The Associated Press

TAIPEI, Taiwan € In another step indicating that Taiwan and China want to end their eight-month war of nerves, a Cabinet member has proposed setting up phone links between the island and the mainland, newspapers reported today.

Yesterday, China cooled its rhetoric and ended its war games while Taiwan proposed a significant trade concession to Beijing, suggesting that both sides want to end their eight-month war of nerves.

China sent thousands of troops on military maneuvers near Taiwan and test-fired ballistic missiles in a failed attempt to undercut support for Taiwan's president, whom Beijing accuses of harboring dreams of independence.

But now the two rivals, having plunged into a confrontation that alarmed their Asian neighbors and drew in the U.S. Navy, are looking for ways to improve relations.

The end of the war games had been scheduled, and Taiwan warned another may be imminent, although not so threatening. But China's move coincided with a shift in emphasis from vilifying President Lee Teng-hui of Taiwan to talking about what must be done to restore the peace.

Taiwan, for its part, offered to partially meet a fundamental Chinese demand by establishing direct trade links with China.

The trade concession was hedged and conditional, and has been raised before. Some have come to see the links as inevitable, given the island's $24-billion investment in China, which has continued to flourish despite the war games.

But coming just 48 hours after Lee's landslide victory in Taiwan's first direct presidential election, it appeared designed to demonstrate sensitivity to public expectations of a more conciliatory approach to China.

Taiwan is trying ''to show its goodwill, and offer a chance for the mainland to save face after its military intimidation failed to pull Lee down,'' Ma Kai of Taiwan's Chung Hua Institute for Economic Research said in an interview.

Trade presently goes mostly through Hong Kong. Economics Minister Chiang Pin-kung said the government will submit legislation in June to create special districts licensed to have direct trade links to China.

In addition, Transportation Minister Liu Chao-