- DPP's third term implies continuity in innovation-focused industrial policies
- A divided legislature poses challenges, …
- … with KMT and TPP differing from the DPP in energy and trade approaches
- Beijing's termination of ECFA tariff concessions indicates cross-strait tensions, …
- … but KMT and TPP support for renegotiation may delay escalation
Taiwan's presidential and legislative elections, held on January 13, concluded with the victory of Democratic Progressive Party (DPP) candidate Lai Ching-te, who secured the presidency with 40.05% of the popular vote. Kuomintang (KMT) candidate Hou Yu-ih and Taiwan People’s Party (TPP) candidate Ko Wen-je secured 33.49% and 26.46% of the votes, respectively.
In the legislative election, the KMT secured 52 seats in the 113-seat legislature, while the DPP closely followed with 51 seats. The TPP also gained 8 seats. None of the parties reached the 57-seat threshold required for a majority.
Policy impacts
With the DPP securing a third term in the presidency, many observers anticipate the key economic policies pursued by the government over the past eight years will continue. Lai's major policy proposals align closely with the outgoing president, Tsai Ing-wen. Emphasizing innovative economic models, Lai aims to shift away from the traditional OEM manufacturing model and focus on developing cutting-edge industries like semiconductors and AI. He envisions an ambitious transition to green energy, entirely replacing nuclear power with renewable energy by 2026. Meanwhile, Lai is committed to diversifying Taiwan's trade and investment, steering away from mainland China. This includes efforts to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and strengthen ties with Southeast Asia through the "New Southbound Policy."
Due to the divided nature of the legislature, the smooth passage of government budgets and economic policy proposals requiring legislative approval may be challenging compared to the previous eight years. The KMT and TPP differ notably from the DPP in energy and trade policies. Both Hou and Ko advocate for an extended use of nuclear energy as part of Taiwan's energy mix. Additionally, they support further trade engagement with mainland China, including reopening negotiations on the Economic Cooperation Framework Agreement (ECFA) and participating in the Regional Comprehensive Economic Partnership (RCEP).
The relatively balanced election outcomes also indicate a lower risk of deterioration in cross-strait economic ties. In December, Beijing announced the termination of tariff concessions for 12 Taiwanese petrochemical products, effective January 1, 2024. Moreover, the Ministry of Commerce signaled in January that it is contemplating the suspension of tariff concessions for more Taiwanese products under ECFA, spanning agricultural and fishing, machinery, auto parts, and textiles. Considering that both the KMT and TPP support renegotiating ECFA, there is a possibility that Beijing will exercise patience before escalating trade tensions in the short term.Top of Form
Forecast implications
We maintain our macro projections, keeping GDP growth forecasts at 3.5% for 2024 and 2.6% for 2025. Short-term growth drivers will predominantly stem from the cyclical recovery in the global semiconductor sector, propelling Taiwan's exports and manufacturing investment this and next year. There is potential for an uptick in government consumption and public investment during the forecast period, buoyed by cross-party consensus on strengthening education, healthcare, and elderly care systems and constructing additional social housing to stabilize property prices.
A further suspension of tariff concessions by China under the ECFA could inflict targeted damage on specific Taiwanese industries. Given the substantial reliance on mainland exports, petrochemicals and machinery would be particularly affected. Agricultural exports also face notable impacts due to significantly higher tariff rates when entering the Chinese market without ECFA.
We expect the overall impact on Taiwan's economy to be limited. In 2022, ECFA-covered Taiwanese exports amounted to USD 20.5 bn, constituting 17% of Taiwan's exports to the mainland and 4% of its total exports. The average tariff rate on these products before ECFA implementation in 2009 was approximately 9%. Assuming a price elasticity range of 2-5, we project the ECFA termination to result in a GDP growth loss, which is estimated to be 0.3-0.7 ppt.
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