Investors around the globe will have watched with keen interest as the Democratic Progressive Party’s Lai Ching-te was elected as the new president of Taiwan on 13 January.
Lai has described Taiwan as a fortress of democracy and freedom and pledged to protect its survival and development. China, which claims Taiwan as part of its territory, has denounced Lai as a dangerous separatist.
In a year in which countries representing around half of the world’s population will hold national polls, Taiwan’s election was unquestionably one with significant geopolitical and market implications.
China’s claim on Taiwan is important because of the potential for a political, or even military, confrontation with the west.
Taiwan also plays a crucial role in supplying the world with semiconductors. These microchips are used in everything from mobile phones and computers to cars, medical devices and military equipment. They are also vital in the rapidly growing arena of artificial intelligence (AI), providing the computing ‘brainpower’ for data processing and mathematical calculations.
Taiwan produces more than 60% of the world’s semiconductors and over 90% of advanced ones. Semiconductor factories, also known as foundries, are incredibly expensive to build and operate, so global manufacturing is reliant on established players.The largest operator of these foundries is Taiwan Semiconductor Manufacturing Company, which accounts for around 56% of the global market. It is the world’s primary source of advanced semiconductors used by companies including Apple, Nvidia, AMD and Qualcomm. If the flow of chips from Taiwan was disrupted, it would have far-reaching consequences for the global economy.
Clearly, semiconductors are important to everyone including China. Beijing’s plans to establish the country as a global leader in manufacturing and compete with western nations in innovative technologies like AI all rely on semiconductors. The aim of the Chinese leadership is to reduce their nation’s dependence on imported semiconductors and achieve self-sufficiency in advanced chip production. Taiwan could play a critical role in this.
Taiwan is also important to China from a military perspective. Along with Japan, South Korea and the Philippines, Taiwan is one of the links in a US-friendly chain of territories that limits China’s influence in the Pacific. Controlling Taiwan would give China a dominant position in the East and South China Seas, where there are trade routes crucial to the US and its allies.
While China’s stock market has struggled recently, Taiwan’s has delivered strong performance. The MSCI Taiwan index was up 29.9% in 2023 while the MSCI China returned -11.1%.
Looking ahead, Lai’s election at the weekend is only one piece in a complex jigsaw. While Lai succeeded in the presidential vote, his Democratic Progressive Party lost its parliamentary majority and may struggle to pass new legislation, which could hinder the implementation of economic policy and negatively impact sentiment among global investors.
What will be crucial to the island’s future is Taiwan’s relationship with the US and Washington’s approach will be dictated by whoever is president so the outcome of the US election in November is critical.
Current US President Joe Biden has followed the traditional path of ‘strategic ambiguity’, maintaining only unofficial relations with Taipei while also pledging defensive assistance. After Saturday’s election result, Biden said the US did not support independence for Taiwan, in a move calculated to ease concerns in Beijing about the US stance. However, Secretary of State Anthony Blinken said the election showed the strength of Taiwan’s “robust democratic system” and he emphasised that the US is committed to maintaining “cross-Strait peace and stability”.
Donald Trump’s position is less clear. Shortly after winning the US presidential election in 2016, Trump spoke on the phone to Taiwanese president Tsai Ing-wen. This was the first time a US president or president-elect had spoken directly with a Taiwanese president and the call provoked anger in Beijing. However, since then Trump has given a number of interviews in which he has been enigmatic about whether he would deploy US forces to defend Taiwan against China.
In Taipei, President Lai is likely to tread carefully and seek to avoid doing anything that might antagonise the Chinese leadership until the US election has taken place and he knows two things: who will be in the White House and the level of support he can expect from them.
The people of Taiwan have had their say and chosen a candidate committed to limiting China’s influence. However, what happens in 10 months’ time and more than 7,000 miles away in the US election could have crucial implications for the island's future – and for a global economy reliant on Taiwan’s semiconductors.
Nathan Sweeney is CIO of multi-asset at Marlborough