What’s at stake for the global economy as Taiwan goes to the polls

Analysis by Laura He, CNN

Hong Kong (CNN) — When Taiwan heads to the polls on Saturday to elect a new president and legislature, their votes will be keenly watched at home and abroad. That’s because the self-ruled island of 23 million people has an outsized impact on the global business and trade, mainly because of its world-beating chips industry.

But China has ramped up military aggression against Taiwan in recent times, sending jitters globally.

Chinese leader Xi Jinping has repeatedly said Beijing plans to “reunify” Taiwan with China. The Communist Party has claimed the island as its own territory, despite never having controlled it.

Lai Ching-te of the Democratic Progressive Party (DPP), the island’s vice president and the front-runner for the top job, is openly loathed by Chinese officials for his past comments supporting Taiwan independence. He has tempered his stance to favor the status-quo of Taiwan’s de facto sovereignty, but Beijing has continued to denounce him as a dangerous separatist and rebuffed his calls for talks.

China has ramped up pressure on Taiwan in the lead-up to the elections, casting them as a choice between “war and peace” or “prosperity and recession.”

Although Beijing is not expected to launch a war in the near term, an increase in military or economic pressure is likely to follow if Lai is elected.

“If Lai and DPP win, we could see a range of coercive actions from Beijing,” said Charlie Vest, associate director of the Rhodium Group, who studies China.

That may include major military exercises that could disrupt commercial traffic in the Taiwan Strait, the 110-mile wide waterway separating China from Taiwan, or economic sanctions on the trade-dependent island that is home to some of the world’s top tech companies, he said.

Such exercises were seen during the former US House Speaker Nancy Pelosi’s visit to the island in August 2022 and when Taiwan President Tsai Ing-wen met then-US House Speaker Kevin McCarthy in California in April 2023.

Every year, about half of the world’s container ships pass through the strait.

Key rivals and partners

Taiwan and China have a complex political rivalry, but they’re also economically intertwined. China has long been Taiwan’s largest trading partner and a top investment destination.

Last year, 35% of Taiwan’s exports went to China, most of which were integrated circuits, solar cells and electronic components, according to Taiwan’s Ministry of Economic Affairs. Imports from China accounted for 20% of the total imports in the same year.

That pushed Taiwan’s trade surplus with China to an enormous $80.5 billion in 2023.

According to Chinese customs data, the country’s trade surpluses mainly come from the United States and Europe. But it often runs a large trade deficit with Taiwan, along with Japan and South Korea.

For Taiwan, China has been its favorite investment stop for decades. Between 1991 and 2022, Taiwanese companies invested a total of $203 billion in China, according to Taiwan government statistics. They have created millions of jobs in China.

“Taiwan and China are extremely important to one another,” Vest said. “China depends heavily on Taiwanese inputs and firms in the global electronics supply chain.”

For China, semiconductors produced by Taiwanese firms such as (TSM) are indispensable to its economy. The island is also a key link in China’s trade with the world.

The island manufactures over 60% of the world’s chips and around 90% of the world’s most advanced ones, according to estimates by the Rhodium Group.

China imports electronic components or precision machine tools from Taiwan, assembles them and exports the finished products to global markets.

How will China retaliate?

China may respond to a DPP victory by putting military and economic pressure on the island, Vest said.

However, “short of a major escalation such as a full blockade, which is unlikely given the costs to China’s own economy, these actions will not fundamentally put Taiwan’s autonomy or economic growth at risk,” he said.

If Taiwan is blockaded, that could cost the global economy over $2 trillion in annual losses, without factoring in the costs of a potential military confrontation between China and the United States or economic sanctions, Vest estimated.

China has never sanctioned Taiwan’s semiconductor industry, a vital supplier to its own manufacturing sector.

“[That’s] presumably because doing so would cause appreciable pain to China’s economy,” wrote analysts from Capital Economics 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 keeps a close eye on what its companies are doing and does not allow its most advanced technology to be produced there.

On January 1, China suspended tariff cuts for 12 chemical compound imports from Taiwan. On Tuesday, China said it was looking to suspend even more tariff reliefs on other Taiwanese imports, including agricultural and fishery products, machinery, automobile parts and textiles. Analysts said the move will likely backfire.

“High-profile economic sanction maneuvers that came just weeks before the election are more about theatrics for Beijing’s internal consumption than actually trying to change the electoral outcomes in Taiwan,” said Wen-Ti Sung, a Taiwan-based fellow with the Atlantic Council’s Global China Hub. “This shows that there’s probably a significant amount of internal pressure inside Beijing to be seen as doing something on Taiwan.”

The trade restrictions that Beijing has imposed since 2021, including on pineapple and fish, have hardly posed any critical threat to Taiwan’s economy.

Analysts from Capital Economics expect any further economic sanctions imposed on Taiwan in response to a DPP victory would still be “narrowly focused and small in scale.”

This has been the pattern in recent years. In 2022, China retaliated after Pelosi’s visit by banning imports of a range of food products from Taiwan. But the impact was limited because Taiwan’s total food exports to China before the ban were worth less than 0.2% of its gross domestic product.

Even if China suspends the Economic Cooperation Framework Agreement, a free trade deal which was signed in 2010, it might not work as expected, the analysts said.

The agreement hasn’t boosted cross-strait trade as much as its backers had hoped for, they added.

“Regardless of the outcome, the election result itself will not upend Taiwan’s success,” Vest said.

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CNN’s Wayne Chang contributed to reporting.