Because of the declining agricultural sector the rural industry is being restructured in Taiwan. In the process of globalization, technological progression based on knowledge and innovation is substituting for labor, land, and capital as the major source of development. The state power is weakening and cities are emerging as direct players in the world economy. In this arena of inter-city competition, the ability of rural areas to grow is limited. This paper therefore suggests the formation of rural policy should be based on promoting urban-rural interaction. The establishment of a secondary city system is essential to incorporate living, ecological concerns and the production environment. Unless policy makers consider urban and rural areas as integrated, the development of rural Taiwan will not be sustainable.