Taiwan’s Economic Setback Should Be Short-Lived

UNLIKE ON THE other side of the Taiwan Strait, Taiwan’s GDP shrank 0.9% year-on-year in the fourth quarter of last year, taking 2022’s full-year growth to 2.4%, a marked deceleration from 2021’s 6.5%

The fourth quarter was the first year-on-year quarterly contraction since the first quarter of 2016 and the largest since the global financial crisis in 2009.

Inflation, interest rate hikes and the dip in tech demand in Taiwan’s Western markets are suppressing demand for exports from the trade-dependent island. At the same time, Beijing’s zero-Covid policies, only abandoned during the fourth quarter, continued to disrupt business operations and suppress consumer demand on the mainland, which takes a quarter of Taiwan’s goods exports.

The 8.6% fall in total exports knocked 2.6 percentage points off GDP growth, muting the stimulative effect of a 3.1% increase in public spending in the fourth quarter.

The revival of China’s economy in 2023 should give Taiwan a strong boost, especially in the second half of the year, assuming the mainland’s Covid waves pass without significant economic mishaps and stimulus measures kick in.

The economy should return to growth in the first quarter, although the risks are to the downside.

There is still roughly a year before Taiwan’s next presidential and legislative elections, so that should be ample time for the economy to recover.

With Taiwan’s ruling party picking a self-described ‘political worker for Taiwanese independence’, William Lai, as its next chairman, thus putting him in line to be its candidate to succeed the term-limited President Tsai Ing-wen, the economy is unlikely to be the primary election issue.

China Now Routinely Riled By US Over Taiwan

THE LATEST PACKAGE of US military kit that the Biden administration has approved for sale to Taiwan has drawn predictable condemnation from China.

The $1.1 billion deal includes a radar warning system to track incoming strikes and Harpoon anti-ship and Sidewinder anti-aircraft missiles, Taipei’s need for which was demonstrated by the People’s Liberation Army’s live-fire exercises following the visit to the island last month by US House Speaker Nancy Pelosi.

A further round of live-fire drills followed the mid-month visit to the island by a separate group of US lawmakers.

The Chinese embassy in Washington told the United States to rip up a deal that it said ‘severely jeopardises’ relations and promised ‘necessary countermeasures. 

The US arms sale still has to be approved by the US Congress, but the votes are sure to be there. US legislators have become increasingly pro-Taiwan and anti-Beijing.

The US administration says the deal is part of continuing efforts to modernise Taiwan’s armed forces, as it is presenting most of its Taiwan policy as routine in counterpoint to Beijing’s belligerence.

Similarly, US officials say they will soon start discussions on a US-Taiwan trade agreement to be concluded by next year. That has already drawn warnings from Beijing not to include anything that implies Taiwanese sovereignty.

The missile sales appear to be catch-up, fulfilling orders placed by Taiwan in the past that went unfulfilled as the United States sent weaponry to Ukraine. Nonetheless, there is no masking that ‘a new normal’ now applies to US-China relations.

With Beijing increasing its ‘grey zone’ activity — somewhere between civilian and military operations — the risks of escalation are growing.

Last week, Taiwan shot down a Chinese drone in Taiwanese airspace for the first time. The downed quadcopter (of the sort that anyone can buy on Alibaba; it was not an unmanned military aircraft) was one of several that have been flying over the Taiwan-controlled islands a few kilometres off the mainland coast for the past month.

These have likely been on intelligence-gathering missions. An ulterior motive may have been to have one shot down to allow Beijing to portray itself as the victim of aggression by foreign forces.

The sturm and drang over the arms deal have let another Biden administration decision announced at the end of the week fly under the radar. The United States will keep in place Trump-era tariffs on Chinese imports. 

US-Taiwan Trade Talks Will Further Strain China-US Relations

TAIPEI AND WASHINGTON have agreed to start the formal trade talks anticipated by the US-Taiwan Initiative on 21st Century Trade announced in June.

Unsurprisingly, given the fractious state of China-US relations over the island in the wake of the Pelosi visit, Beijing is opposed to the talks, seeing them as part of an effort by the United States to deepen its ties with Taiwan and further distance itself from the ‘One China’ policy. The Ministry of Foreign Affairs warned Washington not to conclude any arrangements that could imply Taiwanese sovereignty.

The discussions will start in early autumn and include agricultural trade and expanded access for small and medium-sized Taiwanese enterprises to US markets, according to a statement from Taipei’s Office of Trade Negotiations. The Office of the US Trade Representative says the talks will also cover trade facilitation, digital trade and anti-corruption standards, all touchpoints of US President Joe Biden’s approach to trade.

A Washington-Taipei trade agreement will partially plug one of the most prominent gaps in the Indo-Pacific Economic Framework that the Biden administration announced in May as part of its strategy to counter China’s growing regional influence. Pressure from the US Congress, which has become increasingly forceful in its support for the island, preceded the June announcement of the separate trade initiative with Taipei.

Both the framework and the initiative are more symbols of US economic engagement in the region than committed pushes for free trade through traditional means such as lowering tariffs and opening market access; expanding free trade is not the tenor of the times in Washington.

Nonetheless, Taipei will be hoping to increase the share of its exports sold to the United States, around 30%, to bring it into better balance with the 40% that go to the mainland and Hong Kong. It has for some years been trying to diversify its markets and has signed free trade agreements with Singapore and New Zealand.

Taipei also hopes that a trade deal with Washington will bolster its application to join the region’s largest operational trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, or TPP11), the successor to the Trans-Pacific Partnership from which former President Donald Trump withdrew the United States in 2017. However, this Bystander sees little immediate prospect of Taipei’s application advancing, especially with Beijing also wanting in.

China Announces Military Exercises Close To Taiwan After Pelosi Lands

US HOUSE SPEAKER Nancy Pelosi has landed in Taiwan, the most senior US politician to visit since 1997.

China has announced military exercises, including live-fire drills in six areas close to the island from Thursday to next Monday (see map above). All appear to be within Taiwan’s Air Defence Identification Zone, and several are in what the United States would consider international waters (the Taiwan Strait) and Taipei its territorial waters.

China has ordered all vessels and aircraft not to enter the six areas where it will conduct its military exercises. The United States will have to respond to this assertion of sovereignty.

The foreign ministry has again condemned the visit, calling it a serious violation of the One-China principle. Economic sanctions have also been imposed on Taiwanese food exports to the mainland.

Pelosi Keeps The Guessing Game Going

US HOUSE SPEAKER Nancy Pelosi has landed in Singapore on an, at a minimum, four-country visit to the region.

She has still not said whether she will make a fifth stop, in Taiwan, which is stretching strategic ambiguity to near breaking point.

Given Chinese officials’ high-profile warnings of the consequences of any visit, it will be difficult for her not to visit Taipei; otherwise, she will be accused in Washington of buckling to Beijing.

Word reaches this Bystander that US naval assets in the region are moving closer to the island and that the People’s Liberation Army is conducting live-fire exercises near offshore islands opposite Taiwan.

Foreign Ministry spokesman Zhao Lijian’s description of Pelosi as the “number three official of the US government” may suggest a lack of understanding in Beijing about the US constitutional separation of powers. While Pelosi is second in line of succession to the vice-president in assuming presidential powers in the event of the US president’s death, incapacity or removal from office, she is not third in the line of command in the executive branch of government. As head of the legislative branch, she can act independently of the White House.

None of that constitutional nuance will prevent an escalatory response from Beijing should Pelosi set foot on the island or meet President Tsai Ing-wen, even in international waters.

Pelosi Visit Would Raise Taiwan Tensions

FORMER US SECRETARY of State Mike Pompeo would probably be the most provocative travelling companion imaginable for Nancy Pelosi, Speaker of the US House of Representatives, if she makes her much-discussed trip to Taiwan next month.

On July 24, Pompeo, an arch-China hawk even by the standards of former Trump administration officials, offered to accompany Pelosi on her controversial trip, even though she has not confirmed when, or even if, she would visit Taipei.

If she goes, Pelosi would be the most senior serving US official to visit Taiwan since one of her predecessors as Speaker, Newt Gingrich, a quarter of a century ago.

Ministry of Foreign Affairs spokesman Zhao Lijian yesterday repeated Beijing’s uncompromising opposition to the trip:

The Chinese side has repeatedly made clear to the US side our serious concern over Speaker Pelosi’s potential visit to Taiwan and our firm opposition to the visit. We are fully prepared for any eventuality. If the US side insists on making the visit, the Chinese side will take firm and strong measures to safeguard our sovereignty and territorial integrity. The US must assume full responsibility for any serious consequence arising thereof.

China has reportedly backed up its open threats of retaliation if the visit occurs with stronger than usual warnings through official back channels. The US military is understood to have been told that her plane would not be allowed to land, although it is unclear how China would enforce that.

Whether Pelosi flew in on a military plane or a commercial flight, shooting it down, or even intimidating it would be an act that the United States could not let pass without a strong, probably military response. President Xi Jinping would need to be extremely sure of his ground to let that unfold ahead of the autumn’s Party Congress (or be in a position of desperation, of which there is little to no evidence).

US President Joe Biden said on July 20 that ‘the military thinks it’s not a good idea’ for Pelosi to visit Taiwan. The White House would prefer the trip not to go ahead. It has already been postponed once, after Pelosi contracted Covid-19 in the spring. Yet, given the public discussion about the trip and China’s warnings, Pelosi’s not going would be seen in both Beijing and Washington as a US climb down in the face of Chinese pressure.

Biden said last week that he intends to hold his next conversation with Xi by the end of the month, offering some prospect of a diplomatic de-escalation of the rising tensions over Taiwan. His case will not be helped by efforts in the US Congress to pass a resolution formally abandoning the One China policy, although it has a low chance of passing in this Congress. The next Congress, if Republican-controlled as is possible after November’s elections, would be another matter.

Beijing has been responding to what it sees as Washington salami-slicing the One-China policy through increasing acts of US support for Taipei by ratcheting up its squeeze on Taiwan diplomatically, economically and especially through military intimidation. The risk in tit-for-tat retaliation is always an accidental clash that escalates into a bigger crisis.

Xi And Biden May Talk As China-US Relations Stay Tense

ANOTHER CHAT BETWEEN Xi Jinping and US President Joe Biden is reportedly in the offing as the United States mulls easing Trump-era tariffs on Chinese imports of solar panels and household goods like washing machines and bicycles.

Helping to suppress domestic inflation appears to be more of a motivation for easing tariffs than improving China-US relations. If anything, US attitudes towards Beijing are hardening.

There is also a division of opinion within Biden’s economic team over tariff easing. Trade officials argue for the retention of tariffs to give the US leverage in trade discussions.

Tariffs on steel and aluminium will likely stay regardless, and while tariffs make goods more expensive for US consumers, lifting them will not make much of a dent in US inflation. However, Biden will undoubtedly be considering, if he does ease sanctions, what he can extract from Xi in return.

Rising tensions over Taiwan are complicating the issue. A particular point is Chinese officials repeated assertions to US counterparts of late that the Taiwan Strait is not international waters. While that stops short of saying the strait is an internal waterway, it still implies that US warships should not be freely sailing through it as they have been doing around once a month.

Update: Taiwan’s defence ministry said that the PLA Air Force flew 29 warplanes including six H-6 bombers towards the island’s airspace, its third-largest such sortie this year, after Washington rejected Beijing’s suggestions that the Taiwan Strait was not international waters.

Taiwan Gains Prominence As A US-China Flash Point

EVER SINCE THE Russian invasion of Ukraine, backed again by President Xi Jinping in a birthday conversation with his Russian counterpart, Vladimir Putin, Taiwan has gained new prominence in the US-China relationship.

Recent US gestures of support for Taipei, including arms sales, visits from lawmakers and President Joe Biden’s affirmations of US intent to defend Taiwan in the event of an invasion, intend to warn off Beijing against attempting to take advantage of the current focus on Ukraine. Unlike other Beijing red lines, such as Xinjiang and Hong Kong, the United States has leverage regarding Taiwan.

Yesterday, US and Taiwanese officials opened their annual working-level security talks ahead of high-level meetings starting next Monday that will reportedly focus on weapons and military strategy for defending Taiwan against China. Chinese and US officials have recently exchanged bellicose language over Taiwan during meetings in Luxembourg and Singapore.

The Biden administration has said it wants Taiwan to adopt an asymmetric strategy against China, something Taipei has already done, recognising that it cannot keep up with the modernisation of the People’s Liberation Army. Thus it has been developing unconventional capacities to thwart any future Chinese aggression, such as anti-access capabilities, mobile defence systems, a submarine fleet to break any blockades and cyber warfare.

The PLA, too, has long planned for asymmetric warfare, intending to deploy drones, anti-ship missiles, mines and cyberattacks to keep US forces at bay in the event of military conflict over the island.

Taiwanese press reports say the Biden administration intends to maintain and upgrade Taiwan’s existing weapons systems. This would include missile defences to counter incoming missiles and air attacks. Selling Taipei advanced new weapons systems raises the risk of pushing Beijing closer to military action against the island.

Neither the US nor China wants that. However, the US and its allies have been sailing warships near Taiwan, including through the Taiwan Strait, while PLA Air Force warplanes are skirting the island’s airspace almost daily.

Beijing’s ambiguity about its red lines creates scope for misjudgement — as the agreement struck in Singapore last week between Defense Minister Wei Fenghe and his US counterpart Lloyd Austin to keep open lines of communication to head off crises indicates.

Update: Two leading US senators on the Foreign Relations Committee are seeking an overhaul of US Taiwan policy. Their proposed Taiwan Policy Act of 2022 would provide $4.5 billion in defence assistance to Taiwan over the next four years. The legislation would designate Taiwan as a major non-NATO ally of the United States and set up a broad sanctions regime to penalize China for any hostile action against Taiwan, including actions in the Taiwan Strait. Most provocatively in Beijing’s eyes, the bill would rename the Taipei Economic and Cultural Representative Office in Washington as the Taiwan Representative Office.

Taiwan Is Not A Small Ukraine

THE UKRAINE CRISIS has drawn inevitable — but ill-founded — comparisons with Taiwan.

More strident nationalist voices in China are calling on Beijing to mimic Moscow’s ‘liberation’ line and take the opportunity of the West’s diverted attention to reclaim the island by force. They interpret the United States’ unwillingness to send troops to Ukraine as a systemic weakness that would mean Washington would similarly not intervene on Taipei’s behalf.

That would be a misunderstanding of the United States’ intent, and of the capability of the People’s Liberation Army to deliver a fait accompli by scoring a military victory before US forces arrive.

Nonetheless, earlier in the week, Taiwan’s President Tsai Ing-wen ordered the armed forces to increase their surveillance and strengthen their combat readiness. She also instructed security services to be alert for information warfare.

In this Bystander’s view, covert infowar operations to demoralise Taiwan are more likely than a military assault. So, too, a stepping up of the PLA Airforce flights across the median line in the Taiwan Strait and into Taiwan’s air defence identification zone.

Nor should some action against Taiwan’s small islands near the mainland coast or more distant ones in the South China Sea be discounted. China tried this twice in the 1950s, once successfully, once not.

The islands would be difficult for Taipei to defend, so the costs for China in taking them would likely be low and success more likely.

Geography and meteorology make a military invasion of Taiwan more challenging than an invasion of Ukraine. PLA forces would have to undertake a combined amphibious and airborne landing. Crossing the often storm-tossed waters of the Taiwan Strait would be far more difficult than sending tanks and infantry rumbling across a land border with secure supply lines in their wake, and doubly so for an army that has not been battle-tested since 1979.

The military uncertainty would raise the political risk of an attack on Taipei so close to the Party Congress due in the autumn. Beyond the near certainty that the United States and its allies would come to Taipei’s aid militarily, Western sanctions imposed in response to such an attack would be significantly more severe than those related to Xinjiang and Hong Kong.

President Xi Jinping is walking a geopolitical tightrope over Ukraine. He will likely be cautious and absorb the military and political lessons from how Russia’s invasion plays out.

Once the Congress is passed, and, assumedly, Xi has consolidated his control and secured a third term, an invasion of Taiwan in the medium to long term would become more likely. A favourable and low-cost outcome for Russia in Ukraine or a perceptible weak Western response would shorten the time horizon.

Biden Will Sustain Strong US Ties With Taiwan But With Little Fuss

CHINA’S CONDEMNATION OF the outgoing Trump administration’s latest provocation over Taiwan — lifting long-standing restrictions on contacts between US and Taiwanese officials — has been tetchier than usual albeit along the customary lines of argument.

Beijing’s spokespeople no longer feel any constraints on piling in on the Trump administration, and did so again today in response to the newly declassified US Indo-Pacific strategy document. However, in both cases Beijing is sending a message to incoming Biden administration about its red lines — and they do not come much more rufescent than Taiwan.

President-elect Joe Biden is likely to tone down the US rhetoric in support for Taiwan, but not necessarily the substance. He will want to stabilise cross-Strait relations and, if possible, return them to the status quo as it was before the Trump administration took office. Kurt Campbell, the veteran US diplomat expected to become Biden’s ‘Asia tsar’, has hailed that state of affairs as ‘the greatest unclaimed success in the history of U.S.-Chinese relations’.

After four years of outspoken support for Taiwan from the Trump administration, US-China relations are in a very different place.

Nonetheless, Biden will support continued US arms sales to Taiwan. During his campaign, Biden said US policy should be to help Taiwan resist China’s expansion of its power-projection capabilities in part to subjugate Taiwan. This should mean that the Biden administration will follow Trump’s in supplying arms and equipment to strengthen Taiwan’s maritime and aerial surveillance capabilities, and to increase its ability to ‘hang on’ in the event of an invasion until substantial US force arrives. US war gaming scenarios show a quick capitulation as a critical element in ‘losing’ Taiwan.

Biden is also unlikely to push to repeal the Taiwan Travel Act of 2018, which lets US and Taiwanese officials to go on official trips to meet each other, rather than making ‘informal’ visits. US UN ambassador, Kelly Craft, was due to go to Taiwan today but the trip was cancelled as part of halting all international travel by senior US officials for domestic reasons. Biden will, however, avoid irritating Beijing in this regard by not trumpeting such visits in the confrontational manner of the Trump administration.

An acid test of how far Biden will go in backing Taipei is whether he puts the United States’ weight behind Taipei’s effort to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This is the successor to the Trans-Pacific Trade Partnership (TPP), which Trump pulled out of, and counterweight to the Regional Comprehensive Economic Partnership (RCEP) created in November, with China as its largest participating economy.

Biden will also likely dampen expectations of a free trade deal with Taipei, although one is gathering some support within the US Congress. Biden’s US Trade Representative, Katherine Tai, who as it happens is of Taiwanese descent and her boss will have similar reasons for being unenthusiastic about a US-Taiwan free trade agreement as Trump’s US Trade Representative, Robert Lighthizer. He held out against opening negotiations for fear of jeopardising other US-China issues, in his case, Trump’s Phase One trade deal with Beijing. Tai and Biden will have to pick up that deal, whose trade component runs to the end of his first year, and start on the contentious issues such as intellectual property protection that Trump ducked as too difficult.

Nonetheless, trade between the two economies will be underpinned by the US-Taiwan Economic Prosperity Partnership Dialogue that Trump inaugurated in November, and Biden will let continue. The focus areas will be health care, supply chain security, energy, infrastructure investment and 5G development.

The last two particular stand out. President Tsai Ing-wen has sided with the United States against ‘untrusted IT vendors’ such as Huawei and ZTE. Biden is unlike to change US policy on 5G security.

Meanwhile, Taiwan will join the United States, Japan, Australia in multilateral infrastructure investment in the region to counter China’s Belt and Road Initiative.

From there to facilitating Taipei’s greater international participation more generally is where it will get difficult for Biden. In March 2020, Trump signed the Taiwan Allies International Protection and Enhancement Initiative Act, which requires the US government and its officials to promote Taiwan’s international participation. It had passed the US Congress with bipartisan support. If anything, Taipei’s assiduous burnishing of its democratic credentials, including its support for protestors in Hong Kong, has won Taipei more friends in Washington since.

Nonetheless, the act has had little demonstrable effect now it is law. Beijing’s relentless chipping away at the number of countries that recognise Taiwan diplomatically has been far more effective. Trump’s main effort was to include Taipei in the annual World Health Assembly (WHA), the decision-making body of the World Health Organization (WHO, which did not succeed. Biden will have some breathing space with the WHO, as the United States will itself have to rejoin it first.

If Biden’s proposal to hold a Summit of Democracies comes to fruition, he will have to take a hard decision on whether Taiwan is invited as an observer or as a formal participant, which would imply statehood status. The latter would be closer to a red line than Beijing would tolerate or Biden would be comfortable with.