Taiwan’s missile launch feeds into steadily worsening relations with the Mainland. Should investors in Formosa be concerned?
On July 1st, as the Chinese Communist Party celebrated its 95th anniversary, a Taiwanese patrol boat accidentally fired a supersonic anti-ship missile into the Formosa Strait during a drill inspection. The missile struck a Taiwanese fishing vessel, killing its captain. Mainland China quickly expressed concern and demanded an explanation.
Many observers worry that the incident has further raised tensions between the mainland and Taiwan. The misfire also highlights the potential for crisis instability and incidental escalation between the two states. This article investigates the risks that recent developments in cross-strait relations pose for investors with a stake in cross-strait commerce and the Taiwanese economy.
Cross-strait relations and crisis instability
Beijing-Taipei relations are already in poor shape. Heightened nationalism in the mainland and growing alarm in Taipei over economic dependence on the mainland are driving a significant wedge between the two governments. The election of the Democratic Progressive Party’s presidential candidate Tsai Ing-Wen in 2016 on a platform emphasizing greater economic autonomy from China in particular has set relations on edge. Most recently, the Beijing suspended talks with Taipei after Tsai failed to reaffirm the 1992 Consensus on cross-strait relations.
Taiwan’s misfiring will only further degrade cross-strait ties. The mainland State Council’s Taiwan Affairs Office has already declared that the incident will “severely affect” relations. The incident will foster greater suspicion toward Taiwan among the mainland’s political elite and broader public. Beijing will likely use this misstep as ammunition to more stridently oppose US arms sales to Taiwan and future military exercises, drills, and weapons-tests conducted by Taipei.
The missile launch also underscores the continued risk of crisis instability in the Strait of Formosa. Accidents like this misfire can and do happen, whether driven by human error or technical malfunctions, and these accidents can quickly escalate into armed confrontation. If Taiwan’s missile had struck a mainland vessel, for instance, Taipei could have found itself coping with a major crisis which could in turn escalate in a militarized conflict. This would likely draw in the US and might lead to a broader regional confrontation.
Without adequate communication and stronger command and control on both sides of the strait, the risks of crisis instability will continue to loom over the Strait of Formosa. Thankfully, however, the short-term consequences of this mishap have not been too destabilizing. China has not overreacted, although it has issued a stern demand that Taiwan explain its actions. Taipei also seems duly shaken by the event and serious about investigating and addressing the personnel errors that led to the error.
The stakes: trade, investment, and tourism
The quality of cross-strait relations has significant consequences for investors with a stake in the Taiwanese economy. Heightened tensions will likely impede greater economic cooperation between the two states while increasing the risk of punitive economic measures by the mainland against Taiwan. In the worst-case scenario, conflict across the strait could completely curtail commercial interaction and devastate the Taiwanese economy. In particular, investors with stakes in cross-strait trade, Taiwanese investment in the mainland, and Taiwan’s tourism industry could all suffer as a result.
Taiwan is increasingly dependent on trade with China – it consumes a large quantity of Chinese goods and China is its largest export market. An estimated 40% of all Taiwan’s exports go to China. In particular, exporters of electronic equipment, technical and medical equipment, civilian nuclear equipment, plastics, organic chemicals, copper, iron, and steel would suffer if cross-strait ties continue to degrade.
Source: Bureau of Foreign Trade, Taiwanese Ministry of Economic Affairs
Taiwan also has a considerable amount invested in the mainland – investments that could be put at risk by deteriorating cross-strait ties.
Source: Investment Commission, Taiwanese Ministry of Economic Affairs
Taiwan’s substantial tourism industry could also be adversely affected if tensions continue to deteriorate. The bulk of tourists in Taiwan come from the mainland, these numbers have begun to decline in the aftermath of Tsai’s election and downgraded cross-strait relations.
Source: Tourism Bureau, Taiwanese Ministry of Trade and Commerce
Cross-strait relations in flux
Investors should continue to monitor cross-strait developments carefully. The long-term prospects for stable Sino-Taiwanese relations are in flux. Taiwan’s growing dependence on China has helped reduce the chances of conflict but also is generating mounting concern and backlash within Taiwanese society. This sentiment was most vividly highlighted during the 2014 Sunflower Student Movement.
Hong Kong’s recent tensions with the mainland are also feeding into Taiwan’s desire to distance itself from the mainland. The mainland’s growing interference in Hong Kong politics and constraint of free speech in particular are reducing the appeal of a “one country, two systems” structure for Taiwan.
Furthermore, the US informal deterrent commitment to Taiwan, long considered a staple of cross-strait stability, is being called into question. The policy of retrenchment advocated by a leading US presidential candidate in particular alarms America’s partners in Asia and could dramatically shift the cross-strait balance of power.
