China’s threats of war push Taiwan to boost U.S. economic links

It’s hard to find a world leader who’s had a better 2020 than Taiwan President Tsai Ing-wen.

She won re-election in January in a landslide, oversaw one of the world’s best responses to the Covid-19 pandemic and helmed an economic recovery that has boosted Taiwan’s stock exchange to record heights. The central bank last week revised up its 2020 growth target to 1.6%, making it an outlier among global peers as most major economies shrink.

But Tsai does have one major problem: The Communist Party is threatening her life, with its Global Times newspaper saying over the weekend she would be “wiped out” in a war if she violated China’s anti-secession law.

The warning in a tweet Saturday described her dinner with Keith Krach, the most senior U.S. State Department official to visit Taiwan since 1979, as “playing with fire.” People’s Liberation Army aircraft last week repeatedly breached the median line between Taiwan and China, and the PLA Air Force released a video showing H-6 bombers making a simulated strike on what looked like a U.S. military base on the nearby island of Guam.

While China’s military dwarfs that of Taiwan, an amphibious invasion across the 100-mile-wide strait separating the two carries risks that could easily backfire on the world’s number-two economy. Although many observers see the U.S. coming to Taiwan’s aid if China were to launch an attack, Tsai’s government is actively taking steps to increase economic ties between the unofficial allies to provide more incentives for American policy makers to intervene.

“If we lessen our economic reliance on China, it won’t be able to politically blackmail us,” Kolas Yotaka, presidential office spokeswoman, told Bloomberg. “By establishing closer economic ties with other countries, we’ll be able to uphold regional peace through shared prosperity.”

Right now, the economic relationship is heavily tilted toward Beijing. Exports to China accounted for 42.3% of Taiwan’s total in the first half of this year, with only 1.5% going to the U.S. during the same period. Taiwanese investment in China in the first eight months of this year was up 50% year on year, totaling $3.9 billion, according to Taiwan’s economic ministry.

Tsai’s government, however, has sought to reverse those trends in particular by encouraging companies to bring their tech supply chains out of China to Taiwan and places like Southeast Asia. In late August, she also lifted a ban on certain U.S. pork and beef products—the major obstacle toward a trade agreement with the U.S.

“We must accelerate our linkage to economies around the world, in particular strengthening our ties with our most steadfast partner,” Tsai said at the time. Through July, American government data shows Taiwan as its ninth-largest trade partner, up from eleventh last year.

The Krach visit marked another milestone in that effort. Tsai hosted a dinner Friday night for him that also included Morris Chang, founder of Taiwan Semiconductor Manufacturing Co., the main chipmaker for Apple Inc. The presence of Chang, whose company recently announced it would build a $12 billion facility in Arizona, highlighted the importance of Taiwan’s cutting-edge semiconductor industry, which the U.S. is looking to wall off from Chinese companies such as Huawei Technologies Co.

On Sunday, Taiwan’s economic minister, Wang Mei-hua, announced she had met with Krach’s delegation for talks to prepare for a formal economic dialogue. Any serious discussions would be helmed by U.S. Trade Representative Robert Lighthizer, who negotiated the phase-one deal with China signed earlier this year.

While it’s unclear if Taiwan is on the USTR’s list of priorities, any agreement would go a long way toward bringing Taiwan out of its diplomatic isolation, according to Tiffany Ma, senior director at Bower Group Asia.

A bilateral trade agreement “would further benefit Taiwan’s security by giving momentum—and political cover—for other countries to pursue similar arrangements with Taiwan,” she said.

Worst Fears

The U.S. formally cut ties with Taiwan’s government in 1979 in order to establish relations with Beijing. Four decades later, however, U.S. ties with China are getting worse by the day while trade and official exchanges with Taiwan are on the rise.

Shortly before Krach arrived in Taipei, Republican congressman Tom Tiffany introduced a bill to establish formal diplomatic relations with Taiwan and negotiate a free trade agreement. While the bill is unlikely to pass, the fact that a member of Congress is calling for recognition of Taiwan risks adding to Beijing’s worst fears.

Despite the military saber-rattling over the weekend, China doesn’t appear ready to give up on economic engagement with Taiwan. Wang Yang, the Communist Party’s No. 4 official, on Saturday pledged to “further improve policy measures and arrangements” that benefit Taiwanese people.

“We need to have a longer-term vision,” said Liu Guoshen, director of the Taiwan Research Institute at Xiamen University, which sits across the strait.

Even so, China’s recent military maneuvers near Taiwan signal that it is watching carefully and possibly willing to escalate. While the Communist Party has never ruled Taiwan, and polls show the vast majority of Taiwanese citizens don’t want it to, President Xi Jinping has vowed to take it by force if necessary.

“Beijing fears a slippery slope,” said Bonnie Glaser, director of the China Power Project at the Center for Strategic and International Studies. “It worries that the U.S. has abandoned its one-China policy and won’t respect China’s red lines.”