Taiwan – More of same or break with past?

WILL BEIJING punish Taiwan if it abandons the more ‘China-friendly’ Kuomintang in the coming Presidential election? Or will the Opposition DPP be able to manage the cross-strait relationship? Regardless, Taiwan needs to rethink its trade and investment policy as its economic model continues to lose steam . . .

TAIPEI — Perhaps at no time since 2008 has Taiwan been faced with so much uncertainty, with the January 16, 2016 elections
expected to bring a reinvigorated opposition Democratic Progressive Party back into the Presidential Office, this time perhaps with a majority in the Legislature.
Although the DPP’s Presidential candidate, Tsai Ing-wen, has ridden on a platform of continuity and stability in the Taiwan Strait, questions remain about how the Chinese leadership, which faces unprecedented challenges on the political and economic fronts, will react to an electoral decision that threatens to undermine much of Beijing’s political ambitions vis-à-vis the island-nation it regards as part of its territory.   
There is no doubt that a deepening financial crisis in China, added to the possibility of an intensifying spat with the United States over cyber espionage, would have a negative impact on the export-heavy and increasingly China-reliant Taiwanese economy.
If Beijing decided to punish Taiwan for abandoning the more “China-friendly” Kuomintang (KMT) at the polls, as looks extremely likely given the party’s near disintegration, the drawdown effects on Taiwan’s economy could be even more severe.
Economic retaliation, however, is just one of many possible scenarios, and Tsai has made substantial efforts to build confidence with her counterparts in Beijing. This could help mitigate disappointment within the Chinese Communist Party.
Thus, notwithstanding President Xi’s strong ideological beliefs, a DPP victory in 2016 will not inevitably compel Beijing to turn off the economic spigot.
Nevertheless, a DPP administration, especially if it or an alliance succeed in ending the KMT’s long-standing hold on the legislature, would complicate Beijing’s ability to use the economy to further draw Taiwan in and thereby achieve its political objective, which has been at the heart of its strategy under the eight years of the Ma Ying-jeou administration.
The realisation, despite Ma’s sundry promises, that closer economic ties with Beijing, of which the Economic Co-operation Framework Agreement (ECFA) was the centerpiece, were not the expected panacea in terms of job creation, GDP growth and improvements in standards of living, will also likely dampen desire by the Taiwanese to explore similar future agreements with
Beijing.
The discrediting of Ma’s China-centric strategy could reasonably fuel a desire by Taiwan to diversify its portfolio and reduce its dependence on the Chinese economy (China accounts for 38.9 per cent of Taiwan’s total exports).
Furthermore, as China loses some of its economic lustre and becomes more assertive as a fledging regional hegemony, countries that had been loath to sign trade agreements with Taiwan lest this “anger” Beijing might become more willing to do so.
Such a shift would be more feasible if Washington decided to press ahead with a future FTA with the island. So far, this is at an exploratory stage. Taiwan has also signalled its intention to join the TPP. Such accession will be contingent on its ability to restructure its economy and the geopolitical mood vis-à-vis China, as well as the Beijing-led Asian Infrastructure Investment Bank.
Recent accusations against Chen Yunlin, former head of the Taiwan Affairs Office and of the semi-official Association for Relations Across the Taiwan Straits (ARATS) (which has orchestrated most of the 20-plus cross-strait agreements since 2008), that he had “lost” Taiwan could also presage a shift in the Beijing strategy to woo the Taiwanese that relies less on economic incentives. This, in turn, could influence economic ties between the two sides, or at least diminish Beijing’s desire to sign the kind of cross-strait economic agreements that were sealed under Ma.
Regardless of the impact of cross-strait politics in Taiwan’s economic future, the island-nation faces serious problems of its own. The economic downturn in China will have a drag-down effect on export-oriented economies like Taiwan.
As BMI Research wrote in a note: “The growth of regional supply chains has led to steady integration of both Taiwanese and South Korean economies with the Chinese one. While this resulted in significant benefits during China’s period of rapid growth, heavy exposure to China has also led to a sharp decline in export growth as the Chinese economy slows down.”
Taiwan’s high-tech export sector is also highly vulnerable (among the 10 countries with the greatest exposure) to any yuan devaluation.
On August 14, Taiwan’s Directorate-General of Budget, Accounting and Statistics (DGBAS) cut its annual GDP growth forecast from 3.75 per cent to a mere 1.56 per cent. Total trade for the first seven months of 2016 fell 11.3 per cent to US$302.57 billion.
Exports were down 7.8 per cent for the same period to US$165.97 billion, while imports declined 15.3 per cent to US$136.59 billion, according to Bureau of Foreign Trade statistics.
Export figures for electronics and machinery—the mainstay of Taiwan’s exports, which account for 48.6 per cent of the total—declined 2.7 per cent during the same period, while heavy industries (steel and chemicals) were hit hardest, with drops of 12.6 per cent and 15.9 per cent respectively.
Year-on-year exports declined for a seventh consecutive month in August, down 14.8 per cent on weak electronics exports.
Exports to China, including components and materials for assembly, were down 9.4 per cent for the January-to-July period due to the slowing Chinese economy and a surging US dollar that has brought prices up for finished electronic products.
Barring a sudden upswing in China’s economy, those trends are likely to continue into 2016
and to draw down export-reliant economies in Northeast Asia.