Asia Centric by Bloomberg IntelligenceTaiwan’s hotly contested presidential election was cast as a stark choice between two different destinies, but for the island’s voters, relations with mainland China are just part of the picture.
Economic growth, jobs, and a path to prosperity are big issues for Taiwan’s more than 23 million people, especially its young adults, who’ve come of age facing the risk of conflict, a changing identity, and an uncertain future.
How likely is Taiwan to find itself at the center of a wider conflict? How much damage would an invasion inflict? How would the US respond? Can such a scenario be prevented? And what will the next four years look like?
Jennifer Welch, Chief Geo-Economics Analyst at Bloomberg Economics and Maeva Cousin, Senior Global Economist for Bloomberg Economics join co-hosts John Lee and Tom Corbett for a look at the precarious road ahead for Taiwan and the world.
You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific rim. I'm Tom Corbett in Hong Kong and.
I'm John Lee. Taiwan's election was cast as a stark choice between two very different destinies, but relations with China may be only part of the picture. For the island's.
Voters, Taiwan's new leaders have their work cut out for them, navigating the way forward for its more than twenty three million people while walking a tightrope in relations between two global superpowers.
Taiwan's voters are also concerned about its economy, growth, jobs and prosperity, and how china response could set a new tone in relations with the US and for Taiwan's business clan.
What will the next four years look like for the Taiwanese people and for Taiwan's standing on the global stage. Let's bring in two experts to sort it out. Jennifer Welch is chief geoeconomics analyst at Bloomberg Economics. She also served in the Trump and Biden Whitehouses shaping US Taiwan policies. She joins US from Taipei.
And Mayva Kuza, senior global economists for Bloomberg Economics, joins us from Switzerland.
Jennifer and Mava, it's great to have you.
Hijahntam, great to be here, Thanks so much for having us.
Taiwan just elected lighting To as the new president. Is this a resounding success for the ruling party, the Democratic Progressive Party or DPP. On one hand, they sealed an unprecedented third presidential term, but on another it was one of the tightest mansions in years. Jennifer, what's your key takeaway?
Yeah, I'm not sure that they would use the term resounding and to describe their victory. As you noted, they won, but they won by a pretty narrow margin, and perhaps more concretely, they failed to secure a majority of their legislature. They're going to be facing a divided government as a result, and that could be a major challenge for them going forward in terms of advancing their domestic agenda. But other than that, yes, it's a historic win. This is the first time that any party has secured a third term since Taiwan began holding open elections several decades ago, and certainly a really strong sign of Taiwan's maturing and very vibrant democracy.
And Jennifer, it's pretty much safe to say that this is the party that mainland China did not want to see. When what do you think the reaction will be from mainland.
China, Well, we're still watching and observing what China's going to do, and this is very much a live issue. In fact, we just saw the news that China has established relations with Nauru, one of Taiwan's few remaining diplomatic partners, leaving Taiwan with just twelve partners left on the world stage, including the Vatican. So my take on this is though that Beijing's reaction has still been fairly considering the spectrum of things that they could possibly do in the week of the election. For example, we haven't seen a heightened amount of military activity, yet we haven't yet seen them roll out economic measures that they had been sort of singling they'd be willing to take in the week of the election if they didn't get the results they wanted. And I think a major reason for this is one because of that legislative outcome that the DPP is not going to be having full control over both the presidency and the legislative un and two, I think part of it is that they believe that Lie sort of extended an olive branch in his victory speech enough at least to give them no immediate cause for concern. But I think in the weeks and months between now and the inauguration in May, when Lai will be sworn in as president, we're likely to see additional steps from Beijing seeking to shape his approach and probably up the pressure on Taiwan.
Mayva Kuzam Jennifer Welch. Let's get into the heads of the Taiwan voters for a moment. How heavily do cross straight relations figure in their thinking, especially considering economic considerations growth, jobs, wages, unemployment. Right there is in the low double digit Is this really all about China?
Well that's a really good question, Tom, because actually, when you speak to a lot of Taiwanese voters, despite all the headline attention from international media on the cross rate issue, but most voters here have been concerned about are that more bread and butter issue of cost of living, you know, the economy or social policies. That's where a lot of the focus has been. And yes, cross right issues are an important topic, not just in terms of China being a major economic trading partner and obviously a major consideration for Taiwan, but also you know, for how Taiwan thinks about itself and its role on the world stage. But yes, the vast majority of voters are far more concerned, just like many voters around the world, with issues that affect their day to day life, and that tends to be more in the economic realm.
Which is kind of contrary to what we hear in the Western narrative that this is a big all about China elections, so to speak, What, in your assessment do Western observers, particularly in the US, perhaps not understand or not yet or not fully appreciate about the nuances between the Taiwan elections and relations with China.
And in fairness to Western media, I will say one of the biggest differences between the candidates going into this election was on crosstrate issues like when you look at their economic policies and their social policies, there's not a huge amount of ideological changes there. What they really had a difference of opinion on is what Taiwan's relationship with mainland China should be and how Taiwan should conduct that relationship. So in fairness, there is a major difference there, and that's probably the biggest areas of divergence among the candidates.
And is there any demographic trends that we should be aware of. I have been reading in the press that some of the younger voters were more support of the ruling party or the DPP.
Actually, one of the most interesting trends in this election is how many youth voters we think were brought over to the third party, the Taiwan People's Party led by Coinja. He has had a lot of attraction among youth voters, and that was true when he was mayor of Taibei as well. In fact, if you're looking for an interesting excursion, he's got a really great rap video that he did as part of one of his re election campaigns. It was the signal of how he's been able to curate a lot of interest among youth. I went to a TPP rally on Friday night just to kind of get a sense of the ground, and I'd say about ninety five percent of the people I saw there were youth, And there were so many folks there that I couldn't even approach the rally stage, it was that crowded. I couldn't even see it from where I was. The streets were so jammed. So he really attracted a lot of youth, and that became a really interesting facet in this election because he wasn't just drawing from the other opposition party that Guilming down. He was probably drawing youth that would otherwise traditional voted for the DPP. And I think what's going to be really interesting to watch going forward is do those youth voters stick with the TPP four years from now or even two years from now in the next sort of local elections, or are they going to eventually mature back into the DPP ranks. A lot of this might really determine the future of this new third party and how much sort of running room they have still in Taiwanese politics.
That youth vote is having a big impact on other democracies, not just in Taiwan. Do you think we're on the cusp of a generational shift in attitude, so to speak in Taiwan?
I think it's it's going to be something to watch because the thing that's been most interesting among this youth vote is the generation just before them, as they mentioned, was very heavily inclined towards the DPP and also to this more China skeptic perspective. It was culminated in something called the Sunflower Movement that happened under the previous administration in Taiwan around this trade agreement that Taiwan was pursued with mainland China, and a lot of the same students and activists who are involved in that movement have since become major sort of officials in the DPP. The generation behind them didn't have that experience and doesn't seem to necessarily have the same level of China skepticism as the one in between them. So it's going to be really interesting to watch how use views towards China and Taiwan evolved and what translates that into in terms of like which of the parties that they tend to lobby behind. But I think that's going to be the key demographic that these parties are going to have to capture going forward, and it might be the one that's hardest to place where exactly they'll land. They seem to again be more in this middle zone of actually not as concerned about China as the generation above them, but something to watch for.
Sure, Jennifer, With the latest election results, what does these meanful relationships between mainlane China and the US. There seem to be some progress between both countries after President's Biden and She met last November. Do you think this will still be the case going forward.
I think it will still be the case going forward. That's my base case. But I will say as someone who was there for Bali in twenty twenty two, where we likewise had very good sort of feelings coming out of that meeting, shared sense of the importance of stabilizing the relationship. Just a few months later, we had the Chinese spy balloon incident, which really threw all of those plans off the rails, and it took several months for those to get back on track in terms of when US Cabinet members started visiting China again and then eventually laying down the plans for the San Francisco meeting. So I think what that goes to show is that meeting was a really positive sign. Another positive sign, I should say, their ability to still sit down and meet and agree on sort of the fundamentals of this relationship. But on the other hand, this is a really fragile sort of equal that can be easily challenged by another major crisis or point of tension, and whether it's something as completely unexpected as that spy balloon, or it's something like, for example, tensions over Taiwan. And I think a huge factor looking forward is going to be what is Beijing's reaction to the election, What does Beijing think Washington's reaction to the election is, and how does that relationship proceed over the coming months between now and the inauguration and then immediately after the inauguration in May.
And Jennifer's remarks are a great segue to bring in Mavokuzam with Bloomberg economics. Maybe, but you have put forth a widely publicized is it a model? Five theories, five scenarios modeling Taiwan, US and China relations, ranging from lasting stability to full blown conflict. Talk a little bit about how that came about, how you modeled it and how you arrived at the potential ten trillion dollar cost of a conplic to the global economy.
Hey, thanks Tom, Yes, that's right. We've looked into those five scenarios, the status COO and then some improvement scenarios and some scenarios of very severe escalation in the relationship between Taiwan mainland China and the US, and in particular this extreme case scenarios that you mentioned term, which is by no way our main baseline scenarios within the status chool, is sticky, and it's sticky for a reason. And one of these reasons, of course, is human costs. But the other reason is exactly what you've just said, that the economic costs of a severe escalation would be disastrous for all the main parties involved and for the global economy. But coming back to this war scenario, just to give a flavor of how we've looked into it. So what we've done is that we've worked closely with Jennifer to decide on the modeling assumptions to design this scenario of what could happen in a very severe scale. And this very severe escalation would be a case where China would launch an invasion of Taiwan that would draw the US into a local conflict. So what could happen in that case. The first thing, of course, is that Taiwan's economy would be cut off from the rest of the world. So we have modeled a case of one hundred percent cut in Taiwan's trade with the rest of the world, we would have US soldiers fighting directly with Chinese soldiers, and in that case, we would expect that the two economies, the two countries would actually cut off all relationships, especially economic relationships. So we've also modeled only one hundred percent cut in all trade between the US and China. What would also happen is that the Taiwan's trade is actually the busiest shipping route in the world, with lots of shipping from Stasia, from Japan, from Korea transiting to go to their different destination. It would hurt one of the biggest manufacturing hub in the world. We are looking at a one year war scenario and eighty percent of trade in this region would be disrupted. Eighty percent of trade coming out of South Korea, Japan and Selfistasia would be disrupted. And finally, we would expect uslies to take very severe retaliation or severe economic functions against China, as we've seen precently of course in the uk Usha a question. And so that's a sort of modeling basis that we've used, and from there we've used different suite of models to look into what the implications would be.
And I think just to add on to that and elaborate on what we are saying, Yes, we exsess that the risk of a war at this point is low probability. However, it's a high enough probability and risk and a high enough impact, certainly a very severe impact that we think warrants examination of what that would entail. I think, more broadly, if you look past the specific scenario of a war, the odds of a crisis are also not that small. If we had to put a number on it, we'd say about one in four. And there are a lot of reasons for that, but some of the main ones are that we've just seen the traditional pillars of stability in the street really eroding over the last few years. You know, for example, Taiwan is associating itself with a distinct Taiwan identity. Beijing sees that and is extremely concerned by it, and is also sort of in line with its growing power, seeking to make progress towards unification with Taiwan, this sort of historic task for Beijing. And then meanwhile, you have the United States, which is historically plaid sort of a balancing role in the street. Also having a very tense relationship with China, and that really invokes Taiwan and makes cross straight issues more challenging. So there's a lot of dynamics that play that are really straining stability. And if you look at the other end of the probability spectrum, it's also not a pretty picture. For example, we would say that there's probably greater chance of relations getting tenser over the next few years than improving.
So MAYEVI, could you put these in perspective? How big is ten trillion dollars as a percentage of global GDP.
It's ten percent of global GDP, so it is ten trillion dollars in twenty twenty two GDP numbers, for example, But it's ten percent of global GDP. It's seventeen percent of Chinese GDP. It's nearly seven percent of US GDP. So of course the US is less exposed, it's further away from the conflict, it's not directly on the conflict zone. It's also a bit less industrial economy, so it's not as badly by the semiconductor's shock, but seven percent is still huge. And if you think ten percent of global GDP to give your perspective the global financial crisis or the pandemic crisis, the COVID crisis, we're about six percent, so GDP fell six percent below its previous round on the shock, so ten percent. It's bigger than the global financial crisis or the pandemic, so it would be a huge shock there. Of course, uncertaintyes it's a scenario, so things could develop very differently. And it also realized a lot on this assumption that semiconductors is what we called sometimes in supply chains, the golden screw, this very specific part without which you can't do anything. And we've worked very closely with your colleagues in Bloomberg Intelligence looking at how much semiconductor's capacity is made in Taiwan, almost made in Korea and Japan. And the big thing in that case is that sixty percent more or less of the most advanced logic semiconductors, the one we find in smart phones, tablets, sort of advanced electronics are made in Taiwan and most of the rest is made in South Korea. So that's already one thing, and we've just assumed that without those semiconductors we can build smart funds so these factory has come to HELT. That's the first cost. And then about a third of the less advanced logic semiconductors are made in Taiwan, and a lot of it is actually made in China and South Korea, but a lot is made in China. So you use access to probably about sixty percent of all the semiconductors that you need in cars, that you need in consumer electronics, that you needed, all the transport equipment at very big chocked supply chains. If you lose ten percent or those semiconductors, you need to decrease production by ten percent. And on top of that, of course, if you decrease production of cars by sixty percent, production of all the steel or robber that goes in cars also goes down by sixty percent. So there are the second round effects. There are lots of uncertainties, but I think the sort of scale of thinking how exposed Western supply chains and Western industries are to these very specific semiconductors coming from Taiwan and from Asia give us a scale of the show can they risk?
And Jennifer, you mentioned that this is a low probability event. I think you mentioned one out of four chance it could happen, but walls in Ukraine as well as Gaza have reminded us that long simmering feuds can erupt into conflict if these wars increase.
The odds, And just to be clear, the one and four was more for a major crisis in the street, I think we would put the probability of war as probably less than half of that, so somewhere in the ballpark of more like a one in ten. And I want to be really clear here when it comes to geopolitics, you know, assigning probabilities to really complex, dynamic geopolitical environments is more of an art than a science, So I really want to emphasize here is more it's a low probability. The exact number is sort of a wide confidence range when you put it that way, I think in terms of what the ongoing conflicts in Ukraine and the Middle East suggest and what the implications are for conflict in the Taiwan Street, it's sort of a mixed bag, you know. I think in particular, if you look at the war in Ukraine, it has some detern effects. Right because we're approaching the two year anniversary, Russia is still at war. It didn't achieve the quick victory that I think Moscow thought it was going to achieve, and that it probably indicated to Beijing that it thought it was going to achieve. And if I'm Beijing watching that, how difficult their land invasion of a much smaller power has been with the largest land army in Europe. And I'm thinking towards an amphibious invasion, which is one of the most difficult military operations for any military to undertake, but especially against an environment as challenging as Taiwan with its rocky cliffs and its really dense environment, That's a pretty high challenge and I'd probably be thinking more closely about whether my military is ready for that. In sort of learning the lessons learned from Russia, I think where it starts to maybe become less concerning of a warning sign or warning story for Beijing would be sort of the impact of the international reaction. Right the West came out pretty quickly and scercely with international sanctions on Russia, but Russia has demonstrated the ability to weather those at least well enough for Putin's sake. And then the second piece of it is recent science that we've been seeing that Western support for Ukraine might be slightly wavering or might be starting to hit a point in which there's a timeline attached to it. And again, if I'm Beijing watching that, I might think, Okay, I'm expecting some degree of international probrium if I take this step, which let's just be clear, Beijing right now does not signal any interest in taking Taiwan by force. It continues to prefer a peaceful solution to the issue, and I think has a lot of other things on its plate.
China's domestic issues are well document to. The property crisis has been dragging down much of the economy. Growth is the slowest in decades. You've got a consumer segment fearful of spending or at least conservative. There's a lack of demand, concerns about salary cuts, job losses. How much do you think these conditions, these challenges in mainland China are shaping China's reaction and shaping Taiwan's outlook.
I think on the first part of your question about how they shape Beijing's outlook and speaking more broadly than just Taiwan, but I think in general, we're seeing Beijing really emphasize that it wants to maintain a stable external operating environment, and by which I mean, I don't think Beijing's likely to pick a fight to distract attention from their internal challenges. Instead, what we tend to see Beijing do is it prefers not to take on too many challenges at once, internal or external. That being said, I also think Beijing is not going to be one to shy away from a fight if it feels like it's being forced into it. And what I mean by that is if it feels its challenge or it feels that another power, whether it be Taiwan, the Philippines, in the South, Chinesee, or anyone else is sort of taking for granted Beijing's resolve, then it might feel even more pressure to come out strong and demonstrate that it is not distracted and that it is not incapable of responding swiftly to it. I think in terms of the economic relationship, you know, it's been really interesting to observe is even as Taiwan is developing this sort of separate identity and has a very tense political relationship with Beijing, the economic ties are still quite robust even after eight years of tensions. In eight years of the current administration in Taiwan working to diversify Taiwan's economic ties. Taiwan exports are still finding a major market in Main Man China. There's still a lot of investment relationships there. So it's a very interdependent relationship. And that was actually part of the campaign discourse and the debate here in Taiwan was it's not just about the political relationship, it's also about what the political relationship means for Taiwan's economy when it has that level of interconnectedness with China's.
Jennifer, you have the unique distinction of working under both President Biden and Trump as a Taiwan expert. And we have another election coming around the corner in November, the US will decide how do you think that election will impact US China relations.
I think this might be, from the perspective of both US chinations and the cross right dynamic, one of the more decisive US elections in recent decades. And what I mean by that is, as I mentioned earlier, the US has traditionally played this role as kind of a power balancer in the street, and increased US China tensions over the past years have complicated that role a little bit because Beijing no longer sees the US, not that they ever really did, but even less so as an objective kind of observer. In fact, there was growing concern in Beijing that the United States is using Taiwan to sort of contain China as part of a broader containment effort. And when you have that is the backdrop plus increased cross straight tensions, I think Washington's role and how it handles that role becomes even more sort of decisive for how dynamics industry might play out going for it, and I think having worked for both of these administrations before, there are major differences in how they approach China and how they approach cross rate issues. Some of it is a difference in tone, not necessarily substance, but tone can really matter when you're dealing with complex and somewhat contentious issues like crossright issues, which is among the most sensitive issues in US general relations.
What did you notice in the change of tone. We've heard the rhetoric from both former President Trump and current President Joe Biden. What would your take?
I think what I'd point to is, especially towards the end of former President Trump's first term in office, he took a much more direct, I would say adversarial approach to China. I think he might share that characterization, you know, for example, being very direct and criticizing China over the pandemic. This coming on the heels of, of course, the trade war and all of his frustrations about China's economic practices. Adding on top of that, there was just a sweep of actions that the previous administration undertook and that last year in office, everything from restrictions on Chinese companies like TikTok and to things like condemning China's human rights practices and rolling out the genocide determination on Hinjong. In terms of the Biden administration approach, again, I think you see a lot of continuing in substance. Right the Biden administration has continued efforts of what they frame is de risking from China, continuing to roll out some of the restrictions that may have been mentioned earlier on China's access to technology that could fuel its military. But the tone is shifted a little when you look at how, for example, President Biden talks about the importance of maintaining stability in the relationship with China even as they have their differences. The importance of I think, as they put it, responsibly managing this competition even as they compete fiercely. That's sort of a difference in tone between how the two administrations have talked about balancing these competing imperatives of having a competitive relationship and acknowledging that that is, you know, fundamental piece of this equation, while also trying to maintain the stability to ensure it doesn't go off the rails in ways that neither party really wants it to. And you know, going into the November election, I think that we're likely to see you know, these two approaches really at the forefront. I fully expect former President Trump, if he secure as a second term, would pick up that you know, approach to China where he left it off. He's already talked about his concerns about China's economic practices, among other things. And likewise, I think for President Biden and I would expect a continuity of his approach to China. The commonality is that competition, but I think that the difference is a slight difference in tone.
Our guests have been Jennifer Welch, chief geoeconomics analyst at Bloomberg Economics and Mava Kuzemp, senior global economists for Bloomberg Economics. Jennifer has joined us from Taipei, Mava from Uric. It's been a wide ranging and very engaging conversation about China, the US, Taiwan and the road ahead. We look forward to being in touch.
Thank you Tom, Thank you John Alert.
I'm Tom Corbett in Hong Kong and I'm John Lee.
This podcast was produced by Claraton and you've been listening to the Age of Century podcast
