Zhao Tao as Xiao Yu in A Touch of Sin. Credit: Kino Lorber, Inc.

TAIPEI – On a recent Thursday evening, a movie theater in a fashionable district of this city showed a film called "A Touch of Sin," which had been hailed around the world as one of Chinese director Jia Zhangke's finest works. China's Politburo had tried to squelch it, with a directive prohibiting all news coverage and reviews, since it painted an unflattering view of the new China. But the film's producers had a devil of a time showing it in Taipei too.

Hardly anyone will see Touch of Sin here, despite its anti-China themes, but the reason has less to do with politics than economics. The quasi-national state only allows 10 films a year from China -- which are determined by drawing lots -- and Jia's film didn't make the cut. So the distributor figured out a workaround: The film could be shown in a special "festival" held by a non-profit that would allow for 63 screenings, total.

"It's kind of ridiculous," said Taiwan's minister of culture, Lung Ying-Tai. Her administration has proposed raising the limit from 10 to 15 films, but that will require approval from the legislature. And why have the limit at all? "Protectionism," she answered simply, to a group of American journalists earlier this month.

Lung's response is a little odd, given that Taiwan dropped restrictions on film imports from other countries when it joined the World Trade Organization in 2001, and foreign movies already dominate the island's box office proceeds. In reality, Taiwan's protectionism is really about one country. As mainland China's influence rises and Taiwan falls behind other Asian powers, officials here are caught between a desire to open up to the behemoth next door, while also protecting the island's economic and cultural sovereignty. And that has led them to restrict the flow of goods, services, and even award-winning films across the Taiwan Strait.

On the one hand, Taiwanese officials boast about easing tensions with the mainland, which still regards the island as a wayward piece of its empire. There are 828 direct flights to China today, up from zero in 2007. A 2010 treaty lowered tariffs on many goods and established standards for investment and trade in commodities. Tourism has increased from 2 million Taiwanese visiting the mainland in 2007 to 5.2 million in 2013. And last month, the longtime rivals pulled off the first in-person meeting of high-profile officials in 65 years (while stopping short of a presidential rapprochement).

But the warmth only goes so far.

Taiwan is keeping China at a stiff arm's length -- not just on the feature films it shows, but the ways it allows capital to cross the border. Mainlanders can only own a small piece of a bank, for example, and no part of semiconductor or technology companies. They're Taiwan's crown jewels, and can easily be devalued through intellectual property theft.

"We really care about those high-tech industries," explained Steve Lin, Taiwan's deputy minister for Mainland Affairs, in a meeting with American journalists. That's perhaps why, while he could cite 90,000 cases of Taiwanese investment in China since 2009, there are only 400 cases of investment flowing the other way.

Lin's admission speaks to a deep worry about the country's economic future. President Ma Ying-jeou's promise of greater integration with China hasn't yielded the economic gains he promised, and Taiwan's Asian tiger days are long gone -- double-digit annual growth has sunk to one or two percent, while wages have stagnated, allowing emerging economies such as South Korea to surge ahead. Also, the limited ability of businesses to move across the strait has had serious consequences.

Just talk to Godwin Wang, assistant vice president at the Farglory Free Trade Zone outside Taipei. The government has helped set up these zones around the country's ports to help companies import and export goods with lower tariffs. When Farglory opened its high-tech, high-volume complex eight years ago, it expected to reach capacity in short order. Instead, it's done only about half the business it could handle -- mostly in lighter, more valuable goods like motherboards and outdoor wear -- as more and more Taiwanese companies just decide to move abroad seeking lower costs for labor and land.

"They all feel a certain kind of pressure from mainland China," Wang says, of his cargo-shipping clients. "We are suffocating, because they are stealing our jobs."

Farglory is pinning his business on one last hope: That consumers around the world will still believe Taiwan makes better products than China. To capitalize on that perception, it's built what it calls a "value-added center," where workers might add enough of a finishing touch to something imported from China -- putting the drivetrain on a bicycle, for example -- to qualify as "made in Taiwan" by the World Trade Organization's standards.

"Of course you could do it in China. But then it's 'made in China,'" Wang says. "What it means is that the bike was 'made in Taiwan.'" So the bike can now fetch a much higher price, he says -- a widely-held impression in the region.

The value-added center supplies 30 percent of Farglory's revenues at the moment, which Wang hopes to increase to 50 percent in the coming years. It's unclear, however, that the strategy is sustainable over the long term -- especially given that Taiwan's comparative advantage in advanced manufacturing is on the decline, as other regional economies learn how to replicate it.

To make matters worse, Taiwan has also failed to join many regional trade agreements that might help the nation make up for its cautious openness. Having missed out on the first two rounds of the massive Trans Pacific Partnership trade deal, it's hoping to get on board for the next round of talks. That, however, will require an overhaul of regulations governing trade and investment, which is proving difficult as well -- and frustrating for the American businesses that want access to the Taiwanese market.

"Very often we find that Taiwan comes up with proposed regulations that are unique, that do not line up with international practices," says Amy Chang, senior director for government affairs at the American Chamber of Commerce in Taiwan. The advent of robust democracy, she notes, hasn't helped in this regard -- consumer groups often resist new products, and the issue gets demagogued by public officials, Chang says.

Of course, Lung, the minister of culture, knows that it's more than just democracy and protectionism that's keeping Taiwan from opening the economic floodgates to China.

"It was a bloody civil war and 60 years of separation," she said. "It takes a while to see what used to be your enemy the way they really are." Plus, she pointed out, everybody in East Asia is a bit edgy about the behemoth next door. "The Taiwanese are even edgier than other people, and they have a reason to be," she said, mentioning the missiles China has pointed in their direction. "So we set up a lot more barriers."