Five things to watch in Taiwanese politics in 2023

王烜

• EIU expects Lai Ching-te, the current Taiwanese vice-president and chair of the ruling Democratic Progressive Party (DPP), to win the presidency in the national elections scheduled for January 2024.
• Mr Lai has previously espoused pro-independence views. Although he has moderated this stance in recent years, we expect elements of the Taiwanese population to be sceptical of his future policy ambitions, which could influence his popularity.
• If Mr Lai fails to clinch the DPP's presidential nomination, we would expect Su Tseng-chang (the recently resigned premier) to serve as the DPP's candidate. However, this outcome lies beyond our forecast.
• The mayor of New Taipei City, Hou Youyi, is likely to be the nominee of the opposition Kuomintang (KMT). Mr Hou is popular, and would probably prompt a tight race between himself and Mr Lai. Regardless of the candidates, however, we retain our expectation of a presidential (and legislative) victory for the DPP, given the KMT's difficulty in shedding its China-friendly image.
• China will respond with hostility to electoral dynamics in Taiwan, particularly if—as we expect—public opinion starts to turn more obviously pro‑DPP in the months ahead of the contests. We caution companies to prepare for an extended period of regional volatility, which is likely to persist into early 2024.
  

Campaigning for Taiwan's presidential and legislative elections in January 2024 will kick off in early 2023, with the presidential primary season expected to commence in the second quarter. Political dynamics in Taiwan point to another geopolitically volatile year, however, with China and the US watching the electoral outcomes closely. What key themes should Taiwan-watchers be following in 2023?

1: Who is Lai Ching-te?

Mr Lai, the current vice-president, assumed the chair of the DPP on January 15th—a move widely interpreted as laying the groundwork for a presidential bid (as has long been our core forecast). These developments came after the previous DPP chair—Tsai Ing‑wen, the Taiwanese president—resigned her post in November, following her party's historic defeat in local elections that month.

Mr Lai is perhaps best-known for publicly describing himself as a "pragmatic worker for Taiwanese independence" in 2017. This raised eyebrows, both domestically and internationally. Although he has moderated these views in recent years, there is lingering suspicion among the Taiwanese public, as well as within the Chinese and US governments, that Mr Lai harbours pro-independence views.

A formal declaration of independence by Taiwan would spark an immediate attack by China, which would carry the risk of spiralling into a global conflict involving the US (and, probably, its security partners). Despite these perceptions, we would not expect Mr Lai, as president, to pursue this path. He has stated publicly that he would maintain Ms Tsai's pro-status quo foreign policy stance, whereby Taiwan already functions as an independent nation (without having to declare itself as one officially).

2: Why would a Lai presidency matter?

Mr Lai's embrace of (and willingness to maintain) Taiwan's current diplomatic status quo will not assuage tensions across the Taiwan Strait. China's hostility towards Taiwan increased during Ms Tsai's two terms, even as she pushed back against pro-independence views within the DPP. This strategy was ultimately counterproductive: the more China sought to pressure Taiwan, the more it encouraged officials from the US, Australia, Japan and the EU to deepen their (unofficial) links with the island. As China reacts negatively to an expected presidential victory for Mr Lai, these diplomatic dynamics will persist under his administration, which will underpin a deepening of Taiwan's own relations with these same Western countries.

Domestically, Mr Lai's leadership of the DPP may give the party hope of uniting around a new standard-bearer. This may help it to brandish a new image to win back voters, particularly after the damaging November midterm elections; party morale has suffered since those contests, and the DPP has lost two by‑elections for public office. However, we are not yet convinced that his control over the DPP will yield stronger policy attention to issues such as stagnant wages, weak job growth and Taiwan's narrowing industrial base—areas of popular concern that will emerge as key political topics in the upcoming elections, even if the electoral narrative is dominated by cross-Strait issues.

3: If not Mr Lai, then who?

It is not inconceivable that broad swathes of the Taiwanese population could regard Mr Lai's association with pro-independence views as dangerous. While not our core view, if Mr Lai were to perform more poorly than we expect in public opinion polls (and the DPP primary), it is likely that the DPP leadership would anoint an alternative candidate as the party's nominee.

Mr Su is best placed in this regard, and we interpret his resignation as premier, in mid-January, as affirming his presidential ambitions. Nevertheless, we attach a low risk of him clinching the DPP nomination. In addition to Mr Lai's greater popularity, Mr Su is heavily associated with Ms Tsai, whose job approval ratings have plummeted since the midterm elections (standing at around 35‑40% in mid-January). It will be difficult for him to break this association, which we expect to erode his attractiveness in the coming months.

Should Mr Su emerge as the DPP nominee, however, we would raise our geopolitical risk outlook for Taiwan; the ex-premier has previously been sanctioned by China as a "Taiwan separatist" (China has not extended this branding to Mr Lai), hinting that a government led by Mr Su would usher in a period of stronger cross-Strait turbulence than we currently expect.

4: Who should we watch from the KMT?

The KMT has three front-runners for its presidential nominee. These include Terry Gou, the founder of Foxconn and a previous presidential primary candidate in 2020, and Eric Chu, the KMT chairman. However, we expect Mr Hou, the mayor of New Taipei City, to be best placed to secure the party's candidacy.

Mr Hou is the only one of the three front-runners currently trumping Mr Lai in Taiwan's presidential popularity polls. Mr Hou's popularity may reflect his long-standing unwillingness to wade into thorny political topics, preferring instead to cultivate an apolitical, "common man" image. In recent weeks, however, he has voiced comments that are seen as criticising both the US's role in worsening cross-Strait relations and Taiwan's worrisome status as a "pawn of great powers". This fits with mainstream KMT rhetoric, which he had hitherto largely eschewed. If Mr Hou were to run a successful campaign against Mr Lai, he would need to distance himself from the KMT's positions on cross-Strait affairs (namely, its adoption of a China-friendly, US‑sceptic stance). We expect him to struggle to do so, which will ultimately undermine his (and his party's) electoral prospects.   

5: How will China react to these events?

These electoral dynamics do not change our assumption of a DPP victory in January 2024. In the run-up to the contests, we expect China to enhance its military, diplomatic and economic harassment of Taiwan, particularly if—as we expect—popular sentiment becomes increasingly pro‑DPP. This will include live fire exercises, aerial intrusions into Taiwan's air defence identification zone and other tactics meant to intimidate the electorate. Consequently, we advise companies with operational or asset exposure to Taiwan (or the Taiwan Strait) to prepare for a sustained period of volatility in the coming quarters.

Our expectation of a DPP electoral victory suggests that cross-Strait volatility will surge in the first half of 2024, remaining elevated until around the time the next president formally takes office, in May. Tensions should recede thereafter as China adjusts to the new Taiwanese political reality.