First of all,
The world’s attention is focused on Taiwan as it prepares for yet another set of vital elections. The political environment of Taiwan carries far-reaching ramifications, and its effect reverberates long beyond its boundaries. We explore the complex network of international economic factors connected to Taiwan’s election process in this in-depth blog article.
Voting for a new legislature and president in Taiwan on Saturday will be closely followed both domestically and internationally. This is due to the self-governing island home to 23 million people having a disproportionate influence on international commerce and business, mostly because to its dominating position in the world’s semiconductor market.
In the run-up to the elections, China has increased its pressure on Taiwan by portraying the vote as a choice between “prosperity and recession” or “war and peace.”
Beijing intends to “reunify” Taiwan with China, as Chinese leader Xi Jinping has stated on several occasions. Although it has never held power on the island, the Communist Party has declared it to be its own territory.
China publicly despises Lai Ching-te, the vice president of the island and the front-runner for the presidency, because of his prior remarks for Taiwan independence. Lai is a Democracy Progressives Parties (DPP) candidate. Although he has softened his position to support Taiwan’s de facto sovereignty, Beijing has dismissed his appeals for negotiations and maintained to label him as a hazardous separatist.
In the short future, Beijing is not anticipated to go to war, but if Lai is chosen, there will probably be more military or economic pressure.
According to Charlie Vest, an associate director with the Rhodium Group who specializes on China studies, “we might observe a range of coercive measures from Beijing if Lai and DPP win.”
According to him, this might involve significant military drills that may impede trade across the 110-mile-wide canal between China and Taiwan, as well as economic penalties on the trading-dependent island that is homes to some of the biggest tech businesses in the world.
These drills took place in August 2022 during the visit of former US House Speaker Nancy Pelosi to the island, and in April 2023 with Taiwan President Tsai Ing-wen’s meeting with then-US House Speakers Kevin McCarthy in California.
Approximately 50% of all container ships in the world go through the strait each year.
Important adversaries and allies
In addition to their intricate political conflict, Taiwan and China enjoy a close economic relationship. China has been Taiwan’s main commercial partner and a popular place to invest for a long time.
According to Taiwan’s Ministry of Economic Affairs, 35% of Taiwan’s exports to China last year consisted mostly of integrated circuits, solar cells, and electronic components. Twenty percent of all imports in the same year came from China.
Taiwan now enjoys a trade surplus of $80.5 billion with China in 2023 as a result.
China has trade surpluses, but the biggest sources of these are the US and Europe, according to customs statistics. But like South Korea and Japan, it frequently has a significant trade imbalance with Taiwan.
Taiwan’s preferred investment destination for many years has been China. Statistics from Taiwan’s government show that between 1991 and 2022, Taiwanese enterprises spent $203 billion in China. Millions of employment in China have been created by them.
“There is a great deal of importance between Taiwan and China,” stated Vest. In the global electronics supply chain, Taiwanese companies and inputs are crucial to China.
Chinese manufacturers like TSM are essential to the country’s economy because of their semiconductors. In terms of China’s international trade, the island is also crucial.
The Rhodium Group believes that the island produces more than 60% of the world’s chips and almost 90% of the most sophisticated ones.
China buys precise machine tools and electronic components from Taiwan, assembles them, and then exports the completed goods to international markets.
What kind of response might China expect?
Vest stated that China may exert economic and military pressure on the island in retaliation for a DPP win.
Yet, he said that “these actions will not substantially put Taiwan’s autonomy or its economic development at risk, short of a major escalation that results in a full blocking, which is improbable given the costs to China’s own economy.”
Vest calculated that the annual losses from a blockade of Taiwan may exceed $2 trillion for the world economy, without including the costs of any military conflict between China and the US or the effects of economic sanctions.
The semiconductor business in Taiwan is a significant supplier to China’s industrial sector, although China has never sanctioned the industry.
“[That’s] presumably thinking doing so would cause considerable pain to China’s finances,” said analysts from Capital Economy in an investigation note on Wednesday.
Numerous Taiwanese businesses, such as Foxconn, an Apple supplier, and the semiconductor giant Taiwan Semiconductor Manufacturing Company (TSM), are present in China and are deeply entwined with its supply chains. But the government of the island closely monitors what its businesses do, and it forbids the production of its most cutting-edge technologies there.
China stopped lowering tariffs on 12 chemical compound shipments from Taiwan on January 1. China announced on Tuesday that it intended to halt additional duty reductions on other imports from Taiwan, such as textiles, equipment, car parts, and items related to agriculture and fisheries. Analysts predicted that the action would probably backfire.
Wen-Ti Sung, a fellow of the Atlantic Council’s Global China Hub based in Taiwan, said that the high-profile economic sanctions that were implemented only weeks before the election were more about theatricality for Beijing’s domestic consumption than real attempts to influence the results of the election in Taiwan. “This suggests that there is likely a great deal of internal pressure in Beijing to appear to be taking action on Taiwan.”
Taiwan’s economy has not really been seriously threatened by the trade restrictions Beijing has put in place since 2021, notably those on fish and pineapple.
If the DPP wins, analysts at Capital Economics predict that Taiwan would still only face “narrowly focused and small in scale” economic penalties.
In recent times, this has been the trend. China banned the import of a variety of food items from Taiwan in 2022 as payback for Pelosi’s visit. However, given Taiwan’s total food exports to China prior to the embargo were less than 0.2% of its GDP, the impact was minimal.
As per the experts, there’s a possibility that the 2010 free trade agreement, the Economic Cooperation Framework Agreement, may not function as planned even if China suspends it.
They said that supporters of the accord had anticipated for a greater boost to cross-strait commerce, but this has not happened.
Vest stated that Taiwan’s achievements would not be undermined by the election results alone.
Gaining an Understanding of the Political Environment:
Setting in History:
It is crucial to understand the historical background in order to appreciate the relevance of Taiwan’s elections today. The persistent animosity between Taiwan and China adds a degree of complication to its political scene. The intricate relationship between these two organizations has a significant impact on the stability of the world economy.
Relations Across Cultural Divides:
Political complexity and economic interdependence define Taiwan’s relationship with China. The results of Taiwan’s election might affect foreign commerce and investment by reducing or increasing tensions across the Taiwan Strait.
Taiwan’s Economic Significance
The World’s Tech Hub:
Taiwan is a global leader in technology, home to important companies in the electronics and semiconductor sectors. In the global supply chain, businesses such as Taiwan Semiconductor Manufacturing Company (TSMC) are essential. The outcome of the election may have an effect on the laws regulating these important sectors, which may then have an effect on international technology markets.
Supply Chain Interruptions:
Taiwan leads the world in semiconductor production, so any political unrest might cause supply chain problems across the board. Production schedules and market dynamics are impacted, and the effects are seen in a variety of industries, including consumer electronics and the automobile.
Trade Connections:
In terms of global commerce, Taiwan is a big role. Changes in elections might mean changes to trade agreements and regulations, which would impact not just the country’s immediate trading partners but also other countries worldwide. Particularly important in this context is the emphasis on regional trade alliances and economic partnerships.
Impact on the World Economy
Market turbulence:
Financial markets react to developments in geopolitics. In Taiwan, market volatility may be brought on by elections, which can impact commodities markets, stock prices, and exchange rates. Traders keep a careful eye on political happenings in hopes of gaining insight into economic policies that might affect their investment holdings.
Investor Self-Belief:
An important component influencing investor confidence is political stability. The results of the elections may have an impact on portfolio investments and foreign direct investment (FDI) in Taiwan. Political stability is often seen as favorable to economic expansion, drawing in both foreign and domestic investment.
Values of Currency:
The currency markets are especially susceptible to changes in politics. The value of the New Taiwan Dollar (TWD) is susceptible to fluctuations in Taiwan’s political environment, which may have repercussions for adjacent economies and other areas.
International Trade Balances:
Global trade balances are greatly impacted by Taiwan’s trade policy and alliances. The nation’s position on international trade agreements may change as a result of changes in political direction and leadership, which might also have an impact on the dynamics of world trade.
Energy Security:
Taiwan’s election may have an effect on the country’s energy policy, particularly if it comes to lowering its dependency on particular energy sources. Any change in energy policy can have an impact on energy prices and other countries’ strategy for achieving energy security on a global scale.
In summary:
Because of the close ties between the political decisions made in Taiwan and the state of the international economy, the globe is very vigilant as Taiwan heads to the polls. The combination of historical conflicts, economic importance, and geopolitical circumstances makes Taiwan’s elections a major topic of discussion for corporations, politicians, and economists throughout the world. The results have the potential to significantly influence not just Taiwan’s future but also the complex network of the world economy. With huge stakes and far-reaching consequences, everyone in the globe is holding their breath while we wait for the results.
