After eight years of increasingly close relations between China and Taiwan, political tensions are rising across the Taiwan Strait following the entry into power of a new president, Tsai Ing-wen, who is determined to assert the islands sovereignty.
Tsai, Taiwans first female president, led the pro-independence Democratic Progressive Party (DPP) to a sweeping election victory in January by promising to reduce the territorys economic dependence on China and protect its democracy, themes she reiterated in her inaugural address last month.
Once again, the people of Taiwan have shown the world through our actions that we, as a free and democratic people, are committed to the defense of our freedom and democracy as a way of life, she said. The president also promised to bid farewell to our past overreliance on a single market and revitalize the economy by strengthening ties with countries across Asia and around the world.
The day after her speech, Beijing fired a diplomatic warning shot: Unless Tsai recognizes the so-called 1992 Consensus, under which both sides admit they are part of one China, without specifying exactly what that means, Beijing will cease direct communications with Taipei. That threat followed a May 16 report in Cankao Xiaoxi, a Communist Party publication, saying the Peoples Liberation Army had recently drafted plans for a military takeover of Taiwan, which split from China in 1949 after Communist rebels led by Mao Zedong seized power in Beijing and forced the routed Kuomintang to flee across the Taiwan Strait.
Markets so far seem to be taking the heated rhetoric in stride. The Taiwan Capitalization Weighted Stock index had gained 5 percent since the May 20 inauguration, as of June 2, and 10 percent since her election on January 16. Mainland stocks have traded mostly sideways over the period, with the CSI 300 composite index up just 1.6 percent since January 16.
Tsai offered some conciliatory words in her inauguration speech, acknowledging that Chinese and Taiwanese officials had met in 1992 to seek common ground and promising to honor the existing political foundation. But in outlining her plans for forging new trade relationships, the president referred several times to Taiwan as a country, a notion that Beijing adamantly rejects.
Tsai has built her career around an assertion of Taiwans distinctive identity and frequent criticism of the Communist Party of China and its authoritarian rule. A former law professor at National Chengchi University in Taipei, she authored a policy proposal called the two state theory, arguing that the Republic of China, as Taiwan is formally known, is a sovereign state separate from the Peoples Republic of China. The policy was embraced in 1999 by former president Lee Teng-hui.
Tsais stance represents a dramatic break from the policies of her predecessor, Ma Ying-jeou. During eight years in office, Ma and his Kuomintang party focused on improving relations with Beijing. The government established regular direct flights between the two territories, which opened the door for thousands of investors and millions of tourists to come to Taiwan from the mainland. But those policies angered many working-class people, who felt they were not getting a fair share of the economic benefits generated by closer ties with China.
Many Taiwanese, particularly young voters, thought President Ma tried too hard to please Beijing, says Chu Ya-hu, a retired Taiwanese army general and director of the chairmans office of the Core Pacific Group, a conglomerate that owns petrochemical refineries and real estate in both Taiwan and China. Some thought he focused too much on signing trade agreements, and not enough on criticizing Beijing.
Many Taiwanese are proud of their democratic system and freedom of speech and feel that the Kuomintang should have been more critical of Communist Party rule on the mainland, says Jeffrey Ko, chairman of Taipei-based magazine publisher DK International Media Group.
To strengthen the economy, Tsai vowed in her speech to reinforce Taiwans global and regional connections, and actively participate in multilateral and bilateral economic cooperation as well as free trade negotiations including the Trans-Pacific Partnership agreement.
But some analysts are skeptical that the government can forge new trade and investment ties in Asia at a time of rising tensions with Beijing. The problem with that strategy is that China already has a free-trade agreement framework with members of the Association of Southeast Asian Nations and will impose many diplomatic roadblocks for Taiwan in the region, says Ko.
China has been moving aggressively against Taiwan since the January elections, which also saw the DPP win a strong majority in parliament. In recent months Beijing has used its diplomatic clout to have more than 100 Taiwanese arrested on various charges in Kenya, the Philippines and Malaysia and then sent to China for trial, effectively enforcing its claim to be the sole legitimate Chinese government. On March 17 Gambia established diplomatic relations with the Peoples Republic of China after having cut ties with Taipei, leaving only 20 nations that formally recognize Taiwan as a sovereign state.
These moves stand in sharp contrast to the cordial ties between Beijing and Taipei under the Kuomintang government. China is now ramping up diplomatic tactics again, and Tsai and Taiwan will face similar bullying abroad for years to come, says Ko.
A weak economy and close trade links with the mainland leave Tsai vulnerable to pressure from Beijing, analysts say. The countrys gross domestic product expanded by only 0.65 percent in 2015, the worst showing since the recession year of 2009, and the government is predicting growth will edge up only slightly this year, to just over 1 percent. Unemployment stands at slightly less than 4 percent, the highest in two years.
Taiwan is bearing the brunt of the slowdown in Chinas growth rate. China is the countrys biggest trading partner, and many Taiwanese manufacturers have extensive operations there. Taiwans largest electronics company Hon Hai Precision Industry Co., perhaps better known by its trading name, Foxconn Technology Group employs more than 500,000 workers at 12 factories in China that assemble many products for Apple.
The economy will remain vulnerable to negative shocks to confidence related to changes, perceived or real, to Taiwans relationships with China, says Marie Diron, a Singapore-based senior vice president in Moodys Investors Services Sovereign Risk Group. Such confidence shocks from periodic increases in tensions also could hamper foreign direct investment. Diron predicts Taiwans economy will grow by just over 1 percent this year and by less than 2 percent in 2017.
Life for Taiwanese businesses will become more difficult on the mainland, says publisher Ko. Many already are facing challenges of rising labor and material costs. Now they may face increasing political risk.
Nicholas Consonery, director of Asia at political risk consulting firm Eurasia Group in Washington, predicts Tsai will have a difficult time managing relations with China, given the stark differences over sovereignty. My sense is, Chinese President Xi Jinping is willing within certain boundaries to find a way to manage a stable relationship with Taiwan, he says. That is in their interest as well. China may have some patience with Tsai at the beginning, but it will not be infinite. So it means we need to watch very carefully.
One thing Tsai has on her side is the U.S. Washington is obligated by the Taiwan Relations Act of 1979 to sell Taiwan defensive weapons, and possibly provide military aid at the discretion of the president and Congress to help it ward off aggression from China. Taiwan has traditionally been one of the largest foreign buyers of U.S. weapons, purchasing nearly $28 billion of military hardware in the past decade.
In a gesture of support for the Tsai administration, the U.S. House of Representatives passed a bill on May 19 proposing that Congress authorize the Defense Department to invite Taiwans armed forces to join the U.S.-led Rim of the Pacific exercises that are held every two years.
Tsai has visited Washington frequently and has an excellent command of English, having obtained a masters degree in law from Cornell University and doctorate in law from the London School of Economics and Political Science.
President Tsai knows very well that she cannot count on the U.S. to come to Taiwans rescue against a mainland invasion, says a Taiwanese businessman with substantial investments in China, who asked not to be identified by name for fear of retribution in either Taiwan or China. But she will be doing her best to swing Taipeis diplomatic initiative away from Beijing and toward Washington.
Taipeis new orientation entails increased risk for Taiwan, China and the U.S. President Tsai can ill afford to make a miscalculation.