Taiwan’s new president inherits old economic woes

January 18, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Taiwan’s new leader will inherit some old economic woes. The island’s fortunes are uncomfortably tied to the tech industry and China. While the electoral triumph of Tsai Ing-wen’s Democratic Progressive Party (DPP) reflects deep distrust of the mainland, the next president must keep Taiwan’s giant neighbour onside.

Local giants like TSMC and Hon Hai and many smaller manufacturers are pivotal to the global supply chain for iPhones and other high-tech kit. But demand is now softening. That ties into a second problem: the slowdown in China, which supplies two-fifths of Taiwan’s export earnings. That is why 2015 was its hardest year since the financial crisis. Officials expect GDP growth of just 1.1 percent, while exports plunged by 10.2 percent.

Tsai’s campaign focused on the inequality and housing shortages that fed some of the dissatisfaction with the ruling Kuomintang (KMT). She plans to build affordable houses, lift the minimum wage, reform pensions, and scrap nuclear power. Reconciling all that with a vow of fiscal responsibility will be hard: presumably, as Citigroup economist Adrienne Lui says, taxes on the rich need to go up.

China regards Taiwan as a renegade province, and so the independence-leaning DPP’s victory introduces new political uncertainty to what is already a volatile region. Even slightly frostier relations could lead to big problems – such as limits on mainland tourists, or pressure from Beijing to exclude Taiwan from international deals. However, while Tsai hasn’t endorsed the “1992 consensus” – a fudge agreeing there is only one China, but not what that means – she favours the status quo, as do most Taiwanese.

If anything, even deeper economic ties could be useful. Ratifying a free-trade deal on services with China would pave the way for deals with other countries and regions, which have held back for fear of annoying Beijing. Such an open attitude plus an easier approach to spending could yield a decade of 3-5 percent GDP growth, Societe Generale economists say, versus 0-1 percent growth under an isolated, penny-pinching scenario.

But the same services agreement has already sparked protests which helped undermine the KMT. Taiwan’s economic prospects will depend on Tsai’s ability to navigate between a wary electorate and an equally suspicious China.

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