As Taiwanese voters prepare to go to the polls on Saturday, the island’s economy is on the upturn after a difficult 2023.
Exports, wages and stocks are all on the rise after a very disappointing 2023, when GDP growth was a third of what had been the case during the boom years of the past. At the same time, several economic problems have been piling up, such as a rapidly falling population and increasingly unaffordable housing coupled with stubbornly low wages.
Another important development has been shaping the Taiwanese economy without receiving much attention, namely the diversification of trade and investment away from mainland China, which Europeans – followed by the US – have dubbed “de-risking.”
The Taiwanese approach to de-risking not only came earlier than in the West, but it certainly cannot be confused with de-coupling.
Politics paramount
If there is a place where economics and politics cannot be separated, it is Taiwan. Foreign investors increasingly ask themselves how interlinked the Taiwanese economy is with that of the mainland, or more bluntly, how dependent it might be.
In other words, investors want to understand how high the cost of de-risking might be, but they miss an important point: Taiwan has managed to reduce its exposure to the mainland during the last few years, especially for foreign direct investment, but less so for trade.
Still, the trend has not been rapid enough to change the obvious: China remains the most important trade and investment partner for Taiwan.
The rest of Asia has grown in importance as a market for Taiwan since 2020. In the same vein, the proportion of exports going to the US has increased even more rapidly.
The same is true for Taiwan’s outbound investment, which has grown quickly but no longer toward the mainland. Instead, it is toward the US and the rest of Asia, with Europe remaining a more stagnant destination.
Despite this diversification of Taiwanese trade away from China and toward the rest of Asia and the US, it is not clear how the island can further reduce China’s share given Taipei’s failure to conclude any significant bilateral trade agreements or join any new regional trade pacts, in part because of interference from Beijing.
Where the contenders stand
Against this backdrop, the current chairman of Taiwan’s ruling Democratic Progressive Party, Vice-President Lai Ching-te, who is also the DPP’s presidential nominee, is keen to maintain the current government’s strategy of promoting geographical diversification of trade and investment, mostly for national-security reasons.
The Kuomintang (KMT) nominee, in the opposition for the last eight years, Hou Yu-ih, is betting on improving economic ties with the mainland.
In particular, he is planning to relaunch the economic cooperation agreements that the last KMT president, Ma Ying-jeou, did not manage to finalize during his second mandate from 2012 to 2012, which included more technological, financial and people-to-people cooperation.
Ma’s efforts were finally put aside because of political tensions, both domestically and across the Taiwan Strait, as well as protests in the form of so-called Sunflower Movement.
The third candidate in the race, Ko Wen-je, founder of the Taiwan People’s Party (TTP), lies somewhat in between his rivals in a way that is probably not clear to the voters, possibly why he has appeared to lose ground in recent weeks. Still, his party is likely to become essential in the Legislative Yuan (Taiwan’s parliament).
Beyond the economic relations with the mainland, the three parties have somewhat different views on energy policies and the green transition. In particular, the DPP remains adamant that nuclear energy will not serve as a transition to reach Taiwan’s bold commitment to reaching net zero emissions by 2050, announced by the government in 2022.
This is even more surprising since Taiwan relies heavily on coal partially imported from the mainland.
On industrial policy, the only party that is seeking diversification away from the semiconductor industry is the TTP.
Where all parties seem to align, at least as part of their campaign to win votes, is on the need to improve social and labor policies in Taiwan, which still has the lowest minimum wage among developed Asian economies while income per capita has surpassed those of Japan and South Korea.
All in all, Taiwan’s economic direction stands at a crossroads as far as relations with the mainland are concerned, pending the election results but also other key developments thereafter.
These are the potential negative reaction from the mainland to a third mandate of a DPP government, and the US reaction (with President Joe Biden having recently announced that a US delegation will visit the island after the elections), as well America’s own presidential election later this year.
Finally, the third party in the race, the TPP, may also play a key role in alliance-building if neither of the other two parties secures control of the Legislative Yuan.
Alicia García Herrero is chief economist for Asia-Pacific at Natixis and senior research fellow at Bruegel. Follow her on Twitter/X @Aligarciaherrer.