A few days ago, while an American envoy was here in Taipei pressuring Taiwanese officials to bend to Communist Chinese demands, a small demonstration erupted outside the U.S. mission.

"We want to be the 51st state!" chanted the band of protesters, called the 51st Club.

Meanwhile, among the vodka-and-tonic set hobnobbing at Taipei's hip saloons and coffee bars, a popular joke goes as follows: Cuba loves China and Taiwan loves America. So why don't we switch islands?

While no one takes the 51st Club or the joke seriously, they illustrate a key problem facing Taiwan as it attempts to negotiate its future with mainland China. One-hundred miles off the coast of Fujian province, and five minutes away for a missile, Taiwan is damned by its geography to deal gingerly with the People's Republic of China.

Things that would make sense anywhere else in the world--such as Taiwan's recent announcement that it was, after all, a separate state from China--don't make sense here because of China's size, unpredictability and military heft. Things that wouldn't make sense anywhere else in the world--such as China's stated policy that Taiwan's national government does not exist--make sense here, for those same reasons.

On July 8, President Lee Teng-hui announced that Taiwan wanted "special state-to-state" relations with China. Since then, tensions have skyrocketed along the Taiwan Strait. China revealed that it had neutron bomb technology and publicized a few minor military exercises--and Taiwan's stock market plummeted 14 percent. An island-wide blackout in Taiwan on Friday sparked fears of a Chinese invasion. On Saturday, the Chinese coast guard seized a Taiwanese freighter carrying supplies to front-line Taiwanese troops on the heavily fortified Taiwan-held island of Matsu, close to the Chinese coast, causing some to think that China was preparing an economic blockade.

"Really, we're at their mercy," said a senior Taiwanese official. "Their psychological warfare is first rate."

Because of China's success at scaring Taiwan and the United States, Lee's advisers spent three weeks fumbling with an explanation of the president's "special state-to-state" relations concept--even though a small group of senior advisers had spent a year formulating the change. When Taiwan's top envoy to China, Koo Chen-fu, attempted to clarify Lee's statement on Friday, it was rejected by Beijing, throwing planned October talks with China's top Taiwan envoy, Wang Daohan, into doubt.

But why shouldn't China establish "special state-to-state" ties with Taiwan, Taiwanese officials ask. After all, Taiwan has a democratically elected president, one of the freest presses in Asia, a bustling economy and a truly civil society.

The answer is: Because China says so. And increasingly in Asia, what China wants, it gets. American diplomats jumped into the fray soon after Lee made his announcement and attempted to force Taiwan to retract the statement. "Risky, adventurous and unnecessary" was how one senior American envoy described the move.

"What China has been able to create is a situation in which everyone is scared," said another Western envoy. "If you 'dis' China, your company or your country stands to lose business or cooperation. So everyone toes the line."

China's position is that Taiwan's national government doesn't exist. When Taiwan refers to Lee, it puts the word president in quotation marks. Beijing's "one China" policy is this: Beijing is the capital of all of China. Taiwan is a province of China. So if China negotiates future reunification, Taiwan will be a local government and China will be the central government.

China has threatened to invade Taiwan if it declares independence. Beijing said it viewed Lee's announcement as a major step toward such a declaration.

China also has squeezed Taiwan diplomatically. Only 28 countries recognize Taiwan, the most prominent being Honduras. Taiwan is a member of only 16 international organizations, including three devoted to saving various types of tuna.

Lee's motivations for the "special state-to-state" announcement are complex. For one, it is increasingly clear that the president has no interest in uniting with China--even in the distant future.

"Lee wants to create an independent Taiwan, that's totally clear," said Chang Ling-chen, a professor of political science at National Taiwan University. "He can package it nicely, but that's what he wants."

Born in Taiwan during Japanese rule, Lee, 76, essentially was brought up as Japanese and is known to have little affinity for Chinese culture. C.V. Chen, who worked closely with Lee managing relations with China from 1990 to '92, said his former boss dreams of an independent Taiwan.

But in an interview at his law office, Chen noted that Beijing, by its diplomatic pressure, gave Lee the excuse he needed to sell the "special state-to-state" concept to Taiwan's people.

"China should have been more generous," said Chen, who quit the Taiwanese government in 1992 over disagreements with Lee over China policy. "They could have offered us a lot more diplomatic space without jeopardizing their position, but they didn't."

The United States has also played a role in pushing Lee to roil the waters in the Taiwan Strait. Since March, U.S. officials have pressured Taiwan to start concluding "interim agreements" with China on issues leading toward reunification.

"Lee was tired of American pressure," a senior Taiwanese official said.

Taiwan's reaction to Lee's move has been mixed, an illustration of the open nature of society here. Many people on this island seem united in the belief that Lee spoke the truth. But the question is whether he should have said it and risk riling Beijing.

"Taiwan should be free and independent, but we have crazy people living next door," said Isabel Chang, a systems analyst. "I'd rather my government was vague than at war."

Another factor for Lee is the upcoming elections. Next March, Taiwan will directly elect its president for only the second time. So far, the campaign has been going badly for Lee's man, Vice President Lien Chan, who formally announced his candidacy Saturday. Lien is widely considered stiff and lacking a common touch.

Lian's challengers are James Soong, a mainland-born former powerhouse in the ruling Nationalist Party who is running as an independent, and Chen Shui-bian, a scrappy leader of the opposition Democratic Progressive Party. The best way to hurt both men, analysts said, is for Lee to create a crisis with China, prompting people to opt for continuity with Lien.

But so far, it's not clear whether Lien is getting any boost. For one thing, Beijing seems to be handling the crisis calmly--as opposed to a 1996 crisis when China fired missiles across Taiwan's bow during Taiwan's first direct presidential election, an act that helped Lee significantly.

"This time Lee can't succeed like last time," said Xu Shiquan, director of Beijing's Institute of Taiwan Studies. "We know him very well."