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Why is China friendly towards Taiwan in the realm of trade but hostile in the political and diplomatic arenas? Objectives. This paper is to examine the significance of TaiwanÂ’s economic development to ChinaÂ’s economy, and to explore the extent to which the economic interdependence of the two sides affects the level of tension across the Taiwan Strait. My arguments are that China does not use economic means to sanction or attack Taiwan because TaiwanÂ’s economic development, based on a large amount of trade and investment in China, has great implications for ChinaÂ’s economic growth. The increase of ChinaÂ’s economic growth because of the salient economic interactions between Taiwan and China contributes to lowering the level of tension between the two sides. Methods. Using data derived from Monthly Statistics of Exports and Imports, Ministry of Finance, Taiwan, the Republic of China (ROC), I test my hypotheses using one multivariate regression model and an ordered logistic model with twenty-five observations for each variable, which are based on a time series analysis ranging from 1979 to 2003. Results. For the regression model, the findings, based on GDP indicators, demonstrate that TaiwanÂ’s economic growth has positively significant influence on ChinaÂ’s economic growth. The findings of the ordered logistic model show that ChinaÂ’s GDP and GDP ratio are negatively significant to the tension level, meaning that the increase of ChinaÂ’s GDP and GDP ratio respectively decrease the level of tension between the two sides. However, TaiwanÂ’s regime change to democracy has positive effect on the increase of tension. The statistical results support the long-standing liberal hypothesis that trade ties facilitate interstate peace. ..PAT.-Conference Proceeding [ABSTRACT FROM AUTHOR]