Taiwan's election is shaped by economic realities, not just Beijing's threats to use force

Beijing's threat to use force to claim the self-governed island of Taiwan isn't just about missiles and warships

Beijing’s threats to use force to claim self-governed Taiwan aren't just about missiles and warships. Hard economic realities will be at play as voters head to the polls Saturday, though the relationship is complicated.

The economy has slowed since the pandemic, with growth in 2023 estimated at only 1.4%. That partly reflects inevitable ups and downs in demand for computer chips and other exports, and a slowing of the Chinese economy. But longer-term challenges such as inequality, housing affordability and unemployment are especially vital for younger voters, but often are eclipsed by China’s looming presence.

The two sides split in 1949 after a civil war and have no official relations but are linked by tens of billions of dollars in trade and investment. Beijing has been courting Taiwan investment, while at the same time flying fighter planes and sailing warships near the island to enforce its stance that the island must eventually unite with the mainland, by force if necessary.

Taiwan imports nearly all its energy, leaving it vulnerable to blockades.

The election's outcome could impact relations between China and the United States and also affect decisions on investment and manufacturing far into the future. The Chinese mainland and Hong Kong buy about 35% of Taiwan’s exports, though their share has been falling, and account for about one-quarter of its imports.

Despite Beijing’s muscle flexing, any overt military action would come at a huge cost to China itself. The Taiwan Strait plays a vital role in China's trade with the world. Bloomberg Economics calculated the potential cost to the world economy at $10 trillion.

So far, China's moves have been piecemeal. At times it has banned imports of hundreds of Taiwan products, including grouper fish, cookies and pineapple. On Jan. 1, China ended preferential tariffs on some Taiwan exports, including chemicals, that had been part of a 2010 trade pact.

On Tuesday, the Chinese Commerce Ministry said it was considering suspending other tariff concessions on farm products, fish, machinery, auto parts and textiles from Taiwan. Taiwan's Foreign Ministry condemned that as using trade as a “weapon” to manipulate the election.

Taiwan has imposed bans on hundreds of mainland exports, and it holds an ace card of its own: Taiwan Semiconductor Manufacturing Corp. is the world's largest supplier of computer chips, providing more than 90% of leading-edge chips.

“Taiwan’s dominance of chip fabrication, which constitutes a global strategic industry, gives it geopolitical influence far beyond its size, economy and population,” Richard Cronin, a fellow at the Stimson Center, a Washington think tank, wrote in a recent report. “China’s dependence on Taiwan to cover its chip deficit has been called its ‘Silicon shield.’”

TSMC operates two plants in China, in Nanjing and Songjiang, making less advanced computer chips. But it has been complying with demands from the United States and other trading partners to restrict exports of equipment and technology for leading edge semiconductors.

Like many other Taiwan companies wary of geopolitical and trade tensions with Washington, TSMC has been shifting some production further offshore — to Japan, Germany and Arizona. Such investments also reflect moves to diversify supply chains after the COVID-19 pandemic caused massive disruptions for automakers and many other industries that depend on chips.

Taiwan’s 23 million residents enjoy an enviable standard of living, with per-capita GDP at about $33,000, more than double that in the Chinese mainland.

To insulate Taiwan's economy from retaliatory moves by Beijing, Tsai's government has been boosting trade with the rest of Asia and other regions. Taiwan also restricts investments by mainland Chinese businesses on the island, to limit what it calls “economic coercion” by Beijing.

Even when tensions have surged, Chinese authorities have largely refrained from targeting the thousands of Taiwanese companies that operate on the mainland — in the past few decades, hundreds of thousands of Taiwanese have moved to China to work, start small businesses or set up factories, though investments in the mainland have fallen steadily for more than a decade.

In various charm offensives, Beijing has rolled out a plan for an “integrated development demonstration zone” in Fujian province, the closest to Taiwan and only 160 kilometers (100 miles) away. It's encouraging Taiwan companies to list on Chinese stock exchanges and has promised better conditions for Taiwanese investors and a more “relaxed” environment for travel.

But Foxconn, a Taiwan-headquartered Fortune-500 company known for making Apple iPhones that employs hundreds of thousands of people in China, felt the heat in October when tax and other Chinese officials searched its offices in several places.

That followed an announcement by Foxconn’s billionaire founder Terry Gou that he was running to replace President Tsai Ing-wen. Gou was seen as a China-friendly candidate but his candidacy could have further split opposition to Tsai's Democratic Progressive Party, which Beijing reviles. Gou later withdrew, saying it was for the sake of Taiwan's future.

The front-runner to take over from Tsai when she steps down after her maximum two terms is Vice President and DPP candidate William Lai, the son of a coal miner. Beijing has refused to negotiate with the DPP, which maintains that Taiwan is in effect independent but does not need to make a formal declaration that could draw greater military, economic and diplomatic pressure from China.

China's “leaders will feel compelled to signal to the Taiwanese public that voting against Beijing’s preferences carries consequences. Both military exercises and new coercive economic measures are therefore likely,” Gabriel Wildau, a political risk analyst for the consultancy Teneo, said in a recent report.

Hou Yu-ih is the candidate for the Nationalists, also known as the Kuomintang or KMT. It agrees with Beijing's stance that the mainland and Taiwan are part of the same country, though under separate governments. Ko Wen-je, the candidate for another opposition group, the Taiwan People’s Party, also favors building friendlier relations with China. Both have said they would try to restart trade talks with Beijing if elected.

Tsai has struck a precarious equilibrium between Beijing and Washington. With so much at stake, whatever the vote’s outcome, her successor will face the same balancing act.