Taiwanese voters must choose confrontation or compromise with Beijing
Taiwan’s January elections will have substantial implications for multinationals operating on the island and will likely have ramifications for the wider APAC region. The presidential candidates have different policy priorities and offer divergent visions on cross-strait relations. (As we believe the likelihood of a Ko presidency is minimal, we will limit our discussion to the implications of a Lai or Hou presidency. However, we have included details of Ko’s policy priorities in the infographic for interested parties.)
Under a Lai presidency, multinationals should anticipate heightened tensions across the Taiwan Strait, resulting in increased economic pressures and uncertainties for businesses. Lai’s efforts to boost Taiwan’s defense capabilities and forge stronger partnerships with the West are likely to affect trade policies and regulatory frameworks in Taiwan, China, and beyond. Companies that rely on supply chains running across the Taiwan Strait should ensure they have contingency plans in place to mitigate potential disruptions. Companies with a presence on both sides of the Strait will find strong government relations with Chinese and Taiwanese officials especially helpful for navigating the situation. Additionally, multinationals may want to explore further opportunities in sectors such as semiconductors, artificial intelligence, defense, security, and communications, all of which are likely to receive increased government support under Lai’s presidency.
Conversely, under a Hou presidency, multinationals should expect a shift in Taiwan’s China policy, a significant improvement in cross-strait relations, and, as a result, a more stable and predictable business environment. Less volatile geopolitical relations may lead to fewer trade restrictions and smoother supply chains, yielding opportunities for growth and expansion. However, in light of Hou’s commitment to better protect labor rights, multinationals are advised to prepare for increased human resource expenditures, which will inevitably lead to higher operational costs.
Regardless of who wins the presidency, multinationals must also prepare for the possibility of divided government, where the executive and legislative branches are controlled by different parties. This outcome could result in a more chaotic political environment within Taiwan and heightened uncertainty in cross-strait relations, disrupting policy consistency and increasing unpredictability in the business climate. Taiwan’s exchange rate would also likely become more volatile.
Additionally, given the deep instability in the geopolitical situation surrounding Taiwan, multinationals should be prepared to act promptly and efficiently to ensure business continuity and protect their investments on either side of the Strait should China move against Taiwan. We advise multinationals to utilize our “US-China-Taiwan Scenarios” report, which was released earlier this year, to conduct scenario planning and risk assessments. This will help executives increase their business operations’ resilience amid the rapidly changing political and economic environment across the Strait.
Overview
- Voters in Taiwan will go to the polls on January 13, 2024, to elect Taiwan’s next president as well as its legislature.
- There are three candidates running for President: Lai Ching-te of the Democratic Progressive Party (DPP), Hou Yu-ih of the Kuomintang (KMT), and Ko Wen-je of the Taiwan People’s Party (TPP).
- The future of Taiwan’s relations with China is the central theme of this election. Typically, the DPP has favored independence from China, whereas the KMT, often seen as pro-Beijing, advocates for increased engagement with China. The TPP, fielding a presidential candidate for the first time, is regarded as a potential disruptor to the island’s long-standing two-party system.
- At the time of publication, the incumbent DPP is the frontrunner (though its advantage in the polls is slipping), the KMT is making headway, and the TPP lags far behind and is very unlikely to be elected.
- Both the US and China are keeping a close eye on the election. China has publicly labelled the election as Taiwan’s choice between “war and peace,” while US President Joe Biden has cautioned Chinese President Xi Jinping against intervening in the election.
Our View
This election carries significant weight in terms of cross-strait relations, as the policy differences between the two main parties, the DPP and the KMT, are so stark that their respective directions could lead Taiwan down considerably divergent paths.
If the DPP takes the presidency, which is our current base case, Taiwan can anticipate a continuation of its current policies concerning China. These policies dispute China’s sovereignty over Taiwan and actively aim to enhance the island’s defense capabilities. They also seek to establish stronger relationships with the Western world, particularly with the US and Japan. This approach will undoubtedly aggravate China, which is expected to intensify pressure on the island from all fronts. Consequently, cross-strait relations will remain tense, and it is unlikely that official communication between senior leaders on both sides will resume. The US-China relationship could also further deteriorate as a result, considering that Chinese leaders typically attribute the escalation of cross-strait tensions to US instigation.
On the other hand, if the KMT takes the presidency, cross-strait relations are likely to improve significantly due to the party’s pro-Beijing stance. China would undoubtedly welcome this result and would almost certainly alleviate some pressure on Taiwan, particularly in the military and economic spheres. Beijing would also agree to increased interactions between the two sides, through both official and unofficial channels. For instance, China would likely be open to resuming the exchange of university students with Taiwan, a common practice from 2008 to 2016 during the tenure of former KMT President Ma Ying-jeou. In addition, Taiwanese exporters would find it easier to sell their products into China.
The situation may not be as clear-cut at the legislature level. Currently, we predict that the DPP will lose control of the legislature, meaning that it will win less than half of the total seats. In this scenario, even if Lai won the presidency, he would encounter significant hurdles when pushing bills through. In some instances, these hurdles could prove insurmountable, leading to disruptions in legislative matters that might hinder the DPP from governing effectively. This pattern has occurred previously in Taiwan’s history, and it wouldn’t be surprising if it were to happen again.
Such chaotic circumstances would not only impact many facets of Taiwan’s domestic political economy but would also have implications for cross-strait relations. If the DPP’s ability to govern effectively is considerably impeded by legislative opposition, Taiwan’s position in its dealings with China could be weakened. Moreover, if China perceives this internal discord as a sign of weakness, it could feel emboldened to exert greater pressure on Taiwan both politically and economically. The resulting tension could escalate the current strain between the two sides, putting regional stability at higher risk.
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