Massive student protests recently erupted in Taiwan in response to a controversial trade pact with China, which critics claim could pave the way toward China's eventual assimilation of the island nation.

The pact is an extension of the tariff- and barrier-lowering ECFA (Economic Cooperation Framework Agreement) signed between China and Taiwan in 2010, and could allow citizens on both sides to work and invest in select industries. Critics claim that the deal is unbalanced and could cede local businesses to the Mainland Chinese.

In response, students stormed the Legislative Yuan (Parliament Building) in Taipei on March 18, vowing to barricade themselves inside until the pact is repealed. On March 23, another group of students and supporters stormed the Executive Yuan (Taiwan's executive branch), smashing windows and breaking into the compound, resulting in a violent brawl with riot police that resulted in over 150 injuries.


A wall of protesters block off the Executive Yuan on March 23. (Source: Author)

The pact's supporters, however, believe that it is the only way for Taiwan to remain on equal footing against stronger Asian rivals such as South Korea and Japan, which are close to finalizing an historic free trade agreement with China -- an agreement that would create a region with a GDP equivalent to 20% of the world's total, with a combined import and export volume equivalent to 17.5% of all global trade.

Evolution and revolution
Yet to truly understand this nation, which I have called home for the past decade, we should take a look back at how historical events have flowed into current ones.

Taiwan, a former colony of Japan between 1895 and 1945, was ceded to China at the end of World War II. Taiwan's early days under the rule of the Kuomintang (KMT), which retreated to Taiwan under deposed leader Chiang Kai-Shek's rule in 1949, were tense. Many Taiwanese had enjoyed a higher quality of life under Japan, but after Chiang's Nationalists lost the mainland to Mao Zedong's Communist Party, it became a rump state placed under martial law for 38 years.


Chiang Kai Shek Memorial Hall, Taipei. (Source: Author)

Chiang and his son, Chiang Ching-Kuo, served as the first two presidents of Taiwan. Their terms were marked by admirable progress in infrastructure and economic development, but also tarnished by brutal crackdowns on dissenting journalists and pro-independence factions. After Chiang Ching-Kuo's death in 1988, President Lee Teng-Hui started a localization movement that led to the first series of democratic presidential elections.

Due to this localization effort, the pro-independence Democratic Progressive Party (DPP) quickly gained ground, causing an irreparable rift with the KMT, which favored an eventual reunification with China.

Isolation and survival
Taiwan's executive and legislative branches have been dominated by the KMT since 2008. The KMT's conundrum, however, is that it is expected to maintain a status-quo relationship with China -- to never officially declare independence, but to never surrender the island either. China, in response, has boosted economic ties, in hopes that it can rein in a region that it officially considers a renegade province.

As a result of China's stance on Taiwanese independence, Taiwan has been isolated from the rest of the world. The country, once considered the official governing body of China, was expelled from the UN in 1971. Taiwan currently only has 22 remaining allies in the world -- many of them tiny nations without a military force or viable economy. Yet despite that isolation, Taiwan evolved into one of the "Asian Tigers" in the 1990s, thanks to the growth of tech giants like Taiwan Semiconductor (NYSE:TSM), Asus (NASDAQOTH:AKCPF), Acer, and Foxconn.

Unfortunately, that golden age didn't last. The Third Taiwan Strait Crisis in 1996, the Asian Financial Crisis in 1997, and the steady exodus of Taiwanese companies to lower wage nations like Vietnam, Thailand, and Indonesia all resulted in a stagnant economy -- one that China was eager to court with promises that economic cooperation would lead to mutual prosperity.

A partnership indeed makes sense, considering that China's annual GDP growth has slid over the past several years, dropping from 14.2% in 2007 to 7.7% in 2013. By comparison, Taiwan's GDP only grew 2.2% in 2013.

Stuck in the middle
Taiwan is currently stuck in the "middle income trap" that has trapped nations like Brazil for decades.

The current average monthly wage per employee is NT$37,938 ($1,244), but the average college graduate can only expect a starting monthly salary of NT$22,000 ($721). Meanwhile, inflation has outpaced wage growth, and company-led real estate investments have created a self-sustaining real estate bubble in which the average price of a tiny 20-ping (711 square foot) apartment in Taipei has soared to a whopping NT$13 million ($426,000).

The KMT government has done little to raise wages or lower housing prices across the board, out of fear of respectively angering companies (which are itching to relocate) and affluent, influential real estate investors. When we combine those problems with the fact that ECFA allowed Chinese businesses to boost their investments in Taiwan from $43.7 million in 2011 to $328.1 million in 2012, many Taiwanese citizens now believe that the government favors the aspirations of Chinese businesses over the needs of its own people.

Good for the big fish, bad for the small fish
That's where the disputed trade pact, which opens up 80 of China's service sectors to Taiwan and 64 Taiwanese sectors to China, comes in.

Taiwan is letting investors from China invest in the retail, hospitality, delivery, computer, and advertising industries, along with other service sectors traditionally dominated by Taiwanese citizens. A widely cited, non-official calculation claims that the pact could allow a Chinese family who invests around NT$6 million ($197,000) to immigrate to Taiwan, raising fears of a Crimea-like takeover -- a theory that the government has dismissed as faulty logic. The pact does not open up the employment market to all Chinese workers, since current cross-strait work visa standards remain unchanged.

In exchange, China opens the doors to large Taiwanese companies by allowing investments in construction contracts, private hospitals, and bus corporations. It also allows Taiwanese retailers to set up shop in China and lets securities firms set up branches in Shanghai, Shenzhen, and Fujian province. Both China and Taiwan are allowing funeral homes -- a booming business in both aging countries -- to set up shop across the strait.

The main fear is that the pact could cause Chinese-owned businesses to push out Taiwanese-owned ones across various industries, and Taiwanese citizens will end up working for bosses from Mainland China. The deal also notably benefits the biggest players in Taiwan -- construction firms, financial institutions, and funeral homes -- which all hold considerable clout in the government.

In other words, aiding the biggest fish might help the overall economy, but cause the smaller fish to go belly up -- a classic Wal-Mart versus the local grocer scenario.

The road ahead
Before pursuing a career in finance writing, I taught English in Taipei. That's why it pains me to see the country being paralyzed by its current crisis.

Many people have oversimplified the situation on Twitter via the hashtag #taiwanoccupy, claiming that policemen "violently broke up" a "peaceful" demonstration. On the contrary, breaking into a government building then subsequently attacking the police with bottles and firecrackers can hardly be considered "peaceful."

Others claim that the trade pact was "undemocratic," which is also untrue, since the pact is currently supported by a popularly elected president and the majority of the legislative body. The only real issue is the process of line-by-line bipartisan deliberation, which critics claim was skipped during the maze-like Taiwanese law-making process, although the pact was introduced over nine months ago and was under deliberation when the students stormed the Legislative Yuan.

It's understandable why the students feel rage at the country's stagnation, but it's no excuse to undermine democracy by invading government buildings to preserve it. The students have demanded that President Ma Ying-Jeou repeal the trade pact "or else," leaving no room for real negotiations. These students might be better off remembering, as Gandhi once said, that "anger and intolerance are the enemies of correct understanding."

The next step for you
Did you ever want to learn more about growing Asian markets like Taiwan, China, and South Korea? The Motley Fool is offering a new special report, an essential guide to investing, which includes access to top stocks with exposure to these markets. Click here to get your free copy today.


Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Compare Brokers