese rms tailor their marketing strategies to the needs of local consumers. Enhancing the Image of Taiwan’s Industries e Taiwan Industry Image Enhancement Project 臺灣產 業形象廣宣計畫 (2014-2016) helps original brand manufactur- ers in Taiwan raise awareness of their brands in domestic and overseas markets. e project reaches out to major markets such as Japan, the EU and the U.S. as well as emerging coun- tries such as Brazil, mainland China, Egypt, India, Indonesia, Mexico, Myanmar, the Philippines, Turkey, the United Arab Emirates and Vietnam. e project increases exposure of award-winning Taiwan Excellence 臺灣精品 brands in the ICT and home and living industries by promoting innovative, reliable and high-value products. Promotional activities include establishing Taiwan Excellence zones in shopping malls, promoting select brands through multiple distribution channels, setting up Taiwan Excellence pavilions in trade shows, and launching digital marketing campaigns.134

A Taiwan Excel- lence pavilion set up at a trade show in Germany showcases select Taiwan brands in the ICT and home and living industries. (Cour- tesy of the Taiwan External Trade De- velopment Council)Innovation and Entrepreneurship Increasingly sharp economic competition as well as newopportunities stemming from globalization and the rise ofnewly industrialized economies have underlined the imper-ative for Taiwan’s businesses to place greater importance oninnovation and entrepreneurialism. Among the several mea-sures taken to encourage such e orts is the enactment of theStatute for Industrial Innovation 產業創新條例 in 2010. e acto ers a tax credit on 15 percent of innovative R&D expendi-tures over the period 2010 to 2019. In line with this act, the Executive Yuan promulgated theGuidelines for Industrial Development 產業發展綱領 in 2011,outlining visions for injecting greater innovation and valueinto Taiwan’s agriculture, industry and services sectors. Ac-cordingly, the MOEA has formulated the ree Industries,Four Reforms Plan 三業四化行動計畫 to create service-orientedmanufacturing, internationalized and high-tech services,and specialty-oriented traditional industries. To support budding entrepreneurs, the government hasbeen implementing several measures and projects encour-aging startups and boosting technological innovations and 135

6 Economy & Finance applications in the private sector. In 2013, the National Development Council (NDC) 國家發展委員會 launched the Business Angel Plan 創業天使計畫, under which the Execu- tive Yuan’s National Development Fund 行政院國家發展基金 invests NT$1 billion (US$33.59 million) over ve years to provide the capital that innovators and entrepreneurs need to get their businesses o the ground. e HeadStart Taiwan program 創業拔萃方案 launched by the NDC in 2014 focuses on innovation and high value- added innovative businesses. e ve-year project brings together local and global businesses to mold Taiwan into a comprehensive and e cient “entrepreneurial ecosystem” with a worldwide reputation for innovative business. e program has three strategies: remove legal barriers to inno- vative startups; bring in international capital and profession- al knowledge; and set up international startup parks. In March 2015, the government inaugurated the Taiwan Rapid Innovation Prototyping League for Entrepreneurs 臺灣創新快製媒合中心, which enables inventors to quickly turn their abstract concepts into visible, tangible high-tech prod- ucts. e league identi es rising business stars, provides them with marketing and R&D support, and matches them to investors and technology experts. Also in 2015, the Executive Yuan established the Taiwan Innovation and Entrepreneurship Center 臺灣創新創業中心 in Silicon Valley to serve as an outpost for developing businesses and talent. e government sends select teams, entrepreneurs and venture capital talent from Taiwan to Silicon Valley to start companies and receive eld training. e center monitors the innovation environment there to channel technologies, professionals and business orders back to Taiwan as well. Under the Taiwan Silicon Valley Technology Fund Invest- ment Program 臺灣矽谷科技基金投資計畫 launched in May 2015, the government and the private sector are joining forces to invest in startups that promote the ow of talent, know- how and capital between Taiwan and Silicon Valley. A total of136

US$120 million from the Executive Yuan’s National Develop-ment Fund and National Science and Technology DevelopmentFund 國家科學技術發展基金 will be allocated over the next threeyears to implement the program.Youth EmploymentPromoting Youth Employment In 2014, the Ministry of Labor and several other agencieslaunched a three-year, NT$14 billion (US$460.98 million)Youth Employment Promotion Program 促進青年就業方案 todevelop a young labor force that will raise the nation’s com-petitiveness. Incorporating 62 programs from 11 govern-ment agencies, the plan aims to nd suitable jobs for 150,000young people by helping them set career goals, build positivework attitudes, and develop their interests and talents.Supporting Young Entrepreneurs e government also helps young people start businessesof their own. e Youth Entrepreneurship Program 青年創業專案 initiated by the MOEA in 2014 pools the resources of 48government programs at 13 agencies to prepare and guideyoung people through the stages of building a business. Convenience stores are an essential part of life in busy Taiwan. The nation has one of the highest densities of con- venience stores in the world, with one serving every 2,300 people. (Courtesy of President Chain Store Corp.) 137

6 Economy & Finance Between 2014 and 2016, the program will inject NT$2.72 billion (US$89.56 million) to encourage youths to engage in new agricultural businesses, cultural and creative industries, and social enterprises. A young entrepreneurs information platform has also been set up to enable quick access to useful information and resources. To help young people raise the funds needed to build their careers, Taiwan launched equity crowdfunding plat- forms for the private sector in April 2015, making it among the rst countries in Asia to institute such a mechanism. Services Sector Under a services industry development blueprint 服務業發 展藍圖 unveiled by the MOEA in late 2012, Taiwan’s services sector is set to become a major growth driver for the local economy. Commencing in 2013, the eight-year plan will see NT$30 billion (US$1.01 billion) invested in 15 strategic industries: retail, hospitality and catering, logistics, consulting, ICT services, design, advertising, conferences and exhi- bitions, digital content, wireless broadband applica- tions, health care, intelligent automation, cloud computing, e-commerce and energy services. e ministry forecasts public-private collaboration to drive the output of Taiwan’s services industry to NT$4.75 trillion (US$159.56 billion) by 2020, creating 166,000 new jobs and bringing the total labor force to 2.78 million. Flagship Programs Beginning mid-2008, the administration of President Ma Ying-jeou 馬英九 has pushed forward a number of “ agship programs” aimed at promoting sustainable economic devel- opment, enhancing the quality of life and improving distri- bution of wealth in Taiwan. i-Taiwan 12 Projects Among them are the i-Taiwan 12 Projects 愛臺十二建設, which focus primarily on public infrastructure. Scheduled for completion by 2016 at a projected cost of NT$4.3 trillion138

(around US$130 billion), about one-third of which is expect-ed to come from private investors, the projects include:Transportation Networks:• E cient transportation networks• Kaohsiung port-city regeneration• “Aerotropolis” encompassing the Taiwan Taoyuan Inter- national Airport (TTIA) 臺灣桃園國際機場Industrial Innovation:• High-tech industrial clustering in central Taiwan• Wireless broadband and digital content industries• Innovative industrial corridors Free Economic Pilot Zones To expedite Taiwan’s economic liberalization and globalization, the Exec- utive Yuan launched a plan in 2013 to establish free economic pilot zones (FEPZs) 自由經濟示範區 throughout the nation. As of August 2015, Taiwan’s seven free trade ports—Port of Keelung 基隆港, Port of Kaohsiung 高雄港, Su- ao Port 蘇澳港, Port of Taipei 臺北港, Port of Taichung 臺中港, Anping Port 安平港 and the TTIA—along with the Pingtung Agricultural Biotechnology Park 屏東農業生物科技園區 and the Changhua Coastal Industrial Park 彰化濱海工 業區 had been approved as FEPZs. These facilities are promoting five types of business activities: intelligent logistics, international medical care, value-added agriculture, financial services and innovative education. Trade regulations will be relaxed to ease the flow of capital, people, goods and information through the FEPZs. In the second phase, which will begin after the Legislative Yuan (Legislature) 立法院 passes a special act governing the zones, central and local governments may establish more FEPZs, and the zones may be set up on private land through co-development with the government. 139

6 Economy & Finance Urban and Rural Development: • Urban and industrial park regeneration • Rural regeneration Environmental Protection: • Coastal regeneration • Green forestation • Flood prevention and water management • Sewer construction Four Intelligent Industries Programs have also been launched to expedite the development of four “intelligent” industries, namely, cloud computing, electric vehicles, green architecture and patent commercialization. About NT$48.74 billion (US$1.54 billion) in public funding is expected to be spent between 2010 and 2016 to maintain information technology competitiveness, cut carbon dioxide emis- sions and conserve energy. Economic Power-Up Plan In response to ongoing economic challenges at home and abroad, the Executive Yuan in 2012 announced the Econom- ic Power-Up Plan 經濟動能推升方案 to map new strategies for spurring growth and restructuring industries from 2012 to 2030. Its initiatives are summarized as follows: • Promote innovative and diverse industries: Implement the Three Industries, Four Reforms Plan. Turn high- potential SMEs into “backbone enterprises,” and develop cross-strait nancial services. • Develop new export markets: Explore emerging markets and participate in regional economic integration. Boost exportable services such as tourism and events hosting. • Cultivate industry talents: Reform technical and voca- tional education to meet industry demands and foster talents specializing in emerging markets. Adjust labor laws and regulations to create a friendly environment for overseas professionals.140