The biggest disparity in cross-Straits trade is the huge deficit the mainland has suffered over 25 consecutive years since the two sides resumed trade links in 1979.

Official data shows the deficit has accumulated to US$230 billion by February this year.

The trade imbalance has been widening on the constant growth of cross-Straits trade volume, which exceeded US$30 billion in 2000 and US$50 billion in 2003. Cross-Straits trade totalled US$336.7 billion by the end of February 2003.

Overseas-funded enterprises, particularly Taiwanese-funded firms which are granted preferential treatment, are the main source of the deficit. In 2003, overseas-funded companies exported US$5.7 billion to and imported US$35.8 billion from Taiwan, accounting for US$30.1 billion, or 74.6 per cent of the mainland's overall trade deficit with Taiwan.

The mainland's increasing imports from Taiwan mainly come from processing trade. Foreign and Taiwanese investors' purchases, which mainly involves equipment and raw materials in processing trades, makes up 72.5 per cent of the mainland's imports from Taiwan. Growing Taiwanese investment has stimulated the mainland's imports of processing trade-related products from Taiwan.

There are various reasons for the widening cross-Straits deficit, but the Taiwan authorities' restrictive mainland economic policy is the fundamental one.

For years, Taiwan has been adhering to an "easy out, tight in" line on trade with the mainland, and has unilaterally set importing restrictions on most mainland commodities, especially Taiwan's large import sectors in elementary agricultural and industrial products, machinery and marine products, as well as home electric appliances.

Of course, Taiwan authorities' long-standing ban on direct trade, which adds to mainland costs in exporting to the island, is another reason for the deficit.

Since both sides of the Straits joined the World Trade Organization (WTO), Taiwan authorities have adjusted their mainland economic policy to an limited extent in response to WTO requirements and pressure from business circles in the island.

In February 2002, Taiwan authorities lifted import bans on 2,058 mainland products. The mainland now can export a total of 7,689 agricultural and industrial products to Taiwan, covering 72.6 per cent of the province's list of products for open trade.

The ban on mainland exports has relaxed but mainland exports to Taiwan are not likely to rise substantially, in that most of the newly open items are neither the mainland's competitive products nor ones that are largely consumed in Taiwan such as home electric appliances, telecommunication products, clothing and light industrial products.

To an extent, however, the unbalanced cross-Straits trade structure is also attributed to the mainland's poor performance in exploring the Taiwan market.

Although the mainland's tolerance of the deficit is positive to expand cross-Straits economic co-operation, it has created unfavorable repercussions for the mainland's foreign trade as a whole and, in particular, has sparked more trade friction between China and other countries.

For example, the United States has been Taiwan's largest exporting destination and a major source of the island's trade deficit. As Taiwan moved most of its labor-intensive industries to the mainland in recent years, however, the trade surplus is moving to the mainland too, which in turn leads to increasing trade frictions between the mainland and other countries.

Predictably, neither side of the Straits sits idly in the face of unbalanced trade. They will instead introduce new measures.

By continuing a discriminatory mainland trade policy, Taiwan has seriously violated WTO rules. It is not unlikely that the mainland will embark on relevant WTO mechanisms to counter Taiwan's practices and press it to abandon discriminatory trade policies step by step.

Meanwhile, the mainland will also gear up to promote its exports to Taiwan. The Ministry of Commerce and local trade administrations will be more concerned with the long-standing deficit with Taiwan and make exports to Taiwan a focal point in their work.

The mainland will take steps to promote exports of competitive local products to Taiwan, including agricultural and electrical products. It will also strengthen cross-Straits co-operation in high-tech industries and the service sector to promote exports in these areas to Taiwan.

The mainland will foster technical upgrading of exports to Taiwan to improve the added value of these products.

It will familiarize local businesses with Taiwan's technical, quality, environmental and quarantine criteria on products that have the potential for being exported to Taiwan.

The mainland is also likely to foster the cross-Straits processing trade to develop in new ways. It will stimulate Taiwanese businesses to localize their production and integrate Taiwanese capital, technology and marketing networks with the mainland's industrial progress.

Taiwanese investors' industrial chain in the mainland should be stretched from processing-trade-based business to coordinated production with mainland enterprises. The Taiwan side is also likely to speed up opening up to mainland exports, urged by both WTO rules and an enthusiastic Taiwanese business circle.

Generally speaking, a lasting growth in cross-Straits trade can be expected, but the imbalance will not change fundamentally in the near future. The growth rate of cross-Straits trade may drop slightly this year, considering the gigantic base of last year's trade volume.

However, the volatile political climate in Taiwan has added to the uncertainties in cross-Straits relations. It may lead to some twists and turns despite the overall picture of stable cross-Straits trade relations.

(China Daily August 20, 2004)