Taiwan Politics January 2016


Taiwan: Landslide victory in Taiwan signals end of historic rapprochement with China

January 27, 2016

Tsai-ing Wen, candidate of the pro-independence party Democratic Progressive Party (DPP), won the presidential elections of January 16 by a landslide. Beating analysts’ expectations, Tsai accrued 56.1% of the votes against the 31.0% of Eric Chu from the ruling Kuomintang (KMT) and secured a majority in the Legislative Yuan for the first time in Taiwanese history with 68 of the 113 seats. Tsai’s victory was not only a huge blow to the KMT but will also put Cross-Strait relations back in the spotlight as Tsai’s victory signals the end of the most important and deepest reconciliation with mainland China under the eight-year presidency of Ma Ying-jeou of the KMT.

Revitalizing the economy and relations with China were the two main issues that defined the election. The KMT’s economic policy, which aimed to bring growth and prosperity to the country through closer ties with China didn’t materialize. GDP growth in Taiwan for Q3 2015 contracted 0.6% compared to the same period of the previous year and the government’s forecasts for 2016 was cut in November from 2.9% to 2.3%. Wages have stagnated, and income inequality as well as youth unemployment have risen. Under the banner “innovation, employment, distribution”, Ms. Tsai and the DPP aim to boost the economy through innovation and industrial upgrading. Tsai wants to drive the economy by reducing Taiwan’s overreliance on China and by fostering new industries in order to capitalize on Taiwan’s information and communication technology advantage. To achieve this, the DPP aims to incentivize FDI investment, increase public spending on education and R&D, encourage start-ups and new industries, such as smart machinery and green technology. The DPP strongly advocates for diversification of trade to reduce Taiwan’s overreliance on China. As was demonstrated by China’s recent economic cooldown, the Taiwanese economy took a hit. China is the destination for 40% of Taiwanese exports and is the largest market for Taiwanese investment. Tsai, a Western-educated, trade-specialist that negotiated Taiwan’s entry into the World Trade Organization, has demonstrated interest in joining the Trans-Pacific Partnership (TPP), and to push for additional bilateral and multilateral free-trade agreements (FTAs).

Nevertheless, Tsai-ing Wen faces internal and external challenges to push her government program. Domestically, the sluggish Taiwanese economy will weigh on the capabilities of the private and public sector to invest and innovate. The scope of fiscal tools to support short-term growth are limited because the public debt reached 45% of GDP in 2015 and is just under the 50% legal limit of debt-to-GDP ratio. Bitter opposition from different sectors, such as agriculture, is expected if the government signs the TPP and other FTAs. Externally, there is great uncertainty as to how mainland China will react to independence-leaning Tsai.

Tsai’s victory ushers in a new era of Cross-Strait relations. Under former-President Ma, Taiwan signed 23 pacts with China and a partial free-trade agreement. The thaw in the relations culminated with the first-ever meeting between the Taiwanese President and the Chinese Premier, Xi Jinping. Analysts agree that Tsai-ing Wen’s biggest challenge will be handling relations with China. Tsai-ing Wen, who supports maintenance of the current status quo in cross-strait relations, has to reconcile contradictory forces. Tsai’s electoral success was driven in large part by a hefty cohort of young voters who identify themselves as Taiwanese and have strong pro-independence tendencies. The pro-independence Taiwanese strength was seen in 2014 when they occupied Parliament in the so-called Sunflower Revolution.

Across the Strait, patience with Taiwan is running short. Premier Xi wants a “final resolution” on the issue of Taiwanese sovereignty to be reached during this generation. Mainland China demands that president-elect Tsai approve the “1992 Consensus”, which she has refused to endorse. The 1992 Consensus establishes the notion of the “one China principle”, though the exact meaning when it comes to practice of the principle varies on both sides of the Strait. Tsai and the DPP have refused to recognize the Consensus, which would inevitably contribute to an escalation of tensions. Tsai, however, is adamant about returning to the previous nationalistic rhetoric of the former president Chen Shui-ban of the DPP that ruled Taiwan from 2000 and 2008 and resulted in a significant escalation of tensions. Tsai has attempted to reassure the United States and China that the stability that characterized Ma’s government will trump over nationalistic rhetoric and Cross-Strait relations will continue without major incidents. Tsai-ing Wen strives to avoid an escalation of tensions with China as it could debilitate the Taiwanese economy.

Analysts believe that China can resort to a variety of tactics to coerce Taiwan if they insist on their independence plea. Mainland China can cut the quota of mainland Chinese tourists and put a dent in growth as the Chinese represent 40% of all tourists in Taiwan. China can also resume the diplomatic tug-of-war with Taiwan by luring the 21 states that recognize Taiwan diplomatically, through economic incentives, to recognize mainland China instead. China can also impose numerous diplomatic and political hurdles to prevent Taiwan from joining FTAs. Taiwan has already been barred from the China-sponsored Asian Infrastructure Investment Bank and China can pressure Taiwan and signing states to avoid TPP membership. Lastly, the territorial dispute in the South-China Sea adds another layer of complexity for Ms. Tsai. With conflicting maritime claims on the South China Sea, territorial disputes have become an additional source of tension and escalation to the already-delicate relations.

Nevertheless, analysts anticipate that both sides will proceed carefully. Premier Xi is aware that using coercion to influence Taiwan will alienate the Taiwanese public from China and be counterproductive to his goals. Conversely, China is Taiwan’s economic lifeline and Ms. Tsai is aware that China possesses multiple tools to weaken the economy and isolate Taiwan diplomatically.

Author: Jean-Philippe Pourcelot, Economist

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