Historical background

In 1895, military defeat forced China to cede Taiwan to Japan. Taiwan reverted to Chinese control after World War II. Following the Communist victory on the mainland in 1949, 2 million Nationalists fled to Taiwan and established a government using the 1946 constitution drawn up for all of China. Over the next five decades, the ruling authorities gradually democratized and incorporated the local population within the governing structure. In 2000, Taiwan underwent its first peaceful transfer of power from the Nationalist to the Democratic Progressive Party. Throughout this period, the island prospered and became one of East Asia's economic "Tigers." The dominant political issues continue to be the relationship between Taiwan and China - specifically the question of Taiwan's eventual status - as well as domestic political and economic reform.

Economic overview

Taiwan has a dynamic capitalist economy with gradually decreasing government guidance of investment and foreign trade. In keeping with this trend, some large, state-owned banks and industrial firms have been privatized. Exports have provided the primary impetus for industrialization. The island runs a large trade surplus, and its foreign reserves are among the world's largest. Recently opened cross-strait travel, transportation, and tourism links are likely to increase Taiwan and China's economic interdependence. In 2008 China overtook the US to become Taiwan's second-largest source of imports, after Japan. China is also the island's number one destination for foreign direct investment. Growth fell to 0.1% in 2008 because of the global slowdown.