When bozos attack

Slagging reaches new low in Taiwan campaigns

Jonathan Adams

Taiwan Election Notebook, March 18, 2008

Far Eastern Economic Review

Last week it was a group of loose-cannon Kuomintang legislators, who barged into the campaign office of Frank Hsieh, the Democratic Progressive Party candidate. An embarrassed KMT candidate Ma Ying-jeou apologized for the intrusion, as did the legislators. Their ringleader even said tearfully he would “consider killing himself” if his actions led to Mr. Ma losing the election.

Today, the media went crazy over comments at a pro-Hsieh rally yesterday by a DPP education official. The official used unprintable slang to insult Mr. Ma’s deceased father. As one newscaster put it, “both blue and green [referring to KMT and DPP camps] agreed he went too far.”

Frank Hsieh apologized to Mr. Ma for the comments, while trying to distance his campaign from the official, Chuang Kuo-jung. Mr. Chuang resigned over the remarks late Sunday, according to local media. But all day, TV stations continued to replay the offensive footage, as analysts picked apart the impact on the election.

It wasn’t the first time the official in question had slagged Mr. Ma. In fact, Mr. Chuang became notorious in December for his off-color remarks while defending the government’s decision to change the signage on the former “Chiang Kai-shek Memorial Hall,” a Taipei landmark, to “Taiwan Democracy Memorial Hall.”

While verbally jousting with the KMT over the change, he called Ma “sissy” (niang) and a “wimp” (xiao nao nao). He said that another KMT official so tightly “embraced” Chiang Kai-shek that he seemed gay.

Many Taiwanese criticized him for his intemperance; some even blamed him for contributing to the DPP’s thumping defeat in January’s legislative election. But he became an overnight hero for hardline KMT-haters; his fans in the DPP legislative caucus even brought him flowers. It remains to be seen how much Mr. Chuang’s comments will hurt Mr. Hsieh — they may serve to remind many fatigued voters of their disgust with DPP rule.

But the flap highlighted two points on this election. One is that both parties continue to have trouble reining in hardline elements in their own camps, a worrisome sign as Taiwan attempts to move toward a more stable two-party system.

The second point is more encouraging: Both candidates immediately disowned the remarks, highlighting their insistence on taking a more moderate road and themselves resisting extremism. That, at least, is an encouraging sign for Taiwan’s young democracy.

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Victory for pragmatism

As a vote looms, Taiwan seems ready to abandon an era of defiant nationalism

Jonathan Adams
Newsweek, March 15, 2008

Ken Wen, 60, is fed up with Taiwan's pro-independence president, Chen Shui-bian. Wen, a home builder, voted for Chen and his Democratic Progressive Party (DPP) back in 2000. In so doing, he helped end the 50-year rule of the Kuomintang, which has traditionally opposed independence from China.

But now, after eight years of corruption scandals, cross-strait tensions and poor economic performance, Wen says it's time for another change. At a rally in the port city of Keelung last week, he said he planned to vote for the KMT's Ma Ying-jeou for president on March 22, hoping Ma will boost Taiwan's stagnant economy by strengthening links with China. "If we don't open up more, we're finished," Wen says.

That's a common view in Taiwan these days. In fact, both candidates in the upcoming vote—Ma and his DPP challenger, Frank Hsieh—have promised to open Taiwan's economy to the giant next door and to take a more moderate tone with Beijing.

But if the front-runner Ma, who is Hong Kong-born, triumphs over native son Hsieh, the voters' message will be especially clear. Ordinary Taiwanese will have rejected Chen's confrontational tactics: a victory not just for moderates like Ma, but also for Chinese President Hu Jintao, who's taken a more restrained approach to the island in recent years.

And by electing the first mainland-born leader since the end of Taiwan's authoritarian era 20 years ago, locals will also have stepped away from the identity politics that have long divided this island.

As all this suggests, a Ma victory would have far-reaching implications. First, of course, it would cool off one of the world's most dangerous flashpoints, the one place that could actually spark a war between China and the United States. (Beijing views Taiwan as part of its territory and has threatened force if the island makes a permanent break; Washington has pledged to help its democratic ally if attacked).

Since 2000, China and Taiwan have been locked in a vicious circle: Beijing has refused to deal with the island's pro-independence government, and Chen has inflamed tensions by loudly trumpeting the island's sovereignty. But Ma wants to break this cycle with expanded economic links and engagement with Beijing.

His pledges include the opening of direct cross-strait flights by May 2009 (travelers currently must touch down in a third location, adding several hours to trips), lifting caps on China-bound investment (helping Taiwan firms better tap the mainland market), allowing more Chinese tourists to visit the island (they're currently limited to 1,000 a day) and opening Taiwan's economy to more Chinese investment.

"There's no need to antagonize the dragon," Ma adviser Su Chi put it in an interview in January. His boss has even proposed to restart political talks with Beijing, which have been suspended since 1999.

Oh, and then there's the pandas. Unlike Chen, Ma has said he'd accept China's standing offer of two of the cuddly bears (the pair are currently cooling their paws in Sichuan).

But is Taiwan ready to put a panda-hugger in office? Despite Ma's lead in the polls, he's not yet a shoo-in. Pro-independence sentiment and Taiwan pride remain near record highs; 21 percent of islanders back full independence and 44 percent identify themselves as Taiwanese only, according to recent survey data.

As a mainlander, Ma remains vulnerable to attacks on his patriotism; if elected, he'd be first the non-local-born president since the autocrat Chiang Ching-kuo (who was Chiang Kai-Shek's son) died 20 years ago. Some Taiwanese say they still won't vote for a mainlander, and fear a Ma victory could usher in a return to KMT authoritarianism.

The DPP's Hsieh has tried to stoke such fears with negative attacks, portraying Ma as disloyal to Taiwan. But there are signs that the identity card is waning in force. After eight years of misrule by the local-born Chen, many Taiwanese are simply sick of him and his party. Restrictions on cross-strait investment and travel have hindered Taiwanese firms' ability to cash in on China's boom, and Chen's inflammatory moves—such as his recent plan to hold a referendum on rejoining the United Nations under the name "Taiwan" (as opposed to the "Republic of China")—have strained relations with Beijing and Washington to the limit.

With incomes stagnant and inflation on the rise, even many DPP supporters are now ready to jump ship. Wang Cheng-kun, the director of the doctors' association in Tainan, a DPP stronghold, recently endorsed Ma, in part because he was put off by what he saw as Hsieh's smear attacks and fearmongering. Wang also says he admires Ma's clean character and more-global outlook. "I've always been a [DPP] supporter, and I was afraid my friends wouldn't forgive me for my change of heart," Wang said. "But Taiwan must internationalize; we shouldn't isolate ourselves."


As well as a victory for Ma, a KMT win would also represent a triumph for China's President Hu. In years past, Beijing repeatedly drove islanders into the independence camp with its fiery rhetoric and ham-handed military threats. But in the past five years, it has adopted a much more nuanced strategy. "Under Hu's leadership, Beijing's approach has become more patient, less inclined to saber-rattling, and more self-restrained," wrote cross-strait security expert Lin Chong-pin in a recent essay.

True, China has ratcheted up the threats against Chen and other pro-independence diehards. But it's also launched a charm offensive targeting both the KMT leadership and the DPP's base. One recent carrot: a relaxation of restrictions on Taiwanese doctors—a traditional pillar of DPP support—working on the mainland. And on March 4, Hu repeated his offer for peace talks with Taiwan under the "one China" condition, even offering to meet those who'd backed independence in the past if they moderated their views.

Such overtures appear to be paying off; it's harder for pro-independence politicians like Hsieh to whip up anti-China sentiment while Beijing holds out olive branches.

Still, a Ma victory wouldn't end cross-strait tensions entirely. As president, he would have to avoid looking like a sellout to the 77 percent of islanders who still favor some sort of independence from Beijing or the political status quo. "Ma [must] take a slow, gentle pace in improving cross-strait relations," says political analyst Liao Da-chi. "I don't think there will be a dramatic change—each side will be very cautious."

What this means is that Ma is likely to emphasize the strengthening of economic links. A major political breakthrough remains unlikely: Ma himself has said it probably won't occur in his lifetime. At most, Beijing and Taipei will put aside, rather than resolve, the thorny issue of Taiwan's permanent status. So the island will remain in limbo, a territory claimed by China but effectively independent.

Yet like it or not, Taiwan's and China's economies are now connected at the hip—giving both sides a strong incentive for warmer relations. In that sense, it's good news that both Ma and Hsieh have pledged to take an open-minded approach to Beijing.

Whoever wins, pragmatism has already triumphed.

With Ko Shu-ling in Taipei

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Closing the gap

Fear-mongering on the campaign trail

Taiwan Election Notebook, March 17

Far Eastern Economic Review

After a long buildup, Taiwan’s presidential race is finally heating up.

For weeks the KMT’s Ma Ying-jeou has been far ahead of rival Frank Hsieh in media polls, in what looked like a highly lopsided race. Now, with one week to go before the election, it appears Hsieh is catching up.

Two Taiwanese media friends of mine said Hsieh’s ads and negative campaign were making a difference. Hsieh’s camp appears to have found a chink in Ma’s armor, by hammering away at what it calls Ma’s “one China market” policy. The proposal, long championed by Ma’s running mate Vincent Siew, would create a cross-Strait common market, binding the two sides’ economies closer together in a trade pact.

But Hsieh’s pro-independence Democratic Progressive Party is using the “one China market” theme to raise fears of Chinese competition. Namely, he’s raising the specter of a flood of Chinese agricultural imports and Chinese competition for jobs. The scare tactics seem to be having an effect–one of my media friends said she was shocked to overhear two Taipei roadworkers discussing the “one China market” as she passed by.

Meanwhile, Ma’s camp has been distracted by the fallout from an incident last Wednesday night. Four KMT lawmakers barged into Hsieh’s campaign headquarters with the finance minister in tow, accusing Hsieh of getting a sweetheart deal on his office rent. The scene spiraled out of control as scores of outraged Hsieh supporters protested, had shoving matches with police and smashed a police car outside Hsieh’s campaign office.

For the last two days, the KMT legislators have been apologizing for sparking the incident; Ma has apologized to the public on behalf of his party.

The Hsieh camp has pounced on this as well. It’s cast the KMT lawmakers’ barge-in as a taste of what’s in store if the KMT controlled both the legislature (where it now has a large majority, as of January) and the presidency. The subtext: voting for Ma would give the KMT so much power it would be akin to a return to the bad old days of KMT authoritarian rule.

In short, Hsieh’s campaign has seized on fear-mongering in a last-ditch bid to come back. That’s a time-honored DPP tool that’s especially potent when combined with positive emotional appeals to Taiwan-first patriotism.

The question, of course, is will it work? The March 22 vote has been hyped as one in which economic concerns may finally trump Taiwan identity. Ma’s promise of more economic engagement with China holds broad appeal–indeed, Hsieh’s platform is actual quite similar in substance (more cross-Strait flights; more Chinese tourists allowed in Taiwan; a relaxation of cross-Strait investment going both ways).

But now, Hsieh is cleverly trying to turn Ma’s strength (a vision of economic openness) into a weakness. The line of attack is straight from the protectionist playbook familiar in many other democracies. Most Taiwanese think more economic openness would boost incomes and livelihoods; but now Hsieh wants them to believe that too much openness–which Ma would promote–could actually have the opposite effect.

There’s no way to know what impact all this is having. The TV media reported last Tuesday a DPP poll showing Ma at 45.8% and Hsieh at 39.7%, but the Hsieh campaign would not confirm that.

In an email to me, it noted only that it’s illegal to release polls numbers in the 10 days before election day.

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Market backs Ma to win

Big test for Taiwan prediction market

By Jonathan Adams

Asia Times Online, March 14, 2008

TAIPEI - When the first "prediction market" for a Taiwan election was set up in 2000, the result was disappointing.

The market correctly called the election result, but by other measures it was a dud.

"There were only three or four guys who were really doing the trading, and they had really strong biases - one guy favored one party, one was in favor of the other," said Forrest Nelson, a co-founder of the Iowa Electronics Markets, which helped run the Taiwan market. "The fact that it worked at all was a major surprise."

Eight years on, such markets have boomed in popularity. Once the preserve of a few oddball US enthusiasts, they've gone mainstream - and global. They're now used as high-tech crystal balls to help predict everything from soccer scores in Europe to the severity of the flu season in Iowa to the likelihood of Pakistan's President Pervez Musharraf stepping down.

Such markets' growing global appeal is evident in Taiwan, which boasts a new, online Chinese-language prediction market. In contrast to the lonely market Nelson observed, some 2,000 politics fans from Taiwan, mainland China, Hong Kong and elsewhere have already crowded into the new market to trade contracts on who will win the closely watched March 22 presidential vote in Taiwan.

Whether it guesses correctly will be one of the market's first big trials. The election will also test two still-debated points: Do "funny money" markets such as Taiwan's perform as well as ones using real money, and how susceptible are such markets to trader bias?

Taiwan's Center for Prediction Markets, set up in mid-2006, is one of a small but growing crop of Asia-based markets. In Japan, the first political prediction market was set up in 2005; the market Shuugi.in now has some 500 registered traders predicting the coming Lower House election. Taiwan also boasts the smaller Taiwan Political Exchange, which correctly called the island's hotly contested 2004 presidential vote.

Like those other prediction markets, The Center for Prediction Markets' works on the model of a futures market, aggregating collective sentiment into one market "price". Except instead of guessing, say, the price of corn three months from now, participants guess the likelihood of a specific outcome (such as a certain candidate winning). Traders start with 100,000 virtual points, which they use to buy and sell contracts. The better their predictions, the more points they rack up.

In the US, such markets have often outperformed public polls, experts say. But they're still struggling to explain exactly why.

One reason is that such markets ask people who they think will win rather than who should win. Another often-cited point is financial incentive. Traders have to put their money where their mouth is, which gives them a stake in making good predictions.

But Taiwan's new market, like most in the US, can't use real money because of anti-gambling laws. That should put it at a disadvantage, right?

Not necessarily. Experts say the jury is still out on whether real money prediction markets outperform "funny money" ones. A 2004 study comparing real and virtual money markets for the US National Football League season found little difference in their predictive powers (both markets' predictions were better than the vast majority of individual predictions).

"People in play money markets act surprisingly similar to people in real money markets because they get some kind of psychic reward for doing well," said Justin Wolfers, a professor at the Wharton School and one of the study's co-authors. Turns out bragging rights can be as strong a motivator as cold cash.

Skeptics have another criticism of Taiwan's market. Its traders include many from mainland China and Hong Kong, who are likely to have a strong bias against Taiwan's pro-independence party. Won't that skew the results in favor of its rival, the China-friendly Kuomintang (KMT)?

Nope again. Traders with extreme and opposing biases can be expected to cancel each other out, experts say, as happened in the 2000 Taiwan prediction market. And traders who are in the game to win (instead of to prove a point or back a party) will rush in to any market thought to be out of whack, whether by manipulation or home-team bias.

"When traders suspect that such manipulation might exist, they will bet on the other side," said Robin Hanson, an expert on prediction markets at George Mason University. "The net effect is that the existence of people who might want to manipulate [the market] usually increases the accuracy of market prices."

Still, no one claims prediction markets get it right every time - they don't. The point, according to what academics call a persuasive body of evidence, is that such markets generally do a better job than predictions by any individual experts or forecasts from public polls.

Outperforming Taiwan's polls shouldn't be hard. They're notoriously bad as a forecast of election outcomes. In late 2006, for example, many media polls underrated the pro-independence party's support - a recurring problem. Taiwan's prediction markets did a much better job of estimating vote shares (the island's two markets both called the Kaohsiung mayoral election wrong, but that contest was a statistical dead heat).

"Most opinion polls usually have 20 to 30% 'no answer'," said Lin Jih-wen, director of the Center for Prediction Markets. "We don't have missing data or a sampling bias, that's our strength."

The market has now picked the strong likelihood of victory by the China-friendly candidate Ma Ying-jeou. Time will tell if it's got the right guy.

But even if it doesn't, the markets' enthusiastic reception shows how Asia - like the US and Europe - has embraced such markets as a powerful fortune-telling tool.

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Judgment Day

China's new labor law is sealing the end of its heyday as a cut-rate production platform

by Jonathan Adams and Ko Shu-ling
Far Eastern Economic Review, March 2008

At a Taiwanese-owned stainless-steel factory in Dongguan, China, the ax just fell.

Interviewed by phone, the firm’s president—who did not want him or his company to be identified by name—says he just laid off 10 workers from his 100-strong workforce, and wouldn’t rule out more layoffs. The cuts are a bid to soften the impact of a new Chinese labor law that took effect Jan. 1. “The law is hurting business owners a lot, and many are worried,” explains the businessman. “Taiwanese firms must seriously consider lowering personnel costs if they want to stay in business.”

The new law has sent shock waves through the Taiwan business community in mainland China. Downsizing is one survival strategy. The law mandates contracts for all employees, open-ended contracts for long-term employees, and health insurance and other benefits. Unlike past labor laws, it provides more channels for workers to bring complaints against employers.

The net effect, according to businesses, analysts and government officials, is a fundamental shift in China’s production landscape. “The end of rock-bottom Chinese labor is near,” says Cheng Tun-jen, an expert on cross-strait economics at the College of William and Mary. With that comes the end of China as the world’s cut-rate factory.

But if Judgment Day is nigh, not all firms will get bad news. The damned, say observers, are smaller, labor-intensive Taiwan-and Hong Kong-owned manufacturers in southern cities like Dongguan, and their South Korean peers clustered in cities like Qingdao. Such firms were pioneers in establishing coastal China as a cheap production platform for export. But the new labor law is the latest in a series of blows that have pummeled razor-thin margins.

Labor shortages became a problem several years ago in some coastal areas, driving up market wages. Material costs have soared. The yuan has appreciated by some 15% against the dollar since July 2005, making exports more dear. Last summer the Chinese government scrapped or reduced a rebate on a 17% value-added tax for some exports. And as of January this year, China raised taxes on foreign firms’ earnings to the new, uniform rate of 25% for both domestic and foreign firms.

Can’t firms simply raise prices to cope? After all, they’ve done so since 2003 in response to rising wages, as UBS economist Jonathan Anderson recently noted. But he says the days of resorting to price hikes are “coming to a close” because of slowing demand for Chinese products, and the appreciation of the yuan.

Facing that dreary picture, some firms are throwing in the towel. The most dramatic example may be South Korean firms. Some owners of failed companies have fled China in the night to avoid paying debts and back wages, a practice the South Korean media calls “night flights.” A South Korean business association official in Qingdao told the Chosun Ilbo that an estimated 20% of the 5,000 South Korean firms in that city will close down by August due to the harsh new business climate.

The Federation of Hong Kong Industries estimates that 10% of the 60,000 to 70,000 Hong Hong-owned factories in the Pearl River Delta will close this year, and some 1,000 shoe companies in the area have already closed, according to a recent Wall Street Journal report. Numbers for Taiwan firms are also bleak. Chang Hen-won, honorary chairman of the Taiwan Merchant Association in Dongguan, estimates that at least 200 Dongguan-based Taiwanese business owners have left. More are expected to leave as the effects of the labor law and other changes sink in later this year.

The End of an Era

Taiwan firms are typical of low-end manufacturers who rushed into China but are now eyeing the exits. They started moving across the Taiwan Strait in the late 1980s to make shoes, textiles, toys and cheap electronics; that flight turned into an exodus after Taiwan’s government officially allowed China-bound investment in 1991 as cross-Strait relations eased. For such firms, setting up shop in the mainland was a far easier business option than expensive upgrades or paying rising wages at home.

The effect was a hollowing out of the island’s manufacturing sector. Annual employment in Taiwan’s fabled export processing zones dipped sharply to 50,000 in 1994 from 90,000 in 1987. Politicians bemoaned the flight of Taiwanese industry to the mainland, and warned it was making the island too economically dependent on its bitter political rival across the Strait.

Now, economic forces and policy choices in the mainland have begun to blunt that political threat. “There’s no need for the government to have a policy of stopping Taiwan businesses from going to China, because industrial policy is changing there,” says Gordon Sun of the Taiwan Institute of Economic Research in an interview last year. “Labor and land costs are bigger, so naturally [Taiwan businesses] will go somewhere else. Dependency won’t be an issue because now China is changing.”

Many Taiwan firms are seeking greener pastures, moving production to places like Vietnam, the new low-cost platform of choice. They’re also eyeing western China, where Beijing has left some incentives in place to lure foreign money to the poorer hinterland. A Chinese Commerce Ministry official recently announced that China would help Taiwanese firms struggling with higher costs by offering loans and other incentives if they expand inland.

Some have already done so: Contract electronics giant Hon Hai, for example, has opened two “mega sites” for production in inland areas in the past three months. And inland industrial hubs like Chongqing have already attracted investment from Taiwanese firms like chemicals giant Formosa Plastics and memory chip maker Promos.

Meanwhile, the Taiwan government has actively touted alternatives to China. The latest candidate: India. The economics ministry recently announced a public-private partnership to develop a 1,200-hectare industrial zone in Andhra Pradesh state. They are specifically targeting investment from Taiwan firms hit by rising costs in China.

Still, India has far to go in becoming an investment target on par with China: Taiwan statistics showed $400 million invested by Taiwan manufacturers as of last July, compared to cumulative Taiwanese investment in China that by one government estimate has reached $150 billion.

Taiwan’s government is pushing another option: come home. A decade or two after first moving into mainland, some Taiwan businessmen are responding to that call. They’re taking advantage of free or slashed rent at Taiwan’s industrial parks and other incentives.

Berton Chiu, director general of the Department of Investment Services under Taiwan’s Ministry of Economic Affairs, says that the Taiwan government in September 2006 launched a program to welcome back Taiwanese firms, after hearing complaints about the mainland’s harsher business climate. Since then, 70 mainland-based firms have moved back to Taiwan or plan to. “Compared with 15 or 20 years ago, mainland China isn’t so good for some industries.” says Mr. Chiu. “They feel they’re not as welcome there as before.”

Steven Tsai is one Taiwanese businessman who has come back. Ten years ago he moved to Dongguan, where he started export businesses in porcelain, hardware, souvenirs, computer parts and cell-phone panels. His businesses now employ some 1,000 workers in China. But for Mr. Tsai, the mainland has lost its investment allure. He estimates his costs rose 10% from the new labor law alone and also cites the rising yuan, higher taxes and new environmental regulations as burdens.

While China was getting increasingly forbidding, Taiwan’s government offered him incentives to return. So in September last year, he moved back to Taiwan with his wife and family. He’s not getting rid of his mainland factories, but he has decided there’s very little room for expansion. Instead, he’s invested $90,000 in an “Ocean World” development back in Ilan County on Taiwan’s northeast coast. He’s bullish on the “Ocean World” project because it’s near a new tunnel that opened in 2006, sharply reducing travel time from the capital Taipei, and he’s mulling more investments nearby in hotels or electronics.

Uneven impact

But not all business owners are feeling as much pain in China as Mr. Tsai. Taipei-based ABN AMRO analyst Steven Tseng says in a phone interview that the big Taiwanese contract electronics manufacturers he covers already offer competitive wages and benefits similar to those now mandated. Such firms are clustered in places like the Kunshan special zone outside Shanghai. In the long term, he says, the law could even benefit big firms like Hon Hai and Wistron as smaller competitors get “shaken out.”

Meanwhile, such firms are more likely to pursue a hedging strategy rather than leave. “They may not necessarily move out of China, but clearly they’ll diversify their concentration of risk,” says Mr. Tseng. “They’ll rely a lot on China, but they’re also looking elsewhere—Vietnam, Brazil, Mexico and Eastern Europe.”

Take Quanta Computer, the world’s biggest contract laptop maker. For Quanta, labor costs represent only some 2% of total production costs, according to a company spokesperson, who asks not to be identified by name. The company’s factories are near Shanghai, where wages are the highest in China.

The new law mandates about 840 yuan per month wages in the Shanghai area; Quanta was already paying roughly 800 yuan per month for such workers, according to a company spokesperson. (wages of 500 to 600 yuan are more typical in southern China.) That’s greatly lessened the impact of the new labor law, though Quanta’s suppliers are feeling the pinch.

Quanta said in January that it too is considering increasing production in Vietnam and other locations (Hon Hai started production in Vietnam this summer and has said it will boost investment to $5 billion). “We’ll still expand in China, but we’re keeping our eye on other alternatives,” the Quanta spokesperson says. Vietnam has one major sweetener for Quanta and others: its tax policy. While China has now hiked taxes on corporate earnings for foreign firms to 25%, Vietnam is sharply reducing taxes.

What the Future Holds

The uneven effects of higher China costs point to a longer-term trend. China’s new labor law will likely foreshadow a structural shift in China-bound investment. Flows to low-end manufacturing will dwindle, while investment in high-end manufacturing like Quanta Computer’s, and in services, will rise. In fact, that’s China’s aim, observers say: Beijing is encouraging foreign investment in value-added industries that bring China expertise, technology and better jobs, while slowing inflows of investment into low-end sectors.

National Chengchi University economist Lin Chu-chia says labor-intensive Taiwanese manufacturers who are forced out will likely be replaced by a new wave of investment by Taiwanese retail chains, pharmaceutical firms and high-tech services. “China could change from the world’s factory to the world’s market,” says Mr. Lin.

That won’t happen overnight, of course. And it’s still not clear whether the departure of low-end Taiwanese firms will be a trickle or a stampede. “It will take six months to a year to see how much impact the law will really have,” says Andrew Yeh, chairman of the Taiwan Merchant Association in Dongguan. In the meantime, Taiwanese managers are waiting nervously to see just how bad business will get.

Wu Chin-ching is one. His firms, including Lung Tai Chemical, have exported processed chemical products from the mainland since 1993. He says in a phone interview that he’s had to hike his 600 workers’ wages an average of 70% because of the new law. But the real pain has come from the yuan’s appreciation and higher taxes. Altogether, he estimates production costs have gone up 30%, some of which he’s had to pass on to customers.

As a result, he’s set to shut down any of his factories still bleeding money by July. He doesn’t think he’ll move to Vietnam or inland China, because he would have difficulty finding the materials he needs there, including calcium carbonate and clay. For Mr. Wu, there’s nothing to do but dig in.

“I can grit my teeth and keep my business alive,” says Mr. Wu. “But I’m more worried about my clients, who may find it difficult to cope with rising prices.”

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