Shared cultural identity materially lowered transaction costs in Taiwan-mainland trade

Evidence

The rapid expansion of economic relations between Taiwan and the mainland that followed was greatly facilitated by their “shared Chineseness” and the mutual trust that resulted from it. The people of Taiwan and China, as Taiwan’s principal negotiator observed, have a “blood-is-thicker-than-water kind of sentiment,” and took pride in each other’s accomplishments. By the end of 1993 there had been over 4.2 million visits of Taiwanese to the mainland and 40,000 visits of mainlanders to Taiwan; 40,000 letters and 13,000 phone calls were exchanged daily. Trade between the two Chinas reportedly reached 14.4 billion in 1993 and 20,000 Taiwan businesses had invested something between 15 billion and $30 billion in the mainland. Taiwan’s attention was increasingly focused on and its success dependent on the mainland. “Before 1980, the most important market to Taiwan was America,” one Taiwan official observed in 1993, “but for the 1990s we know the most critical factor in the success of Taiwan’s economy is the mainland.” — Samuel P. Huntington, The Clash of Civilizations and the…, 466

Categorization

• XREF: This echoes the trust-based trade mechanisms in Milgrom’s law-merchant papers: cultural familiarity substitutes for formal enforcement institutions.
• SEED: Essay angle: ‘shared civility’ as a trade lubricant — how cultural identity functions as an informal contract-enforcement mechanism in the absence of legal rails.