The Global Impact of Taiwan's Election

Over the weekend, Taiwanese voters didn't just choose their next president and legislature, they also helped set the course for U.S.-China relations over the next four years. Voters chose between a ruling party determined to maintain Taiwan's independence and an opposition that sees closer ties with China as Taiwan's only viable path.

China's leadership considers Taiwan declaring independence as a "red line" that must not be crossed. China views eventual control of the self-governed island as vital to its national security, and frequently conducts military exercises into the Taiwan Strait. The U.S. officially acknowledges the People's Republic of China's claim to Taiwan but remains a staunch supporter of the status-quo (a self-governed, fully democratic society, with its own economy, currency, military, and elected officials). U.S. Secretary of State Blinken defused tensions last year by explicitly saying that the U.S. does not support independence, paving the way for a meeting with Chinese President Xi and President Biden in November. Yet, President Biden has repeatedly said the U.S. would come to the defense of Taiwan if attacked, seemingly abandoning the U.S.'s long-maintained "strategic ambiguity" on Taiwan, and has stepped up military exercises with allies across the Indo-Pacific. It is possible that Taiwan's next president could upset the balance in tensions between these two superpowers.

Domestically, the election was seen differently. Surveys have shown it wasn't the relationship with China, rather domestic economic issues that were the main concern of Taiwanese voters, including wage growth, inflation, housing affordability and energy security. In 2023, wages trailed the pace of inflation and the cost of housing ranks among the world's most expensive relative to income. While the presidential candidates have made similar pledges addressing most these issues, there are some key differences. One being the future of Taiwan's nuclear power plants. According to comments made during the 2nd presidential candidates' debate, the Democratic Progressive Party (DPP) pledged to close them down and the Kuomintang (KMT) proposed to delay those closures in favor of a slower energy transition.

The winner of the Presidential election, the ruling pro-independence DPP, did not see a decisive victory, winning 40% of the vote. The conservative KMT—which has eventual reunification with China in its charter—came in second with a 33.5% share of the vote. The relatively new Taiwan People's Party (TPP), which has a more pragmatic view of Taiwan-China relations, came in third at 26.5%.

The victory by the DPP is likely to be market-neutral, with continued risk to U.S.-China tensions for the next four years. But there are offsets to how China may view the outcome:

• First, President-elect Lai Ching-te, stressed in his campaign that he has no plans to upset the status quo with China. Writing in the Wall Street Journal on July 4, he said he would "support the cross-strait status quo."
• Second, the outcome was closer than in 2016 and 2020 when the DPP's candidate led the KMT candidate by double-digits and went on to win comfortably with more than 50% of the vote. This rise in support for the party that most favors closer ties with China may ease Beijing's concerns that Taiwan is drifting further from its grasp.
• Third, the DPP losing its majority in the legislature demonstrates political support for parties in favor of greater dialogue with China.

The ongoing U.S.-China reengagement that took place over the summer of 2023, culminating with a Xi-Biden meeting in November took a lot of work on both sides. China would have to consider the cost of losing its hard-earned goodwill and stabilization in U.S. relations should they decide to engage in an aggressive response to the election. China's response is more than likely to be symbolic, perhaps involving some economic sanctions or military drills—a comparison may be the military drills that followed then U.S. House Speaker Pelosi's visit in 2022. 

It's possible the election outcome may hold little overall market significance given these offsetting factors. Despite the shifting tensions in 2023, Taiwan's stock market outperformed peers, as you can see in the chart below. 

Yet the outcome could hold impacts for certain sectors if China suspends tariff concessions on Taiwanese agricultural, fishery, and machinery products, as well as auto parts and textiles. The election outcome may have implications for the global computer chip supply chain and foreign capital flows to Taiwan's tech sector. One reason Taiwan's stock market fared well in 2023 was an artificial intelligence boom and a turnaround in the semiconductor cycle. Currently, Taiwan Semiconductor Manufacturing Co. produces around 90% of the world's most-advanced chips, according to research conducted by the Boston Consulting Group and the Semiconductor Industry Association. The DPP administration will likely continue to maintain Taiwan's status as an independent location to fabricate chips and assemble AI servers. A KMT victory might have led to firms attempting to diversify their supply chain away from the island. How the new administration manages U.S. and European relations will be crucial in ensuring access to chip-making equipment from Western providers such as the Netherland's ASML.

Beijing has long described reunification with Taiwan as a goal. However, China knows that using military force would likely result in the developed world inflicting negative economic consequences in response. China is much more integrated with the global economy, compared with Russia prior to attacking Ukraine. The threat of sanctions from the rest of the world could cause significant damage to China's economy.

Furthermore, the election outcome may not hold much significance for Taiwan's immediate future. We maintain our view that an invasion of Taiwan by China is a low probability over the intermediate term. The chart below from Taiwan's National Chengchi University tracks sentiment among the Taiwanese on independence versus reunification with China over several decades. The latest reading from the middle of last year (the next 6-month update should be published soon) has continued to show an overwhelming majority of Taiwanese in favor of the status quo, rather than a shift to either independence or reunification. In fact, sentiment favoring independence has declined in recent years, even as tensions over such a shift have increased. The takeaway is that the people of Taiwan don't seem to favor a change in the Taiwan-China relationship no matter who won the election.

• The Taiwanese election is unlikely to change the status quo of tense U.S.-China relations, as both the U.S. and China aim to support their own economic growth independently, perhaps through protectionist measures.
• China-Taiwan tensions may rise but are unlikely to result in a military conflict. The overwhelming majority in Taiwan are favor of the status quo and Beijing is averse to economic sanctions resulting from taking military action.
• The outcome is likely neutral for Taiwan and China stocks, due to an already elevated geopolitical risk premium in anticipation of a response by China in the form of sanctions and military drills.
• China excels at the long game and may take some comfort in the gains by the KMT in the Presidential and legislative elections.