Taiwan and the balance of cross-strait relations

2024 has been dubbed the biggest election year in history, with more than half of the world’s population heading to the polls in over 40 national elections.

This includes seven of the ten most populous countries in the world, including the United States, India and Indonesia, who will all be holding national elections this year. While smaller in scale, the Taiwanese elections held on 13 January 2024, are of global critical significance, given their potential to escalate into a flashpoint with China.

Cross-strait relations

In the months leading up to election, it was clear on the global stage that China was trying to sway voters. This ranged from China conducting its largest ever military exercise in the western Pacific, to the announcement of plans for an integrated economic zone with Taiwan on mainland China.

It is crucial to situate the election within the growing public sentiment of identifying as ‘Taiwanese’ rather than Chinese. A recent poll showed that three quarters of the country felt this way, partly attributed to a generational shift as those who remember Chinese rule are ageing, and recent Chinese state laws in Hong Kong have spurred civil action.  

The outcome of the election served to signal that Taiwan increasingly identifies as Taiwanese not Chinese. The then Vice President William Lai was elected, representing the incumbent Democratic Progressive Party (DPP). Lai champions Taiwanese autonomy and as such his stance is much tougher on relations with China, as opposed to Beijing’s preferred candidate, former New Taipei City mayor Hou Yu-ih, of the Kuomintang opposition party.

Beijing’s response

Thus far Beijing has been largely muted, though with Lai winning, it is widely expected that Beijing will become much more confrontational in the coming months. It is likely that the Chinese state will expand its grey-zone coercive efforts against the island nation in all domains - social media, cyber, economic, diplomatic, and military.

However, an escalation of the situation into a Chinese invasion of Taiwan remains highly unlikely, though these efforts will likely cause Cross-Strait tensions to rise and pull their respective allies closer to boiling point.

It is probable that China’s modus operandi in the short term, rather than the use of force, will be to change DPP policies and to persuade public to overthrow Lai, or to at least ensure he does not win the next election in four years. Beijing will be keeping a close eye on whether it views Lai as deviating from Tsai and likely calculate their aggression based on this.

Furthermore, there are a number of other factors shackling China from outright force. China faces significant economic headwinds within its mainland and likely understands that any use of major military force against Taiwan could exacerbate China’s domestic environment.

Additionally, the Chinese government has actively sought to stabilise US-China relations in recent times and has increased official dialogues and engagements with the US, and so a military operation could counteract this “progress”.

Wider geopolitical importance

A new leader brings uncertainty, and so the US and allies are anxious that Lai may prove more disruptive. From a US perspective, former President Tsai was a cooperative partner and so they will try to encourage Lai to also follow status quo policies and maintain being their key partner in East Asia. Meanwhile, it is likely the US will serve to further bolster Taiwan’s military capabilities, to convince China that an invasion is too risky and to take heed from the Russian invasion of Ukraine – China also needs Taiwan economically.

Meanwhile, the economic ramifications are likely to be less severe than previously felt. This is partly due to the intentional actions of Taiwan and the US to safeguard vulnerable assets and supply chains. For example, in 2023 Taiwan’s investment in China fell to 23% in a bid to diversify risk and reduce its exposure to Chinese economic coercion. Also, due to Taiwan’s global dominance in the semiconductor industry, under the pressure of US companies and the government, Taiwan has begun building semiconductor fabrication factories in Arizona.

Looking forward, Taiwan has sought to negotiate better trade and investment access with its Western partners to mitigate Chinese sanctions. It is likely that the DPP will lean towards the US and South and Southeast Asian countries.

What does this mean for businesses?

Although any new leadership brings a spectrum of uncertainty, there is the opportunity for the situation surrounding Taiwan to calm both diplomatically and economically – especially from the lessons the US and Taiwan have learnt over the last two years with China.

The geopolitical situation is already having an impact for companies seeking insurance coverage for their operations, whether physically located in Taiwan or exposed through their supply chain. Insurance markets are rightly concerned about the potential for a systemic loss event should China target the island, and to mitigate this, political risk and political violence insurers have withdrawn capacity, leading to increased prices, reducing coverage, and ultimately leaving companies more exposed.