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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
THE DILEMMA OF THE TAIWAN STRAIT
Since 1949, when the Kuomintang relocated the Republic of China government to
Taiwan following its defeat to Chinese Communists, who established the People’s Republic of
China (PRC), the Taiwan Strait has emerged as not only a regional but a global flashpoint.
Three cross-Strait crises have emerged, threatening the fragile peace in East Asia, and almost
prompted the use of tactical nuclear weapons in the mid-1950s by the US against the PRC. In
the decade since the last cross-Strait crisis of 1995-1996, an uneasy and uncomfortable peace has
emerged in the Taiwan Strait. Constant saber-rattling by the PRC and independence rhetoric by
Taiwan means that there is no permanent peace, but simply a lack of violence or aggression
materializing in real military conflict. The almost surprising non-violence that has persisted in
the Taiwan Strait can be analyzed from a variety of angles. One analytical tool that seems to be
salient in describing the Taiwan Strait is game theory. Even notwithstanding its existing
contributions to the study of international relations, which surely underpin its expanding
application, game theory holds much analytical promise in describing, analyzing, and hopefully
facilitating a solution to the Taiwan Strait dilemma.
TAIWAN STRAIT AS A PRISONER’S DILEMMA
Game theoretic analysis of the Taiwan Strait invariably begins by describing the dilemma
as a classic Prisoner’s Dilemma (PD) game.1 Though there are various modifications and more
sophisticated extensions of the PD game, it is essentially a two-person game where each player
has two choices, either to cooperate or defect. In the Taiwan Strait context, the two players,
Taiwan and the PRC, have two choices, either to maintain the status quo or to change the status
quo. A unique feature of the PD game is that it appears to be a zero-sum game. Since both
players assume the worst of the other player, they choose their least bad option, which in this
case, is for both parties to maintain the status quo. This is the most common perception of the
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
dilemma as “propagandists and the media on both sides of the Taiwan Strait [consistently
portray] the contest in the international arena as a zero-sum game.”2 In the public understanding
of the Taiwan Strait as a zero-sum PD game, there appears no little opportunity or incentive for
cooperation. Scholars, too, have adopted this perception, arguing that unequivocally, the
“political game across the Taiwan Strait [is a] deadlock game in game theory.”3 However, that is
in fact an erroneous misapplication and misunderstanding of the characteristics of the PD game.
What the public and many scholars fail to realize is that the Taiwan Strait dilemma is a PD game
in its true theoretical form, and as such, “may be zero-sum in the short run but [has] scope for
mutual benefit in the long run.”4
Table 1: Taiwan Strait PD game payoff matrix
Maintain
PRC Change
status quo status quo
Taiwan
Change
(a)
1 (b)
-1
status quo
1
-2
Maintain
status quo
-2
(c)
-1
(d)
0
0
As Table 1 shows, in the Taiwan Strait PD game, unilateral deviation, designated by (b)
and (c), significantly reduces the payoff as it would most likely lead to military conflict, leading
to loses for both parties; the initiating player would lose more, which is further incentive not to
defect. As such, both players assume that the other player will assume the status quo, and so, in
a self-fulfilling prophecy, both maintain the status quo, at (d). However, payoffs are maximized
when both players decide to cooperate and both change the status quo, as seen in (a). Therefore,
there exists a solution, a best strategy where “both players could benefit if they both changed
their strategies together.”5
In the context of the Taiwan Strait dilemma, the basic PD game is insufficient because it
does not properly specify the full range of strategic options that Taiwan and the PRC can
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
execute. By better defining the strategies available to both players, a more refined Taiwan Strait
PD game will provide more insight into possible non-zero sum solutions. Though enumerating
more strategies does not necessarily ensure a solution, it does reveal more combinations that
could emerge as equilibria solutions. As Table 2 below illustrates, a better defined Taiwan Strait
PD game has nine possible solutions, instead of just four with the basic PD game as each player
now has three playable strategies, to maintain the status quo, to move to a two-state option, or to
move towards Taiwanese unification with the PRC.
Taiwan
Table 2: Re-specified Taiwan Strait PD game payoff matrix
PRC
PRC
Two states
Status quo
Taiwan
(a)
0 (b)
-1
Two states
1
-1
(d)
-2 (e)
0
Status quo
0
0
(g)
-2 (h)
0
Unification
-2
-2
Unification
(c)
-2
(f)
-1
(i)
0
In the payoff matrix for this redefined Taiwan Strait PD game, the current status quo is at
(e), where both players both marginally seek to maintain the status quo. As in the basic Taiwan
Strait PD game, unilateral deviations from the status quo, as seen in (b), (d), (f), and (h), lead to
negative payoffs for both parties, with the initial defector suffering the most. The strong
disincentive to act means that all the unilateral defections from the status quo are not equilibria
solutions. Beyond the four combinations of unilateral deviations from the status quo, there are
also four solutions where both Taiwan and the PRC simultaneously deviate from the status quo.
When both states play different strategies, as in (c) and (g) when one state moves towards
unification and the other towards a two-state solution, both players experience very negative
payoffs. Points (c) and (g) represent impossible solutions, since at these combinations both
players suffer the greatest loss. Conversely, though (a) and (i) are not equilibria solutions, they
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-2
-1
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
are still more optimum than (e) because at these combinations, total payoff for both players are
maximized. At (a), where both states adopt a two-state strategy, Taiwan experiences a positive
payoff. While Taiwan gains full independence, a “normal” international status, and a cessation
of uncertainty regarding its future, the PRC would suffer a net payoff of zero. Though the PRC
would lose all claims over Taiwan, and its associated effects of solidifying nationalistic
sentiments, it would no longer have to deal with criticisms of its aggression towards Taiwan.
Moreover, relations with the US would undoubtedly improve since the Taiwan issue is one of the
most prevalent sticking points in the bilateral relationship. At (i), a mutual move towards
unification, the PRC would gain a positive payoff while Taiwan experiences a net zero payoff.
Under unification, the PRC would now possess Taiwan, which would then rival Hong Kong as
one of the nation’s crown jewels. Though Taiwan would lose what sovereignty it has, a
voluntary acceptance of unification means that it would be able to insure some favorable terms,
perhaps even a limited degree of political and economic autonomy. Both parties would also
benefit from a greater degree of certainty over the Taiwan Strait. However, though there are two
combination points where the total payoff is maximized, (a) and (i), the negative payoffs
associated with the rest of the defection strategies are strong disincentives for any deviation from
the status quo. Therefore, though this redefined payoff matrix shows more combination points, it
does not reveal a more salient equilibrium.
In game theory, a solution to the PD game comes through cooperation and
communication. With the key assumption that there are an indeterminate number of future plays,
three strategies for cooperation are often suggested, the trigger method, tit-for-tat, and the leader
initiative. However, each of these is insufficient and ineffective in the cross-Strait context. The
trigger method fails because the threat of permanent punishment, triggered by an inevitable
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
incident of PRC antagonism or Taiwanese provocation, would eliminate permanently the
possibility of future cooperation. Tit-for-tat and the leadership initiative also fail because there is
no incentive for either Taiwan or the PRC to make the first move towards cooperation, as the
payoff matrix demonstrates. For the PRC, offering an olive branch to Taiwan or assuming the
leader initiative as the stronger party is irrational. Indeed, “no Chinese leader…can afford to be
cast as a lishi zuiren (a person condemned by history) for not acting to prevent the split of the
nation.”6 Similarly, “Taiwan’s leaders will see no opportunity for moderating their own
activity”7 especially since “electoral considerations [are] the most powerful force in Taiwanese
politics,”8 and having a soft stance towards the PRC can be politically fatal. Not only are
prospects for cooperation weak, but differences between Taiwan and the PRC are increasingly
divergent. As the PRC remains insistent on unification, the evolution of Taiwanese political and
cultural identity has caused it to move ever away from the PRC. Exacerbated by the “PRC’s
rather ham-handed management of the return of Hong Kong to its jurisdiction,”9 unification is
now all but been dismissed in Taiwan. Indeed, given the dynamics of the Taiwan Strait, there
are grim prospects for increased cross-Strait cooperation and communication in the near future.
FOCAL POINT SOLUTION TO THE TAIWAN STRAIT PD GAME?
Though there appears to be slim prospects of increased cooperation and communication
to coordinate strategies, and there is no internal solution to the Taiwan Strait PD game, there is
nonetheless another means by which a cooperative solution may be achieved. Thomas Schelling,
in his classic Strategy of Conflict, suggests that cooperation is possible even in situations where
there is no meaningful communication. He argues that since “people can often concert their
intentions or expectations with others if each knows that the other is trying to do the same, [there
is] some focal point for each person’s expectation of what the other expects him to expect to be
expected to do.”10 In the absence of direct communication, Schelling instead focuses on
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
expectations and perceived expectations of behavior as a means of players independently
arriving at a common solution, the focal point. Finding a focal point requires analysis of the
cultural norms and behavioral identities prevalent in the Taiwan Strait. Analysis in the
constructivist tradition may be the key to finding a solution to the Taiwan Strait dilemma
because the dynamics of the Strait are such that “emotion supplants reasoned debate…given
history, the growing Taiwan identity, PRC actions, and the fear of outsiders that many feel.”11
In Taiwan, two behavioral norms, political liberalization and economic liberalization with
the PRC, dominate. As one of the shining beacons of democracy in Asia, Taiwan’s domestic
society is increasingly marked by a “new way of life for which democratic politics, respect for
human rights and the upholding of the rule of law are becoming entrenched, [making] it
increasingly difficult for people in Taiwan to see why it would be in their best interest to risk
them all to join the PRC.”12 One consequence of increased political liberalization and
democratization is the emergence of domestic politics as a shaper of foreign policy. Since
“electoral considerations [are] the most powerful force in Taiwanese politics, no government in
Taipei…can afford not to push to the limit of Beijing’s bottom line through Taiwan’s assertion
of its sense of national identity.”13
Simultaneously, while Taiwanese nationalism is rising,
which can but antagonize the PRC, there is also a recognized need for greater economic
engagement and trade with the PRC. Since PRC liberalization that opened its market to
Taiwanese investors, Taiwanese FDI into the PRC has topped $100 billion.14 Taiwanese firms
have also invested “on a per capita basis…more capital to China than has any other country”15
while “almost three-quarters of Taiwanese firms that had invested overseas had investments in
the PRC.”16 This trend shows no sign of relenting, as in the first five months of 2006, the flow
of Taiwanese FDI into the PRC was up 46% from the same period in 2005.17 Qualitatively, this
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
means that “Taiwan is now China’s third-largest trade partner, and China is Taiwan’s secondlargest trade partner.”18 The simultaneous existence of two conflicting norms, one that risks
antagonizing the PRC and another that seeks greater PRC engagement, means that it is difficult
to identify a single dominant behavioral norm in Taiwan. It is unclear how Taiwanese policy
will balance these conflict norms. Even the growing assumption that most Taiwanese have
rejected unification with the PRC cannot be taken for granted, given the volatility and
unpredictability of Taiwanese domestic politics, which is both a sign of democratic maturity and
a constraint on governmental statecraft.
By contrast, the PRC’s behavior seems to be dominated by a single norm of nationalism,
as reflected in an uncompromising insistence on unification of Taiwan to the mainland. As the
PRC moves away from its communist ideological roots, nationalism and territorial integrity has
become a key source of future regime legitimacy. Ensuring unification of Taiwan is the PRC’s
“sacred duty”19 as “regaining Taiwan is the chief goal as well as the leading symbol of that
reborn nationalism and assertiveness.”20 Since a conciliatory stance towards Taiwan may cause
“secessionist movements in Tibet, Xinjiang, and other parts of China [to] be emboldened to
escalate their resistance to Chinese rule,”21 the Taiwan issue is effectively the means of
consolidating power domestically. As power begins to transition from the fourth generation of
PRC leadership to the fifth generation, the need to consolidate power domestically means that
Chinese leaders will continue “to compete fiercely to be seen as most hawkish on Taiwan [to]
gain more credit through nationalist appeals.”22 Yet in the opaque halls of PRC decision makers,
there may be internal disagreement on a timetable and means of achieving unification, as PRC
policy seems to vacillate between emphasizing the stick (holding military exercises simulating a
potential invasion of Taiwan) or the carrot (reaching out to Taiwanese business interests).
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
Nonetheless, the official PRC governmental position remains an iron-clad commitment against
Taiwanese independence dictates policy, even if its associated costs “may appear prohibitive in
the assessment of academics, military analysts, and government officials outside of the PRC.”23
Therefore, this domestic norm is a strong determinant and guiding principle of the PRC’s crossstrait policy, resulting in a cross-Strait policy largely “influenced by the emotionally blinding
force of Chinese nationalism.”24
Normative analysis of Taiwan and the PRC reveals contesting norms that present
different expectations and perceptions of expected behavior. Though such marked differences
are more prevalent in Taiwan, variance in the intensities of conflicting norms may only be a
reflection of societal differences. Since Taiwanese society is more open and liberalized,
conflicting norms are perhaps more pronounced than in the PRC, where the central government
strives to maintain social harmony and minimize the resonance of disunity or contending
viewpoints. Nonetheless, even accounting for these variances, the general direction of
Taiwanese and PRC behavioral norms remains unchanged—there is a Taiwanese aversion to
unification, if not outright embracing of a two-state strategy, while the PRC will settle for
nothing short of unification. In order to formulate a focal point solution, normative analysis
would need to reveal a convergence of norms as “the more consistent with each other the policies
of both parties are, the less possible it is they would initiate a conflict with the opponent.”25
However, the norms and predicted behavioral preferences held by Taiwan and the PRC do not
lead to convergence, but divergence. There is thus an “increasing improbability that the
trajectories of the two Chinese factions can be reconciled—as Taipei’s desire to design a future
independent of the mainland grows, so does Beijing’s ability and determination to prevent that
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AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
independence.”26 Therefore, no focal point solution exists as prevailing domestic norms all but
eliminate opportunities for cross-Strait cooperation.
BEYOND JUST THE PRISONERS’S DILEMMA FRAMEWORK
Existing research of the Taiwan Strait using the game theoretic framework begins and
ends at the Prisoner’s Dilemma framework. But in merely describing the Taiwan Strait dilemma
as a PD game, no new analytical insights are achieved, as it is simply an intellectual exercise
where the status quo of the Taiwan Strait dilemma is described using different terms and
technical jargon. The failure of traditional cooperation strategies and even Schelling’s focal
point theory in this context means that such game theoretic tools do not adequately describe the
dynamic realities of the Taiwan Strait. The failure of the PD game in the Taiwan Strait context,
then, is not by the lack of compatibility, but by a lack of descriptive power. Its first inherent
shortcoming is its base assumption of unitary state actors. This assumption, already challenged
by normative analysis of Taiwan and the PRC in trying to arrive at a focal point solution, must
be abandoned given the intricacies of decision-making in Taiwan and the PRC. It is rare that
each of the state players exhibit consistent and coordinated statecraft. There are a wide variety of
different sub-state and non-state actors that actively engage in cross-Strait relations, all of which
say and do different things. For example, while Taiwanese governmental officials criticize the
PRC’s aggressive overtures towards Taiwan, leaders of Taiwan’s opposition party actively
engage the PRC, even going so far as to visit their counterparts in the PRC, most recently in
April 2007.27 Indeed, then, the fundamental reason why there the Taiwan Strait is a dilemma is
that there is a plurality of national, social, and economic interests involved, as shown in the table
below. Compounded by a similar plurality of actors in each state, there exists a wide array of
different desired objectives at play in the Taiwan Strait, making cooperation complicated and a
cohesive state policy difficult.
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
Table 3: Varying interests in the cross-Strait context
Actors
Taiwan
Government (CCP)
Opposition (KMT)
Business community
PRC
Government (CCP)
Military (PLA)
Business community
Interests
Remain in power, expand international status, solidify national identity
Return to power, manage cross-Strait engagement for political advantage
Peace and stability to enable trade and commerce
Remain in power, solidify regime legitimacy, foster economic growth
Assert greater role in domestic politics, justify need for military spending
Peace and stability to enable trade and commerce
BARGAINING POWER
Given the dynamic nature of the players in the Taiwan Strait, a bargaining power (BP)
model is the best game theoretic means by which to describe realities of the dilemma and
hopefully provide an equilibrium solution. Bargaining theory states that a solution to conflict
arises when players negotiate given their relative power endowments and come to a cooperative
solution that reflects this power parity. In other words, “in this bargaining process each player
should be expected to behave according to some bargaining strategy that satisfies the same
utility-maximization criterion as in any other game situation.”28 It assumes and accounts
explicitly for differing levels of initial power and endowment; thus, bargaining “does not
necessarily arrive at “fair” outcomes.”29 In technical form, formulated utility functions represent
each state’s bargaining power. Each bargaining power function has four variables and an
independent variable. The four variables represent a distinct source of bargaining power:
outcome power (α), threat power (β), credibility power (γ), and attitudes toward risk (δ); each
value is a ratio relative to the strength of the other sources of bargaining power in the context of
that state’s total bargaining power posture. The independent variable (x) represents each player’s
actions, with an increase signifying a move towards two-state strategy and a decrease signifying
a move towards a unification strategy. To understand the dynamic behavior and predictive
power of the bargaining power functions, each source of bargaining power is explained.
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
The first source of bargaining power, outcome power, describes a player’s overall ability
to achieve its desired outcomes, usually predicated on a state’s military and socio-economic
strength. Taiwan’s outcome power is not its indigenous military capabilities, but rather, the
American military presence in the Pacific that could potentially intervene in the event of a PRC
invasion. Taiwan, thus, does not posses positive outcome power, but merely the restraining
power that could prevent the forceful unification outcome. Conversely, the PRC’s outcome
power seems to be growing as it has an ability to coerce Taiwan through economic pressure,
project military power across the Strait, and is developing a legitimate deterrent against potential
an American military deployment. Increased economic engagement across the Strait, and a
growing dependence of Taiwanese firms on production centers in the PRC means that the PRC
“is in a position to use Taiwan’s economic dependence as leverage to coerce Taiwan [as the
Taiwanese business community], so glued to the Chinese economy, could unintentionally
become a liability for Taiwan’s security and autonomy, creating a “hostage effect.””30 The
PRC’s outcome power is also bolstered by its burgeoning military strength. As “the primary
near-term focus of China’s military modernization is to develop military options for addressing
the situation with Taiwan,”31 it is also developing increased capabilities of deterring potential US
military intervention in the Strait. Since Taiwan’s main source of outcome power is the
expectation of American intervention, so the PRC’s ability to prevent American military
deployment is an important source of countering outcome power. The PRC is engaging in
“asymmetrical warfare and has directed its military planning toward US weakness or “holes” in
its capabilities.”32 To deal with the expected deployment of an American carrier fleet, the PRC
is developing and acquiring “anti-ship and theater ballistic missiles, wake-homing torpedoes,
computer viruses, and electronic jamming [to] give Beijing a capacity to inhibit the U.S. Navy’s
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
ability to protect Taiwan.”33 The PRC has even made submarine capabilities a centerpiece of
ongoing efforts to modernize the Chinese navy because “submarines are as a potent, asymmetric
answer to US maritime superiority.”34
Threat power, the second type of bargaining power, is the ability of one player to
“threaten the other with the possibility of a Pareto-inferior state—without necessarily moving
there—by communicating its intentions in advance.”35 Threat power resonates in the Taiwan
Strait as “Chinese strategy and tactics since ancient times have consisted largely of seeking to
win without fighting, and of outwitting the opponent by ruse and stratagem instead of combat.”36
Taiwan’s threat power is largely non-existent as it lacks real offensive capabilities to threaten the
PRC, though it is trying to revive an indigenous cruise missile program. On the other side of the
Strait, the PRC’s threat power is based on military coercion and intimidation. The PRC, in
preferring “to mass forces and provide plenty of warning to its adversaries [to] avoid combat
while prevailing by intimidation,”37 projects significant threat power. Threat power is a stop-gap
measure that enables the PRC to become strong enough to “bring about unification on terms it
can tolerate.”38 The PRC’s threat power is embodied in its offensive missile arsenal and its
staging of military exercises as large-scale displays of force. Its threat power was in full display
in 1996 when it test-fired missiles very close to Taiwan while simultaneously staging massive
military exercise. Though tensions looked like it might deteriorate into military conflict, “the
military brinkmanship in 1995-96 was [paradoxically] intended to ensure peace across the
Taiwan Strait [as] the military brinkmanship …never went beyond a war of posturing.”39 These
saber-rattling exercises thus demonstrate the PRC’s “resolution and willingness to escalate to
high levels of military action if necessary”40 to prevent a war it has no desire of fighting.
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
The third component of bargaining power, credibility and reputation power, determines
the extent that a player’s outcome and threat power affect the other player. Having a credible
reputation strengthens a player’s threat power, while a weak reputation reduces the intimidating
force of threats. Indeed, since “credibility is the only limitation on threats,”41 having a credible
reputation strengthens one’s bargaining power by minimizing the costs of threatening or totally
obviating a player from “the need actually to carry out threats.”42 Taiwan’s credibility and
reputation power does not derive from its threat power, which it does not have, but from the
continued development of a rationally stubborn reputation. A strategy of rational stubbornness is
feasible if there are “potential long-term benefits in acting stubbornly, [if] a reputation for
stubbornness will mean that they are threatened less often and thus may carry on doing what they
prefer.”43 In the face of growing PRC threats, Taiwan has unified in opposition against the PRC
despite domestic differences. Indeed, the independence “sentiment becomes quite evident when
Beijing rattles its sabers and seeks to bully Taiwan.”44 Therefore, as national consolidation takes
place in the face of increasing PRC threats, and it repeatedly declares that “it will not enter into
negotiations [with the PRC] under pressure [and will not] abandon any efforts deemed as
essential to its national dignity,”45 Taiwan is developing a stubborn reputation that will not bow
to PRC shows of force and will not back down in the face of PRC threats. Increasing Taiwanese
reputation and credibility power does not equate to a decrease in the PRC’s reputation and
credibility power. It remains strong, especially as the PRC continues to deploy threatening
ballistic missiles aimed at Taiwan, but may have been diminished following the ineffectiveness
of its 1995-96 military exercise. The military exercises did undermine Taiwanese consumer
confidence, leading to “considerable panic [especially in] the island’s stock market.”46 An
argument can also be made that the US military presence did not cause the PRC to back down, as
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
it conducted another round of missile tests even closer to Taiwan after US carriers arrived in the
Taiwan Strait.47 Indeed, a month after the crisis, PRC President Jiang Zemin “boasted to
Japanese politicians…that he had ordered the missile tests to continue after the US armadas had
moved into the area of the Taiwan Strait [as] he said he was undaunted by the US carriers.”48
Nonetheless, the incident prompted misgivings about the credibility of Chinese threats across the
Taiwan Strait. The military exercises failed in intimidating Taiwanese voters and ironically
emboldened the Taiwanese populace to reelect President Lee; the threats also “failed to dissuade
the DPP and the KMT from endorsing candidates that, in its view, were pushing for Taiwan’s
independence.”49 Furthermore, “polls taken after the 1995-96 missile crisis showed that the
PRC’s actions only deepened popular resentment against it in Taiwan and hardened the
determination of the political leadership in Taipei to resist Beijing’s claim to the island.”50
The final component of bargaining power, attitudes toward risk, reflects a player’s
patience and willingness to assume risk in achieving the desired outcome. A player that is
willing to accept more risk and be more patient stands to have greater bargaining power, and
potentially, a greater payoff. Taiwan’s attitude toward risk is a balancing act between fostering
stable relations with the PRC to facilitate trade and the domestic desire for a greater international
status. Such a risk-neutral attitude reflects the recognition that while Taiwan’s “security depends
critically on its economic strength [as Taiwan] cannot maintain its democratic way of life and
security without economic prosperity,”51 there is also a need to also assert a greater international
stature despite the importance of the PRC to continued economic growth. By contrast, the
PRC’s attitude towards risk is balanced between preventing Taiwanese independence and
maintaining the status quo to facilitate economic development. Its larger initial power
endowment means that the PRC is able to be more risk-acceptant. It has ignored US calls to
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AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
repeal its Taiwanese anti-secession law and withdraw its ballistic missiles aimed at Taiwan.
Moreover, the PRC continues its systematic efforts to reduce Taiwan’s international stature, from
continually blocking Taiwan’s efforts to enter the United Nations to refusing to participate in any
international meeting where Taiwan is allowed to participate using its own name.
TAIWAN STRAIT COMPREHENSIVE BARGAINING POWER MODEL
Together, the four variables that represent a source of bargaining power and the
independent variable, which represents state actions, combine to form a bargaining power utility
function. The dependent variable, U(x), represents the expected payoff accrued by each player;
it reflects each player’s bargaining power, as the greater the bargaining power, the greater the
payoff. For Taiwan, an increase in its payoff signifies a move towards a two state solution,
where it achieves the international stature of a normal international state. Conversely, for the
PRC, a larger payoff reflects a move towards a one state unification solution.
Table 4: Bargaining power utility functions in analytical form
Bargaining powerTaiwan
Bargaining powerPRC
UTaiwan = (αTaiwan + βTaiwan + γTaiwan) – [δTaiwan](xTaiwan)
UPRC = (αPRC + βPRC + γPRC – δPRC) / (xPRC)
Graphically, and after term rearrangement, these two utility functions can be placed on the same
axis. Taiwan, because it is risk-neutral, has a linear representative curve while the PRC has a
convex representative curve because it is risk-acceptant. An equilibrium solution occurs when
both curves intersect at one point. When both players do not play the same strategy, no
equilibrium is achieved, and the status quo is assumed to be the base condition. In other words,
unless both players play the same strategies, the status quo is maintained. These two plays
reflect the status quo. As seen in Figure 1 below, there are two potential equilibria points. Point
B represents the two-state Taiwanese independence solution while point C represents the onestate unification solution. These two points correspond with the two optimized solutions as
derived from the re-specified Taiwan Strait PD game. However, they are potential equilibrium
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
points, and not achieved given the fact that both Taiwan and the PRC are playing their status quo
strategies, remaining at T(a) and C(a) respectively. The status quo strategy is thus represented as
playing a strategy at the reflection point or median point, as seen below, and the status quo
remains until both players play strategies that converge on a single equilibrium point.
Figure 1: Representative bargaining utility curves of Taiwan and the
PRC
Taiwan payoff
Two state solution
PRC bargaining function
B
Taiwan bargaining function
T(a)
C(a)
C
Unification solution
PRC payoff
More than simply graphing out equilibria solutions, my BP model describes how state
actions are a reflection of and constrained by domestic actors. A core assumption of bargaining
power models, in the neorealist tradition, is of a monolithic state actor. One of the implications
of such a theoretical foundation is that many variables in expected utility functions are assumed
to be constant. Graphically, it means that the shape and position of the bargaining power
functions are assumed fixed, except in the event of a significant exogenous shock, and state
action is merely movement along the curve. However, such an assumption does not reflect the
empirical realities of the Taiwan Strait. Given the increased dynamism of interlinked
relationships between non-state actors on the domestic level, each pursuing specific interests, my
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AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
BP model includes domestic feedback loops. In my BP model, a change in the independent
variable, any state action in the Taiwan Strait context, does not only change the payoffs of each
state, but also affects that state’s constitutive bargaining power. In other words, state actions,
which are represented by a movement along the curve, can also change the shape and position of
that state’s bargaining utility function. Including this added element of dynamic interaction, a
domestic feedback loop, means that state action is not analyzed in an interstate context, but also
in the intrastate context.
The feedback loop reflects changing power dynamics on a domestic level, then resonates
affecting interstate relations by changing the shape and position of a state’s bargaining power
function. A necessary element of the feedback loop is defining how the four types of bargaining
power are associated with various sub-state actors.
Table 4: Bargaining power as represented by sub-state actors
Actors
Taiwan
Government (CCP)
Opposition (KMT)
Business community
PRC
Government (CCP)
Military (PLA)
Business community
Associated bargaining power
Outcome power; credibility and reputation power
Credibility and reputation power
Attitudes toward risk
Outcome power; credibility and reputation power
Threat power; credibility and reputation power
Attitudes toward risk
As the table above shows, each facet of bargaining power is associated with certain sub-state
actors, and vice versa. Notable in table is the fact that no sub-state actor in Taiwan possess threat
power; this reflects Taiwan’s lack of threat power altogether. From these links, it is possible to
determine the feedback and resonance of state action. Given a state action, there is feedback, as
that action affects a particular aspect of that state’s bargaining power. Domestically, it means
that sub-state actor(s) will have gained, as that state action achieved that sub-state actor’s
particular interest. A state action can also have similar effects in the other player’s state actions,
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AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
and change the other player’s domestic power balance and constitutive bargaining power. Since
the coefficient values of the bargaining power are ratios of bargaining power, or the distribution
of total bargaining power among the four types of power, a change in domestic power dynamics
changes the coefficients of one or more variables. This could change the shape and position of a
player’s bargaining power model, thus changing that state’s bargaining posture in future
interactions.
TECHNICAL ISSUES OF APPLICATION
The primary technical difficulty of the bargaining power model is how to operationalize
realities that are inherently qualitative into quantitative numerical rankings that can be analyzed
technically. One possible solution is to make all the values uniformly arbitrary such that they
have no real value meaning but can indicate relative differences. For example, the bargaining
power variables have coefficients which are not absolute values, but ratios that represent relative
differences. The second major technical difficulty concerns the bargaining model’s efficiency in
describing simultaneous state actions as it may be hard to capture precisely the differing
magnitude of change in each player’s bargaining power. However, in most real-world scenarios,
bargaining power rarely changes simultaneously, as there is a time-lag response to another
player’s state actions. Given the added dynamism of a feedback loop, additional technical issues
arise. For example, how can the bargaining power variables be fixed in one moment, when state
action is represented by a shift along the bargaining power utility, and then not constant in the
next, as state action causes domestic feedback. One way to overcome this is to reintroduce the
concept of an intra-play time lag, and how one state “play”, or state action, is inherently a twopart sequence. First, there is state action, and a change in the independent variable, and a
movement along the curve. Then, there is a feedback effect, which then changes the bargaining
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
power variables. By increasing the time horizon of each play to encompass this two-step
sequence, issues of temporal inconsistency can be overcome.
ANALYZING SCENARIOS WITH THE BARGAINING MODEL
Though technical issues may never be fully addressed, the BP model is shown to be
efficient by using it to examine case studies.
(Due to my need to meet the 9/15 deadline, my case studies and scenario analysis section was
not satisfactory as I need to redo some graphs and graphical analysis; however, it will be ready
by the time of the conference. My sincere apologies)
INSIGHTS AND LESSONS FROM THE FOUR SCENARIOS
The scenarios analyzed challenge the neorealist assumption of a single, monolithic state
actor. Such an assumption, though analytically feasible, is no longer a viable explanation of
cross-Strait relations. Instead, domestic sub-state actors are increasingly important, not only in
domestic power disputes, but also in feedback and resonance effects on state actions. In other
words, as has been shown, state actions impact domestic sub-state actors, but a feedback loop
exists where these actors can also constrain state policy. As seen in changes in relative
bargaining power, a state action can not only impact domestic sub-state actors, but also the substate actors across the Strait. For example, the PRC’s recent campaign to increase economic
incentives for Taiwanese businesses does not only increase the PRC’s outcome power, it also has
resonance effects for the Taiwanese business community. Already risk-adverse, the Taiwanese
business community will then lobby for non-combative Taiwanese policies so as to not upset the
additional gains from trade that they are receiving from preferential trade incentives; as such,
Taiwan in general loses bargaining power, as it becomes more risk-adverse. Such cross-Strait
resonance effects seem to suggest that increased non-governmental interactions can help to forge
a more sustainable Taiwan Strait solution. Given the seemingly insurmountable political chasm
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AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
that divides the reigning DPP government in Taiwan and the CCP regime in the PRC, the ability
of sub-state actors to engage each other can be a viable means by which cross-Strait relations can
be improved. However, at the same time, guarded optimism must be balanced with a pragmatic
caution, as evidence suggests that civil societies on both sides of the Strait are increasingly
divergent. Though there are growing economic links, and even cultural-tourism links, national
identity formation appears to be on diverging trajectories. Both Taiwanese and Chinese societies
are increasingly nationalistic, and concerned with the assertion of a greater international
presence. Yet there are contradictory claims of nationalism on both sides of the Strait, as
Taiwanese nationalism advocates a distinct social and political state identity while Chinese
nationalism advocates the sacred duty that the PRC to achieve Taiwanese unification.
Regardless of these two contrary claims, this bargaining power model nonetheless demonstrates
the need for future analysis of the Taiwan Strait to place a greater focus on domestic sub-state
actors as their ability to constrain and affect cross-Strait policies on a national level will only
grow in the near future.
CHALLENGES AND APPLICATION
The model also highlights the fact that Taiwan needs to strengthen its bargaining power.
In the face of inevitable PRC political, military, and economic expansion that will increase the
PRC’s bargaining power and shift the balance of power towards the mainland. Taiwan needs to
adopt new strategies of international engagement or risk being at a grave power disadvantage.
Finding means by which to increase its outcome power, its credibility and reputation power, and
its attitude toward risk will be difficult as Taiwan faces increasing international isolation and
greater global reluctance to invoke the ire of the PRC. Therefore, there is need for Taiwan to
formulate a grand strategy so that it has a coherent and systematic plan by which to prevent
international irrelevancy and an undesirable scenario where unification is inevitable. The second
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Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
great challenge for Taiwan is how to balance cross-Strait economic relations in such a way as to
not create overdependence, but manipulate cross-Strait trade as a means of continuing economic
growth. No cross-Strait trade will definitely lead to economic stagnation, but a balance must be
struck between economic necessity and national security. Such a balance will be difficult to
find, much less maintain, especially given the growing prominence of the Taiwanese business
community, which seems less concerned with the consolidation of a distinct Taiwanese
community and more concerned with the consolidation of personal wealth.
The greatest challenge for the PRC is to balance a gentler cross-Strait approach and the
need to maintain a legitimate ability to threaten Taiwan if it chooses to reject the PRC’s
incentives for unification. While seeking to engage the Taiwanese business community, it must
not forget that the state-business relationship is different in Taiwan; while in the PRC the state
has a great ability to directly impact the business community, such a link is more tenuous in
Taiwan. Also, democratic tendencies in civil society may have a negative reaction to economic
incentives purely aimed at Taiwanese economic interests. In other words, it must seek not only
to win the wallets of the Taiwanese people, but also their hearts and minds. Moreover, it must be
willing to remain risk-acceptant, and not succumb to business pressures to too quickly normalize
and expand relations with Taiwan, and in doing so, sacrifice its ability to effectively prevent
Taiwanese independence overtures.
AREAS OF FUTURE RESEARCH
There are areas of future research that will help to make the model even more robust and
analytically efficient. The process of operationalization needs to be better defined so that
changes in the Taiwan Strait are better incorporated into the bargaining power model. The
bargaining power model itself can also be further refined to account for mixed strategies. On the
substantive side, there is an obvious need to define potential equilibria solutions beyond just the
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AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
simple two-state Taiwanese independence and one-state Taiwanese unification model. Also,
research to better define and differentiate between the different determinants of bargaining power
is necessary. More than differentiating, there is a need to consider if other sources of power such
as domestic identity or strategic culture, contribute to each player’s bargaining power; if they do,
then they should be incorporated into the model as a facet of bargaining power.
CONCLUSION
The bargaining power model, by incorporating the relative bargaining power of Taiwan,
the PRC, and the US, is a robust analytical tool for systematic analysis of the Taiwan Strait. By
incorporating game theory into Taiwan Strait research, a significant step has been made towards
an analytical framework that is not only methodologically robust but also systematically
rigorous. Beginning with the simple prisoner’s dilemma game to a redefined multi-strategy
multi-equilibria model to the introduction of a bargaining power model, game theoretic concepts
are able to explain the realities of the Taiwan Strait, why cooperation is difficult, why a
sustainable solution is so elusive, and the growing role that sub-state actors can and will play in
managing the conduct of cross-Strait relations. Further research is needed to better define the
model and the determinants of the model, but this application of game theory and creation of the
bargaining power model stands as an important contribution, specifically to the study of the
Taiwan Strait and more broadly, applied game theory in international relations. Not only does
the bargaining power model provide a new vehicle of Taiwan Strait analysis, but it is also a case
study of game theory’s relevance and salience in international relations. Therefore, the Taiwan
Strait bargaining power model, as a systematically robust methodology for analysis, is a crucial
vanguard and first effort in establishing a new direction of research that will facilitate insightful
academic and policy analysis of the Taiwan Strait in the future.
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AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
See Zhang, Zhaoyong, Xin Xu, and Wei-Bin Zhang. “The dynamics of political and economic interactions
between Mainland China and Taiwan.” Papers in Regional Science, 82, 2003, 373-388, 2003 and Bau, Tzong-Ho.
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Taiwan: Beyond the Economic Miracle. New York: M.E.Sharpe Inc, 1992.
2
Clough, Ralph. “Cooperation or conflict in the Taiwan Strait” in Gong, Gerrit W., ed. Taiwan Strait Dilemmas:
China-US-Taiwan Policies in the New Century. Washington, Center for Strategic and International Studies Press,
2000. 90
3
Zhang, Zhaoyong, Xin Xu, and Wei-Bin Zhang. “The dynamics of political and economic interactions between
Mainland China and Taiwan.” Papers in Regional Science, 82, 2003, 373-388. 375
4
Dixit, Avinash and Susan Skeath. Games of Strategy. New York: W.W Norton and Company, 1999. 20
5
Morrow 91
6
Zhao, Quansheng. “Beijing’s Dilemma with Taiwan: war or peace?” The Pacific Review. 18(2), June 2005, 217242. 224
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Clough, Gong ed 92
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Tsang, Steve. “Drivers behind the use of force” in Tsang, Steve, ed. If China Attacks Taiwan: Military Strategy,
Politics, and Economics. New York: Routledge, 2006. 13
9
Carpenter, Ted Galen. America’s Coming War with China. New York: Palgrave MacMillan, 2005. 78
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Schelling, Thomas. Strategy of Conflict. Boston: Harvard University Press, 1960. 57
11
Bush, Richard. “The US Policy of Dual Deterrence” in Tsang, Steve, ed. If China Attacks Taiwan: Military
Strategy, Politics, and Economics. New York: Routledge, 2006. 50
12
Tsang, Steve. “War or Peace Across the Taiwan Strait” in Tsang, Steve, ed. Peace and Security Across the
Taiwan Strait. New York: Palgrave Macmillan, 2004. 6
13
Tsang, Tsang ed. If China Attacks Taiwan… 13
14
Sutter 528
15
Cheng, T.J. “Cheng, T.J. “China-Taiwan Economic Linkage: Between Insulation and Superconductivity.” In
Tucker, Nancy Bernkopf, ed. Dangerous Strait: The US-Taiwan-China Crisis. New York: Columbia University
Press, 2005. 93
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Sutter 529
17
Nystedt, Dan. “Taiwan Investment to China up 46% in 2006.” IDG News Service, June 21 2006. 1
18
Moore, Thomas. “China’s International Relations: The Economic Dimension.” In Kim, Samuel S, ed. The
International Relations of Northeast Asia. New York: Rowman & Littlefield Publishers, 2004. 101-134. 111
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Tsang, Tsang ed, If China Attacks Taiwan… 12
20
Carpenter 117
21
Ross, Robert. “Navigating the Taiwan Strait: Deterrence, Escalation, Dominance, and US-China Relations.”
International Security. 27(2), Fall 2002, 48-85. 55
22
Yu, Taifa. “Taiwanese Democracy Under Threat: Impact and Limit of Chinese Military Coercion.” Pacific
Affairs, 70(1), Spring 1997, 7-36. 22
23
Tsang, “Peace Proposal Two…”, Tsang Peace and Security…196
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Ibid 13
25
Bau, Simon and Kau ed. 316
26
Porch, Douglas. “The Taiwan Straits Crisis of 1996: Strategic Implications for the United States Navy.” Naval
War College Review, 52(3), Summer 1999. 13
27
BBC News. “Beijing urges closer Taiwan ties.” BBC News Online. April 28 2007.
[http://news.bbc.co.uk/go/pr/fr/-/2/hi/asia-pacific/6602299.stm]
28
Myerson 370
29
Heap, Shaun Hargreaves, Martin Hollis, Bruce Lyons, Robert Sugden, and Albert Weale. The Theory of Choice: A
Critical Guide. Cambridge: Blackwell, 1992. 133
30
Ibid 104
31
O’Rouke, Ronald. “China Military Modernization: Implications for U.S. Navy Capabilities—Background and
Issues for Congress.” CRS Report for Congress, Order Code RL33153, 18 November 2005. 22
32
Cooper, John F. Playing with Fire: The Looming War with China Over Taiwan. Westport: Praeger Security
International, 2006. 228
33
Porch 12
34
O’Rouke 10
35
Brams, Steven J. Theory of Moves. Cambridge: Cambridge University Press, 1994. 121
1
23
Joshua Su-Ya Wu
AACS, Panel 5D
“A Taiwan Strait bargaining power model” (draft)
Scobell, Andrew. “Show of Force: Chinese Soldiers, Statesmen, and the 1995-1996 Taiwan Strait Crisis.”
Political Science Quarterly, 115(2), Summer 2000, 227-246. 233
37
Jencks, Harlan. “Wild Speculations on the Military Balance in the Taiwan Strait” in Lilley, James R. and Chuck
Downs, ed. Crisis in the Taiwan Strait. Washington: National Defense University Press, 1997. 157
38
McVadon, Lilley and Downs ed. 273
39
Zhao, Suisheng. “China’s Bottom Line and Incentives for a Peaceful Solution” in Tsang, Steve, ed. Peace and
Security Across the Taiwan Strait. New York: Palgrave Macmillan, 2004. 94
40
Zhao, Tsang ed. 83
41
Dowding 73
42
Ibid 141
43
Ibid 7
44
Carpenter 76
45
Yu 30
46
Cheung, Tai Ming. “Chinese Military Preparations Against Taiwan over the Next 10 Years” in Lilley, James R.
and Chuck Downs, ed. Crisis in the Taiwan Strait. Washington: National Defense University Press, 1997. 55
47
Carpenter 69
48
Cooper 16
49
Ibid 22
50
Wang, T.Y. “Cross-Strait Relations after the 2000 Election in Taiwan: Changing Tactics in a New Reality.” Asian
Survey, 41(5), Sep-Oct 2001, 716-736. 732
51
Yan, Jiann-fa. “Taiwan’s Bottom Line” in Tsang, Steve, ed. Peace and Security Across the Taiwan Strait. New
York: Palgrave Macmillan, 2004. 106
36
24