Understanding China's Stance and its Impact on Taiwan's Economy

The relationship between China and Taiwan has been strained ever since the latter became a democratic nation while the former seeks reunification. For a long time, Taiwan maintained a status quo that neither denounced mainland China nor appeased them. However, for China, reunification is only a matter of time. The newly elected president, William Lai-Ching-Te, who was a pro-independence advocate, is seen as a separatist by the Beijing government and commenced military drills in the Taiwan Strait after his inauguration speech, resulting in escalating geopolitical tensions, which was the largest military exercise in recent times. Geopolitics experts speculate China would attempt to economically disadvantage the island nation instead of a full-scale frontal assault.

Taiwan is a crucial area of interest for the world. They produce 92% of the advanced chips that are used in nearly all electronic devices, and TSMC produces AI chips that are used by every big tech company. The China-Taiwan relationship that is treading on thin ice, and any upset in this will be a political and economic disaster for the world. Recently, Bloomberg Economics released a model on the financial consequences a Chinese invasion would bring to Taiwan.

Trade and Investment

China is Taiwan's largest trading partner, accounting for 22.6 percent of total trade and 19.6 percent of Taiwan's imports in 2022, according to the International Trade Administration. Taiwan is an export-driven economy, and all of its high-tech industries are flourishing due to its trade with China. The integration of China into its supply chains has allowed them to scale heights and remain competitive in the global markets.

But this relationship is a double-edged sword. China has sanctioned numerous agencies headed by individuals who expressed independence. Historically, sanctions have also been imposed on foreign players who have had military relationships with Taiwan. This fragile relationship of being economically dependent on a player whose exit can cripple the economy is a daunting prospect. Conversely, according to the Bloomberg economics model, mainland China’s GDP would be cut by 8.9% if they were to economically blockade Taiwan.

 Technological Sector

It is a well-known fact that Taiwan supplies its chips to Apple, Nvidia, AMD and numerous prominent players in the tech world who are dominant all over the globe. Taiwan Semiconductor Manufacturing Company (TSMC) is a major part of the world’s supply chain. While its technological prowess is a source of its economic strength, it places the island at the crossroads of geopolitical competition between players like China and the United States of America.

Its volatility has driven numerous companies to diversify their semiconductor sources, as having critical components sourced from a politically unstable nation is a risky venture. Berkshire Hathaway founder and CEO Warren Buffet sold his stake in TSMC in early 2023, citing geopolitical tensions; Kirkland Capital has removed all its holdings from Taiwan. Numerous nations opened their wallets to diversify their semiconductor supply chains. China’s drive to become a self-sufficient semiconductor superpower is developing its semiconductor industry at a rapid pace, continuously diminishing Taiwan’s economic leverage.

Tourism and Services

In 2023, the majority of Taiwan's inbound tourists came from Hong Kong and Macao, amounting to approximately 1.2 million. The tourism sector of Taiwan is influenced by the status of the adjacent Taiwan Strait. Any fluctuation in this zone can result in a butterfly effect, which can deter tourists from visiting the nation. A prominent example of this is the 2016 election, when Tsai Ing-Wen, who the Beijing government saw as a pro-independence candidate, imposed tourism sanctions. Currently, Taiwan only receives 226,000 tourists from mainland China, which is a 90% drop compared to the 2 million tourists it hosted in 2016.

The Taiwanese service industries, such as finance and telecommunications, face challenges in expanding into the Chinese market due to regulatory barriers and political considerations. While there have been some agreements to facilitate economic cooperation, progress is often hindered by broader political issues.

Strategic Considerations

US President Joe Biden has pledged US support in the event of a Chinese invasion. This has upset US-China relations as they consider it to support Taiwan's independence. Taiwan’s economic strategy must navigate the delicate balance between the global superpowers while offsetting the risks associated with its political tensions. It is seen as making efforts to strengthen ties with other countries, mainly through participation in regional trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Furthermore, they are also seen investing strongly in innovation and technology to remain relevant in the competitive innovation markets. The Taiwanese government has rolled out numerous initiatives to promote research and development, encouraging startups, attracting foreign investment, all to sustain economic growth and reducing vulnerabilities associated with geopolitical risks. The relations between China and Taiwan are a complex factor for the world as they are a matter of geopolitics stemming from an intricate history during its formative period. Any minor external intervention can upset the status quo and result in devastating consequences.