The Implications of Taiwan's Election on the Global Economy

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In recent times, China has escalated its military aggression towards Taiwan, causing concern worldwide. Chinese leader Xi Jinping has made it clear that Beijing intends to "reunify" Taiwan with China, despite the fact that the Communist Party has never actually controlled the island and claims it as its own territory.

Lai Ching-te, the Vice President of Taiwan and leading candidate for the top position, has faced strong opposition from Chinese officials due to his past support for Taiwan independence. Although he has since taken a more moderate stance favoring Taiwan's current sovereignty, Beijing continues to label him as a dangerous separatist and has refused his requests for dialogue. In the lead-up to the elections, China has intensified its pressure on Taiwan, framing the choice as one between "war and peace" or "prosperity and recession."

While it is unlikely that Beijing will initiate a war in the near future, they are likely to exert increased military or economic pressure if Lai is elected.

According to Charlie Vest, an associate director at the Rhodium Group who researches China, "If Lai and the DPP are victorious, we may expect a variety of coercive measures from Beijing."

This could involve large-scale military drills that may interfere with shipping in the Taiwan Strait, a 110-mile wide body of water separating China from Taiwan, or economic penalties on the trade-reliant island, which is host to some of the globe's leading tech firms, according to the official. These kinds of drills were observed when former US House Speaker Nancy Pelosi visited the island in August 2022, and when Taiwan President Tsai Ing-wen met then-US House Speaker Kevin McCarthy in California in April 2023.

Every year, about half of the worlds container ships pass through the strait.

Key rivals and partners

Taiwan and China share a complicated political relationship, but they are heavily interconnected economically. For many years, China has been Taiwan's biggest trading partner and a major location for investment.

In the past year, 35% of Taiwan's exports were sent to China, with a significant portion consisting of integrated circuits, solar cells, and electronic components, as reported by the Ministry of Economic Affairs in Taiwan. Additionally, imports from China made up 20% of Taiwan's total imports during the same period.

Taiwan's trade surplus with China soared to an impressive $80.5 billion in 2023. Chinese customs data revealed that the country's trade surpluses are primarily with the United States and Europe, while it frequently experiences trade deficits with Taiwan, Japan, and South Korea.

Taiwan has long favored China as a destination for investment. Between 1991 and 2022, Taiwanese companies poured $203 billion into China, resulting in the creation of millions of jobs. According to Taiwan government statistics, China heavily relies on Taiwanese inputs and firms in the global electronics supply chain, highlighting the mutual importance of the two countries.

For China, semiconductors produced by Taiwanese firms such as (TSM) are indispensable to its economy. The island is also a key link in Chinas trade with the world.

TSMC is located at the Hsinchu Science Park in Taiwan.

Mike Kai Chen/Bloomberg/Getty Images

Taiwan produces more than 60% of the world's chips and approximately 90% of the world's most advanced chips, according to the Rhodium Group. China imports electronic components and precision machine tools from Taiwan, assembles them, and then exports the finished products to global markets.

How will China retaliate?

China may respond to a DPP victory by putting military and economic pressure on the island, Vest said.

The risk to Taiwan's autonomy and economic growth is not fundamentally at stake unless there is a major escalation such as a full blockade, which is unlikely due to the costs to China's economy. However, Vest estimated that if a blockade were to occur, the global economy could incur annual losses of over $2 trillion, not including the costs of potential military confrontation or economic sanctions between China and the United States.

China has refrained from imposing sanctions on Taiwan's semiconductor industry, a critical supplier to its own manufacturing sector.

Analysts from Capital Economics stated in a research note on Wednesday that this decision is likely due to the potential significant impact it would have on China's economy.

Numerous top Taiwanese firms such as Taiwan Semiconductor Manufacturing Company (TSM) and Foxconn, a supplier for Apple, are deeply involved in China's supply chains. Nonetheless, the Taiwanese government closely monitors its companies and prohibits the production of its most advanced technology in China.

On January 1, China halted tariff reductions for 12 chemical compounds imported from Taiwan. Furthermore, China announced its plans to suspend additional tariff reliefs on other imports from Taiwan, including agricultural and fishery products, machinery, automobile parts, and textiles. Analysts predict that this decision will probably have negative consequences.

According to Wen-Ti Sung, a fellow at the Taiwan-based Global China Hub of the Atlantic Council, the high-profile economic sanctions imposed just before the election are more for internal consumption in Beijing than a serious attempt to influence the election results in Taiwan. This suggests that there may be internal pressure in Beijing to take action on Taiwan.

The trade restrictions imposed by Beijing since 2021, such as those on pineapple and fish, have not posed a significant threat to Taiwan's economy.

Capital Economics analysts anticipate that in the event of a DPP victory, any additional economic sanctions imposed on Taiwan would be limited in scope and scale. This has been the trend in recent years, as evidenced by China's response to Pelosis visit in 2022, where they retaliated by restricting imports of various food products from Taiwan. However, the impact was minimal as Taiwan's total food exports to China prior to the ban accounted for less than 0.2% of its gross domestic product.

Analysts said that even if China were to suspend the Economic Cooperation Framework Agreement, a free trade deal signed in 2010, it may not have the expected impact. They also noted that the agreement has not significantly increased cross-strait trade as it was originally hoped.

CNNs Wayne Chang contributed to reporting.