Introduction

This chapter examines the relationship between mainland China and Taiwan both in terms of trade integration and flows of foreign direct investment and in terms of overall macroeconomic interdependence as represented by output, money, inflation, and financial market interrelationships. There has been striking ongoing growth in trade linkages and investments flows in the years since Taiwan's government eased its blanket restrictions on interactions with mainland China in 1985. These trade flows also accelerated sharply after mainland China and Taiwan each joined the World Trade Organization (WTO) around the end of 2001. The importance of Taiwanese foreign direct investment, however, clearly remains understated in official data. Limits imposed by Taiwan's government on allowed investments in the mainland have sparked considerable Taiwan-led investments entering the mainland via third areas like Hong Kong, the British Virgin Islands, and the Cayman Islands. This trend is reflected in the fact that official figures of foreign direct investment inflows to mainland China (otherwise inexplicably) rank the British Virgin Islands second in importance only to Hong Kong. The cumulative total of Taiwanese foreign direct investment in mainland China through 2007 may actually have reached $US 150 billion.