The Taiwan Economy in 2016: A Look at the Political Background

Consideration of the economic outlook for 2016 also has to take the upcoming presidential and legislative elections into account.

President Ma Ying-jeou was elected in 2008 on a platform of reinvigorating Taiwan’s economy and cooling tensions in the Taiwan Strait through unprecedented cross-Strait trade agreements. But after his reelection in 2012, public confidence in the administration was affected by stagnating salaries, high housing prices, the difficulty of young people in finding satisfactory unemployment, and a growing perception that only a wealthy minority were reaping the benefits of the increased business ties with China.

A major sign of the reversal of fortune for the ruling Kuomintang (KMT) was the occupation of the Legislative Yuan for over three weeks in March and April last year by students protesting a cross-Strait services pact the government had negotiated. The protest was supported by many Taiwanese worried that authoritarian Beijing was gaining too much economic influence over Taiwan’s young democracy. The KMT, tarnished by a number of administrative mishaps, including a series of food-contamination scandals, went on to be drubbed in municipal elections in November last year at the hands of the opposition, independence-minded Democratic Progressive Party (DPP).

Now with elections to be held January 16 that may set the tone for Taiwan’s relations with China for the next four years, the DPP’s presidential candidate Tsai Ing-wen is favored to win the race. Tsai has a support rating of 46%, compared to KMT candidate Eric Chu at 29% and People First Party (PFP) candidate James Soong at 10%, according to a survey conducted by broadcaster TVBS in mid-October.

The main political risk-related issue is how China might respond to a return to power by the DPP. In March, Chinese President Xi Jinping warned that cross-Strait relations would become turbulent – the “land would move and the mountains shake” – if a future Taiwanese government did not accept the “1992 consensus, a tacit agreement apparently reached that year by Taipei and Beijing negotiators. The crux of the “consensus” is that both Taiwan and the mainland belong to one China but are allowed to have different interpretations of exactly what that means in practice. The Ma administration’s acceptance of the 1992 consensus facilitated the improvement in cross-Strait relations since 2008.

Tsai has steadfastly refused to accept the 1992 consensus. However, in contrast to former hardline DPP president Chen Shui-bian, who infuriated China during his time in office (2000-2008), Tsai is considered a moderate who has repeatedly stressed that she intends to keep Taiwan-China relations on an even keel. In a key speech in Washington, Tsai pledged to push for the “peaceful and stable development of cross-Strait relations in accordance…with the existing constitutional order,” a signal that she is not planning to make any radical changes in the existing Constitution of the Republic of China (Taiwan’s formal name). She also indicated she would not roll back cross-Strait agreements, saying the “accumulated outcomes” of more than 20 years of institutionalized negotiations and exchanges would be the basis of her efforts to further develop relations with Beijing.

Tsai, who has broad experience in trade-related matters as one of Taiwan’s key negotiators in the lead up to the island’s World Trade Organization (WTO) accession over a decade ago, also promised to make the economy a priority, with a shift of focus from an “efficiency-driven” economy to an “innovation-driven” one.

After Xi’s outburst in March, Chinese officials for the most part have kept mum about Taiwan’s political scene. George Tsai, a political scientist at Taipei’s Chinese Culture University who has frequent contact with mainland officials, says they admit they are in a catch-22 situation. While China would like to influence the election, they know from past experience with Taiwanese elections that heavy-handed approaches can backfire. Another reason for the relative silence, he suggests, is that the Chinese officials do not trust anything Tsai says at this point and are waiting to see what she actually does if elected president.

The question mark over future cross-Strait relations inevitably is having an impact on the economy. “Markets do not like uncertainty,” notes Darson Chiu of the Taiwan Institute of Economic Research. He says that many potential investors, domestic and foreign, are likely waiting for the dust to settle before proceeding with major projects in Taiwan.

More optimistically, a Barclays report predicts that the election outcome will be “neutral” for the market. It dubs Tsai’s China policy “benign” and says the DPP would be likely to maintain the status quo. Liu Meng-chun of the Chung-Hua Institution for Economic Research (CIER) agrees, describing Tsai as pragmatic and suggesting that her experience as Mainland Affairs Minister from 2000 to 2004 will help her control the risks involved.

From his conversations with officials of China’s Taiwan Affairs Office, George Tsai says they seem much less anxious about political developments in Taiwan than they were during the last three presidential election campaigns. China’s rise is making Beijing’s leaders calmer, since they feel that “time is not on Taiwan’s side politically, economically, strategically, and militarily, while diplomatically Taiwan has to depend on China’s goodwill,” he notes in an upcoming conference paper. “Strength brings about confidence, and confidence brings about rational behavior.”

On the more pessimistic side, some pundits say China may choose to punish Tsai if she sticks to her guns and continues to reject the 1992 consensus. Journalist Peter Enav writes on the Thinking Taiwan website that China is disinclined to compromise on what it considers to be core issues, and that it may try to make voters disillusioned with the DPP – for example through a diplomatic offensive to lure away some of the 22 countries that still maintain formal relations with Taiwan. In addition, China could take a harder line to prevent Taiwan from entering into bilateral or multilateral free trade agreements, and could reduce the number of Chinese travelers allowed to visit the island, undermining Taiwan’s lucrative tourism industry.

A Different Landscape

Unlike most countries, the political divide in Taiwan is not so much along the traditional left-right spectrum as it is about national identity and the kind of relationship to pursue with China. But even along those lines, Beijing may consider that Taiwan’s two major parties are converging, especially after the KMT unceremoniously dumped its presidential candidate Hung Hsiu-chu, primarily because of her staunchly held but publicly unpopular views in favor of eventual unification with China.

Amid reports that KMT legislative candidates in southern Taiwan had threatened to quit unless Hung was replaced, the party was facing a potential split, with a “pro-localization” group called the Taiwan Nationalist Party Alliance in the process of formation. When Chu confirmed his willingness to be the presidential candidate, he said Hung’s policies, including her support for eventual unification, were too divergent from mainstream public opinion.

That remark came as a shock to Beijing, says George Tsai, as the KMT had previously never formally indicated it was against eventual unification. For Beijing, Chu’s remarks showed that the China policies of the KMT and DPP “are getting closer and might merge in the foreseeable future,” the professor notes. A cornerstone of Chinese policy towards Taiwan under Ma has been to wait patiently and offer economic sweeteners in the hopes that the Taiwanese people will grow to accept the idea of unification. “If China loses any hope of unification, what Beijing’s reaction might be is anyone’s wild guess,” says George Tsai. (DPP members take issue with the assertion that there are similarities between Chu’s and Tsai’s China policies.)

The Legislative Contests

Many commentators suggest that the main motivation for Chu’s decision to finally enter the presidential race was to help the KMT’s chances in the legislative elections, also on January 16. With Hung heading the ticket, there was concern that the KMT – which currently has 65 lawmakers in the 113-seat legislature compared to the DPP’s 40, might win less than a third of all seats and become a minority party for the first time, says Lin Jih-wen, a political scientist at Academia Sinica. Accepting the party’s nomination on October 17, Chu said it was a critical juncture for the party’s survival.

Chu will undoubtedly wish to differentiate his platform from that of Ma, whose popularity rating has sometimes dipped as low as single digits. But deviating from Ma’s stance on China would be difficult without taking a position similar to that of either Hung or the DPP. So far, Chu has pledged to continue Ma’s China policies, citing the need for stability. With all of the recent chaos and infighting in the KMT, Chu’s challenge will be to convince voters that he can create a strong and effective administration.

In the legislative contests, some pundits see the KMT as heading for a crushing defeat, but there are also signs that the KMT’s fortunes may be improving with Chu in charge. TVBS polls now put support for KMT lawmakers overall at 33%, up from 24% in June and ahead of the DPP’s 28% (with support of less than 6% for various minority parties, including Soong’s PFP.)

The KMT holds some advantages that normally give it a head start in the legislative race. Three seats are elected by the aboriginal community, which traditionally supports the KMT, and two seats belong to the sparsely populated outlying archipelagoes of Kinmen and Matsu that are KMT strongholds.

A DPP president and KMT-dominated legislature (or vice versa) could have its pros and cons. While a mixed government could foster checks and balances, and ensure that broader views are reflected in policymaking, it could also be a recipe for stagnation and gridlock, especially if the party controlling the legislature is determined to stymie every proposal put forth by the executive branch, either on genuine ideological grounds or purely to undermine the rival party.

Generally, the DPP is promising an economy guided by industrial policy, with more attention to small and medium businesses. It is also looking to rebalance Taiwan’s external trade and investment, reducing reliance on the mainland and placing more focus on South and Southeast Asia and the United States. Tsai Ing-wen has noted that ASEAN and India are rapidly gaining prominence in the world economy.

The DPP leader also said in Washington that she wishes to build more economic cooperation with the United States, citing such areas as the Internet of Things, cloud computing, Big Data, and new ICT-based industries.

With Chu’s campaign just beginning, it is not yet known what economic initiatives he may advocate. But he has already stated his strong support for Taiwan’s eventual membership in the Trans-Pacific Partnership (TPP) trade grouping. For her part, Tsai has already set up a task force to work on trade liberalization measures in preparation for a TPP candidacy.

Given the U.S. challenge to Beijing’s territorial claims in the South China Sea, Taiwan’s future policy toward the area could be another unsettling factor with regard to cross-Strait peace. Tsai Ing-wen has pledged that a DPP administration would follow international law and the United Nations Convention on the Law of the Sea (UNCLOS), and respect freedom of navigation. Depending on how the DPP manages the issue and clarifies the claims under UNCLOS, there could be a strong reaction from China.

For his part, Chu recently told a local radio station he would not side with the United States on South China Sea policy if it asked him to do so. The DPP has also promised to strengthen domestic defense industries and increase defense spending to 3% of GDP. In practice that may be hard to achieve, say political commentators, given the strained national budget and other obstacles.

Among the numerous issues that will be raised in the election campaign, the biggest concern for business may be in the area of energy policy. The DPP’s charter calls for a nuclear-free homeland, and Chu, whose KMT traditionally has been more supportive of nuclear power, recently expressed a similar sentiment. At the same time, environmental groups are also opposing the building of any new coal-fired plants, even though renewable wind and solar sources are unlikely to meet more than a fraction of the island’s needs.

Many observers worry that without a stable energy supply, economic growth could be seriously hampered. In fact, power shortages could occur after the licenses of Taiwan’s three existing nuclear power plants begin to expire starting in 2018. In the end, the new administration may find it necessary to compromise on this issue, although that would be particularly agonizing for the DPP, given its longstanding commitment to abandoning nuclear energy.