During the 1950s, American economic assistance to the KMT regime equaled about 6% of Taiwan’s GNP and nearly 40% of its gross investment.
Military aid was even more substantial.
By 1957, 10,000 Americans were present in Taiwan in “an official capacity,” most of them in the capital city, Taipei.
America, the world’s most powerful nation, located the fate of KMT Taiwan squarely within the larger context of the global anti-communist crusade. Taiwan became “Free China” . . . . American military might shielded the island from Communist invasion. American financial and commodity assistance insulated the island’s economy from external forces.
In some ways the Americans treated Taiwan as they treated the Japanese.
As in Japan, the Americans sent in a battery of civil and military advisers to assist in the necessary rebuilding of the decimated structure along new lines. As in Japan, the locals governed, but the Americans constituted enough of a shadow government to influence a wide range of political and economic decisions made by the Chinese.
American influence was most pronounced after 1954 when the US undertook to assist Taiwan militarily against renewed communist aggression.
The Americans helped stabilize the economy, the society, and the Nationalist government.
In 1954, a communist threat to the islands of Quemoy and Matsu was successfully countered, demonstrating Taiwan’s defensive strength. The assault contributed to the signing of a Treaty of Mutual Defense between the US and Taiwan.
US influence actually ensured the survival of the regime throughout the 1950s because of the confidence that such support gave local and foreign investors.
US aid helped finance land reform, including the cost of US advisers, and was an important channel for technology transfer.
Technical assistance to make better military uniforms helped the textile industry, and technical assistance on radar and avionics helped the electronics industry.
More importantly, though, American subsidies allowed Taiwan to maintain a large military (absorbing roughly 10% of GNP) while simultaneously embarking on a path of economic development.
The US also assisted Taiwan in its efforts to get in on the ground floor of the corporate movement toward global manufacturing whereby American firms cut costs by relocating production to cheaper labor sites.
Still, US support and influence could not solve all of Taipei’s problems.
Taipei remained in a state of wartime readiness.
The city was governed by a militarized regime whose policies ensured that society was militarized also.
Martial law mandated that all constitutional guarantees of liberty were abrogated. Mass meetings, strikes, and demonstrations were prohibited. In fact, any gathering of more than two people was illegal unless first registered with the police.
Native Taiwanese were excluded from the top levels of the military, the police, and the party.
Taiwan, as a whole, was obsessed with the goal of retaking the mainland.
Defense accounted for around 70% of total central government expenditure throughout the 1950s.
The military was quite privileged with the generals creating their own relatively closed production systems based on public enterprises and special status ‘private’ firms.
The fact that the regime had lost a war to communism assured it of US support.
Nevertheless, following the 1958 Taiwan Straits crisis, it became clear that United States support of Taiwan was strictly limited to defense of the island.
The regime was forced to acknowledge that the possibility of retaking mainland China by military means was increasingly remote.
Under subtle pressure by the US (and in return for continued US assistance), the leadership undertook economic reforms between 1958 and 1961 which reoriented the economy toward export markets. These actions solidified the state sector and encouraged private entrepreneurship. In return, the US provided the world’s largest market for Taiwan’s exports with preferred terms and conditions of access.
The quasi-Leninist state and the United States, united in the fight against communism, had reached an accommodation that would allow Taipei to benefit from an “economic miracle” that would transform the capital of “Free China” into a capitalist Cold War City.