HONG KONG — Taiwan is coming to grips with a paradox: China is both its best friend and its worst enemy. In recent weeks, the island has been debating what its priority should be — to enhance its economy by taking advantage of what China has to offer, or to safeguard its political security by restricting economic involvement with the mainland.

The business community, eager to take advantage of the mainland’s cheaper land and labor, has been pressuring the government to lift restrictions on investments across the Taiwan Strait. A case in point is the semiconductor companies in Taiwan. Roughly 30 percent of the island’s silicon wafer-making capacity is idle, while China’s market for chips is growing from $25 billion this year to an estimated $41 billion by 2005.

That is why the Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. — the world’s two largest contract chipmakers — lobbied the Taiwan government for permission to move older plants into mainland China. These plants produce 8-inch wafers, using 0.25-micron etching technology. (By contrast, state-of-the-art facilities produce 12-inch chips with 0.13-micron processing technology.)

Even so, the proposal stirred controversy. Critics charged that such a move would exacerbate unemployment in Taiwan. They also voiced fears that it would cause Taiwan to lose its high-tech competitiveness and even threaten the national security.

The Taiwan Solidarity Union, which is the legislative partner of the ruling Democratic Progressive Party and is very much under the influence of former President Lee Teng-hui, was very opposed, fearing that Taiwan would be hollowed out if the plants are allowed to move across the strait.

Taiwan President Chen Shui-bian’s administration, under pressure from the business community, had announced that it was scrapping former Lee’s policy of “no haste, be patient” on mainland investment. In its place, the Chen administration enunciated a policy of “active opening, effective management.”

Lee’s reaction lent considerable prestige to those opposing the move: “What on earth are (the policymakers) thinking about? Both the U.S. and Japan forbid their semiconductor companies to shift their manufacturing bases to China. It’s odd for Taiwan to be so generous.”

Opponents of the plan warned that Taiwan might be denied American and Japanese technology unless it took steps to see to it that such technology did not end up across the strait.

Nat Bellocchi, former chairman in Washington of the American Institute in Taiwan, weighed into the debate, cautioning Taiwan to balance its priorities between the economy and security.

“We often hear about the advantages Taiwanese companies have in doing business with China,” Bellocchi wrote in the Taipei Times. But, he added, “as long as there is an adversarial relationship between the two sides of the strait, it would be irresponsible to ignore the security implications.”

Bellocchi ended by asking rhetorically, “Which comes first for Taiwan, economics or security?”

At the end of March, the Cabinet finally came to a decision. Taiwan chipmakers would be allowed to produce 8-inch wafers on the mainland, but they could open no more than three 8-inch foundries in China before the end of 2005. Moreover, the chipmakers would have to wait until 12-inch wafer fabrication plants in Taiwan had been in mass production for at least six months before setting up 8-inch facilities in China.

This means that Taiwan manufacturers are unlikely to be producing 8-inch wafers on the mainland until late 2003 at the earliest.

At present, Taiwan is considering other actions to defend its security. Its National Science Council is drafting a technology protection law aimed at preventing the outflow of technology developed by companies and research institutions that receive government funding. The government is also drawing up regulations aimed at prohibiting certain high-tech personnel from working on the mainland and, in any case, at limiting the number of those who do so.

It is unclear, though, whether legislation will stop the flow of technology and personnel. Although legislation is in place to bar high-ranking military personnel from traveling to China after they retire, as many as 200 of 414 recently retired military and intelligence officials have violated these regulations, according to Control Yuan, the government’s watchdog agency.

Thus the debate over economics vs. security is likely to rage on.

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