The following article is an excerpt from a speech given by Lee Tong-liang, chairman of Taipei Importers & Exporters Association, at the 10th Joint Meeting held in Taipei on March 29, 2000.

Taiwan's decision to lift its ban on travel to the mainland in 1987 also intensified cross-strait communication. However, as both Taiwan and the mainland still impose restrictions on commercial intercourse, Hong Kong still has a role to play as a "buffer" and "middleman" between the Taiwan Strait -- a role which can strengthen interactive relations between Hong Kong, mainland China and Taiwan.

Trade relations across the Taiwan Strait

Indirect trade across the Taiwan Strait is traditionally carried out via a third territory, with Hong Kong handling about 90 per cent of the total.

Before 1985, Taiwan exported mostly consumer goods -- such as household appliances and umbrellas -- to the mainland. But as it rolled back certain rules restraining cross-strait export and investment activities, Taiwan manufacturers on the mainland began importing more raw materials, parts and equipment from Taiwan for their operations on the mainland.

Changing landscape

Over the years, Taiwan businessmen's strategy has undergone two transformations. The first began in 1988 when many of Taiwan's SMEs involved in labour-intensive industries set up operations in the southern coastal areas of the mainland to take advantage of the cheap labour there. The second change began at the start of 1992 when the mainland opened its domestic market to overseas investors.

Taiwan entrepreneurs now invest mainly in capital- and technology-intensive industries throughout the mainland. Also, these products are not destined for export, but for sale on the domestic market.

Raising competitiveness

Although the mainland has abundant land and cheap labour, it still desperately lacks capital supply and management resources, making it a magnet for labour-intensive industries.

Taiwan and Hong Kong, by contrast, which are rich in capital resources and technical expertise but are struggling to bear rising labour and land costs, are looking to expand their capital- and technology-intensive industries. As such, with its competitive advantage in service industries, Hong Kong has become the focus of multinationals looking for partnerships.

Although Taiwan and Hong Kong exports compete against each other on the world market, they both compete against other countries' exports.

Instead of competing against each other, Hong Kong and Taiwan businesses need to review their competition policy. They could develop strategic alliances by looking at issues such as new market development and new marketing strategies.

But as production rises, distribution becomes more complicated. Therefore, seeking cooperation amongst competitors will help advance market development in the following ways.

1. Hong Kong, Taiwan and the mainland can cooperate on the basis of "Process Specialisation," by providing raw materials and semi-finished products requiring different production techniques along the supply chain. In this specialised supply chain, Taiwan will be the supplier of sophisticated parts, Hong Kong the processing base, and the mainland the assembly hub. The mainland could also become a labour-intensive supplier of parts for re-export to Taiwan and Hong Kong for assembly.

2. Hong Kong and Taiwan have similar investment ideals on the mainland -- electronic equipment, electric appliances, optical products and leather goods -- which makes Hong Kong and Taiwan competitors. By sharing resource management, material supply and sales support the two could capitalise on each other's advantages.

3. The mainland's low costs and cooperation between Hong Kong and Taiwan regarding information exchange, R&D, design and overseas investment, if properly capitalised on, are effective tools for developing markets in Europe, the U.S. and Japan.

4. Taiwan and Hong Kong manufacturers may be able to penetrate the mainland retail sector by setting up sales counters in the mainland's department stores, co-operating with state-owned chain enterprises, or venturing with mainland partners in establishing retail distribution over the Web.