Taiwan’s election over the weekend was an important milestone for the island’s democracy. The Democratic Progressive Party (DPP), long the opposition in the legislature, is now in full power as the ruling party for the first time since its formation in 1986.
While the DPP has held the presidency before, under Chen Shui-bian from 2000-2008, this election marks the party’s full rise as a competitor to the once-dominant Kuomintang, the party of General Chiang Kai-shek and current President Ma Ying-jeou.
Investors should pay attention to the ramifications of this election: DPP candidate Tsai Ing-wen’s strong victory in the presidential race, coupled with her party’s legislative majority, have given her a mandate to pursue substantial economic reforms.
It may also embolden her to press harder against mainland China.
Tsai’s victory rests on the deep disenchantment among Taiwan’s voters with years of slow GDP and wage growth, underemployment, and rising housing prices. Tapping into this disenchantment through a focus on social welfare and stimulating new sources of growth, Tsai crafted a compelling narrative for voters, particularly young voters, about growth based on trade diversification, domestic liberalization, innovation, and job creation.
Her vision is to reestablish Taiwan, once a heralded East Asian “tiger,” as one of the region’s most dynamic economic heavyweights.
The main goal is to position Taiwan for inclusion in one of the world’s biggest trade deals, the Trans-Pacific Partnership (TPP) trade agreement, in its eventual second round of negotiations.
The question for investors is how much Tsai can move the needle on her economic agenda – let alone achieve inclusion in the TPP – in the face of looming economic and geopolitical headwinds.
The economic challenges are great: Taiwan’s growth was less than 1% in 2015. It hopes for more than 2% this year, but the economy’s outsized exposure to China (40% of exports, which are 70% of GDP) looks to be a major vulnerability in 2016.
The aging population is also a growing strain on the government’s fiscal account, limiting its resources to spend on social welfare, infrastructure, or innovation. Taipei projects that its population will start to shrink in 2019. Taiwan, with a fertility rate of just around an average of 1 child per woman, has among the worst demographic trend lines of Asia’s major economies. That will put major strain on the government’s fiscal resources and on its widely-respected social services, particularly the healthcare system.
Tsai’s team is focused on promoting innovation via smarter industrial policies; it also hopes to substantially liberalize and diversify its trade and investment partners to moderate its exposure to China and find new sources of growth. Her party is targeting key industries for the future, like biotechnology, precision machinery, and defense.
Underpinning these goals is a new dynamic in Taiwan’s relationship with China. Taiwan has been a major beneficiary of China’s rising economy, with its once-dominant edge in higher technology and manufacturing. But now Beijing is pushing its own firms toward higher technology, and is replacing the goods and services offered by Taiwanese firms with Chinese ones.
Tsai’s historic election comes just as the era of win-win economic ties between China and Taiwan is coming to a close. If Taiwan continues to innovate and moves more aggressively into a services-based economy, it still stands to benefit enormously from China’s growth. But the bilateral economic relationship is becoming much more complicated, and the need for real reform in Taiwan has never been higher.
There is reason to be optimistic about Tsai’s ability to drive economic reform: the DPP’s victory in the legislature over the weekend has given her a newfound ability to implement policy. The bar is high, as it is now on the DPP to prove that it can govern effectively.
The bar to TPP entry is even higher. The deal itself won’t come into full effect until 2017, and the US will wait until at least then to show any inclination of its thinking on Taiwan’s inclusion. Taipei will have to build a broad coalition of allies supporting its inclusion in the second round, including the existing participants, but also new ones that will seek to enter the deal – like South Korea, which is Taiwan’s leading economic competitor.
The downside risk is that any tension in the China relationship would distract from domestic reform. TPP inclusion will be almost impossible for Taiwan if its relationship with China deteriorates – as that would make it much harder for TPP members, including the US, to support Taiwan’s potential inclusion.
The risk stems from the fact that Tsai does not accept the current political framework for cross-Strait relations – known as “the 1992 consensus.” She will work to find a new framework for relations with Beijing in the weeks immediately following the election.
The good news is that both sides appear to be working toward a compromise, so Tsai’s victory is unlikely to spark an immediate crisis. But Chinese President Xi Jinping won’t wait long for an acceptable solution to be found.
Nicholas Consonery is an Asia Director at Eurasia Group.
