Dr Tsai Ing-wen won Taiwan’s presidential election on 16 January 2016 - her pro-independence Democratic Progressive Party (DPP) defeated the ruling Nationalist Party/Kuomintang (KMT) and captured the majority in the legislative body for the first time in Taiwan’s history. Tsai, the first female head of state in the Chinese-speaking world, referred to as Taiwan’s Angela Merkel for her sharp reason and determination, must recalibrate Taiwan’s economy and avoid colliding with China on sensitive issues. She is expected to encounter an array of difficult challenges in cross-straits and foreign relations that may be determined by how Tsai handles the intricate and delicate aspects of the 1992 Consensus. The more grueling test awaiting Tsai is Taiwan’s petrified economy with its systematic malfunctions that has become an impediment for the pursuit of any meaningful growth.  

Cross-Straits Relations

Tsai’s campaign platform is to maintain the status quo in cross-straits relations. China has claimed sovereignty over Taiwan, which it considers a renegade province. The 1992 Consensus, the pillar of the current government that has brought peace and stability to Taiwan-China relations in the past eight years, receives no recognition from either Tsai or her party. China has so far showed patience for Tsai’s endorsement, but pressure is expected to mount in the period leading to the inauguration.

The dual meanings of the 1992 Consensus (hereinafter ‘the Consensus’) provide just enough ambiguity for both China and Taiwan to avoid the tenacity of the ‘One China’ issue. For China, the Consensus means ‘One China’, but for Taiwan, it means ‘One China, Respective Interpretations (that can either mean the People’s Republic of China or the Republic of China [Taiwan]).” Upon a careful perusal there exists no evidence that both sides inscribed the Consensus as an agreed defined term because it was a mere understanding deriving from the pressures of grappling with the ‘One China”’ principle in cross-straits exchanges in 1992. Yet, the recognition of the Consensus somehow becomes China’s precondition for engaging with Taiwan on almost every issue as it has become the domestic version of the ‘One China’ policy. President Ma Ying-jeou and the KMT’s embrace of the Consensus has attracted political and economic favours from China, but voters in this election have rejected these ever-closer ties with China for fear that it will dilute Taiwanese identity and lead to eventual reunification with mainland China.    

Sensing the discomfort of voters, Tsai has only indicated that the Consensus can be “a topic of discussion, but not a precondition” in negotiating with China. This deviation from her predecessor’s position and whether Beijing will accept anything less than the Consensus requires further observation.    

Diplomacy

While Tsai may be able to cope with China’s pressure on the Consensus given her wide margin of victory, her room for manoeuvre in diplomacy is very limited. China’s international version of ‘One China’ constitutes the more enhanced-1992 Consensus: there is one China, and that is PRC, and ‘Two Chinas’, ‘One China, One Taiwan’, or Taiwan’s independence is strictly forbidden. Before Ma assumed the presidency in 2008, Taiwan and China had engaged in a long and expensive diplomatic war. Ma’s acceptance of the Consensus brought a truce in the checkbook diplomacy and maintained diplomatic allies that recognised Taiwan. With China’s increasing economic might, Taiwan’s allies were rumored to approach Beijing but received no approval from Beijing as it feared that any move would damage cross-straits relations. With Tsai’s negation of the Consensus, China may start to welcome any of Taiwan’s diplomatic allies seeking to establish diplomatic relations with China. To maintain formal relations with diplomatic allies is a top priority for the new president as Taiwan’s citizens have long aspired for more exposure in world affairs.      

On top of the potential loss of diplomatic allies, Taiwan’s participations in United Nations specialised agencies may also be in jeopardy. The acknowledgment of the Consensus has expanded Taiwan’s involvements in UN organisations. Taiwan has been an observer of the World Health Assembly since 2008. This annual association is based on China’s letter asking for Taiwan’s attendance to the Secretary General of the World Health Organisation. Upon the receipt of China’s letter, the Secretary General issued Taiwan’s invitation letter. This procedure is specifically designed as a check in case of any possible cross-straits turmoil - China can discontinue Taiwan’s participation as punishment. A similar mechanism also applies to Taiwan’s ‘guest’ status in the International Civil Aviation Organisation Assembly. The 69th Annual World Health Assembly is scheduled to convene on 23 of May 2016, just days after Tsai’s inauguration. Whether Taiwan can continue to participate in the conference may serve as a litmus test on how China decides to deal with Taiwan. If China’s letter of approval comes to the World Health Organisation without Tsai’s expressive concession on the Consensus, China is likely to take a flexible stance on Tsai. Should Taiwan’s presence be denied this year, it could be indicative that China will take a tough position in limiting Taiwan’s international space.

Taiwan’s other potential diplomatic challenges have to deal with the territorial disputes on two fronts. China, Japan and Taiwan all claim the right over the Diaoyutai/Senkaku Islands. Tsai has continued and affirmed this claim. In the South China Sea, Taiwan holds the Taiping/Ibu Aba Island. With multiple nations claiming their sovereignty over islands, South China Sea has become a trigger for coming conflicts. The magnitude of territorial disputes may be as much trouble as losing diplomatic allies or international participation.    

Economy

Tsai and the DDP are able to come to power largely because of economic issues. All estimates indicate that the economy will grow between 1.5 and 3 per cent. This range of low growth has become common as Taiwan has moved from a developing to a developed economy. Yet, most citizens are still nostalgic about the glory of those high-growth days in the past. Tsai will have to come up with a drastic change in policies to revitalise the economy.  

Taiwan’s economy faces serious structural inadequacies. It hosts three areas of high concentration: on export, on China, and on Information and Communication Technology (ICT) products. Taiwan has long depended on export for growth and about a quarter of this export goes to China. With the speculation of gradual slowing down of China’s economy, Taiwan’s export is likely to shrink as well. A large number of Taiwan’s manufacturing bases have shifted to China whose labour and environmental regulations are rather lax. The remaining ICT industry produces Taiwan’s most important export item. However, Taiwan’s high-tech firms are facing increasing competitions and buyouts/takeovers from Chinese companies backed with state capitals. It is important to note that cross-straits affinity does bring some economic benefits; however, it is generally viewed that only the KMT gentry or wealthy businessmen are the exclusive beneficiaries.  

Salary stagnation seems to be have been the most contending economic issue in the election. Taiwan’s current real salary has fallen back to that of 16 years ago. There are several factors contributing to this. First, in its transformation to a market economy, Taiwan does not host other high value-added industries other than the hi-tech industry. So the economy is closely tied to the up and downs of the hi-tech industry. When challenged by China, South Korea and other emerging economies that profit from regional free trade agreements, Taiwan’s products are becoming less competitive relative to price. The education system, with most emphasis on memorisation but not cultivating innovation, fails to produce high calibre entrepreneurs to take advantage of the new landscape of the globalising economy.

Second, Taiwan’s business has often prides itself on cost-down as a successful business model. Outsourcing has become common to keep the payroll low. With the hollowing-out of manufacturing jobs, Taiwan’s workers can only go to traditionally low starting salary industries such as hospitality. Finally, the government often sides with businesses and labour unions are almost non-existent, leaving workers with little leverage in pay negotiations. With little prospects for better material lives, many Taiwanese youth are taking their expertise and skills abroad; consequently, the island suffers a serious brain drain. Furthermore, low wage compounded by high housing prices results in late marriages and the lowest birthrate in East Asia, paving the way for an aging society with welfare burden and possible labour shortage.

Tsai’s campaign calls for a diversified export market with Southeast Asia and India as potential partners. Taiwan also plans to join the Trans Pacific Partnership (TPP) as a means to open markets for both economic and strategic reasons. But the entrance to the TPP is not without a price. The first step is to secure the support of the US whose economic and military superiority has backed Taiwan when other nations adhere to China’s strict ‘One China’ principle. And the very same prowess is behind the TPP with the ‘Back to Asia’ policy. American officials have frequently asked Taiwan to open the market for importing American pork. American meat often contains ractopamine, a feed additive to grow more lean meat, which may cause cancer given excessive intake over a long period of time. Taiwan had already suffered a political blow when allowing the import of American beef. The question is not whether but when Tsai is willing to expend her political capital on the pork issue in order to secure the greater economic and strategic interests of the TPP. Also, the TPP will impose higher labour and environmental standards on Taiwan that may further increase the cost of conducting businesses in Taiwan. Another way to encompass Southeast Asian markets is by joining the China-led Regional Comprehensive Economic Partnership (RCEP). But this option can only be feasible when Tsai concedes on the ‘One China’ issue.  

Tsai has also identified five areas, such as green technology or defence that Taiwan should focus on in order to chart new directions, to reduce the dependence on ICT, and to increase salaries for workers. These are the long-term goals that Tsai will have to implement with policy direction, guidance and resources.  

Conclusion

Tsai will be facing complex and difficult cross-straits, diplomatic and economic challenges at the moment of her inauguration or even before if China decides to undermine her presidency.  Any mishandling of the 1992 Consensus will lead to a series of chain reactions in diplomacy. Taiwan’s economy needs a whole new model to transform itself as it faces increasing competitions from China and emerging economies. The most important yet difficult challenge here would be to address possible increase in salaries and to bring hope to the youth of Taiwan.