SINGAPORE- Taiwan's Vice President Lai Ching-te secured the presidency but lost his party's control of parliament. That could spell trouble for his ambitious economic agenda and tough stance on China. But it could also ease tensions between the island and the mainland and prevent a global crisis in the semiconductor industry.
Lai, who leads the pro-independence Democratic Progressive Party (DPP), has been a thorn in China's side for years. China considers Taiwan part of its territory and has threatened to use force to reunify the island. Lai has defied China's pressure and reaffirmed Taiwan's sovereignty, but he has also denied seeking formal independence.
China was not happy with Lai's victory, but it did not lash out at him. Instead, it tried to undermine his legitimacy by saying that most voters did not support him. Lai, for his part, gave a "balanced" victory speech, calling for cooperation but also vowing to protect Taiwan from China's intimidation.
This may be a sign of pragmatism on both sides and a relief to world markets, which feared a military conflict over Taiwan. Such a conflict could be disastrous for the global economy, especially the technology sector.
Taiwan is a powerhouse of semiconductor manufacturing, producing 60% of the world's chips and 90% of the most advanced chips. These chips are used in everything from smartphones and laptops to cars and airplanes. Taiwan's largest company, Taiwan Semiconductor Manufacturing Co (TSMC), is Asia's most valuable publicly traded company and a major supplier to Apple, Huawei and many others.
If China were to impose sanctions on Taiwan, or worse, invade it, the global supply of semiconductors would be severely disrupted. This could cripple the technology and artificial intelligence industries, affecting millions of consumers and businesses around the world.
But while Lai's victory could avert a geopolitical crisis, it could also create a domestic one. His DPP lost its majority in parliament, making it harder for him to pass his economic policies and reforms. He faces strong opposition from the Kuomintang (KMT) and the Taiwan People's Party (TPP), which are more friendly to China and favor closer ties with the mainland.
This could lead to policy paralysis and uncertainty, which could hurt Taiwan's stock market and currency. The market is already up 25% over the past year, and investors may be tempted to take profits and reduce their exposure to Taiwan. The Taiwan dollar may also weaken as the political stalemate reduces confidence in the economy.
Investors will have to wait and see how Lai deals with the new parliament, which opens on Feb. 1. His cabinet will take office on May 20. In the meantime, they can expect more volatility and noise as Taiwan, China and the U.S. exchange words and gestures over the island's future.
The bottom line is that Taiwan's election is a mixed blessing for investors. It could reduce the risk of war with China, but it could also increase the risk of a standoff in Taiwan. It could protect the global semiconductor industry, but it could also hinder Taiwan's economic growth. It could be a win for democracy, but it could also be a loss for stability.