The Pacific Review

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Leadership, regime security, and China's policy

toward Taiwan: prospect theory and Taiwan crises

Kai He & Huiyun Feng

To cite this article: Kai He & Huiyun Feng (2009) Leadership, regime security, and China's policy
toward Taiwan: prospect theory and Taiwan crises, The Pacific Review, 22:4, 501-521, DOI:
10.1080/09512740903146051

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The Pacific Review, Vol. 22 No. 4 September 2009: 501–521

Leadership, regime security, and China’s

policy toward Taiwan: prospect theory
and Taiwan crises

Kai He and Huiyun Feng

Abstract Traditional analyses of Taiwan crises have relied mainly on deterrence

theory for their explanatory power. This approach fails to account for China’s risk-
taking behavior, which can be explained by prospect theory. We suggest that Chi-
nese leaders are more likely to use more risky military coercion against Taiwan’s
pro-independence movements within a domain of losses, i.e., when their regime
faces serious domestic and international challenges to its security. Conversely, Chi-
nese leaders are more likely to employ less risky political pressure to oppose Tai-
wan’s pro-independence forces if their decision making takes place in a domain of
gains, i.e., when the security of China’s regime is not challenged. We conclude that
maintaining a good US–China relationship is the best strategy for the United States
to help prevent military crises in the Taiwan Strait.

Keywords Prospect theory; Taiwan Crisis; China–Taiwan relations; US–China re-

lations; regime security.

Kai He is Assistant Professor of Political Science at Utah State University. He is a Postdoc-

toral Fellow in the Princeton-Harvard China and the World Program at Princeton University
during the 2009–10 academic year. His publications have appeared in European Journal of
International Relations, Security Studies, Journal of Contemporary China, International Rela-
tions of the Asia Pacific, Asian Security, and Asian Perspective. He is the author of Institutional
Balancing in the Asia Pacific: Economic Interdependence and China’s Rise (Routledge, 2009).
Huiyun Feng is Assistant Professor of Political Science at Utah State University. She is a for-
mer Jennings Randolph Peace Scholar at United States Institute of Peace. Her publications
have appeared in Security Studies, Chinese Journal of International Politics, and Asian Per-
spective. She is the author of Chinese Strategic Culture and Foreign Policy Decision-Making:
Confucianism, Leadership and War (Routledge, 2007).
Address: Department of Political Science, Utah State University, 0725 Old Main Hill, Logan,
UT 84322, USA. E-mail: khe@princeton.edu and Huiyun.Feng@usu.edu

The Pacific Review

ISSN 0951-2748 print/ISSN 1470-1332 online

C 2009 Taylor & Francis

http://www.informaworld.com/journals
DOI: 10.1080/09512740903146051
502 The Pacific Review

Introduction
Taiwan is one of the most dangerous flashpoints in regional security af-
ter the cold war. Military conflicts across the Taiwan Strait may drag the
United States into a direct war with China. Although Ma Ying-jiou’s elec-
toral victory seemed to open a new phase in Taiwan’s relations with main-
land China in May 2008, uncertainties across the Taiwan Strait still exist.
How to prevent a future war across the Taiwan Strait, therefore, becomes
an important research topic for both scholars and policymakers. In order
to prescribe possible solutions for avoiding wars, it is essential to examine
under what conditions military crises are more likely to take place between
China and Taiwan and risk the intervention of the United States.
After the cold war the Taiwan Strait witnessed two military crises, re-
spectively, in 1995–96 and 1999–2000. In both crises China conducted
military exercises and missile tests in the Taiwan Strait to oppose Taiwan’s
pro-independence movement. Since Chen Shui-bian’s election as the new
President of Taiwan in 2000, Beijing has gradually changed its military coer-
cive policy to political and diplomatic pressure toward Taiwan. The tensions
of the Taiwan Strait have been limited to non-military intimidation and ver-
bal attacks between China and Taiwan. It is clear that Taiwan’s provocative
movements toward independence are the major triggers of political tensions
across the Taiwan Strait. However, China’s different retaliation policies, ei-
ther military coercion or political pressure, determine whether the political
tensions will escalate to military crises. It is less likely for either Taiwan or
the United States to initiate military attacks against mainland China.
Therefore, China is the only actor who can directly determine peace or
war across the Taiwan Strait. China’s different strategies toward Taiwan’s
pro-independence movement before and after 2000 become crucial in un-
derstanding the underlying reasons for international crises across the Tai-
wan Strait. The real danger in the Taiwan Strait lies in the possible esca-
lation of a military crisis between China and Taiwan. Most scholars agree
that Taiwan’s formal declaration of independence will lead to a real war be-
tween China and Taiwan no matter whether the United States intervenes
or not. However, declaring independence is so dangerous that any Taiwan
leader, even the most provocative Chen, hesitates to cross this red line.
Most scholars rely on deterrence theory to explain the reasons for the
outbreak of crises and to prescribe how to avoid them. There are two pre-
vailing deterrence arguments regarding the study of Taiwan crises. One is
‘coercive diplomacy’ theory (Ross 2000; Garver 1997), and the other is the
‘hawkish military’ model (Scobell 2000; also see You 1997; Zhao 1999).
While coercive diplomacy theory suggests that China’s show of force in
both 1995–96 and 1999–2000 follows a deliberate deterrence strategy for
opposing Taiwan’s independence, the hawkish military model contends that
China’s military threats toward Taiwan are mainly driven by hawkish Chi-
nese military leaders supported by a consensus from civilian leaders.
 Kai He and Huiyun Feng: China’s policy toward Taiwan 503

We challenge these arguments and suggest that deterrence theory cannot

fully account for China’s different policies, i.e. military coercion vs. polit-
ical pressure, toward Taiwan. First, deterrence theory cannot explain why
China’s People’s Liberation Army (PLA) conducted repeated, seemingly
counterproductive, military exercises and missile tests between July 1995
and March 1996. The two key elements for successful deterrence are capa-
bility and credibility. Repeated military exercises, however, cannot substan-
tially strengthen China’s military capabilities and credibility against Taiwan.
As Ross points out, ‘Taiwan seemed unfazed by China’s threats’ during the
1995–96 crisis. Taiwan held its own military exercises as well to respond to
China’s intimidation in early 1996. Lee Teng-hui even called China a ‘paper
tiger’ that can only bluff (Ross 2000: 107; also see Lieberthal 2005).
Second, neither the coercive diplomacy nor the hawkish military argu-
ment can explain the variation in China’s behavior after 2000. After the
pro-independence Democratic Progressive Party leader Chen came to
power, China’s deterrence policy suddenly lost its teeth as China changed
its military coercion to political pressure after 2000. Deterrence theorists
may argue that China’s policy change is rooted in the unsuccessful outcome
of previous military coercion against Taiwan and that the shift is a learn-
ing effect. But why did Chinese leaders not learn this lesson earlier? The
victory of Lee in 1996 had surprised China. Chinese leaders should have
realized the counterproductive effect of its military coercion. They should
have avoided the same mistake in the 2000 election. As some scholars sug-
gest, Chen’s electoral victory in 2000 resulted mainly from the split of the
Nationalist Party (KMT) between Lien Chen and James Soong and had
little to do with the Chinese military exercises (Ross 2006). Thus, the coer-
cive diplomacy and the hawkish military arguments fail to explain fully the
change of course in China’s policy toward Taiwan after 2000.
We introduce prospect theory to address the deficiencies of existing
explanations regarding China’s policy toward Taiwan.1 We suggest that
China’s policies towards Taiwan are mainly shaped by Chinese leaders’
different prospects regarding the future outcome. When Chinese lead-
ers perceive that they are located in a domain of losses, i.e., when they
face serious domestic and international challenges, they are more likely to
choose a more risky policy of military coercion to intimidate Taiwan’s pro-
independence movement. When Chinese leaders perceive themselves to be
in a domain of gains, i.e., when their power and regime security are assured,
they will prefer a less risky policy of political pressure to respond to Tai-
wan’s provocative behavior.
This paper is divided into three parts. First, we introduce prospect
theory and our hypotheses on China’s Taiwan policy. Second, we examine
China’s different policies toward Taiwan’s provocations before and after
2000 to test our hypotheses. Finally, we discuss some policy implications
regarding what the United States should do to alleviate the tensions across
the Taiwan Strait.
504 The Pacific Review

Prospect theory and the Taiwan Strait

Prospect theory is a behavioral theory of decision making under condi-
tions of risk introduced by Daniel Kahneman and Amos Tversky (1979)
through laboratory experiments. They find that how people interpret their
choices, as gains or as losses, influences how they behave in terms of
risk aversion or risk acceptance. They argue that people tend to evaluate
choices with respect to a reference point. People choose risk-averse be-
havior in a domain of gains but risk-acceptant behavior in a domain of
losses.2 Simply put, if people are in an advantageous situation, or a domain
of gains, they are more likely to behave cautiously (risk-aversion). How-
ever, when people are in a disadvantageous situation, where all the choices
and possible outcomes are getting worse, they are more likely to choose
risky behavior (risk-acceptance) to avoid their losses (McDermott 2004:
294).
There are two main reasons for applying prospect theory to analyze
the Taiwan crises. First, prospect theory can shed some light on what
deterrence theorists cannot fully explain about the Taiwan issue, i.e., the
variation of China’s different strategies toward Taiwan before and after
2000. The dilemma of deterrence theory is that it does not have a theory of
interests and preferences. Scholars have to assume decision makers’ inter-
ests and preferences in order to make further arguments. However, under
certain circumstances policy makers’ interests and preferences may not be
consistent with what deterrence theorists presume and their behavior seems
irrational. Prospect theory does not claim that it can explain everything.
But because prospect theory is based on individuals’ risk propensities in
explaining behavior without assuming preferences and interests, it is a
useful theoretical tool to complement what rationalists cannot do, namely,
to explain some irrational behavior in the study of Taiwan crises.
Second, Chinese leaders make decisions toward Taiwan under a high
level of risk during crises. Military coercion is a more risky policy than po-
litical pressure since the former has a higher probability of escalation into a
real war. However, when and under what conditions Chinese leaders prefer
a more risky behavior over a less risky policy cannot be fully explained
by a rationalist-based deterrence theory. Prospect theory suggests that
leaders are more likely to choose a more risky policy in the domain of losses
and a less risky option in the domain of gains. Therefore, through defining
the reference point and assessing the domains of action of Chinese leaders,
we can explain differences in China’s risk-taking behavior during crises.
How to set the reference point and assess action domains is still a debat-
able question among prospect theorists. Since there is no theory of framing
to set the reference point, many international relations scholars have in-
troduced different techniques to set a reference point for determining an
actor’s domain. Five major criteria have prevailed in setting the reference
point: the status quo, aspiration, heuristics, analogies, and emotion (Mercer
 Kai He and Huiyun Feng: China’s policy toward Taiwan 505

2005: 4). In this paper we choose the status quo as the reference point to de-
termine domains of action for Chinese leaders regarding the Taiwan issue.
The status quo refers here to the political power status of Chinese leaders
and not to the situation across the Taiwan Strait. A leader’s political power
is closely related to regime security (Bueno de Mesquita et al. 2003). Chi-
nese communist leaders are deeply concerned about regime security since
the communist ideology is gradually eroding and the communist govern-
ment fears a loss of its political legitimacy in China after the cold war.
Leaders’ perceptions of regime security, therefore, become a driving
force in dictating China’s foreign policy behavior. For example, Taylor
Fravel (2005) suggests that the regime’s insecurity caused Chinese leaders
to compromise with other neighboring countries in the negotiation of
territorial disputes after the cold war. It should be noted that Fravel’s
‘diversionary peace’ theory mainly applies to China’s borderland and
offshore territorial disputes. However, Fravel (2005: 59–60) recognizes
that Taiwan as a homeland dispute is a nonnegotiable issue for Chinese
leaders and beyond the scope of his theory. Complementing Fravel’s
argument, we employ prospect theory to account for the variation in
China’s non-compromising policies between military coercion and political
pressure toward Taiwan.
We set leaders’ perceptions of regime security as a reference point in de-
termining leaders’ domains of action. There are two indicators measuring
leaders’ perceptions of regime security: internal political stability and an ex-
ternal security threat. When Chinese leaders perceive high internal political
stability and a low external threat, China’s leaders are in a domain of gains.
When Chinese leaders face either internal political unrest or an external
security challenge, China’s leaders are in a domain of losses.
Notably, the Taiwan issue represents high stakes for Chinese leaders’ po-
litical power status. Chinese leaders truly believe that losing Taiwan will
cause their government to collapse. Taiwanese independence will not only
destroy Chinese prestige and self-confidence, but also cause a domino ef-
fect in Tibet and Xinjiang. Early in 1982, Deng Xiaoping (1982) told British
Prime Minister Margaret Thatcher that, ‘On the question of sovereignty,
China has no room for maneuver . . . if China failed to recover Hong Kong,
no Chinese leaders or government would be able to justify themselves for
that failure. . . . It would mean . . . the present Chinese leaders were just like
Li Hongzhang!’
For Chinese leaders the nature of the Taiwan issue is the same as the
Hong Kong one. In Chinese history textbooks Li Hongzhang was a high-
ranking official in the Qing Dynasty who signed several treaties that ceded
Chinese territory and sovereignty, including Taiwan and Penghu, to foreign
countries under humiliating terms. Li was hated by the Chinese people as a
traitor of the nation. No Chinese politician, including Deng, Jiang and Hu,
would like to take on the political liability of losing Taiwan. As Michael
Swaine (2004: 42) points out, ‘the Chinese leadership would thus almost
506 The Pacific Review

certainly fight to avoid the loss of Taiwan . . . even if its chances of prevail-
ing in such a conflict were low’. However, China’s resolve to fight does not
mean that China would like to invade and rule over Taiwan by force before
Taiwan can declare independence.
The bottom line of China’s policy toward Taiwan is simply to avoid los-
ing Taiwan. Therefore, deterrence theorists are right to identify the goal of
deterrence in China’s policy toward Taiwan after the cold war. However,
China can conduct two types of deterrence strategies, military coercion and
political pressure. Military coercion is risk-acceptant behavior since it con-
tains a higher probability of escalation to a real military conflict. Political
pressure is risk-averse behavior since it has a lower probability of causing
a military confrontation. Applying prospect theory, therefore, we have two
hypotheses based on the model in Figure 1.

H1: If Chinese leaders perceive stable regime security, i.e., high inter-
nal stability and a low external threat, they are more likely to frame
decisions in a domain of gains and their policy option towards Taiwan
is more likely to be risk-averse – political pressure.
H2: If Chinese leaders perceive unstable regime security, i.e., either
low internal stability or a high external threat, they are more likely to
frame decisions in a domain of losses and their policy option toward
Taiwan is more likely to be risk-acceptant – military coercion.

Figure 1 shows the regime security-prospect model of China’s policy

toward Taiwan. Leaders’ perceptions of regime security are the reference
point in the application of prospect theory. Domestic political stability
and international pressure indicate Chinese leaders’ perceptions of regime
security. As civilian leaders both Presidents Jiang and Hu face challenges
from the society and the military. Whether they can control the society and
the military determines their perceptions of regime security. In addition,
international pressure, especially from the United States, poses another
challenge to Chinese civilian leaders. A relatively peaceful international
environment, especially a good relationship with the United States, is
conducive to China’s economic growth and thereby strengthens China’s
regime security. On the contrary, a hostile external environment troubles
China’s economic development and threatens the political legitimacy of
Chinese leaders. As we discuss later, although the United States officially
has maintained its ‘One China policy’ for decades, its occasional policy
shifts regarding the Taiwan issue disturbed Chinese leaders’ perceptions of
regime security in the 1990s.
When Chinese leaders perceive stable regime security, i.e., the mainte-
nance of the status quo as a reference point, they are placed in a domain
of gains. Chinese leaders are more likely to choose a risk-averse policy –
political pressure toward Taiwan. When Chinese leaders perceive unstable
regime security, i.e., the breakdown of the status quo as a reference point,
 Reference point Behavior outcome
(China policy toward Taiwan)
Domestic
political
stability Stable Domain of Risk-averse
gains policy:
Leadership political pressure
perception of
regime security

International Domain of
pressure (the losses Risk-acceptant
US) Unstable policy:
military coercion

Figure 1 Leadership, regime security, and China’s policy toward Taiwan.

Kai He and Huiyun Feng: China’s policy toward Taiwan
507
508 The Pacific Review

they are making decisions in a domain of losses. In order to avoid further

losses, Chinese leaders are more likely to choose a risk-acceptant policy –
military coercion toward Taiwan.3 To test the validity of these two hypothe-
ses, we conduct a longitudinal case study to examine China’s different poli-
cies toward Taiwan before and after 2000.
It should be noted that one variable, Taiwan’s pro-independence move-
ments, is controlled in the case study. As mentioned before, Taiwan’s pro-
independence moves intensified under Chen’s administration after 2000. If
Taiwan’s pro-independence movements are the major reasons for China to
conduct military exercises in the 1990s, China should at least continue its
military coercion toward Taiwan after 2000. However, China changed its
military coercion to political pressure after 2000. It appears that Taiwan’s
pro-independence movements cannot account for China’s policy change to-
ward Taiwan.
Based on our regime security-prospect model, we suggest that in the
1990s Jiang Zemin, as President of China, faced serious internal and exter-
nal challenges in 1995 and 1999 before the two military crises. Therefore,
Jiang was making decisions toward Taiwan in a domain of losses. Military
exercises and missile tests reflected his higher risk-taking behavior aimed
at avoiding possible losses in the Taiwan Strait. After 2000, Jiang gradu-
ally transferred his power to Hu Jintao who faced relatively stable internal
and external environments. Therefore, Hu’s policy toward Taiwan focused
more on less risky behavior employing political/diplomatic pressures.

Jiang, Hu and the Taiwan Strait

Jiang Zemin came into office after the Tiananmen incident when Deng Xi-
aoping appointed Jiang, then Shanghai mayor, as the new Secretary Gen-
eral of the Chinese Communist Party (CCP). Jiang was widely seen as a
transitional figure in the CCP’s internal struggles since Deng also appointed
Hu Jintao, then the party leader of Xizang (Tibet), as Jiang’s successor
at the same time. This strange, dual-appointment arrangement reflects the
‘lame duck’ status of Jiang when he first came to power in 1989 (Gilley 1998;
Lam 1999; Fewsmith 2001).
After the Tiananmen incident the Chinese government led by Jiang faced
severe domestic unrest and international isolation. Although students no
longer demonstrated on the streets, Chinese leaders were still concerned
that a Western peaceful evolution would make China a second Soviet
Union. More importantly, the sudden collapse of the Soviet Union also had
an effect on the legitimacy of the communist ideology in China. How to
strengthen and justify the CCP’s domestic political legitimacy and ensure
the deteriorating regime security in China became the toughest question
for Jiang after 1989.
In addition, China suffered international isolation and economic sanc-
tions from the West after the Tiananmen incident. The US, Japan, the
 Kai He and Huiyun Feng: China’s policy toward Taiwan 509

European Community and the G-7 Economic Summit announced that they
would stop all bilateral high-level visits, stop exporting arms for military or
commercial purposes, and defer new economic loans to China provided by
international organizations. Although China’s huge market and emerging
economy attracted Japan and the European countries to lift their economic
sanctions later, China’s relations with the United States remained at odds
in the early 1990s.
Jiang was very anxious in finding a new pillar to strengthen his own
power and ensure the regime’s security. He clearly realized that any mis-
take might cause him to have to step down. Jiang continued domestic cam-
paigns against Western peaceful evolution since the Western influence was
seen as the major reason for the Tiananmen incident. However, Jiang’s
conservative political move inevitably constrained China’s economic devel-
opment. More importantly, the ‘anti-peaceful evolution’ campaign indeed
challenged Deng Xiaoping’s reform and opening-up policy, which is seen
as the bible of China’s economic development. Therefore, Deng publicly
stated during his famous ‘Southern Tour’ in 1992 that reform was the only
path for China and those who did not support reform had to step down
(Zhao 1993; Fewsmith 2001).
After receiving Deng’s warning, Jiang started to mute the ‘anti-peaceful
evolution’ campaign and refocused on economic reform and development.
Jiang finally realized that economic performance could become another
pillar to support the CCP’s legitimacy and ensure regime security after
the erosion of the communist ideology. At the 14th National Congress
of the CCP in 1992, Jiang Zemin (1992) publicly recognized that main-
taining economic growth and improving the living standard of the Chi-
nese people were not only economic priorities but also political issues for
the CCP. However, China’s economy could not succeed without cooper-
ation and support from the United States, the most powerful state in the
world after the cold war. The United States was one of the largest trading
partners of China in the early 1990s. More importantly, the United States
was also one of the largest investors and technology providers for China’s
economy.
Cultivating a good bilateral relationship with the United States, there-
fore, became Jiang’s major task during his tenure. Good US–China
relations helped Jiang in two ways. China’s economic development largely
relied on China’s engagement with the global economy and the United
States as the most important actor in world economy. Rapid economic
development could not only strengthen the CCP regime security, but also
consolidate Jiang’s political power. In addition, a diplomatic success with
the United States would also compensate for Jiang’s power deficiency in
domestic politics. Because of his weak political and military background,
Jiang needed to use his diplomatic successes, especially with the United
States, to justify his unchallenged position in the CCP. Therefore, Jiang
advocated ‘great power’ diplomacy in the 1990s and actively forged various
510 The Pacific Review

‘partnership’ relations with all the great powers in the world (Swaine 1995;
Shambaugh 2001; Whiting 1995).
The United States did not respond to Jiang’s overtures easily. In 1992,
President Bush sold 150 F-16 fighters to Taiwan due to his electoral needs
in Texas where the fighters were manufactured. The Chinese government
strongly protested the US decision, but it did not do anything further. China
apparently needed the United States more than it needed China in the early
1990s. The United States provoked China again in 1994 when President
Bill Clinton compromised with the Congress to allow Taiwan President Lee
Teng-hui to visit the United States. Jiang’s plan of using diplomatic success
to consolidate his power was destroyed by the US change of course on the
Taiwan issue.
Because the Taiwan issue is a hypersensitive one in Chinese politics, no
politician dares to touch the red line of Taiwan’s possible independence.
When Jiang’s political power status was challenged by the United States’
policy change and Lee’s provocative visit in 1995, Jiang and other civilian
leaders (especially those from the Foreign Affairs Ministry) faced tremen-
dous pressures from military leaders who were frustrated by their failed
diplomacy toward the United States (Forney 1996; Scobell 2000). Jiang and
Foreign Minister Qian Qichen tried to persuade the United States to issue
a public commitment against Taiwan’s independence after Lee’s visit. Al-
though the Clinton administration privately assured China that it would not
change the ‘one China’ policy, Washington refused to make a public com-
mitment to oppose Taiwan’s independence in 1995 (Qian 2006; Ross 2000).
To a certain extent, the United States tried to maintain a strategic ambiguity
posture toward the Taiwan issue.
Lee’s visit and US diplomatic blows to China placed Jiang in a domain
of losses. Jiang’s political power status was seriously challenged by military
leaders and other politicians inside the CCP. Robert Kuhn (2004: 268), the
author of Jiang’s political biography endorsed by the Chinese government,
points out that Jiang was under huge pressure from the PLA: ‘for a time re-
ceiving eight hundred irate letters a day from officers protesting Lee Teng-
hui’s visit to the United States’. During this period Jiang sometimes could
not sleep well. In mid-June of 1995, Jiang even made self-criticism at an
enlarged Politburo meeting for his ‘soft’ policy toward Taiwan (Lam 1999:
173–4). Jiang realized ‘[T]aking an uncompromising stand was the only an-
swer . . . that would both restrain foreign foes from future aggression and
convince domestic critics he could protect the country’s interests’ (Kuhn
2004: 268).
In other words, if Jiang had not taken strong actions to rebuild his creden-
tials, he would have become a real transitional figure in the CCP’s internal
political struggles. Hu, as a handpicked successor by Deng, seemed to be
ready to replace Jiang. More importantly, Jiang’s political fate also influ-
enced the CCP regime’s security. Domestically, the Taiwan issue might in-
tensify the political struggle inside the CCP and ignite strong nationalism in
 Kai He and Huiyun Feng: China’s policy toward Taiwan 511

China. Internationally, the US change of policy toward Taiwan might cause

a domino effect on other countries’ policies toward Taiwan. It was reported
that Lee attempted to visit Japan after his diplomatic success in the United
States.
According to prospect theory, Jiang should choose risk-acceptant behav-
ior to avoid further losses in the domain of losses. Military exercises and
missile tests became a risky move that Jiang had to adopt. From July 1995
to March 1996 China conducted four large-scale military exercises and mis-
sile tests in the vicinity of the Taiwan Strait. China’s military coercion can
be seen as risky behavior since it could easily escalate in to a real conflict
between Taiwan and China. For example, during the March missile test in
1996 China launched three missiles across the Taiwan Strait. Two landed
near the port of Keelung which was only 23 miles from Taiwan’s northern
coast and approximately 30 miles from Taiwan’s capital of Taipei (Global
Security Website; Ross 2000). Although China emphasized that it did not
intend to invade Taiwan, any misunderstanding and miscommunication be-
tween the two sides might have caused real military conflict in the Taiwan
Strait.
It is still not clear whether Jiang had a real invasion plan in the 1995–
96 Taiwan crisis. However, China had mobilized the Nanjing military the-
ater rather than the Nanjing military region during its military exercises in
late 1995. As Robert Ross (2000: 102) suggests, ‘China had gone on war
footing’. If China’s military exercises and missile tests had become serious
enough in late 1995, why did China continue its military coercion in March,
1996? Deterrence scholars may suggest that China intended to influence
Taiwan’s election in 1996 and also demonstrate its resolve to the United
States. These rational choice explanations may be partly true. However,
prospect theory suggests that China’s continued show of force in March
1996 might be driven more by Jiang’s domestic insecurity concerns than the
goals of intimidating Taiwan and the United States.
During the 1996 Taiwan election Lee Teng-hui was the front-runner can-
didate from the KMT. One possible competitor for Lee was Peng Mingmin,
the Democratic Progressive Party (DPP) candidate, who was more proac-
tive in advocating Taiwan’s independence than Lee. Since Lee apparently
was the better choice, it was not rational for China to use military exercises
to intimidate Taiwan’s voters not to vote for Lee. The United States had
already shown its deep concerns about the Taiwan situation after China
conducted its first round of military exercises and missile tests in late 1995.
The United State sent high-ranking diplomats to China to assure China that
the United States would not change its ‘one China’ policy and would not
support Taiwan’s membership in the United Nations (UN) (Lampton 2001:
46–55). Therefore, intimidating the United States was not necessary in 1996.
More importantly, the United States’ low-profile response to China’s mil-
itary maneuvers did not match Jiang’s domestic needs. China continued
its military coercion toward Taiwan in March 1996 when China’s National
512 The Pacific Review

People’s Congress held its annual meeting in Beijing. Jiang used military
exercises and missile tests to show the People’s Congress that he had the
resolve to control the Taiwan situation. As Kuhn (2004: 280) points out,
‘[T]he power of domestic politics to influence foreign policy was epitomized
during this period when Jiang Zemin’s two rivals in the Politburo Standing
Committee, Qiaoshi and Li Ruihuan, voiced tougher, harder-line positions
on Taiwan, implicitly criticizing Jiang’s weaker, softer approach’. There-
fore, Jiang had to continue military exercises in the Taiwan Strait in order
to ‘convince his country, and his military, that he was resolute’. In other
words, China’s missile tests were not only targeted at deterring Taiwan’s
pro-independence forces, but also strengthening Jiang’s political power and
the CCP’s regime security.
The Taiwan crisis in 1995–96 eventually ended when the United States
deployed two carrier battle groups to Taiwan, and China stopped its mili-
tary exercises and missile tests as scheduled. It is still unclear whether US
deployment of carrier groups had a direct relation with China’s termina-
tion of military exercises. However, it is clear that both the United States
and China realized the high stakes in the Taiwan Strait; thus, they began to
restore bilateral relations after the 1995–96 military confrontation. Jiang
and Clinton exchanged state visits in 1997 and 1998. More importantly, dur-
ing his state visit to China in 1998 Clinton publicly assured Jiang with the
US’s ‘three no’s policy’, i.e. that the United States would not support a two-
China policy, Taiwan independence, or Taiwan’s membership in the UN or
other sovereign state-based international organizations (Halloran 1998).
The US–China reconciliation after the 1995–96 crisis helped Jiang con-
solidate his power status inside the CCP. Jiang highlighted the importance
of US–China summits and also used this opportunity to negotiate with the
United States over China’s membership to the World Trade Organization
(WTO). China’s bid for WTO membership stemmed from Jiang’s belief
that WTO accession would help China further integrate into the global
economy and revive its economy which has been stagnant since the Asian
economic crisis in 1997 (The Economist 2002). Michael Armacost (2002:
vii) observes that Chinese leaders ‘expect to leverage the increased foreign
competition inherent in its WTO commitments to transform the country’s
inefficient, money-losing companies and hasten the development of a com-
mercial credit culture in its banking system’. Maintaining economic growth
through entering the WTO becomes in this account the only path for Chi-
nese leaders, including Jiang, to preserve political legitimacy and ensure
regime security of the communist government in China.
The new China–US honeymoon was disturbed by the ‘embassy bombing’
in May 1999 when a US bomb hit the Chinese Embassy in Belgrade dur-
ing the Kosovo War. The bomb killed three Chinese reporters.4 Chinese
leaders were shocked by the bombing. However, besides strong diplomatic
protest and condemnation, they could not do anything further to retaliate
against the reckless US behavior. As pro-American leaders, Jiang and Zhu
 Kai He and Huiyun Feng: China’s policy toward Taiwan 513

(then Premier) faced harsh criticisms from the hard-line politicians inside
the CCP (Garrett 2001; Miles 2000). After the 1999 embassy bombing inci-
dent China–US relations hit a nadir and China’s WTO negotiation with the
US also halted. However, Jiang and Zhu eventually won the battle against
these CCP anti-American politicians.
Jiang reopened the ‘technical level’ WTO talks with the US one week
before the Asia-Pacific Economic Cooperation (APEC) summit in Septem-
ber 1999 in New Zealand. At the APEC summit Jiang and Clinton held
a two-hour discussion, and most importantly, China and the US finalized
the agreement on China’s WTO accession (Kuhn 2004: 389). According to
Jiang’s political biography, he repeated in virtually every speech even af-
ter the 1999 embassy bombing, ‘only through economic development could
China be truly strong . . . and [it is] impossible without decent relations with
the United States’ (Kuhn 2004: 382). Apparently, Jiang did not want to sac-
rifice China’s economic development and the CCP’s regime security to con-
front the United States because of the embassy bombing.
However, Jiang faced another challenge from Taiwan after the embassy
bombing in July 1999 when Lee publicly stated that the China–Taiwan
relationship was a ‘special state-to-state’ relation (Wu 1999; Wu 2001: 40–
8). China interpreted Lee’s statement as a provocation against the one-
China policy and cancelled the semi-official, bilateral meeting scheduled
between Wang Daohan and Koo Chen-fu across the Taiwan Strait. More
importantly, Lee’s state-to-state argument came out soon after the embassy
bombing incident when Jiang was still facing criticisms and accusations from
other party leaders due to his pro-American attitude. Jiang was once again
placed in the domain of losses when making decisions toward Taiwan.
Although Jiang could reach a consensus or win the battle with other party
leaders on the WTO bid and US–China relations due to the high importance
of the United States to China’s economic development, the Taiwan issue
was another story (Lai 2001). Jiang had to show his strong position against
Lee’s provocation in order to ease the domestic anger over his weakness
toward the United States. China started military coercion against Taiwan as
it had in 1995–96 by conducting military exercises and sending aircraft over
the midline of the Taiwan Straits from late 1999 to mid-2000. The 1999–
2000 Taiwan crisis ended after Chen won the presidential election in May
2000 in Taiwan. Taiwan experienced the first democratic power transition
from KMT to DPP. Compared to Lee Teng-hui, Chen strongly advocated
pursuing the formal independence of Taiwan. While Lee only wanted to
separate the Republic of China from the mainland, Chen’s proposal was to
establish a Republic of Taiwan without any connection with Chinese culture
and tradition. Under US pressure and China’s intimidation, Chen promised
in 2000 that he would not declare Taiwan’s independence if China would
not invade Taiwan.
George W. Bush came to power as the new President of the United
States in 2001. During his presidential campaign Bush had harshly criticized
514 The Pacific Review

Clinton’s China policy and argued that China would be a strategic competi-
tor of the United States instead of a strategic partner. When first entering
the White House, Bush publicly stated that the United States would de-
fend Taiwan should China invade without stating any conditions, appar-
ently dropping Clinton’s three no’s policy on Taiwan. In addition, Bush
authorized large weapon sales, including submarines and anti-submarine
aircraft, to Taiwan in April 2001.
Chinese leaders, especially Jiang, were irritated by the US change of
course. China strongly protested the US arms sales to Taiwan through
diplomatic channels. In addition, China conducted a large-scale military ex-
ercise simulating the invasion of Taiwan in June 2001 as another response to
Bush’s arms sales to Taiwan.5 The 2001 military exercise can be explained
as a risky decision made by Jiang under a domain of losses given US policy
change.
After the September 11 tragedies Bush changed his hostile policy to-
ward China because the United States needed China’s support in its global
campaign on terrorism. US–China relations have improved significantly
by high-level exchanges since late 2001. More importantly, Bush resumed
Clinton’s China policy and publicly criticized Chen’s provocative behavior.
Bush warned Taiwan that US support for Taiwan was not unconditional
when he met China’s Premier Wen Jiabao in the White House in December
2003. Several high-ranking US officials, including Secretary of State Colin
Powell, issued a series of statements during 2004 to emphasize the US’s ‘one
China’ policy and criticize Taiwan’s pro-independence movement.
The latest US change of course on the Taiwan issue after the Septem-
ber 11 tragedies helped the new President Hu consolidate his power. Since
2002, Jiang has gradually transferred his power to Hu, who had been ap-
pointed as Jiang’s successor for more than a decade by Deng. Compared to
Jiang, Hu had a relatively stronger power foundation in the CCP because
he had worked in the CCP’s decision making circle as Jiang’s successor for
a long time (Gilley and Nathan 2002; Li 2001). Although Hu was very cau-
tious in tackling the CCP’s internal politics when Jiang was still in power, he
established strong connections with different forces inside the CCP, includ-
ing the military. Hu’s low-profile leadership style was also praised by the
remaining older generation of leaders, who had revolutionary experience
(Li 2001; Ewing 2003). After the embassy bombing incident, Hu instead
of Jiang delivered the official public TV statement condemning the United
States’ aggressive behavior in 1999.
From late 2002 to 2004, the outbreak of the epidemic of SARS (Severe
Acute Respiratory Syndrome) became the first tough task faced by Hu Jin-
tao. Early in the epidemic, the Chinese government’s slow and hesitant re-
action to SARS was widely criticized by the international community. On
16 April 2003 Hu publicly inspected the Disease Prevention and Control
Center in Guangdong, where the epidemic originated. Later the Chinese
government assured the world that it would fully cooperate with the World
 Kai He and Huiyun Feng: China’s policy toward Taiwan 515

Health Organization to control and combat SARS. Two top officials, the
Beijing mayor and the Minster of Pubic Health, were fired due to the alle-
gation of an early cover-up of the epidemic. Hu’s success in dealing with the
SARS crisis significantly strengthened his domestic power and support. As
one article in Time points out, ‘Hu’s government during the SARS epidemic
displayed a degree of responsiveness not seen under previous leaderships.
This generated a flood of praise from around China, and the whispers of
“tame puppet” that were floating around faded away’ (Liu 2003).
After resuming full power in 2004 when Jiang resigned as the Chairman
of the Central Military Committee, Hu began to adjust China’s domes-
tic and foreign policies. Domestically, Hu changed Jiang’s gross domestic
product (GDP) driven policy to a people-oriented policy. Hu emphasized
building a harmonious society to help the less-advantageous social groups.6
While Jiang had relied mainly on rapid GDP growth to support the CCP
legitimacy and his own power, Hu tried to find more support from the tradi-
tional Confucian culture, which stresses the harmonious relations between
society and state. Although rapid economic growth brought wealth to the
Chinese society, the unbalanced distribution of wealth caused mounting
social problems in the form of corruption, unemployment, income disparity
and social unrest (Pei 2006). Hu’s harmonious society policy may or may
not address these problems directly, but at least it has delivered some hope
to the Chinese people.
Internationally, improved Sino-American relations offered Hu an oppor-
tunity to adjust China’s diplomacy. China’s foreign policy under Jiang em-
phasized great power politics and advocated a multipolar world in the in-
ternational system. Since the United States was the hegemon in the world
after the cold war, China’s multipolar world policy inevitably clashed with
US interests. In other words, China’s international responsibility for build-
ing a multipolar world made China a generic opponent of the United States
as the hegemon in the system. However, Hu has downgraded China’s in-
ternational responsibility for a multipolar world, emphasizing China’s na-
tional responsibility for a peaceful rise (Zheng 2005a; Glaser and Medeiros
2007).7
Instead of advocating a ‘multipolar’ world, Hu proposed at the UN sum-
mit in 2005 a ‘harmonious world’ in which all countries maintain peaceful
relations with one another (Xinhua News Agency 2005). Although critics
may argue that Hu’s policy is too idealistic, the real purpose of Hu’s harmo-
nious world policy is to shift China’s policy toward the United States from
confrontation to cooperation. As Zheng Bijian (Hu’s longtime policy advi-
sor) states, ‘China’s only choice is to strive to rise and, more importantly, to
strive for a peaceful rise. That is to say, we have to work toward a peace-
ful international environment for the sake of our own development and at
the same time, safeguard world peace through this process of development’
(2005b: 15). In other words, China no longer opposes US hegemony in the
current unipolar world. Beijing intends to build a harmonious relationship
516 The Pacific Review

with the United States and take advantage of the US-dominated interna-
tional order for its economic development.
After the 9/11 tragedy China showed strong support for the US fight
against terrorists. In the UN Security Council China supported anti-
terrorism resolutions, which granted the US a rationale to conduct military
actions in Afghanistan. In addition, China agreed to freeze the accounts of
terrorist suspects in Chinese banks at the request of the US government
and allowed the US to use the Shanghai APEC Summit as a platform to
promote the anti-terrorist cause. On 24 October 2002 the US opened its
first office of the Federal Bureau of Investigation (FBI) in China to facili-
tate US efforts on counter-terrorism (US Department of State 2004).
Internationally, China has gradually become a cooperative and responsi-
ble power that actively coordinates its policies with the US. In 2002 China
voted for Resolution 1441 in the UN on weapons inspection in Iraq, which
was favored by the US. In 2003 China played a crucial role in mediating
the North Korean nuclear crisis between Washington and Pyongyang. It
was reported that China suspended crucial oil shipments to North Korea
and shifted troops around the Sino-Korean border to press Pyongyang to
return to the six-party negotiations (Medeiros and Fravel 2003). Although
the North Korean crisis is still ongoing, China’s cooperative policy again in-
dicates that China has become a responsible and active player on the world
stage instead of a passive and confrontational country against the United
States. Secretary of State Colin Powell noted in 2003 that ‘the China–US re-
lations are the best in more than 30 years since former US president Richard
Nixon paid his first visit to China in 1972’ (People’s Daily 2003).
Domestic stability and improved US–China relations, therefore, placed
Hu in a domain of gains when he faced provocative challenges from Tai-
wan after 2001. As a pro-independence leader, Chen never gave up his at-
tempts to move Taiwan in a legally independent direction. As stated before,
Chen’s ‘creeping independence’ approach is at least as provocative as what
Lee did in the 1990s. However, Hu did not follow Jiang’s military coercion
toward Taiwan, but chose instead a less risky policy – political pressure –
against Taiwan’s pro-independence forces. On the one hand, China strongly
criticized Chen’s ‘creeping independence’ behavior and warned Chen that
China did not rule out the use of force to reunify Taiwan if Chen went too
far. On the other hand, Hu showed his cooperative face by inviting Taiwan’s
opposition leaders to visit Beijing. More importantly, China worked with
the United Stats to pressure Taiwan. In 2004, even though Chen provoca-
tively bound a ‘defensive referendum’ to the presidential election despite
US opposition and Chinese warnings, Hu did not use military exercises to
intimidate Taiwan.
It should be noted that Hu’s current low-risk policy of political pres-
sure does not mean that China will not use military coercion in the future.
Prospect theory suggests that if Hu enters a domain of losses due to either
domestic pressures or international threats, or Taiwan’s pro-independence
 Kai He and Huiyun Feng: China’s policy toward Taiwan 517

movements go too far, Hu will use military coercion – even military vio-
lence – to prevent the loss of Taiwan. Despite policy differences, Hu and
Jiang have shared the same overriding policy goal, which is to strengthen
CCP legitimacy and power in China.

Conclusion
The Taiwan issue is one of the most dangerous and complicated strategic
puzzles faced by US policymakers. The key in prescribing an effective pol-
icy to keep the status quo in the Strait is to understand why and under what
conditions the crisis may take place. This paper challenges the traditional
rational deterrence approach and suggests a new psychological model using
prospect theory to explain the origins of the Taiwan crises. After focus-
ing on variations in China’s foreign policy toward Taiwan under Jiang and
Hu, we conclude that Chinese leaders are more likely to use military coer-
cion against Taiwan’s provocation when they face both domestic pressure
and international threats, i.e., when they operate within a domain of losses.
However, when Chinese leaders are located in a domain of gains, i.e., with
no serious domestic and international challenges, their Taiwan policy will
be more risk-averse in adopting political and diplomatic pressure against
Taiwan’s pro-independence movements.
Table 1 shows the structured-focused comparison of the two Taiwan
crises over time in this research. We can see that both the 1995–96 and
the 1999–2000 Taiwan crises took place when Chinese leaders faced
both domestic instability and international insecurity. Since 1995 Tai-
wan’s pro-independence actions have continued to intensify after Chen
came to power. However, China’s policy toward Taiwan changed from

Table 1 Structured-focused comparisons of the two Taiwan Crises over time

1995–96 1997–98 1999–2000 2001–

Comparison variables (crisis) (non-crisis) (crisis) (non-crisis)

China’s Taiwan policy∗ Military Political Military Political

Risk orientation∗∗ Acceptant Averse Acceptant Averse
Action domain∗∗ Losses Gains Losses Gains
Domestic instability∗∗∗ YES yes yes NO
International pressure∗∗∗ YES NO YES NO
Taiwan provocation∗∗∗∗ YES yes YES YES
∗ Dependent variable: China’s Taiwan Policy (military coercion or political pressure).
∗∗ Leadership intervening variables: risk orientation (risk acceptant or risk averse); Action do-
main (domain of gains or domain of losses).
∗∗∗ Regime security independent variables: Domestic instability (yes or no); International pres-
sure (yes or no). Upper case (YES) indicates stronger presence than lower case (yes).
∗∗∗∗ Control variable: pro-independence provocations (yes or no). Upper case (YES) indicates
stronger presence than lower case (yes).
518 The Pacific Review

military coercion to political pressure after 2001. Apparently, Taiwan’s

pro-independence movements cannot fully explain the variation in China’s
policy after 2001. In 1997–98 China momentarily softened its military
posture toward Taiwan during its honeymoon with the United States under
the Clinton Administration. After 2001 Hu gradually assumed power
under relatively benign domestic and international environments. The
US anti-terrorism campaign constrained Washington to maintain good
relations rather than antagonize Beijing. Chinese leaders conducted a
risk-averse policy – political pressure – toward Taiwan although Taiwan’s
pro-independence provocation under Chen remained very troublesome.
Traditionally, US policymakers have employed a dual deterrence strat-
egy to keep the status quo in the Taiwan Strait (Christensen 2002; Sutter
2006). However, the outbreak of military confrontation in the 1995–96 cri-
sis as well as the military tension in the 1999–2000 crisis both reveal the de-
ficiency of a US dual deterrence strategy based on rational choice assump-
tions. Prospect theory suggests that Chinese leaders may or may not take
the rational deterrence signals from the United States if they are placed in
a domain of losses. They may choose more risky polices to avoid further
loss. The US deterrence strategy may not be effective against seemingly
irrational, risk-taking behavior of Chinese leaders framed within a domain
of domestic losses.
This analysis suggests that the US policy toward China over Taiwan
should focus on shaping the reference point of Chinese actions. Given the
strategic importance of the United States to China, the United States can
exert a positive as well as a negative impact on Chinese decisions. No Chi-
nese leader intends to confront the United States given the US’s unpar-
alleled power in the world. Therefore, the United States enjoys an upper
hand in shaping its relations with China. If the United States maintains pos-
itive and cooperative relations with China, it will facilitate Chinese leaders
in strengthening their power status in domestic politics and place them in a
domain of gains for their decision making. Chinese leaders, therefore, are
more likely to choose a less risky policy to deal with the Taiwan issue. How-
ever, if the United States should treat China as an enemy, China’s leaders
would be placed in a domain of losses because of domestic and interna-
tional challenges. If Taiwan provokes China when Chinese leaders are in
a domain of losses, more risky policies are likely to be chosen by Chinese
leaders in order to avoid further losses in Taiwan. A coming US–China con-
flict in the Taiwan Strait, therefore, may become a self-fulfilling prophecy
for the United States.

Acknowledgement
An early version of the paper was delivered at the 2008 Annual Meeting
of the International Studies Association, 26–29 March 2008, San Francisco,
CA, USA. The authors thank Stephen Walker, Sheldon Simon, Yuan-Kang
 Kai He and Huiyun Feng: China’s policy toward Taiwan 519

Wang, and anonymous reviewers of The Pacific Review for their construc-
tive comments and suggestions.

Notes
1 Other scholars also use prospect theory to complement rational deterrence the-
ory. See Berejikian (2002) and Schaub (2004).
2 For applications of prospect theory in international relations, see Farnham
(1994); Levy (1997); McDermott (1998); Mercer (2005); and Taliaferro (2004).
3 There is a third possible situation when Chinese leaders are positioned in be-
tween a domain of losses and a domain of gains, i.e., when Chinese leaders
perceive ambiguous regime security. According to prospect theory, leaders’ risk
propensity will become risk neutral. It means that leaders will not take action
based on their risk propensities. Other factors, such as leadership style and cul-
tural norms, may come into play in shaping leaders’ decisions. The authors thank
one of the reviewers for suggesting this point.
4 The US claimed that the bombing was unintentional due to faulty maps of Bel-
grade. However, the Chinese government did not accept this excuse.
5 Taiwan also fired missiles purchased from the US as a response to China’s mili-
tary exercise.
6 The reasons for Hu to conduct the ‘people-oriented’ policy are complicated.
This paper suggests that Hu took the initiative to cope with domestic challenges.
Other scholars may argue that Hu is only reacting to the mounting social un-
rest after he took over the power. The authors thank one of the reviewers for
suggesting this point.
7 Zheng Bijian, Hu’s policy advisor, first proposed the ‘peaceful rise’ policy at the
Boao Forum in 2003. However, due to internal debates and disagreements, the
Chinese government used ‘peaceful development’ to replace the early ‘peaceful
rise’ policy slogan in 2005. For details, see Glaser and Medeiros (2007).

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