Geography
Area: 35,967 sq. km. (13,887 sq. mi.).
Cities (2006): Capital--Taipei (pop. 2.6 million). Other cities--(Kaohsiung 1.5 million), Taichung (1.0 million).
Terrain: Two thirds of the island is largely mountainous with 100 peaks over 3,000 meters (9,843 ft.).
Climate: Maritime subtropical.

People
Population (Dec. 2006 est.) 22.9 million.
Annual growth rate (2006): 0.47%.
Languages: Mandarin Chinese (official), Taiwanese, Hakka.
Education: Years compulsory--9. Attendance (2006)--99.4%. Literacy (2005)--97.3 %.
Health: Infant mortality rate (2006 est.)--0.63%. Life expectancy (2006) male 74.57 yrs.; female 80.81 yrs.
Work force (2006):10.6 million.

Political Establishment
Type: Multi-party democracy. There are four major parties forming two alliances known as Pan-Blue and Pan-Green. The Pan-Blue includes the Kuomintang (KMT) and the People First Party (PFP). The Pan-Green includes the Democratic Progressive Party (DPP) and the Taiwan Solidarity Union (TSU). The Pan-Blue coalition holds a slight majority of seats in the Legislative Yuan (LY).
Constitution: December 25, 1946; last amended 2005.
Branches (Yuan): Executive, Legislative, Judicial, Control, Examination.
Major political parties: Democratic Progressive Party (DPP); Kuomintang (KMT or Nationalist Party); People First Party (PFP); Taiwan Solidarity Union (TSU).
Suffrage: Universal over 20 years of age.
Central budget proposed (FY 2007): $50.8 billion.
Defense proposed (2007): 18.7 % of entire budget.

Economy
GNP (2006): $366 billion.
Real annual growth rate (2006): 4.6%.
Per capita GNP (2006): $16,098.
Unemployment (2006) 3.9%.
Natural resources: Small deposits of coal, natural gas, limestone, marble and asbestos.
Agriculture (1.6% of GDP): Major products--pork, rice, fruit and vegetables, sugarcane, poultry, shrimp, eel.
Services: (73.4% of GDP). Industry (25.0% of GDP): Types--electronics and computer products, chemicals and petrochemicals, basic metals, machinery, textiles, transport equipment, plastics, machinery.
Trade (2006): Exports--$224 billion: electronics, optical & precision instruments, information and communications products, textile products, basic metals, plastic and rubber products. Major markets--U.S. $32 billion, P.R.C. and Hong Kong $89 billion, Japan $16 billion. Imports--$203 billion: electronics, optical & precision instruments, information & communications products, machinery & electrical products, chemicals, basic metals, transport equipment, crude oil. Major suppliers--Japan $46 billion, P.R.C. $27 billion, U.S. $23 billion.

PEOPLE
Taiwan has a population of 22.9 million. More than 18 million, the "native" Taiwanese, are descendants of Chinese who migrated from Fujian and Guangdong Provinces on the mainland, primarily in the 18th and 19th centuries. The "mainlanders," who arrived in Taiwan after 1945, came from all parts of mainland China. About 475,000 "aborigines" inhabit the mountainous central and eastern parts of the island and are believed to be of Malayo-Polynesian origin. Of Taiwan's total population, approximately one million, or 4.4%, currently reside in Mainland China.

Education
A 9-year public educational system has been in effect since 1979. Six years of elementary school and 3 years of junior high are compulsory for all children. About 94.9% of junior high graduates continue their studies in either a senior high or vocational school. Taiwan has an extensive higher education system with more than 160 institutions of higher learning. Each year, over 100,000 students attempt to enter higher education institutes; about 89% of the candidates are admitted to a college or university. Opportunities for graduate education are expanding in Taiwan, but many students travel abroad for advanced education. In FY 2006, over 16,000 U.S. student visas were issued to Taiwan passport holders.

Languages
A large majority of people in Taiwan speak Mandarin Chinese, which has been the medium of instruction in the schools for more than five decades. Native Taiwanese and many others also speak one of the Southern Fujianese dialects, Min-nan, also known as Taiwanese. Recently there has been a growing use of Taiwanese in the broadcast media. The Hakka, who are concentrated in several counties throughout Taiwan, have their own distinct dialect. As a result of the half-century of Japanese rule, many older people also can speak Japanese. The method of Chinese romanization most commonly used in Taiwan is the Wade-Giles system. In 2002, Taiwan authorities announced adoption of the pinyin system also used on the Mainland to replace the Wade-Giles system, but its use is not consistent throughout society, often resulting in two or more romanizations for the same place or person.

Religions
According to Taiwan's Interior Ministry figures, there are about 11.2 million religious believers in Taiwan, with more than 75% identifying themselves as Buddhists or Taoists. At the same time, there is a strong belief in traditional folk religion throughout the island. These are not mutually exclusive, and many people practice a combination of the three. Confucianism also is an honored school of thought and ethical code. Christian churches have been active on Taiwan for many years, and today, the island has more than 600,000 Christians, a majority of whom are Protestant.

Taiwan, Taipei, cityscape at sunset, elevated view 200166259-001 Digital Vision Royalty Free Photograph Taiwan, Taipei, cityscape and Taipei 101 building, elevated view 200166258-001 Digital Vision Royalty Free Photograph China, Taiwan, Taibei, neon signs F0009500 Iconotec Royalty Free Photograph China, Taiwan, Taipei, Chiang Kai Shek memorial F0016343 Iconotec Royalty Free Photograph China, Taiwan, Taipei city, elevated view 200515671-001 Photodisc Royalty Free Photograph China, Taiwan, Taroko national park F0018642 Iconotec Royalty Free Photograph China, Taiwan China, Taiwan, Taipei, Taipei Financial Center district F0018686 Iconotec Royalty Free Photograph

Culture
Taiwan's culture is a blend of its distinctive Chinese, Japanese, and Western influences. Fine arts, folk traditions, and popular culture embody traditional and modern, Asian, and Western motifs. One of Taiwan's greatest attractions is the Palace Museum, which houses over 650,000 pieces of Chinese bronze, jade, calligraphy, painting, and porcelain. This collection was moved from the mainland in 1949 when Chiang Kai-shek's Nationalist Party (KMT) fled to Taiwan. The collection is so extensive that only 1% is on display at any one time.

HISTORY
Taiwan's aboriginal peoples, who originated in Austronesia and southern Asia, have lived on Taiwan for 12,000 to 15,000 years. Significant migration to Taiwan from the Chinese mainland began as early as A.D. 500. Dutch traders first claimed the island in 1624 as a base for Dutch commerce with Japan and the China coast. Two years later, the Spanish established a settlement on the northwest coast of Taiwan, which they occupied until 1642 when they were driven out by the Dutch. Dutch colonists administered the island and its predominantly aboriginal population until 1661. The first major influx of migrants from the Chinese mainland came during the Dutch period, sparked by the political and economic chaos on the China coast during the Manchu invasion and the end of the Ming Dynasty.

In 1664, a fleet led by the Ming loyalist Cheng Ch'eng-kung (Zheng Chenggong, known in the West as Koxinga) retreated from the mainland and occupied Taiwan. Cheng expelled the Dutch and established Taiwan as a base in his attempt to restore the Ming Dynasty. He died shortly thereafter, and in 1683, his successors submitted to Manchu (Qing Dynasty) control. From 1680, the Qing Dynasty ruled Taiwan as a prefecture and, in 1875, divided the island into two prefectures, north and south. In 1887 the island was made into a separate Chinese province.

During the 18th and 19th centuries, migration from Fujian and Guangdong provinces steadily increased, and Chinese supplanted aborigines as the dominant population group. In 1895, a weakened Imperial China ceded Taiwan to Japan in the Treaty of Shimonoseki following the first Sino-Japanese war.

During its 50 years (1895-1945) of rule, Japan expended considerable effort in developing Taiwan's economy. At the same time, Japanese rule led to the "Japanization" of the island, including compulsory Japanese education and forcing residents of Taiwan to adopt Japanese names.

At the end of World War II in 1945, Taiwan reverted to Chinese rule. During the immediate postwar period, the Nationalist Chinese (KMT) administration on Taiwan was repressive and corrupt, leading to local discontent. Anti-mainlander violence flared on February 28, 1947, prompted by an incident in which a cigarette seller was injured and a passerby was shot to death by Nationalist authorities. The island-wide rioting was brutally put down by Nationalist Chinese troops, who killed thousands of people. As a result of the February 28 Incident, the native Taiwanese felt a deep-seated bitterness toward the mainlanders. For 50 years the KMT authorities suppressed accounts of this episode in Taiwan history. In 1995 a monument was dedicated to the victims of the "2-28 Incident," and for the first time, Taiwan's leader, President Lee Teng-hui, publicly apologized for the Nationalists' brutality.

Starting before World War II and continuing afterwards, a civil war was fought on the mainland between Chiang Kai-shek's KMT government and the Chinese Communist Party led by Mao Zedong. When the civil war ended in 1949, 2 million refugees, predominately from the Nationalist government, military, and business community, fled to Taiwan. In October 1949 the People's Republic of China (P.R.C.) was founded on the mainland by the victorious communists. Chiang Kai-shek established a "provisional" KMT capital in Taipei in December 1949. During the 1950s, the KMT authorities implemented a far-reaching and highly successful land reform program on Taiwan. They redistributed land among small farmers and compensated large landowners with commodities certificates and stock in state-owned industries. Although this left some large landowners impoverished, others turned their compensation into capital and started commercial and industrial enterprises. These entrepreneurs were to become Taiwan's first industrial capitalists. Together with refugee businessmen from the mainland, they managed Taiwan's transition from an agricultural to a commercial, industrial economy.

Taiwan has developed steadily into a major international trading power with nearly $427 billion in two-way trade (2006) and the world's 17^th largest economy. Taiwan's accession to the World Trade Organization in 2002 has expanded its trade opportunities and further strengthened its standing in the global economy. Tremendous prosperity on the island has been accompanied by economic and social stability. Chiang Kai-shek's successor, his son Chiang Ching-kuo, began to liberalize Taiwan's political system, a process that continued when President Lee Teng-hui took office in 1988. The direct election of Lee Teng-hui as president in 1996 was followed by opposition Democratic Progressive Party candidate Chen Shui-bian's election victory in March 2000. Chen was re-elected in March 2004 in a tightly contested election.

ADMINISTRATION
The authorities in Taipei exercise control over Taiwan, Kinmen, Matsu, the Penghus (Pescadores) and several other smaller islands. Taiwan is divided into counties, provincial municipalities, and two special municipalities, Taipei and Kaohsiung. At the end of 1998, the Constitution was amended to make all counties and cities directly administered by the Executive Yuan. From 1949 until 1991, the authorities on Taiwan claimed to be the sole legitimate government of all of China, including the mainland. In keeping with that claim, when the Nationalists retreated to Taiwan in 1949, they re-established the full array of central political bodies, which had existed on the mainland. While much of this structure remains in place, the authorities on Taiwan in 1991 abandoned their claim of governing mainland China, stating that they do not "dispute the fact that the P.R.C. controls mainland China."

The first National Assembly, elected on the mainland in 1947 to carry out the duties of choosing the President and amending the constitution, was re-established on Taiwan when the KMT moved. Because it was impossible to hold subsequent elections to represent constituencies on the mainland, representatives elected in 1947-48 held these seats "indefinitely." In June l990, however, the Council of Grand Justices mandated the retirement, effective December 1991, of all remaining "indefinitely" elected members of the National Assembly and other bodies.

The second National Assembly, elected in 1991, was composed of 325 members. The majority were elected directly, while 100 were chosen from party slates in proportion to the popular vote. This National Assembly amended the Constitution in 1994, paving the way for the direct election of the President and Vice President the first of which was held in March 1996. In April 2000, the members of the National Assembly voted to permit their terms of office to expire without holding new elections. The National Assembly elected in May 2005 voted to abolish itself the following month, leaving Taiwan with a unicameral legislature. The President is both leader of Taiwan and Commander-in-Chief of its armed forces. The President has authority over four of the five administrative branches (Yuan): Executive, Control, Judicial, and Examination. The President appoints the President of the Executive Yuan, who also serves as the Premier. The Premier and the cabinet members are responsible for government policy and administration.

The main lawmaking body, the Legislative Yuan (LY), was originally elected in the late 1940s in parallel with the National Assembly. The first LY had 773 seats and was viewed as a "rubber stamp" institution. The second LY was not elected until 1992. The third LY, elected in 1995, had 157 members serving 3-year terms, while the fourth LY, elected in 1998, was enlarged to 225 members. The LY has greatly enhanced its standing in relation to the Executive Yuan and has established itself as a major player on the central level. With increasing strength, size, and complexity, the LY now mirrors Taiwan's recently liberalized political system. In the 1992 and 1995 elections, the main opposition party--the Democratic Progressive Party (DPP)--challenged the half-century of KMT dominance of the Legislature. In both elections, the DPP won a significant share of the LY seats, leaving only half of the LY seats in the hands of the KMT. In 2001, the DPP won a plurality of LY seats--88 to KMT's 66, PFP's 45, TSU's 13, and other parties' 13. In the December 2004 LY election, the Pan-Blue coalition won a slender majority of 114 of the 225 seats (later increased to 115) compared to the Pan-Green coalition's 101 (later reduced to 111 and 97 seats, respectively, of the 220 occupied seats). Taiwan has created single-member legislative election districts and will halve the number of LY seats from 225 to 113 during the next election, scheduled for late 2007.

In 1994, when the National Assembly voted to allow direct popular election of the President, the LY passed legislation allowing for the direct election of the Governor of Taiwan Province and the mayors of Taipei and Kaohsiung Special Municipalities. These elections were held in December 1994, with the KMT winning the Governor and Kaohsiung Mayor posts, and the DPP's Chen Shui-Bian winning the Taipei Mayor's position. In 1998, the KMT's Ma Ying-jeou wrestled back control of the mayorship of Taipei from Chen Shui-bian, and DPP leader Frank Hsieh defeated the KMT incumbent to become Mayor of Kaohsiung. Additionally, in a move to streamline the administration, the position of elected Governor and many other elements of the Taiwan Provincial Government were eliminated.

The Control Yuan (CY) monitors the efficiency of public service and investigates instances of corruption. The 29 Control Yuan members are appointed by the President and approved by the National Assembly; they serve 6-year terms. In recent years, the Control Yuan has become more activist, and it has conducted several major investigations and impeachments. Since December 2004, however, the pan-Blue dominated LY has refused to approve the new slate of CY members proposed by President Chen, leaving the CY inactive.

The Judicial Yuan (JY) administers Taiwan's court system. It includes a 16-member Council of Grand Justices (COGJ) that interprets the constitution. Grand Justices are appointed by the President, with the consent of the National Assembly, to 9-year terms.

The Examination Yuan (EY) functions as a civil service commission and includes two ministries: the Ministry of Examination, which recruits officials through competitive examination, and the Ministry of Personnel, which manages the civil service. The President appoints the President of the Examination Yuan.

Principal Leaders
President--Chen Shui-bian
Vice President--Annette Lu (Lu Hsiu-lien)
Premier--Su Tseng-chang
Vice Premier--Tsai Ing-wen
Legislative Yuan President--Wang Jin-pyng
Judicial Yuan President--Weng Yueh-sheng
Defense Minister--Lee Jye
Foreign Minister--James Huang (Huang Chih-fang)
Minister of Justice--Shih Mao-lin
Mainland Affairs Council Chairperson--Chen Ming-tong
Government Information Office Minister--William Yih (Yih Jung-tsung)
Cabinet Spokesperson--Chen Mei-ling

POLITICAL CONDITIONS
Until 1986, Taiwan's political system was effectively controlled by one party, the Kuomintang (KMT), the chairman of which was also Taiwan's President. As the ruling party, the KMT was able to fill appointed positions with its members and maintain political control of the island.

After 1986, the KMT's hold on power was challenged by the emergence of competing political parties. Before 1986, candidates opposing the KMT ran in elections as independents or "nonpartisans." Before the 1986 island-wide elections, many "nonpartisans" grouped together to create Taiwan's first new political party, the Democratic Progressive Party (DPP). Despite the official ban on forming new political parties, Taiwan authorities did not prohibit the DPP from operating, and in the 1986 island-wide elections, DPP and independent candidates captured more than 20% of the vote. In 1987, President Chiang Ching-kuo lifted the emergency decree, which had been in place since 1948 and which had granted virtually unlimited powers to the President for use in the anti-communist campaign. This decree provided the basis for nearly four decades of martial law under which individuals and groups expressing dissenting views were dealt with harshly. Expressing views contrary to the authorities' claim to represent all of China or supporting independent legal status for Taiwan was treated as sedition. Since ending martial law, Taiwan has taken dramatic steps to improve respect for human rights and create a democratic political system. Almost all restrictions on the press have ended, restrictions on personal freedoms have been relaxed, and the prohibition against organizing new political parties has been lifted. Lee Teng-hui succeeded Chiang Ching-kuo as President when Chiang died on January 13, 1988. The Civic Organizations Law passed in 1989 allowed for the formation of new political parties, thereby legalizing the DPP, and its support and influence increased. Lee was elected by the National Assembly to a 6-year term in 1990, marking the final time a President was elected by the National Assembly. In the 1992 Legislative Yuan elections, the DPP won 51 seats in the 161-seat body. While this was only half the number of KMT seats, it made the DPP's voice an important factor in legislative decisions. Winning the Taipei mayor's position in December 1994 significantly enhanced the DPP's image. The DPP continued its strong showing in the 1995 LY race, winning 45 of the 157 seats to the KMT's 81. In 1996, Lee Teng-hui was elected President and Lien Chan Vice President in the first direct election by Taiwan voters. In the November 1997 local elections, the Democratic Progressive Party (DPP) won 12 of the 23 county magistrate and city mayor contests to the Kuomintang (KMT)'s 8, outpolling the KMT for the first time in a major election. In the 2001 LY elections, the DPP won a plurality of seats for the first time. In March 2000, DPP candidate Chen Shui-bian became the first opposition party candidate to win the presidency. His victory resulted in the first-ever transition of the presidential office from one political party to another, validating Taiwan's democratic political system. In a hotly contested election on March 20, 2004, President Chen Shui-bian was re-elected by 50.1% of the popular vote to a second term. The election was marred by a shooting incident the day before the election during which President Chen and his running mate Vice President Annette Lu were slightly wounded. While the opposition contested the results, it was the first time that the DPP had won an outright majority in an island-wide election.

The March election also included a "defensive referendum." Historically, the issue of referenda has been closely tied to the question of Taiwan independence, and thus has been a sensitive issue in cross Strait relations. There were two referenda before the voters on March 20. The first asked in light of the P.R.C. missile threat whether Taiwan should purchase anti-missile systems. The second asked whether Taiwan should adopt a "peace framework" for addressing cross Strait differences with the P.R.C. However both referenda failed to obtain support from over 50% of eligible voters, as required to be valid.

President Chen Shui-bian called for major constitutional reforms by 2006--later changed to 2008--aimed at further reducing layers of government, and making other structural changes aimed at improving governance. The People's Republic of China has accused Chen of using the constitution issue to move Taiwan towards independence. Chen pledged, however, in his May 20, 2004 inaugural address not to use constitutional reform to alter the constitution's approach to Taiwan's status vis-à-vis China.

The final National Assembly passed a set of constitutional amendments in June 2005 that will halve the number of LY seats from 225 to 113 and create single-member legislative election districts beginning with the next legislative election scheduled for 2007. The constitutional revisions also abolished the National Assembly and provided for the public to confirm or reject future constitutional amendments passed by the LY. President Chen has called for "Round Two" of constitutional revision focusing on the form of government (presidential or parliamentary, 5-branch or 3-branch) and on human, labor, and aborigine rights. He has pledged not to include independence or name change in his proposed constitutional revisions.

In the December 2004 Legislative election, the ruling DPP won a plurality with 89 of the 225 seats, gaining 2 seats more than it did in 2001. The opposition KMT won 79 seats, or 11 more than it did in 2001. The KMT's "pan-Blue" coalition partner, the PFP, won only 34, 12 fewer than it won in 2001, while the DPP's partner, TSU won 12 seats. The New Party won one seat. The ruling "pan-Green" coalition's inability to secure a majority has left the LY in virtual gridlock since the election. The KMT won a landslide victory in December 2005 local elections, however, winning 14 of the 23 city mayor and county magistrate races to the ruling DPP's 6. In December 2006, the KMT won the mayoral election in Taipei City, while the DPP won in Kaohsiung City. Taiwan will hold its next round of legislative and presidential elections in late 2007 and early 2008.

Political Parties
In addition to the KMT (described above in 'History' and 'Political Conditions'), there are three other major parties. The DPP, membership is made up largely of native Taiwanese, and its platform includes outspoken positions on some of the most sensitive issues in Taiwan politics. For example, the DPP maintains that Taiwan is an entity separate from mainland China, in contrast to the KMT position that Taiwan and the mainland, though currently divided, are both part of "one China." In sharp contrast to the tenets of both KMT and P.R.C. policy, a number of ranking DPP officials openly advocate independence for Taiwan.

The People First Party (PFP) was formed in the wake of the March 2000 presidential election, composed of former KMT members who supported former KMT Taiwan Provincial Governor James Soong's presidential bid. PFP and KMT subsequently formed the "Pan-Blue" Alliance to oppose the DPP government. Former KMT President Lee Teng-hui, in turn, broke with the KMT and formed the pro-independence Taiwan Solidarity Union (TSU) in 2001. The TSU, which advocates changing Taiwan's official name and completely replacing the 1947 constitution, allied itself with the DPP as part of the ruling "Pan-Green" alliance.

Taiwan and the Mainland
Despite differences between Taiwan and the P.R.C., contact between the two sides of the Taiwan Strait has grown significantly over the past decade. Taiwan has continued to relax restrictions on unofficial contacts with the P.R.C., and cross-Strait interaction has mushroomed. In January 2001, Taiwan formally allowed the "three mini-links" (direct trade, travel, and postal links) from Quemoy and Matsu Islands to Fujian Province and permitted direct cross-Strait trade in February 2002. Taiwan authorities permitted residents of Penghu Islands starting on April 1, 2007, to begin visiting mainland China via Kinmen and Matsu. Cross-Strait trade has grown rapidly over the past 10 years. China is Taiwan's largest trading partner, and Taiwan is China's fifth largest. Estimates of Taiwan investment on the mainland, both officially approved by Taiwan authorities and investment made by Taiwan firms through third parties, start from $100 billion, making Taiwan and Hong Kong the two largest investors. This trade runs heavily in Taiwan's favor and continues to grow, providing another engine for the island's economy. The trend in cross-Strait economic interaction is one of steady growth with, so far, only temporary setbacks due to political factors such as the P.R.C.'s March 2005 passage of an Anti-Secession Law. In August 2001, President Chen accepted the recommendation of the Economic Development Advisory Council to set aside the "no haste, be patient" policy of the Lee administration and replace it with an "active opening, effective management policy." However, in January 2006, President Chen reversed the policy to "active management, effective opening." In February 2003, Taiwan and the P.R.C. agreed to allow Taiwan carriers to fly non-stop via Hong Kong or Macao to bring Taiwan residents on the mainland home for the Lunar New Year holiday. The two sides agreed to conduct Lunar New Year charter flights again in 2005, with flights operated by both Taiwan and P.R.C. carriers flying over, but not having to land in, Hong Kong or Macau. The two sides agreed on an expanded series of Lunar New Year charter flights in January-February 2006, and in June 2006 regularized these charter flights to include the other 3 major holidays--Dragon Boat festival, Mid-Autumn festival and January 1 New Year.

The development of semiofficial cross-Strait relations has been halting. Prior to April 1993, when talks were held in Singapore between the heads of two private intermediary organizations--Taiwan's Straits Exchange Foundation (SEF) and the P.R.C.'s Association for Relations Across the Taiwan Strait (ARATS)--there had been some lower-level exchanges between the two sides of the Strait. The April 1993 SEF-ARATS talks primarily addressed technical issues relating to cross-Strait interactions. Lower-level talks continued on a fairly regular basis until they were suspended by Beijing in 1995 after President Lee's U.S. visit. Unofficial exchanges resumed in 1997 through informal meetings between personnel of the two sides' unofficial representative organizations. Direct SEF-ARATS contacts resumed in April 1998, and SEF Chairman Koo Chen-fu visited the mainland in October 1998. A planned visit by ARATS Chairman Wang Daohan to Taiwan in the fall, however, was postponed following statements made by then-President Lee Teng-hui that relations between the P.R.C. and Taiwan should be conducted as "state-to-state" or at least as "special state-to-state relations." Since his May 20, 2000 inauguration, President Chen has called for resuming the cross-Strait dialogue without any preconditions. President Chen has stated that such talks should be conducted in the spirit of the 1992 Hong Kong talks, a reference to a meeting the two sides held to discuss how to handle political barriers to cross-Strait interaction. The P.R.C. has responded that the Chen administration must acknowledge that the two sides reached a consensus that there is only "one China" before any dialogue can be restarted. In his May 20, 2004 inaugural address, President Chen recognized the P.R.C.'s insistence on "one China" but stopped short of endorsing the concept. He called for a new "Cross-Strait Framework for Peace and Stability" and enhanced political, economic, and social exchanges between the two sides. In the face of the "one China" recognition obstacle and Taiwan's resentment over the P.R.C.'s March 2005 "Anti-Secession Law," Taipei and Beijing have been cautiously feeling each other out on a series of smaller, intermediary steps, including cross-Strait cargo and passenger charter flights, sale of Taiwan agricultural products in the P.R.C., and P.R.C. tourists visiting Taiwan. The United States has welcomed and encouraged the cross-Strait dialogue as a process which contributes to a reduction of tension and to an environment conducive to the eventual peaceful resolution of the outstanding differences between the two sides. The United States believes that differences between Taipei and Beijing should be resolved peacefully in a manner acceptable to people on both sides of the Taiwan Strait.

ECONOMY
Through nearly five decades of hard work and sound economic management, Taiwan has transformed itself from an underdeveloped, agricultural island to an economic power that is a leading producer of high-technology goods. In the 1960s, foreign investment in Taiwan helped introduce modern, labor-intensive technology to the island, and Taiwan became a major exporter of labor-intensive products. In the 1980s, focus shifted toward increasingly sophisticated, capital-intensive and technology-intensive products for export and toward developing the service sector. At the same time, the appreciation of the New Taiwan dollar (NT$), rising labor costs, and increasing environmental consciousness in Taiwan caused many labor-intensive industries, such as shoe manufacturing, to move to the Chinese mainland and Southeast Asia. Taiwan has transformed itself from a recipient of U.S. aid in the 1950s and early 1960s to an aid donor and major foreign investor, especially in Asia. Taiwan is now a creditor economy, holding the world's third largest stock of foreign exchange reserves ($267 billion as of March 2007). Although Taiwan enjoyed sustained economic growth, full employment, and low inflation for many years, in 2001, the combination of the slowing global economy, weaknesses in parts of the financial sector, and sagging consumer and business confidence in the government's economic policymaking resulted in the first recession since 1952. The economy began to recover in 2002, but the outbreak of severe acute respiratory syndrome (SARS) slowed growth to 3.4% in 2003. The world economic upturn drove growth in 2004 to 6.1%. However, slower world growth in 2005, higher energy prices and interest rates, and excess inventory dragged 2005 growth to 4%. Continued expansion of exports sustained Taiwan's economic growth at 4.6% in 2006, and the growth in 2007 will be well above 4%.

Foreign Trade
Foreign trade has been the engine of Taiwan's rapid growth during the past 50 years. Taiwan's economy remains export-oriented, so it depends on an open world trade regime and remains vulnerable to fluctuations in the world economy. The total value of trade increased more than five-fold in the 1960s, nearly ten-fold in the 1970s, and doubled again in the 1980s. The 1990s saw a more modest, slightly less than two-fold, growth. In the first half of the 2000's, exports grew 60%. Export composition changed from predominantly agricultural commodities to industrial goods (now 98%). The electronics sector is Taiwan's most important industrial export sector and is the largest recipient of U.S. investment. Taiwan became a member of the World Trade Organization (WTO) as a special customs territory in January 2002.

Taiwan firms are the world's largest supplier of computer monitors and leaders in PC manufacturing. Textile production, though of declining importance as Taiwan loses its competitive advantage in labor-intensive markets, is another major industrial export sector. Imports are dominated by raw materials and capital goods, which account for more than 90% of the total. Taiwan imports coal, oil and gas to meet most of its energy needs. Reflecting the large Taiwan investment in the mainland, China supplanted the United States as Taiwan's largest trade partner in 2003. In 2006, China (including Hong Kong) accounted for over 27% of Taiwan's total trade and almost 40% of Taiwan's exports. Japan was Taiwan's second-largest trading partner with 15% of total trade, including 23% of Taiwan's imports. The U.S. is now Taiwan's third-largest trade partner, taking 14% of Taiwan's exports and supplying 11% of its imports. Taiwan is the United States' ninth-largest trading partner; Taiwan's two-way trade with the United States amounted to $57 billion in 2005 and rose 7.6% to $62 billion in 2006. Imports from the United States consist mostly of agricultural and industrial raw materials as well as machinery and equipment. Exports to the United States are mainly electronics and consumer goods. The United States, Hong Kong, the P.R.C., and Japan account for 61.5% of Taiwan's exports, and the United States, Japan, and the P.R.C. provide almost 50% of Taiwan's imports. As Taiwan's per capita income level has risen, demand for imported, high-quality consumer goods has increased. The U.S. trade deficit with Taiwan in 2006 was $15.2, up 19% from $12.8 billion in 2005. The lack of formal diplomatic relations with all but a score of its trading partners appears not to have seriously hindered Taiwan's rapidly expanding commerce, but has made free trade agreements extremely difficult to pursue. Taiwan maintains trade offices in nearly 100 countries with which it does not have official relations. Taiwan is a member of the Asian Development Bank, the WTO, and the Asia-Pacific Economic Cooperation (APEC) forum. Taiwan is also an observer at the OECD. These developments reflect Taiwan's economic importance and its desire to become further integrated into the global economy.

Agriculture
Although only about one-quarter of Taiwan's land area is arable, virtually all farmland is intensely cultivated, with some areas suitable for two and even three crops a year. However, increases in agricultural production have been much slower than industrial growth. Agriculture only comprises about 1.7% of Taiwan's GDP. Taiwan's main crops are rice, sugarcane, fruit, and vegetables. While largely self-sufficient in rice production, Taiwan imports large amounts of wheat, corn, and soybeans, mostly from the United States. Poultry and pork production are mainstays of the livestock sector and the major demand drivers for imported corn and soybeans. Rising standards of living have led to increased demand for a wide variety of high-quality food products, much of it imported. Overall, U.S. agricultural and food products account for more than 30% of Taiwan's agricultural import demand. U.S. food and agricultural exports total about $2.5 billion annually, making Taiwan the United States' sixth-largest agricultural export destination. Taiwan's agricultural exports include frozen fish, aquaculture and sea products, canned and frozen vegetables, and grain products. Taiwan's imports of agricultural products have increased since its WTO accession in 2002, and it is slowly liberalizing previously protected agricultural markets.

Economic Outlook
Taiwan now faces many of the same economic issues as other developed economies. With the prospect of continued relocation of labor-intensive industries to countries with cheaper work forces, Taiwan's future development will have to rely on further transformation to a high technology and service-oriented economy. In recent years, Taiwan has successfully diversified its trade markets, cutting its share of exports to the United States from 49% in 1984 to 15% in 2005 and 14% in 2006. However, a significant proportion of Taiwan's rapidly growing exports to the P.R.C. are ultimately dependent on consumer demand in the U.S. Taiwan firms are increasingly acting as management centers that take in orders, produce them in Taiwan, the Mainland or South East Asia and then ship the final products to the U.S. Taiwan's accession to the WTO and its desire to become an Asia-Pacific "regional operations center" are spurring further economic liberalization.

DEFENSE
In proportion to its population, Taiwan still maintains a large military establishment accounting for 15.3% of the central budget and 2.1% of GDP in FY 2006. However, the defense budget as a proportion of GDP has shrunk significantly over the past decade from about 22.5% of the central budget and 4% of GDP in 1994. (Taiwan has pledged to increase its military spending to 3% of GDP. In the proposed 2007 central budget proposal, military expenditures would increase to 19% of the total central budget, or between 2.6% and 2.85% of GDP.) The military's primary mission is the defense of Taiwan against the P.R.C., which is seen as the predominant threat and which has not renounced the use of force against Taiwan. Taiwan's armed forces were reduced as part of a reform initiative from 1997 to 2001, going from about 450,000 to 385,000, with further reductions since then bringing the total force level down to just under 300,000. Registered reservists reportedly totaled 3,870,000 in 1997. Conscription remains universal for qualified males between the ages of 18 and 30. In 2007 the length of conscription service was dropped from 16 to 14 months, with a view toward eventually creating an all volunteer force. For qualified applicants, alternate service is available in police and fire departments and public clinics, as well as through teaching in some rural schools. Applicants with advanced degrees may qualify for National Defense Service consisting of reserve officer training followed by four years of work in a government or academic research institution.

Taiwan's armed forces are equipped with weapons obtained primarily from the United States. In recent years, however, Taiwan also has procured some weapons from other Western nations and has stressed military "self-reliance," which has resulted in the growth of indigenous military production in certain fields. Taiwan's legislature is currently debating the approval of defense budget proposals to purchase defensive weapons systems the U.S. agreed to sell Taiwan in 2001 and earlier. The proposals would provide funds to purchase the Patriot Advanced Capability (either PAC-3 or PAC-2 upgraded) missile defense system, P-3C maritime patrol aircraft, and diesel-electric submarines. These systems would give Taiwan key capabilities in missile defense and anti-submarine warfare to remedy vulnerabilities in countering the P.R.C.'s accelerated military modernization. Taiwan adheres to the principles of the nuclear Non-Proliferation Treaty and has stated that it does not intend to produce nuclear weapons.

FOREIGN RELATIONS
The People's Republic of China replaced Taiwan at the United Nations in 1971, and Taiwan's diplomatic position has continued to erode, as many countries changed their official recognition from Taipei to Beijing. As of spring 2007, Taiwan had formal diplomatic ties with 24 countries. At the same time, Taiwan has cultivated informal ties with most countries to offset its diplomatic isolation and to expand its economic relations. A number of nations have set up unofficial organizations to carry out commercial and other relations with Taiwan. Including its official overseas missions and its unofficial representative and/or trade offices, Taiwan is represented in 122 countries. Recently, Taiwan has lobbied strongly for admission into the United Nations and other international organizations, such as the WHO. The P.R.C. opposes Taiwan's membership in such organizations, most of which require statehood for membership, because Beijing considers Taiwan to be a province of China, not a separate sovereign state.

U.S.-TAIWAN RELATIONS
On January 1, 1979, the United States changed its diplomatic recognition from Taipei to Beijing. In the U.S.-P.R.C. Joint Communiqué that announced the change, the United States recognized the Government of the People's Republic of China as the sole legal government of China and acknowledged the Chinese position that there is but one China and Taiwan is part of China. The Joint Communiqué also stated that within this context the people of the United States will maintain cultural, commercial, and other unofficial relations with the people on Taiwan.

On April 10, 1979, President Carter signed into law the Taiwan Relations Act (TRA), which created domestic legal authority for the conduct of unofficial relations with Taiwan. U.S. commercial, cultural, and other interaction with the people on Taiwan is facilitated through the American Institute in Taiwan (AIT), a private nonprofit corporation. The Institute has its headquarters in the Washington, DC area and has offices in Taipei and Kaohsiung. It is authorized to issue visas, accept passport applications, and provide assistance to U.S. citizens in Taiwan. A counterpart organization, the Taipei Economic and Cultural Representative Office in the United States (TECRO), has been established by the Taiwan authorities. It has its headquarters in Taipei, the representative branch office in Washington, DC, and 11 other Taipei Economic and Cultural Offices (TECO) in the continental U.S. and Guam. The Taiwan Relations Act (TRA) continues to provide the legal basis for the unofficial relationship between the U.S. and Taiwan, and enshrines the U.S. commitment to assisting Taiwan maintain its defensive capability.

Following de-recognition, the United States terminated its Mutual Defense Treaty with Taiwan. However, the United States has continued the sale of appropriate defensive military equipment to Taiwan in accordance with the Taiwan Relations Act, which provides for such sales and which declares that peace and stability in the area are in U.S. interests. Sales of defensive military equipment are also consistent with the 1982 U.S.-P.R.C. Joint Communiqué.

The United States position on Taiwan is reflected in the Three Communiqués and the Taiwan Relations Act (TRA). The U.S. insists on the peaceful resolution of cross-Strait differences and encourages dialogue to help advance such an outcome. The U.S. does not support Taiwan independence. President Bush stated on December 9, 2003 that the United States is opposed to any attempt by either side to unilaterally alter the status quo in the Taiwan Strait. While the United States welcomes recent exchanges that enhance channels of communication between leaders in Beijing and Taipei, the United States urges Beijing and Taipei to further advance cross-Strait cooperation and dialogue, including direct discussions between the authorities in Beijing and elected leaders in Taipei.

U.S. commercial ties with Taiwan have been maintained and have expanded since 1979. Taiwan continues to enjoy Export-Import Bank financing, Overseas Private Investment Corporation guarantees, normal trade relations (NTR) status, and ready access to U.S. markets. In recent years, AIT commercial dealings with Taiwan have focused on expanding market access for American goods and services. AIT has been engaged in a series of trade negotiations, which have focused on protection of intellectual property rights, market access, and issues relating to Taiwan's accession to the WTO, which occurred in 2002.

Maintaining diplomatic relations with the P.R.C. has been recognized to be in the long-term interest of the United States by seven consecutive administrations; however, maintaining strong, unofficial relations with Taiwan also a major U.S. goal, in line with our desire to further peace and stability in Asia. In keeping with our one-China policy, the U.S. does not support Taiwan independence, but it does support Taiwan's membership in appropriate international organizations, such as the WTO, APEC forum, and the Asian Development Bank, where statehood is not a requirement for membership. In addition, the U.S. supports appropriate opportunities for Taiwan's voice to be heard in organizations where its membership is not possible.