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When Taiwan goes to the polls on Saturday to elect a new president and parliament, their votes will be closely watched at home and abroad. That's because the self-governing island of 23 million has an outsized influence on the global economy and trade, largely due to its world-leading chip industry.
But China has recently escalated its military aggression against Taiwan, causing outrage around the world.
Chinese leader Xi Jinping has repeatedly stated that Beijing plans to “reunify” Taiwan with China. The Communist Party has claimed the island as its own territory, although it has never controlled it.
The Democratic Progressive Party's (DPP) Lai Ching-te, the island's vice president and leading candidate for the top job, is openly loathed by Chinese officials over his past comments supporting Taiwanese independence. He has softened his stance and favors the status quo of Taiwan's de facto sovereignty, but Beijing has continued to denounce him as a dangerous separatist and rejected his calls for talks.
China has increased pressure on Taiwan in the run-up to the election, portraying it as a choice between “war and peace” or “prosperity and recession.”
Although Beijing is not expected to start a war in the near future, military or economic pressure is likely to increase if Lai is elected.
“If Lai and DPP win, we could see a series of coercive measures from Beijing,” said Charlie Vest, deputy director of the Rhodium Group who covers China.
These could include major military exercises that could disrupt trade in the Taiwan Strait, the 110-mile-wide waterway that separates China from Taiwan, or economic sanctions on the trade-dependent island that is home to some of the world's leading technology companies, he said.
Such exercises were seen during the former U.S. House Speaker Nancy Pelosi's visit to the island in August 2022 and when Taiwan's President Tsai Ing-wen met then U.S. House Speaker Kevin McCarthy in California in April 2023.
About half of all container ships worldwide pass through the strait every year.
Main competitors and partners
Taiwan and China have a complex political rivalry, but are also economically intertwined. China has long been Taiwan's largest trading partner and a top investment destination.
According to Taiwan's Ministry of Economic Affairs, 35% of Taiwan's exports went to China last year, most of which were integrated circuits, solar cells and electronic components. Imports from China accounted for 20% of total imports in the same year.
This pushed Taiwan's trade surplus with China to a massive $80.5 billion in 2023.
According to Chinese customs, the country's trade surpluses come mainly from the United States and Europe. However, the country often has a large trade deficit with Taiwan as well as with Japan and South Korea.
China has been the most popular investment location for Taiwan for decades. According to Taiwan government statistics, Taiwanese companies have invested a total of $203 billion in China between 1991 and 2022. They have created millions of jobs in China.
“Taiwan and China are extremely important to each other,” Vest said. “China is heavily dependent on Taiwanese inputs and companies in the global electronics supply chain.”
For China, semiconductors produced by Taiwanese companies such as (TSM) are essential to the Chinese economy. The island is also an important link in China's trade with the world.
Mike Kai Chen/Bloomberg/Getty Images
TSMC is located in the Hsinchu Science Park in Taiwan.
The Rhodium Group estimates that the island produces over 60% of the world's chips and around 90% of the world's most advanced chips.
China imports electronic components or precision machine tools from Taiwan, assembles them and exports the finished products to global markets.
China could respond to a DPP victory by applying military and economic pressure on the island, Vest said.
However, “unless there is a major escalation such as a full blockade, which is unlikely given the cost to China's own economy, these measures will not fundamentally threaten Taiwan's autonomy or economic growth,” he said.
If Taiwan is blocked, it could cost the global economy more than $2 trillion in annual losses, without taking into account the costs of a possible military confrontation between China and the United States or economic sanctions, Vest estimated.
China has never sanctioned Taiwan's semiconductor industry, a key supplier to its own manufacturing sector.
“[That’s] presumably because it would cause significant pain to the Chinese economy,” analysts at Capital Economics wrote in a research note on Wednesday.
Many Taiwanese companies, including chip giant Taiwan Semiconductor Manufacturing Company (TSM) and Apple supplier Foxconn operate in China and are closely integrated into its supply chains. However, the island's government closely monitors what its companies do and does not allow its most advanced technology to be produced there.
On January 1, China suspended tariff reductions on 12 imports of chemical compounds from Taiwan. On Tuesday, China said it would suspend further tariff relief for other Taiwanese imports, including agricultural and fishing products, machinery, auto parts and textiles. Analysts said the move would likely backfire.
“The high-profile economic sanctions maneuvers that took place just weeks before the election were more about theatrics for Beijing's internal consumption than an actual attempt to change the election results in Taiwan,” said Wen-Ti Sung, a Taiwan-based official at the Global magazine of the Atlantic Council China Hub. “This shows that there is likely significant internal pressure in Beijing to appear to be taking action against Taiwan.”
The trade restrictions imposed by Beijing since 2021, including on pineapples and fish, hardly posed a serious threat to Taiwan's economy.
Analysts at Capital Economics expect any further economic sanctions imposed on Taiwan in response to a DPP victory would still be “narrowly focused and small in scope.”
This has been the pattern for the past few years. In 2022, after Pelosi's visit, China responded with a ban on imports of a range of food products from Taiwan. However, the impact was limited because Taiwan's total food supply was sufficient Exports to China before the ban amounted to less than 0.2% of gross domestic product.
Even if China suspends the Economic Cooperation Framework Agreement, a free trade agreement signed in 2010, it may not work as expected, the analysts said.
They added that the deal had not boosted cross-strait trade as much as its supporters had hoped.
“Regardless of the outcome, the election result itself will not undo Taiwan’s success,” Vest said.
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