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As Taiwan heads to the polls on Saturday to elect a new president and legislature, their vote will draw keen attention from home and abroad. That’s because this self-governing island of 23 million people has a huge impact on global business and trade, thanks in large part to its world-leading chip industry.
However, China has recently stepped up its military aggression against Taiwan, causing anxiety around the world.
Chinese leader Xi Jinping has repeatedly stated that China plans to “unify” Taiwan and China. The Communist Party claims the island as its own territory, even though it has never ruled it.
Lai Ching-de of the Democratic Progressive Party (DPP), Taiwan’s vice president and the front-runner for the top job, has been publicly disliked by Chinese officials for past comments in support of Taiwanese independence. Although he has softened his support for maintaining the status quo of Taiwan’s de facto sovereignty, Beijing continues to denounce him as a dangerous separatist and reject calls for dialogue.
China is increasing pressure on Taiwan in the run-up to the general election, forcing the island to choose between “war and peace” or “prosperity and recession.”
Although Beijing is not expected to go to war in the near future, military or economic pressure is likely to increase if Lai is elected.
“If Mr. Lai and the Democratic Progressive Party win, we could see a range of coercive actions by the Chinese government,” said Charlie Best, an associate director at the Rhodium Group, which studies China.
This includes large-scale military exercises that could disrupt commercial traffic in the Taiwan Strait, the 110-mile-wide waterway that separates China and Taiwan, or trade that relies on trade, which is home to some of the world’s top tech companies. That could include economic sanctions on the island, he said. .
Exercises like this have been seen before In August 2022, U.S. House Speaker Nancy Pelosi visited the island, and in April 2023, Taiwanese President Tsai Ing-wen met with then-U.S. House Speaker Kevin McCarthy in California.
Approximately half of the world’s container ships pass through the strait each year.
Major competitors and partners
Although Taiwan and China have complex political conflicts, they are also economically linked. China has long been Taiwan’s largest trading partner and largest investment destination.
According to Taiwan’s Ministry of Economic Affairs, 35% of Taiwan’s exports last year went to China, mostly integrated circuits, solar cells and electronic components. Imports from China accounted for 20% of total imports in the same year.
As a result, Taiwan’s trade surplus with China will reach a huge $80.5 billion in 2023.
According to Chinese customs data, the country’s trade surplus comes mainly from the United States and Europe. However, like Japan and South Korea, they often have large trade deficits with Taiwan.
China has been a favorite investment destination for Taiwan for decades. According to Taiwanese government statistics, from 1991 to 2022, Taiwanese companies invested a total of $203 billion in China. They created millions of jobs in China.
“Taiwan and China are extremely important to each other,” Best said. “China relies heavily on inputs and companies from Taiwan in the global electronics supply chain.”
For China, semiconductors produced by Taiwanese companies such as (TSM) are essential to the economy. The island is also an important link in trade between China and the world.
Mike Kai Chen/Bloomberg/Getty Images
TSMC is located in Hsinchu Science Park, Taiwan.
Rhodium Group estimates that the island produces more than 60% of the world’s chips and about 90% of the world’s most advanced chips.
China imports electronic components and precision machine tools from Taiwan, assembles them, and exports the finished products to the world market.
Best said China could counter a Democratic Progressive Party victory by applying military and economic pressure on the island.
However, “unless there is a major escalation such as a full-scale lockdown (which is unlikely given the cost to China’s own economy), these actions fundamentally jeopardize Taiwan’s autonomy and economic growth.” “It’s not something to expose,” he said.
Best estimates that a blockade of Taiwan could cost the global economy more than $2 trillion a year, not counting the costs of a potential military conflict or economic sanctions between China and the United States. are doing.
China has never sanctioned Taiwan’s semiconductor industry, which is an important supplier to its manufacturing industry.
“[That’s] “This is likely because doing so would cause considerable pain to the Chinese economy,” Capital Economics analysts said in a research note on Wednesday.
Many Taiwanese companies, including semiconductor giant Taiwan Semiconductor Manufacturing Company (TSM) and Apple supplier Foxconn operate in China and are tightly integrated into its supply chain. However, the island government closely monitors the company’s activities and does not allow cutting-edge technology to be produced on the island.
On January 1, China suspended tariff reductions on imports of 12 compounds from Taiwan. China announced on Tuesday that it is considering suspending further tariff relief on other Taiwanese imports, including agricultural and fishery products, machinery, auto parts and textiles. Analysts say the move is likely to backfire.
“The massive economic sanctions campaign, which took place just weeks before the election, is more designed to stimulate domestic consumption by the Chinese government than to actually change Taiwan’s election results.” Wenti Song, a Global Fellow at the Atlantic Council, said. China hub. “This indicates that there is probably considerable pressure within the Chinese government to be seen as doing something against Taiwan.”
Trade restrictions imposed by the Chinese government starting in 2021, including on pineapples and fish, pose little serious threat to Taiwan’s economy.
Analysts at Capital Economics expect further economic sanctions imposed on Taiwan in response to a Democratic Progressive Party victory to remain “focused and small in scale.”
This has been the pattern in recent years. In 2022, China retaliated after Pelosi’s visit by banning various food imports from Taiwan. However, since Taiwan’s food supply is limited, the impact was limited. Before the ban, exports to China accounted for less than 0.2% of gross domestic product.
Even if China suspends the Framework Agreement on Economic Cooperation, a free trade agreement it signed in 2010, it may not work as expected, analysts said.
The deal hasn’t boosted cross-Strait trade as much as its supporters had hoped, they added.
“Regardless of the outcome, the election result itself will not change Taiwan’s success,” Best said.