Taipei Mayor Ma Ying-jeou overwhelmingly elected head of opposition Kuomintang party 16 July: anti-communist who criticised mainland’s anti-secession law but opposes independent Taiwan, almost certain to run as KMT 2008 presidential candidate. Third pro-unification group, New Party, invited to mainland, released 10-point cross-strait cooperation proposal.

Amid signs of worsening Sino-American relationship, U.S. Sec. Defense Rumsfeld said Chinese military build-up threatening Asian security. Pentagon said would supply Taiwan with sophisticated missile and air defence radar system. Taiwanese National Assembly approved significant constitutional amendments: any move towards independence must now be approved by referendum. New system expected to block any radical pro-independence policy shifts.

Cross-strait relations improved as China announced decision to lift travel ban - currently only limited business travel allowed. Decision came after visits by nationalist leader Lien Chan in April and head of opposition People First Party James Soong 13 May. Joint communiqué between Soong and Chinese President Hu Jintao said Taiwan must accept “One-China” principle before talks resume; rejected by President Chen Shui-bien but Chen still prepared to search for common ground. Month-long National Assembly on constitutional amendments, uncontroversial between parties, started 30 May; Chen’s Democratic Progressive Party won 42.5% of votes for assembly in very low turnout poll: better than expected result for Chen.

Opposition KMT leader Lien Chan in China for historic 8-day tour; held talks with Chinese President Hu Jintao 29 April: first meeting between Nationalist and Communist Party leaders since Nationalists fled mainland 1949. Joint communiqué released opposing Taiwanese independence; rejected in Taipei as attempt to divide Taiwan's political parties and undermine its elected government, though President Chen Shui-bian urged Beijing to open talks with his administration. Polls indicated slim majority of Taiwanese supported Lien’s trip. Political fallout from anti-secession law likely to delay lifting of EU arms embargo on China for at least another year.

President Chen Shui-ban sharply criticised “anti-secession law” passed by China’s National Peoples’ Congress authorising “non-peaceful means” to prevent Taiwan from moving towards greater independence. Law led to reconsideration of EU plans to lift arms embargo on China in place since 1989. U.S. said law “unfortunate”. Taipei peace demonstration against law numbered at 1 million by organisers; 500,000 by police. Representatives of opposition Kuomintang party travelled to Beijing in attempt to defuse tensions and undermine Chen.

Some warming of Cross-Strait relations, with conciliatory statements on both sides and continuing interest in direct flights between island and mainland. Beijing proposed closer economic ties 26 February, day after Taiwanese President Chen Shui-bian and opposition politician James Soong said in joint statement they “do not rule out any possible model of relations” with Beijing. U.S. and Japan announced peace in Taiwan as “common strategic objective” after talks 19 February, angering Beijing. EU arms embargo on China likely to be lifted in coming months, but U.S. remains concerned over possible transfer of sensitive technologies: intense lobbying on embargo issue during Bush visit to Europe.

China and Taiwan agreed to resume direct flights between mainland and island during January-February Lunar New Year holidays. But Taiwanese president Chen Shui-bian said Chinese anti-secession law, scheduled to be debated by China’s parliament in March, could force Taiwan to hold referendum in response.

In surprise blow to President Chen Shui- bian’s pro-independence policies, opposition Nationalist party and allies won legislative majority in 11 December elections. Beijing reacted cautiously, saying result proved most Taiwanese wanted peace with mainland: later said it intends to pass law banning secession, possibly providing legal basis for military attack should Taiwan declare independence.

Taiwanese president Chen Shui-bian stepped up peace overtures ahead of 11 December legislative elections. After similar proposal rebuffed October, again called for dialogue in 10 November speech. Centrepiece of proposals is 10-point code of conduct, including many points stated before, but ceding no ground on sovereignty or national identity. Beijing officials called proposals insincere and warned of escalating cross-Strait tension. Taiwan's legislature rejected for second time budget proposal for $18 billion arms purchase from U.S.: decision now deferred until after legislative elections.

Beijing rejected Taiwanese president Chen Shui-bian’s “conciliatory” 10 October speech in which he called for renewed cross-Strait talks, saying speech was yet further move toward independence. Chinese officials also later rebuffed U.S. Secretary of State Colin Powell’s suggestion that they use Chen’s speech as basis for restarting talks. Proposed $18 billion arms purchase from U.S. continues to incite controversy, as pro- and anti-arms purchase groups held rallies and protests across Taiwan. Purchase has yet to be approved by Taiwanese legislature.