National Security & Defense

Taiwan’s Election: Out of the ‘Strait’ Jacket

Tsai Ing-wen campaigns in New Taipei City. (Aaron Tam/AFP/Getty)
Tsai Ing-wen, the president-elect, hopes to diversify away from shaky China.

The January 16 Taiwan elections were the latest evidence of a new reality in Asia: Taiwan’s cross-strait neighbor, China, is in significant decline. Replacing a government that made economic integration with China its chief priority, incoming Taiwan president Tsai Ing-wen asked for and received a mandate to reform her island nation’s economy, precisely because the close links established by her predecessor have been dragging down the island nation as the depths of China’s economic challenges become obvious.

During the Great Recession, the belief among analysts, economists, and corporate leaders in the advanced economies was that China was the engine that would pull the world through. China’s sharply increasing inflationary policies did give some lift to the region, but one need only look at Taiwan’s sharp decline in economic growth over the past year to see that, as China’s economy has slowed under the weight of public debt that increased dramatically during and since the crisis, the situation has turned around: China’s slowdown imperils global growth, something that is immediately evident in Taiwan.

Tsai’s victory was complete, and there should be no doubt that the voters intended to send a clear message. In a three-way race, she carried 56 percent of the vote. She had coattails, too. Her Democratic Progressive party earned its first majority in Taiwan’s parliament, the unicameral Legislative Yuan, gaining 28 seats to win 68 of 113 seats overall. Her predecessor’s party, long seen as the most accommodating to Beijing, lost 29 seats in a rout.

What is the message? Tsai’s DPP has been painted by Beijing — and many China analysts in the U.S. and elsewhere — as a pro-independence party. While Taiwan’s last (and only other) DPP president, Chen Shui-bian, was considered suspect by the U.S. for his pro-independence leanings, that is not Tsai’s message or mandate.

Tsai’s win reflects a sentiment in Taiwan that getting close to China is a mixed blessing at best. In general, of course, it makes sense that successive Taiwan governments would seek to facilitate greater commerce with the mainland. Outgoing president Ma Ying-jeou opened direct transportation links between China and Taiwan, spurred cross-strait trade to the highest levels ever, and systematically elevated official contact between the two governments. This last policy culminated in the first direct meeting between presidents of Taiwan and China since the 1949 end of the Chinese civil war, when Ma’s nationalist Kuomintang predecessor Chiang Kai-shek fled the mainland and established his government in Taipei.

Early in his administration, Ma had the wind at his back while trying to steer his nation closer to the PRC. In the immediate wake of the Great Recession of 2008–09, China’s massive inflationary economic policies were perceived to be beneficial to Taiwan. Cross-strait trade grew to $198 billion by 2014, up 17 percent in the prior two years alone in the wake of tighter economic linkages. Taiwan’s economy grew every year after 2009.

Until now. As China goes, so goes Taiwan, where economic growth slowed to less than 1 percent in 2015 and flirted with two successive quarters of negative growth. Tsai won on a program to diversify Taiwan’s economic relations. Her victory is an explicit rejection by the public of the belief that linking Taiwan’s economy to China’s is an unalloyed good for Taiwan. Instead of being an engine of further growth, it is pretty clear that China has become an anchor dragging down its island neighbor.

To understand Taiwan’s challenge, it is worth reviewing the China challenge briefly. Beijing’s recession-era economic-stimulus package, nearly three times as large on a per capita basis as the 2009 U.S. stimulus, helped create one of the world’s largest public-debt ratios, nearly 300 percent of GDP. The effects of debt overload and overcapacity are everywhere. These include the infamous “ghost cities” of high-rise office and apartment complexes, poised for mass urbanization that isn’t happening at a rate that can keep up with the building. Economic growth continues to slow, below 7 percent by the government’s reckoning and probably much lower — possibly contracting. It certainly is well below the 8 percent growth that the government has indicated is the rate below which the economy cannot absorb those seeking to enter the workforce.

Central planners in Beijing continue to pull every lever they can, but increases in stimulus and government spending aren’t helping the economy, which is too far gone for those measures to have an impact. Among the tools the government is attempting to use are currency devaluation and central-bank rate reductions, to keep the economy inflated. The rate cuts are intended to keep small and medium-sized enterprises afloat and give municipalities and state-owned enterprises a chance to refinance and keep operating.

More recently, manipulation of the China stock market has become a tool of choice, to try to keep the equity-asset bubble from bursting and wiping out billions of dollars in perceived wealth for the millions of ordinary Chinese who have become market and real-estate speculators. The government knows that piling debt upon more debt is a problem, but nowhere near the potential problem of social instability as the economy slows.

The boom-bust cycle that China is experiencing also is impacting the smaller economies on the periphery. This is why President-elect Tsai knows she must diversify her economy away from its excessive dependence on China. Her nation is feeling the reality expressed by former Chinese premier Wen Jiabao. Even before the crisis of 2008–09 and the resultant inflationary bubble, Wen in 2007 laid out the so-called “Four Uns” in describing the true state of China’s economy: Unsustainable, Uncoordinated, Unbalanced, and Unstable. Taiwan has added a Fifth “Un” — Undiversified. Tsai’s task is to reverse that.

Alongside Tsai’s desire to diversify the island’s economic relations is the question of how she and the DPP interpret the so-called 1992 Consensus, which stems from a high-level meeting between the PRC and Taiwan in Hong Kong in 1992. The general interpretation of the 1992 Consensus is that there is only one China, and each side determines what that means.

Tsai’s DPP has kept itself at arm’s length from the 1992 Consensus compared with the KMT, which interpreted it to mean that there is one China and it is the Republic of China (Taiwan). By contrast, the DPP views Taiwan and its people as having a distinct culture, society, and identity. In practice, though, the policy has permitted the PRC, often with support from the United States, to keep Taiwan from establishing an independent diplomatic voice.

As China produces and consumes more for itself, against a backdrop of economic challenges that include a slowing economy with a falling currency, Taiwan’s economy cannot but be further impacted.

During the presidential campaign and since, the PRC has threatened and blustered about the consequences should Tsai move Taiwan away from the 1992 Consensus. Tsai has said she is not focused on changing the cross-strait status quo, but she has not embraced it either. In November 2015, at the height of the presidential campaign, when Ma met with PRC president Xi in Singapore, it was widely reported that Tsai criticized Ma’s reiteration of the 1992 Consensus as the basis for cross-strait linkages. According to the China Post, Tsai reportedly declared that “Taiwan’s free and democratic way of living” is what should guide Taipei’s policy with Beijing.

The new government has a delicate mission ahead as it seeks to diversify and loosen the economic ties that bind it to China. Even as Taiwan has grown more dependent upon China for its economic success, China’s own economy is becoming more diversified and complex. Taiwan, perhaps the most vital cog in the global supply chain (according to a December 2013 Congressional Research Service analysis), faces a much larger economy across the strait that itself is becoming a supply-chain intermediate, rather than just a low-cost producer of exports. Further, China’s leaders and national planners have set a goal of shifting their economy from overdependence on exports and investment towards consumption. As much as 60 to 70 percent of Taiwan’s GDP is attributable to exports, nearly half of which head to China. As China produces and consumes more for itself, against a backdrop of economic challenges that include a slowing economy with a falling currency where the consumer is actually spending less, Taiwan’s economy cannot but be further impacted.

This is why President-elect Tsai must do what she can to diversify the Taiwan economy. Despite Ma’s focus on cross-strait trade relations, his government also engaged in trade and investment liberalization with other regional economies, including New Zealand, Singapore, and Japan. Tsai is likely to build on that and eschew further entrenchment with the PRC. The big prize would be Taiwan’s inclusion in the Trans-Pacific Partnership in future rounds. Taiwan already is one of the top dozen or so U.S. trading partners, and the path to economic diversification lies east, toward North America, not farther west toward a slowing China and the other economies that are being dragged down with it. An agreement that purports to be “Trans-Pacific” in nature but omits a top-20 economy that is the linchpin of regional trade makes little sense.

The Tsai/DPP ascendance also comes at a tricky time for the U.S. and China, those constantly looming shadows over Taiwan’s bright prospects. PRC president Xi is consolidating power and attempting to manage the social and market disruptions that will continue as his country reaches a new equilibrium, with heavy debt, capital outflows, low economic growth, an aging population, and social dislocation. One potential danger for Taiwan is China’s tendency to distract attention from its domestic troubles with external adventurism. That is well underway, with Beijing instigating disputes with many of its neighbors and even the United States over regional property claims and freedom of navigation in the South China Sea and contiguous waters. Should Tsai be seen as too dismissive of the 1992 Consensus, which Beijing and Washington seem to agree upon, she will face the same pressures from both that ultimately stymied her DPP predecessor Chen Shui-bian. Every indication is that Tsai and her colleagues understand that, but Taiwan sovereignty is, unfortunately, in the eye of the beholder.

For policymakers in U.S., the preoccupation with the presidential campaign and the Obama administration’s lack of focus on the region despite its much-promoted “pivot” to Asia create a dangerous brew of indifference and misinterpretation for Taiwan. The administration of late is engaged in freedom-of-navigation and maritime-passage diplomacy that is generally healthy, given China’s extraterritorial claims in the region. But there will be limits to what the administration can do, and will choose to do, to step in should Beijing set its sights on creating a diversion with Taiwan, through a military or economic challenge. Candidates of both parties have an opportunity now, before there are any difficulties, to express support for Taiwan’s interest in diversifying its economy and joining the Trans-Pacific Partnership, reasonable and healthy objectives that will benefit all.

In a year of election upheavals in the U.S., the uncertain timing and outcome of the U.K.-E.U. “Brexit” vote, a national election in Spain that has yet to be resolved after more than a month, and other electoral uncertainties, the result of Taiwan’s January 16 election offers a sharp contrast in which the people spoke with certainty. U.S. and China policymakers, hopefully, will recognize this and do what can be done to ensure stability for Taiwan as it engages in its transition toward a more diversified economy. The stakes are high for all the actors, not least the island nation’s 24 million people, who have spoken with clarity: We choose change.

— Therese Shaheen is a business owner who was chairman of the American Institute of Taiwan.

Therese Shaheen is a businesswoman and CEO of US Asia International. She was the chairman of the State Department’s American Institute in Taiwan from 2002 to 2004.

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