Text: Former AIT Director Bill Stanton Speech on Taiwan's Future

National Security and Taiwan's Future
Remarks by William A. Stanton
World Taiwanese Congress
Taipei, Taiwan
March 15, 2013

WELCOME AND INTRODUCTION
Thank you, Dr. Kao, President of the Formosan Association for Public Affairs, for your kind introduction. And special thanks to Ms. Susan Chang, convener of the World Taiwanese Congress, for inviting me to attend this year's conference to address the critical issue of Taiwan's national security. …. [Acknowledge other VIPs]….. ladies and gentlemen, ….. Good Morning!

Before I begin, let me stress that I speak only for myself. Although I spent 34 years as an American diplomat, I no longer work for the U.S. Government, and I am no longer Director of the American Institute in Taiwan. I do not represent anyone's views but my own.

That said, I also speak as someone who has spent a good share of my diplomatic career thinking about Taiwan and about Taiwan's national security. And I also speak as someone who cares deeply about Taiwan, its people and its culture, and who enjoys living here.
Perhaps the best evidence of this is that I have remained in Taiwan even after retiring from the Foreign Service.

But I also continue to worry a great deal about Taiwan. I worry because I sometimes think the Taiwanese people do not worry enough.

Let me try to explain what I mean by that. I see Taiwan as a modern miracle, and an astonishing success story. Working with virtually no natural resources but the talent, hard work, and determination of its people, Taiwan in fewer than 50 years managed to pull themselves out of poverty and away from a military dictatorship and create a vibrant democracy and a thriving economy.

Taiwan today remarkably ranks as the 20th largest economy in the world in terms of purchasing power parity, according to the CIA's World Factbook, ahead of such countries as Argentina, the Netherlands , Hong Kong, Switzerland , and Singapore. Even on a strictly per capita GDP basis, Taiwan ranks 27th in the world, ahead of the United Kingdom (33rd), Japan (36th), the EU (39th), and South Korea (40th).

Similarly, Taiwan more recently ranked 20th in the world in the Heritage Foundation's 2013 Index of Economic Freedom, well above mainland China's ranking in 136th place.

The people of Taiwan clearly have much to be proud of. The best values embodied in Chinese culture -- including a stress on education, family, and hard work -- have truly paid off. And when Taiwan decided how it would be governed, it chose wisely, pursuing democracy and the principles of freedom, human rights and the rule of law, rather than the Marxist-Leninist rule of a one-party state.

But what makes Taiwan special goes beyond its values. I like to joke with my Taiwanese friends that Taiwan is the most Latin or most Mediterranean of Confucian societies. By that I mean, the Taiwan people are incredibly, warm, hospitable, and friendly. They welcome foreigners like me.
And even while they work hard, they love to eat and drink with friends and family, to sing, and to enjoy life. The Taiwanese have indeed created a unique and successful culture.

Why then am I worried?

I worry because, to judge by the Taiwanese I know, they -- like most people everywhere -- are preoccupied with making a living, raising their families, working hard, and enjoying life. Yet Taiwan remains uniquely vulnerable.

Perhaps because its way of life and indeed its very existence have been under threat for so long, even while Taiwan has flourished, the Taiwanese do not always seem to be paying as much attention to their future as they should.
Meanwhile, the media and some in politics, like the media and politicians everywhere, including the United States, often seem preoccupied with trivial political in-fighting and entertainment. Too few seem to focus on the fundamental issue of where Taiwan is headed. Too few, in other words, think about Taiwan's national security.

I believe national security needs to be understood in the broadest sense. Although it includes Taiwan's armed forces and weapons, it depends just as much on a range of other issues. Allow me to review a few, in no particular order, for in my view all are important to Taiwan's security.

THE DEMOGRAPHIC CHALLENGE
Let's start with Taiwan's demographic challenge. As many of you know, except perhaps for a brief spike during last year's auspicious Year of the Dragon, too few babies are being born in Taiwan. According to the CIA's World Factbook estimates in 2012, Taiwan's fertility rate was just over one child per woman. Taiwan ranked 221 out of 224 countries in the world.

Not last place, but pretty close. Taiwan's low fertility rate raises the prospect of future labor shortages, falling domestic demand, and declining tax revenues. Among the many consequences, one of the most obvious is the prospect of an increasingly older population with increasingly fewer young people to pay for the medical and retirement costs of the aged.

A related challenge is that there are already too few students to fill what are now more than 160 Taiwan universities in an overall educational system that is widely acknowledged to need reform . In the longer term, there will also be far fewer young people with the energy and creativity to build the Taiwan of the future.

ENERGY SECURITY
Energy security is another looming challenge for Taiwan, given the absence of major indigenous energy sources and its dependence on importing fossil fuels. The problem is even more serious because the consensus of most Taiwanese appears to be that Taiwan should give up nuclear energy.

It is not at all clear, however, how nuclear energy will be effectively replaced to sustain Taiwan's huge needs. According to the CIA's World Factbook 's latest estimates, as of 2009 Taiwan ranked 18th in the world in its consumption of electricity, and ranked 12th in the world in the size of its oil imports. 73.6% of Taiwan's total installed energy capacity came from fossil fuels, 12.5 percent came from nuclear energy, 4.7 percent for hydroelectric power, and 2.7 percent from renewable sources.

Most experts with whom I have spoken say there is no way the difference nuclear energy makes can be supplanted by anything but more fossil fuels if Taiwan wishes to sustain its energy-intensive industrial base. And fossil fuels also carry the high cost of high carbon emissions.
It is very easy to say "no" to nuclear energy, but it is much more difficult to find alternatives. Taiwan has tough decisions to make.

ECONOMIC CHALLENGES
One area where we might think we would find no major source of concern is Taiwan's economy. As I have already noted, Taiwan's GDP and purchasing power parity figures are strong. In addition, Taiwan runs a large trade surplus, and its foreign reserves are the world's fourth largest, behind only China, Japan, and Russia.

Yet there are reasons for concern.

As many observers have noted, Taiwan's economy is increasingly dependent on China.

Now, as economists will correctly argue, this is natural. After all, Taiwan and China have cultural and linguistic affinities, close proximity, and complementary economies almost ready made for close linkage as partners in a production chain supplying developed countries.

It is therefore not surprising that Taiwan's smart business people would lash up with the world's fastest-growing major economy, with growth rates averaging 10% annually over the past 30 years.

TRADE DEPENDENCY
What makes sense, however, from an economic point of view does not necessarily make sense from a national security perspective. Over the past few years, China, including Hong Kong, has become Taiwan's largest export market, taking some 40 to 42 percent of Taiwan's production. Meanwhile, since 2005, China has overtaken the United States to become Taiwan's second-largest source of imports after Japan. China is now also Taiwan's number one destination for foreign direct investment

This economic dependency is problematic for a number of reasons.

First, as China continues to develop its high-tech industries, Taiwanese manufacturers will encounter increasing competition from their former best customers. Taiwan clearly needs to diversity its customer base.

Second, the easier and more immediately profitable preoccupation with trade with mainland China has both distracted and limited Taiwan's interest in developing trade with other partners. China reinforces this pattern by leveraging its economic weight against those who would seek expanded trade agreements with Taiwan without Beijing's approval.

 

This focus on trade with China also in turn reinforces Taiwan's diplomatic isolation because Taiwan is not developing those regional and global ties that would give other countries a larger material stake in Taiwan's future. More extensive international trade ties would likely prove far more valuable to Taiwan in shaking its isolation than increased participation as an observer in international organizations.

Third, Taiwan's preoccupation with the ECFA Agreement, as valuable as it might be in itself, is at this point still a kind of "most favored nations" bilateral trading agreement, which serves as a poor model for the kind of free trade agreements which Taiwan needs to pursue to ensure deeper integration into the regional and global economies. ECFA has helped reinforce an unfortunate Taiwanese public perception that a trade agreement can be both beneficial and painless.

Fourth, ECFA did not require the politically difficult economic liberalization that Taiwan needs to implement to ensure an independent and prosperous economic future. In particular, Taiwan as a trading nation needs to find the political courage to end protectionism. It needs to avoid the prospect that in the future, it will again stall its trading relationship with the United States over an issue like beef because it wants to protect its domestic agricultural base. Agriculture in Taiwan, after all, only accounts for 1.8 percent of Taiwan's Gross Domestic Product.
Fifth, the risk of dependency on trade gives China leverage against Taiwan that is dangerous so long as the two sides remain politically divided. For example, in the fall of 2009 mainland tourist groups suddenly cancelled their visits to Kaohsiung over plans there to show a documentary about Uighur political dissident Rebiya Kadeer. If there are economic consequences for something so trivial, what might Beijing do in response to what it regards as a more serious offense?

MORE FOREIGN INVESTMENT FOR CHINA
In addition to China becoming Taiwan's most important export market, China is now also Taiwan's number one destination for Foreign Direct Investment (FDI). According to some informal estimates, Taiwan may have historically invested as much as $300 billion USD in the mainland.

There is of course a certain symmetry and also irony in the fact that the major reason for Taiwan's economic success in recent years has been its booming trade with China. After all, it was the massive investments that Taiwan first put into China beginning in the late 1980s -- along with Taiwanese business experience and technological expertise -- that helped jump start China's economic miracle and in turn strengthen its military forces which now threaten Taiwan.

 

LESS FOREIGN INVESTMENT FOR TAIWAN
Even as Taiwan's economic success is increasingly linked to China, Taiwan is also increasingly losing the regional competition in attracting Foreign Direct Investment (FDI). Currently, according to the CIA's 2012 World Factbook, Taiwan ranks 52nd in the world as the destination for FDI, behind Hong Kong (3), China (7), Singapore (15), Thailand (27), Japan (28), South Korea (29), Indonesia (32), Malaysia (33), and Vietnam (47). Among comparable economies in Asia, it outranks only the Philippines (62).

According to the Financial Times 2012 report on Foreign Direct Investment, in 2011 Taiwan did not rank among the top 10 destinations in Asia for FDI. In other words, Taiwan is increasingly invested in China, but others are not investing in Taiwan.

It remains to be seen how much China will be able to fill this FDI vacuum.
Three cross-Strait financial memoranda of understanding, covering banking, securities, and insurance, took effect in mid-January 2010, opening Taiwan to greater investments from the mainland's financial firms and institutional investors, and providing new opportunities for Taiwan financial firms to operate in China.

Closer economic links with the mainland bring greater opportunities for the Taiwan economy, but also once again pose new challenges as Taiwan becomes more economically dependent on China while political differences remain unresolved.
INDUSTRIAL ESPIONAGE
Two other worrisome phenomena that threaten Taiwan's national security are industrial espionage directed at stealing Taiwan's intellectual property and an ongoing "brain drain." Both are closely linked to China.

Chinese industrial espionage first came to my attention from major American corporations here in Taiwan, where the United States still holds its position as the Taiwan's number one foreign investor. More than one top executive at high-tech firms described to me the problem of Taiwan engineers receiving huge financial incentives as well as other benefits from mainland companies if they would leave their jobs in Taiwan, move to China, and bring downloaded company secrets with them.

If you look on the internet, however, you will see that there many reports on similar thefts from Taiwan companies. For example, last October, two former executives from the Taiwanese flat panel-maker and Apple supplier, AU Optronics, were arrested on suspicion of stealing advanced light-emitting diode technology for their new employer in China, TCL. They reportedly were receiving annual salaries in excess of $1 million USD from TCL while still employed at AU Optronics.

More recently of course, the New York Times reported extensive cyber -attacks dating back years against U.S. companies and also aimed at stealing their technology. The cyber-security firm, Mandiant, which uncovered the source of the attacks, concluded in in their public report that: "The sheer scale and duration of sustained attacks against such a wide set of industries from a singularly identified group based in China leaves little doubt …the organization behind [the attacks]" is "the 2nd Bureau of the People’s Liberation army (PLA) General Staff Department’s (GSD) 3rd Department which is most commonly known by its Military Unit Cover Designator as Unit 61398."

THE BRAIN DRAIN
Meanwhile, a more overt form of loss for Taiwan has been a serious ongoing brain drain. According to a story published in The China Post last month, Taiwan's LCD panel industry has lost many of its executives and engineers to competitors in China. The same story cited a report by a private consulting firm showing that 69 percent of the Taiwan companies it surveyed expected some of their employees to look for work in other Asian countries, particularly China, as well as Hong Kong and Singapore, in 2013.

According to a report Taiwan Today last September, Dr. Cyrus C.Y. Chu, Minister of the National Science Council (NSC), said at an NSC advisory meeting that "Taiwan's low salaries are driving the most capable away from the island." Meanwhile, Taiwan had been unable to attract skilled workers from abroad and, as a result, he said, "Taiwan has become a net exporter of talent."

The same article in Taiwan Today attributed Taiwan's talent exodus to China's growing economic might. It cited a Taipei-based placement agency as saying "77 percent of local respondents saw working on the other side of the Strait as an opportunity for better career development and increased international exposure."

The net consequence of Taiwan's brain drain of course is that it becomes a less attractive destination for foreign investment, and there is less innovation and economic growth.

DEFENSE CHALLENGES
While all of the issues I have been addressing represent significant challenges to Taiwan's national security, they would not be so troubling if Taiwan were not forced to live under the continuing potential threat of an attack. As unlikely as an attack may be, China's Anti-Secession Law --which went into effect eight years and one day ago (on March 14, 2005) --remains in force, and it still both defines and limits Taiwan's parameters of choice about its future.
Meanwhile, Chinese military power has grown enormously since the law was passed. China's 2.3 million-strong army is more than 10 times as large and its ever expanding defense budget is more than 14 times that of Taiwan.

According to the U.S. Department of Defense's 2012 Annual Report to Congress on PRC military developments, the PLA Navy now has the largest force of principal combatants, submarines, and amphibious warfare ships in Asia. China has 26 destroyers to Taiwan's 4; it has 53 frigates to Taiwan's 22; it has 48 diesel attack submarines and 5 nuclear attack submarines, to Taiwan's 4 submarines, two of which are of World War II vintage.
China's air combatant strength is equally daunting. The PLA Air Force and Navy together have about 2120 operational combat aircraft, including air defense and multi-role fighters, ground attack, aircraft fighter-bombers, and bombers. In contrast, Taiwan has around 388 fighters and 22 bomber/attack aircraft.
In addition, the mainland advantage in land, air and sea-based missiles is overwhelming.
At first glance, the huge superiority the mainland military increasingly enjoys might not perhaps seem so worrisome. After all, it is true that cross-Strait relations have significantly improved over the past few years. The United States and other countries have welcomed the stability that this rapprochement has helped to foster.
At the same time, I firmly believe that sufficient self-defense forms the foundation from which Taipei can most confidently manage relations with Beijing, and thereby also contribute to both cross-Strait and regional stability. I know this has also been the position of both the current Taiwan government and of previous Taiwan governments as well.
For this reason, over the past four years I was pleased to see substantive efforts by Taiwan to strengthen its defensive capabilities, including the purchase of nearly $13 billion USD worth of defensive weapons systems.

DEFENSE BUDGET
Nonetheless, Taiwan's overall defense spending strikes most expert observers as unrealistically low. Since at least 1994 Taiwan's defense expenditures have steadily decreased both as a percentage of its GDP and as a percentage of total government spending. In fiscal year 2012, Taiwan's defense budget of USD $10.6 billion represented only 2.2 percent of GDP and only 16.4 percent of total government spending.
Compare those figures to 1994 when Taiwan devoted 3.8 percent of its GDP and 24.3 per cent of government spending to defense. Taiwan's defense spending has in fact been below 3 percent of GDP since the year 2000, a twelve-year period during which China's defense spending has massively increased.
TAIWAN'S DEFENSE NEEDS
A larger defense budget is not needed merely as a matter of buying more arms. (Let me add, by the way, that I am not here to promote arms sales!)

The need for more weapons systems, in fact, may be a moot question if Taiwan does not address other pressing problems. Simply put, there are insufficient funds to undertake the very expensive process of creating an all-volunteer military force which requires attracting and retaining recruits.

Nearly half of Taiwan's 2012 defense budget is already devoted to personnel costs, but that figure will have to climb since conscripted soldiers still make up about 60 percent of Taiwan's military. Of course the all-volunteer force assumes Taiwan can recruit enough soldiers. Consider that, according to a Financial Times report, in 2011 Taiwan's military recruitment drive only reached about half of its goal of 4300 soldiers.

At the same time that Taiwan is attempting to build a smaller, but more capable and professional volunteer force, it is also pursuing innovative and asymmetric approaches to defense. All such changes, however, also require more funding.

Absent a greater and more realistic commitment by the people of Taiwan to their defense budget, I am not optimistic that the Taiwan military can meet the objectives of it ambitious transformation plan. Unfortunately, as in every democracy, citizens want to be assured of a strong defense capability, but they are usually not willing to pay more taxes to obtain it.

MILITARY ESPIONAGE
One possible consequence of declining support for Taiwan's defense may be declining morale among Taiwan's forces, as evidenced by continuing incidents of successful Chinese espionage against Taiwan military.

According to various media reports I could find, there were at least nine cases of Chinese espionage against Taiwan from 2004 to July 2011, and I am sure I missed several more. The most prominent of these was the arrest in early 2011 of Major General Lo Hsieh-che (羅賢哲) on charges of spying for China. He was subsequently convicted and sentenced to life in prison.

As the head of the electronic communications department in the Taiwan Army, Lo was reportedly the highest-ranking officer ever caught spying for the mainland. According to media reports, Lo received money and other incentives to spy, but the United Daily News also observed that his actions were "definitely related to Lo's confusion over the country's future and the loyalty of military servicemen."

There have been even more cases since July 2011. In August 2011, Taiwan's High Court sentenced Lai Kun-chieh, a Taiwanese software engineer, to 18 months in prison for trying to obtain sensitive information about Patriot missiles from a military officer.

In March 2012, an Air Force Captain identified only by the surname Chiang
(蔣), who worked at an air operations control center in northern Taiwan, was arrested for allegedly passing intelligence on Taiwan's air-defense command and control system to China.

Very recently, on February 5, 2013, Taiwan's High Court gave retired air force Lieutenant Colonel Yuan Hsiao-feng (袁曉風) 12 life sentences for passing classified military information to China over a period of six years. Yuan reportedly passed the secret information to China between 2001 and 2007 through Chen Wen-jen (陳文仁), a former colleague in the Air Force.

Also in early February, Taiwan's Ministry of National Defense confirmed that a rear admiral had come under investigation as part of an espionage case involving the possible leak of Navy secrets. According to reports, Admiral Hsu Chung-hua (徐中華), commander of the 146th Flotilla based in Magong, Penghu, had been transferred from his position in connection with the case.

This case first emerged last year from the investigation of Lieutenant Colonel Chang Chih-hsin (張祉鑫), formerly a commander in charge of political warfare at the Taiwan Navy’s Meteorological & Oceanographic Office, which provides mapping data to the military. That investigation is continuing.

On March 1, Chien Ching-kuo, a former Navy Lieutenant, was found guilty of leaking classified information to China and sentenced to three years in prison. It was learned that in August 2011 he had joined the Chinese Communist Party.

Also the same week in February, the Ministry of Defense announced that Army Major General Wu Chin-chun (吳金駿), reportedly a trusted aide to the Minister of National Defense, had been temporarily reassigned as investigators look into a possible connection between a relative of Wu and the Chang case, which has been described as possibly one of the most damaging espionage cases in recent years.

Even more recently, according to the Liberty Times, on February 27 a retired Taiwan Lieutenant General, Chen Chu-fan, was indicted for allegedly passing information to Chinese authorities via a retired Taiwan intelligence officer.

Of course, these are only the cases that have been both uncovered and reported in the media, and other investigations are continuing.

What many of these incidents of espionage have in common is an effort to learn more about Taiwan's command and control and communication systems and U.S. weapons systems sold to Taiwan.

These cases have been harmful not only because of the potential loss of unknown quantities of classified information, but also because their success and frequency serves to undermine U.S. confidence in security cooperation with Taiwan.

It is also particularly troubling that so many of the espionage cases uncovered occurred at a time when cross-Strait relations were ostensibly better than ever before.

TAIWAN PUBLIC OPINION FAVORS THE STATUS QUO

These economic, military, and other challenges Taiwan faces would not be so troubling if in fact the Taiwanese people agreed that unification with China was not only inevitable, but also welcome. That, however, is clearly not the case.

Every Taiwan public opinion poll I have ever seen has concluded that the overwhelming majority of Taiwanese want to maintain the status quo – in some shape or form -- with China. Very few Taiwanese believe independence is a viable option, but even fewer want unification now.

For example, a telephone survey conducted by National Chengchi University from March 30 to April 2 last year and released by the Mainland Affairs Council, showed the following results:

-- Only 1.5 percent of respondents supported “unification at the earliest possible opportunity.”
-- About 8 percent supported “maintaining the status quo and seeking unification at a later date.”
-- 6.1 percent wanted to declare independence as soon as possible
-- 15.7 percent believed that Taiwan should “maintain the status quo and declare independence later.”
-- 29.9 percent said the “status quo” should be maintained in perpetuity.
-- Another 32.4 percent of respondents said that the “status quo” should be maintained with any decision on unification left to the future.

In other words, fewer than 10 percent of respondents supported unification with China, indicating that more than 90 percent of Taiwanese do not support unification.

In fact, as a TVBS poll in February 2011 revealed, if the option of the "status quo" is removed from the polling questionnaire, the response is even clearer. In the TVBS poll, given the choice between becoming an independent nation or unifying with China, 68 percent of those responding chose "Taiwan independence" and only 18 percent chose "unification with China."

 

CAN THE STATUS QUO BE MAINTAINED?

In any case, the very concept of a Taiwanese "status quo" is problematic for two reasons:
• First, it is in fact an illusion because the situation is constantly changing. As we have seen, China is getting increasingly strong and Taiwan is growing increasingly dependent economically. Taiwan is simply drifting closer and closer to the mainland.

• Second, the cross-Strait relationship will not be decided by the Taiwanese people alone, and we do not know the extent of mainland patience with a status quo that does not move quickly enough in the political direction it wants.

Advocates of eventual unification often consider themselves realists, arguing that Taiwan has little choice in any case. Meanwhile, they hold out the hope that over time China will evolve in a positive direction under the influence of the positive model Taiwan provides.

In my view, however, there is no evidence that the Chinese Communist Party is willing to countenance democracy or any challenge to its grip on power. If anything, as it has grown economically stronger, China has grown increasingly nationalistic, expansionist, and belligerent.

Hong Kong hardly provides an attractive model of integration into the mainland. Not to mention non-Han Tibet and Xinjiang which now constitute one-third of Chinese territory but which were never considered part of China until the Manchu Qing Dynasty took them over.

It was during the Qing dynasty as well that the mainland first laid claim to Taiwan. And it was Chiang Kai-shek and Mao Ze-dong who first reasserted the Qing claims to this maximalist vision of China.

WHAT THEN SHOULD TAIWAN DO?

As always, it is much easier to identify problems than to come up with solutions. And even when possible solutions are identified, implementation is never easy. Allow me to offer, however, a few preliminary suggestions for consideration.

First, I think there needs to be wider popular recognition and understanding of the national security challenges Taiwan faces. Such issues need to be an integral part of future national election campaigns and regular balanced coverage in the media. Controversial matters like nuclear energy should be the subject of serious national education and debate rather than just political jousting.

Second, Taiwan should further open its economy as it did when it joined the World Trade Organization, end short-sighted protectionism, and undertake measures that will attract more foreign investment and make free trade agreements with other countries possible. Stronger laws against industrial espionage should be introduced.

Third, the Taiwanese people should reexamine their support for national defense, draw the inevitable conclusion that more needs to be done, and act accordingly. Simply put, as a first step, more money needs to be spent on national defense.

I recognize that such changes may not be popular or easy, but I also know that Taiwan has achieved great success in the face of enormous adversity. And Taiwan has so many friends, as is evident at this World Congress, who will support its efforts.

I look forward to discussing these and other issues during the course of the day. Thank you.