By Robert Manning

Once again, the world has discovered that the Taiwan Strait is a highly combustible place where the problems of an era past (Chinese civil war frozen by Cold War) intersect with the problems of the future (coping with the rise of China and with a democratic Taiwan).

The political shock waves from Taiwan President Lee Teng-hui's apparent policy shift continue to reverberate in Beijing and Washington along with fears of looming confrontation. Lee set off a predictable firestorm in a July 9 interview with German TV when he said that Taiwan would in the future deal with China on the basis of "special state-to-state relations," rather than the "One China" political formula that has underpinned peace in the Taiwan Strait for a generation.

Lee's gambit surprised and baffled many, coming at a moment of relatively calm cross-strait relations and in front of the imminent prospect of renewed cross-strait dialogue in October. For a panicky Clinton administration, the timing could hardly have been worse, with U.S.-China relations in the worst shape in a decade in the aftermath of the U.S. bombing of the Chines Embassy in Belgrade.

Clinton clearly was fearful of a replay of the March 1996 crisis, when the United States sent two aircraft carriers near the strait after China conducted "missile tests" near Taiwan's two largest ports. The president dialed his hotline to Beijing on July 18 to reassure irate Chinese President Jiang Zemin that the United States would reject any deviation from its "One China" policy. Jiang snarled back, "We will never sit idle if some people engage in Taiwan's independence or foreign interventions attempt to separate Taiwan from the motherland."

We will not see the full Chinese response to Taiwan's actions until after the leadership's seaside policy retreat next month at Beidaihe. In the face of a steady stream of threats from Beijing and nervous Taiwanese businessmen who have invested more than $35 billion in mainland China, Taipei quickly sought to "clarify" its new position. In a series of retreats, they argued that "special state-to-state relations" was merely a rephrasing of their desire to be treated as an equal political entity.

To those not versed in the arcane political vocabulary of cross-straits relations this row may seem rather odd. After all, hasn't Taiwan in fact, been a clearly defined territory self-administered separately from Beijing for half a century? Has not China been de facto divided? And has not Taiwan's ruling KMT been saying for most of this decade it is sovereign and wants to deal with Beijing as an equal political entity, not as a wayward province? What's the big deal?

Well, All three sides have prospered under an artful political fiction -- the so-called One China policy -- since the United States reached out to China in 1972. U.S.-China normalization was based on the language that "all Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is part of China." The United States simply "acknowledged" that position, and stressed a "peaceful settlement of the Taiwan question by the Chinese themselves."

The policy worked spectacularly well for a generation. But then Taiwan began to democratize in 1988. In the process, the mainlanders of the ruling KMT began to yield to native Taiwanese. Lee Teng-hui, Taiwan's first directly elected president also is its first native Taiwanese leader. There is a growing sense of Taiwan -- a vibrant, increasingly middle class democratic society -- as a separate actor. Despite growing interaction -- some 2 million Taiwanese visits to the mainland this decade. Taiwanese people little identify with China, at least as it is today. A highly successful economy and a democracy, Taiwanese are tired of being a ghost in the international system. They want international political space.

Lee's posturing reflects his perception of this trend. The odd timing of Lee's comments is the product of Taiwan's upcoming presidential elections next March. Faced with a lackluster successor in Lien Chan, a popular opposition Democratic Progressive Party candidate in Chen Shui-bien, and a break-away candidate in James Soong, a popular ex-governor of Taiwan, Lee apparently sought to box in all the candidates. By tilting toward independence, he outflanked Chen who has favored a referendum for independence, and challenged Soong, who has been more amendable to dealing with Beijing and mollifying nervous Taiwanese businessmen who have invested more than $35 billion in the mainland.

Lee may have successfully triangulated Taiwan domestic politics and strengthened his legacy. But he may have miscalculated in regard to China. Faced with a sputtering economy, and a large sense of vulnerability following Kosovo, Beijing's reaction could easily spin out of control. Chinese leaders cannot afford to appear "soft" on Taiwan. Similarly, the Clinton administration's response of underscoring its "One China" policy has led some to suspect it may see Lee's somewhat provocative stance as something that might help repair U.S.-China relations. If so, it is certain to stir new conflict between Clinton and Congress, which currently is contemplating new pro-Taiwan legislation.

Tension over the future of Taiwan, holds the potential to alter the East Asian balance, should Taiwan's present status as a de facto independent entity prove unsustainable. The Taiwan problem, may be the ultimate symbol of clashing U.S.-China interests and values. Taiwan captures the divergence between China's sense of grievance over two centuries of Western intervention and the reality of U.S. dominance in the Pacific, between universal claims of democracy and China's claims of national sovereignty.

For the three parties, not least the United States, cross-strait military conflict is almost certainly a lose-lose proposition. If the United States did not come to Taipei's aid in the event of an invasion, its would raise profound doubts in the minds of allies as to the credibility of the U.S. security umbrella. Yet a U.S. military response would force choices polarizing East Asia, put U.S. alliances at risk by forcing the region to make choices and harden an enduring enmity with China. Thus the United States has insisted on a peaceful resolution and opposed any unilateral change in the status quo.

All three sides of the U.S.-China-Taiwan triangle have an interest in avoiding conflict. It is worth noting that, despite its heated rhetoric, Beijing has not said it would cancel the scheduled October visit to Taiwan of its chief negotiator (and Jiang Zemin confidant), Wang Daohan. Lee gambit may result in China simply waiting out the remaining eight months of his term, with the hope of a fresh start with his predecessor.

In any case, the new Taiwan flap underscores the compelling need to adjust the understandings between the United States, China and Taiwan to the new realities of democracy in Taiwan. With Hong Kong returned to Chinese sovereignty and Macao due back in December, that leaves Taiwan alone outside of direct Chinese control. Yet a resolution of the Taiwan question is still premature.

It will require a healthy dose of political creativity to find a way for Taiwan to obtain the international political recognition it seeks within the confines of some interpretation of "One China" Beijing can live with. China and Taiwan previously have reached accord allowing Taiwan's membership in the Asian Development Bank and in APEC. One possibility would be for an understanding that Taiwan would under an agreed upon formula join the United Nations system -- IMF. World Bank, WHO, perhaps even observer status or membership in the U.N. in exchange for assurances about its international behavior and a commitment to continue the dialogue about reunification.

Robert A. Manning, a contributing editor to IntellectualCapital.com, is a senior fellow at the Council on Foreign Relations. These views are his own, not the council's. His e-mail address is robertmanning@intellectualcapital.com.