Taiwan Chooses the US Over China: "Pressure for Blockade Will Increase, Major Impact on Global Economy"

"Taiwan is heading toward conflict. This is not merely a regional issue but will have tremendous economic repercussions worldwide." Following the victory of the pro-American and pro-independence Democratic Progressive Party (DPP) candidate in the Taiwan presidential election, which was characterized as a US-China proxy war, there is a flood of speculation that China’s economic pressure on Taiwan may intensify.

[Image source=AFP Yonhap News]

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Independent Strategy, led by Wall Street veteran strategist David Roche, stated in a report titled "Taiwan elections ? like no other" on the 14th (local time), "The market may perceive the Taiwan election results as a continuation of the status quo, but this is a mistaken view." In the previous day’s presidential election, DPP candidate Lai Ching-te secured victory with 40.05% of the vote (5,586,000 votes). As a result, the DPP succeeded in achieving three consecutive terms in power for the first time in Taiwan’s history.

First, Independent Strategy noted, "Through this election, Taiwan has confirmed its status as a sovereign and democratic nation," adding, "What this election demonstrated is the funeral of the mainland (China)’s ambition for peaceful unification or the establishment of 'one country, two systems'." In this US-China proxy war-style election, more Taiwanese people chose the United States. However, since China cannot accept Taiwan’s democracy, which could threaten the legitimacy of the Communist Party, it is expected that cross-strait tensions will inevitably deepen. The report warned, "Ultimately, the trajectory is toward conflict. How quickly the situation deteriorates depends on China’s policy response to this election."

Accordingly, Independent Strategy expressed concern that the confrontation surrounding Taiwan "will entail enormous economic consequences not at a regional level but at a global level." It also pointed out that "the type of conflict likely to occur will not be a D-Day-style amphibious assault on Taiwan but rather chaos and blockade," emphasizing that "Taiwan is highly vulnerable to disruptions in energy imports." Roche had also stated in an interview with economic media CNBC earlier this year that "70% of global trade passes through the strait between Taiwan and China," and that even a blockade without an invasion could cause the worst economic fallout worldwide, including reduced demand and rising inflation.

Currently, the market is closely watching the possibility of strengthened trade sanctions, including the suspension of tariff exemptions on Taiwanese products and the halt of imports of certain goods, as previously hinted by the Chinese government. Additionally, there is a possibility that China might conduct large-scale military demonstrations under the pretext of military exercises in the Taiwan Strait, a major international trade route, or even proceed with a blockade. In such a case, the global economy, already struggling due to the COVID-19 pandemic, Russia’s invasion of Ukraine, and geopolitical risks originating from the Middle East, would face even deeper woes. Taiwan is also a key semiconductor supplier, home to the world’s largest foundry company, TSMC.

According to a recent report released by Bloomberg Economics ahead of the Taiwan presidential election, if China imposes a blockade on Taiwan without war, it is estimated that an economic shock equivalent to about 5% of global GDP, approximately $500 billion, would occur. In the worst-case scenario of a military invasion of Taiwan, the economic shock could reach about $10 trillion.

Independent Strategy also expressed caution against the optimistic view that China’s additional economic sanctions would have limits. The report stated, "Many investors are optimistic based on the global technological superiority of Taiwanese companies like TSMC," but "the long-term problem with this perspective is that Chinese President Xi Jinping does not think that way at all." Recently, in his New Year’s address, President Xi emphasized that "Taiwan reunification is a historical inevitability," hinting at the possibility of military intervention.

Alongside this, Independent Strategy paid attention to the fact that the ruling DPP failed to secure a majority in the legislative election (general election) held simultaneously with the presidential election. This is interpreted as meaning that the new president’s momentum for pushing forward government policies may be weakened. While the DPP secured only 51 out of 113 seats, the pro-China Kuomintang (KMT) expanded its seats from 38 to 52. The report assessed, "The DPP’s failure to secure a majority will complicate efforts to increase defense spending." Taiwan has increased military expenditure in recent years in response to China’s overt military threats, but it remains only 2.5% of GDP.

Major foreign media are also paying attention to the global impact of the Taiwan presidential election results. There are expectations that China will increase military pressure and information warfare against Taiwan under the pretext of military exercises until the new president’s inauguration on May 20. The US daily The Wall Street Journal (WSJ) stated on the day, "This Taiwan presidential election reaffirmed Taiwan’s position as a powder keg between the US and China," and "Considering President Xi’s strong approach, China’s narrative toward Taiwan will become even more hardline."

Georgetown University Asia Studies professor Evan Medeiros analyzed to The New York Times (NYT) that "US-China and cross-strait relations will never be stable over the next five years." The NYT reported that China is struggling with low growth and the US is busy with wars in Europe and the Middle East, so "war is not inevitable," but "President Xi will not sit still." Chen Fang-yu, an expert on US-China-Taiwan relations at Dongwu University in Taiwan, also told The Washington Post (WP) that "(this election result) means President Xi’s Taiwan policy has failed," and predicted that pressure tactics including military operations and economic sanctions will intensify in the coming months.

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