October 16, 2024 • 28 mins
Taiwan's president Lai Ching-te gave his first National Day address last week, vowing he'd stand up to mainland China while maintaining the status quo of peace and stability. The speech elicited a swift response from Beijing, reminding investors of the ongoing geopolitical risks in the region.
David Sacks, Asia Studies Fellow at the Council on Foreign Relations, speaks with John Lee from Bloomberg Intelligence and Katia Dmitrieva from Bloomberg News about key takeaways from the speech and what it means for Taiwan's red hot equity market.
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Speaker 1 (00:02):
You are listening to Asia Centric from Bloomberg Intelligence, the
podcast that explores the big ideas and trends moving money
across the region. My name is Kadid Miitrieva with Bloomberg News.
Speaker 2 (00:13):
In Hong Kong, and I'm John Lee from Bloomberg Intelligence.
The President of Taiwan liking To last week gave it
an important address to his people. The Annual ten tenths Speech,
as it's called, lays out the leader's vision for the
impacts go beyond its borders.
Speaker 1 (00:30):
Yes, it's always closely watched by people around the world,
but especially in the US and China as a kind
of gauge of how relations will shape up in the
coming years with US. To discuss takeaways is David Sachs,
Asia Studies Fellow at the Council on Foreign Relations.
Speaker 3 (00:47):
Welcome David, thanks for having me now.
Speaker 1 (00:50):
The Annual ten tens Speech as it's called, it's important
not just for Taiwan, but also has global implications and
it acts as a guide for US China relations as well.
What were your takeaways from the speech this year?
Speaker 3 (01:05):
Well, if you compare President Lie's Double ten speech to
his inaugural which was delivered in May, I think that
the consensus is. He took a step back on a
few of those points. So, for instance, in his inaugural address,
he called out China by name and was very direct
in his criticisms of China. There was no such direct
(01:25):
criticism in this Double ten speech. Instead, he talked very
vaguely about the threat that authoritarianism poses around the world.
Now there were also olive branches to Beijing, so he
talked about a willingness to work with China on global
issues like climate change and infectious disease, and some members
(01:46):
of Li's administration pointed to a line about hoping that
China will live up to the expectations of the international
community and take up its responsibilities as another signal of
goodwill that he wasn't closing the door on China and
prejudging it, so to speak, as kind of a revisionist power,
(02:07):
but actually expressing hope that China could find its way
in the international system without being disruptive. So those were
some signals that observers in the United States looked to,
as well as reassurances that he would seek to maintain
the status quo, but those were clearly not reciprocated by
Beijing and not recognized by Beijing. They responded to his
(02:31):
Double ten speech by announcing Joint Sword B, a large
military exercise. There was a continuation of Joint Sword A,
which it introduced after his inaugural address. So I think
that the quandary, or the dilemma for observers is that,
on the one hand, I think many believe that this
was a more moderate speech, but on the other hand,
(02:53):
there wasn't really a moderation in Beijing's response, And so
where does cross straight relations go from there?
Speaker 1 (03:00):
So, David, why do you think China stepped up these
military exercises given as you say, President Lai extended these
kinds of olive branches in his speech.
Speaker 3 (03:12):
Yeah, so, you know, we could all analyze the text
of what Lai said, and I'll do that very briefly.
He said that the Republic of China, which is Taiwan's
formal name, and the People's Republic of China are not
subordinate to each other. That's something that the PRC takes
umbrage to, but it's not a new formulation, his predecessor
(03:32):
saying when said the same thing during her twenty twenty
one Double ten speech. He also talked about how essentially
the name of Taiwan didn't really matter. Some people call
it the Republic of China, some people call it the
Republic of China Taiwan, and some people just call it Taiwan.
And of course, you know, for China, that is akin
(03:53):
to talking about independence and a separate identity internationally for Taiwan. Now,
I'll take maybe a bit of a contrarian view on that.
I think what Lie is trying to signal is actually
that he's not going to pursue a formal name change
of the island through the legislature or through other means
that would cause a crisis. And he's essentially saying that
(04:14):
he wants to set aside those divisive issues in the
in favor of national unity. So that's my own view,
but China clearly does not like that formulation. But you
know what I would argue more broadly is that regardless
of what Lie says, China will respond the way that
it has responded. It has a deep distrust of Lie,
(04:36):
and you might even say that it has a visceral
hatred of Lie. This goes back to a statement that
he made years ago that he was a quote pragmatic
worker for Taiwan independence. Now, he said that before he
was the vice president, and obviously before he was running
for president. But if you meet with any Chinese scholar
or official and they bring up lie, they always remind
(04:59):
you of that common that he made now when he
was running for president, and since he's assumed the presidency,
he's had a few other lines that have raised eyebrows
in Beijing. For instance, on the campaign trail, he talked
about how his dream would be to visit the White
House as president, which you know China really objected to,
(05:19):
And since assuming the presidency, just a few days before
his double ten speech, he asked rhetorically, how can China
claim to be the motherland of Taiwan when the People's
Republic of China is younger than the Republic of China,
And so those kind of tweaks of China also really
stick with them. But my overall point is, regardless of
(05:42):
what he says, China's response will be Okay, well you
have to match that with actions. How can we trust
what you say and that you really mean it. So
I think that no matter what the content of his
speech was, they were going to react in a forceful way,
and as you noted at the top, you know he's
going to give three more of these speeches during a
first term, so we should anticipate I think a pretty
(06:05):
robust response from Beijing each of the next three octobers.
Speaker 2 (06:10):
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(06:33):
where do we go from here? Do you think geopolitical
risks could escalate or do you think we're at the
height right now?
Speaker 3 (06:41):
I don't think we're at the height, So I think
that the risks will continue to be elevated because I
don't think that Beijing is accepting of the status quo
as most define it, and they continue to see opportunities
to shift the status quo in their favor. So to
give you just one example, a few months ago, there
was a Chinese vessel that capsized off of the offshore
(07:04):
island of gin Men, and some Chinese fishermen died and
others were taken into custody in Taiwan. And China used
that as an opportunity to change what had been practiced
for decades around patrols near Jinmen. And they don't pull
back after they've established a new baseline. Another instance, you know,
(07:25):
China's naval vessels used to only operate really on Taiwan's
west coast. Now on a near continuous basis, you have
pla navy vessels on Taiwan's west coast, it's east coast,
and the north of Taiwan. So the military activity the
new normal is highly elevated, and in my view, China
will continue to elevate the new normal military activity. In
(07:49):
the economic realm, you know, we've seen a few rounds
of tariffs imposed on Taiwanese goods since Li took office.
My own view is that at some point China will
will withdraw the EKFA agreement. They've already tried to lay
the foundation for doing so, saying that Taiwan is in
violation of its commitments under EKFA.
Speaker 1 (08:07):
And just for just for listeners, what is EKFA sure?
Speaker 3 (08:11):
So the Economic Cooperation Framework agreement is essentially a free
trade deal reached under the mind Joe administration in Taiwan
and the PRC, and it gives Taiwanese firms an array
of ways to have preferential access to the Chinese market.
China warned during the presidential election cycle, if you elect
(08:32):
a lie, you know this might come into question. And
the review just so happened to coincide with the day
of the election. And I believe that China is going
to do more to undo that agreement. So I think
that impose more economic costs on Taiwan. The military pressure
will rise, It'll continue to try to isolate Taiwan internationally,
(08:53):
and then of course add into that mix. We don't
really know what a future US administration's policy will be
towards Taiwan. President Trump has said on multiple occasions, Taiwan
hasn't given us anything. Taiwan stole our chips manufacturing. We
are no different than an insurance company, and Taiwan should
(09:13):
pay US for defense. So you could have an element
of instability in the Taiwan straight in my view, if
Trump returns to office and China concludes that the United
States is not committed to Taiwan's defense, and it might
seek to test a Trump administration on its commitments to Taiwan.
On a Harris administration too, I think there's an open
(09:35):
question is Harris more similar to Biden or is it
going back to the Obama approach to China. So I
think there will be a test regardless of what happens
in the US election, in the South China Sea, potentially
the Taiwan Straight and the question is really how that's
navigated and what the takeaways from Beijing are.
Speaker 2 (09:55):
David, what would be an Obama approach to Taiwan.
Speaker 3 (10:00):
Well, it's a very interesting question. I think that what
the Chinese concluded during the Obama administration was that they
could get US restraint on Taiwan by dangling the prospect
of US China cooperation on certain issues, and that they
would present the Obama administration with those trade offs, and
(10:21):
that the Obama administration would choose the US China cooperation
at some point in the future over doing certain things
with Taiwan. And so one tangible result of that is
arm sales. So under the Obama administration you had what
we're referred to as bundles of arm sales. So you
would have arm sales that were not announced for months
or even over a year, and then you would suddenly
(10:44):
have a big package of arm sales announced, so that
there would only be one set of blowback from Beijing.
Under the Trump administration, arm sales were normalized so that
just like we do with all other partners, when Taiwan
makes a request for certain arms, those are reviewed and
then if those are approved, they're notified in the order
that they're approved. And that's continued under the Biden administration,
(11:08):
so you see much more routine arm sales to Taiwan
rather than what we saw under the Obama administration.
Speaker 1 (11:14):
Of the bundling, you're laying out a risky future. I
guess it's always the case with Taiwan. So as an investor,
I guess what should be the takeaways going forward? Because
Taiwan's Semiconductor t SMC, it's the biggest chips company in
the world based in Taiwan, We've seen the company increasingly
(11:35):
look to build plants elsewhere. Other companies are doing the same.
I mean, as an investor who's heard this speech, who's
heard that there are some concessions, but China has still
had this reaction. What is the takeaway what should they
expect in the next couple of years.
Speaker 3 (11:53):
So I'll address the China part first and then the
Taiwan part. I think that for many investors, the assumption
was that a conflict over Taiwan was around zero percent.
For a long time, I think the assumption was, you know,
Beijing talks about potential use of force against Taiwan, but
it's not really serious. It's just doing that to appease
(12:15):
the nationalists at home and show its domestic audience that
it's making progress on this issue. But I think that
that has fundamentally changed over the last four to six years.
Number one, due to what's happened in Hong Kong and
the demolition of one country two systems. Number two, the
war in Ukraine, I think has shown Taiwanese people, but
(12:38):
also people around the world, that when an authoritarian wants
a piece of land, they're going to act potentially aggressively,
and what we might not think is rationally to try
to achieve those geopolitical aims. And if you look at
how Xi Jinping views Taiwan and how Putent views Ukraine,
it's remarkably similar in a sense. So I think that
you have to factor into your investment decisions in China
(13:02):
a not zero percent chance that there is a major
conflict potentially involving the United States. And so you know,
as you well know, that's referred to as a China
plus one model. You can't have all of your eggs
in the China basket because there is a potential future
where there are heavy sanctions levied on China and potentially
major trade restrictions. So if I was running a multinational corporation,
(13:26):
I would not be comfortable with all of my production
occurring in China or with my biggest growing market being China.
And I think that that's what needs to be taken
into account on the Taiwan side of the ledger, you know,
I think that what's striking to me is that there
are some in the United States who do believe that
we're going to achieve autonomy and semiconductors within the next
(13:50):
five to ten years. They look at TSMC's investments in
Arizona and they think, well, basically, at some point we'll
manufacture one hundred percent of our chips and then we
won't have a stake in piece of stability in the
Taiwan straight And I think that that's quite flawed. I
think that we're looking at a future where, regardless of
the investments TSMC makes in Japan, in the United States,
(14:11):
and in Europe, the world is going to be very
reliant on Taiwan for its chip supply. And I think
the best case scenario is that you're able to build
redundancy and resilience for chips that you need for critical
national security applications. So in a worst case scenario, if
there is a conflict between China and Taiwan, you're still
(14:32):
going to be able to get the chips you need
to fight a war and to continue as a society.
So I think that that's the most realistic scenario in
the future. But I don't really see a future at
least in the near to midterm where the world achieves
self sufficiency in chips and doesn't need Taiwan, especially for
(14:55):
the advanced chips that it really does have a stranglehold on.
Speaker 1 (14:59):
David.
Speaker 2 (15:00):
So your point, Taiwan exports to the United States for
this year will likely eclips those to the mainland China
for the first time in over twenty years. And now
this was based on a report by my colleague Marvin
Chen of Bloomberg Intelligence. A lot of this has been
influenced by searching demand for AI chips by the likes
of Nvidia, But you're also seeing US restrictions for Taiwan
(15:23):
sales to these chips to mainland China. Do you see
this as more of a blip or do you see
Taiwan's economy slowly decoupling from mainland China towards the US.
Speaker 3 (15:36):
I think that we do see a decoupling in a sense.
I mean, there's not going to be a full decoupling
because so many of the intermediary goods the China needs
to then manufacture the finished products that are re exported
around the world come from Taiwan, so you know, Taiwan
is deeply integrated into these supply chains. But you can
(15:57):
also look at things like FDI where Taiwanese outbound FDI
into China has gone down, you know, off a cliff
essentially over the last six or eight years. And as
you know it also Taiwan's trade is rebalancing away from
the PRC. Some of this, I think is due to
the COVID nineteen pandemic and fears of the lockdowns that
(16:22):
caused companies to kind of reallocate their manufacturing and refocus
in Southeast Asia. Some of it is due to policies
that the Taiwanese government has undertaken, like the new Southbound
policy under President's side that's sought to build up these
relationships in Southeast Asia. But when you have also events
like a executive of a major Taiwanese company you know,
(16:44):
under an exit ban in the PRC right now, or
you have Taiwanese individuals convicted under these guidelines of promoting
Taiwan independence, a lot of Taiwanese businessmen are going to
be increasingly uncomfortable doing business in China and they're going
to look for other avenues. So I do think that
we're going to continue to see a rebalancing of Taiwan's
(17:05):
economy away from China and more towards Europe, the United
States and Japan.
Speaker 1 (17:11):
Investors are likely thinking about this as well. They're quite optimistic.
It looks like Taiwan stock index, the tai X, is
up almost thirty percent year today. It's the best performing
major stock index in the world. So do you think
investors are correct and sort of ignoring the geopolitical risks,
which it seems is happening.
Speaker 3 (17:35):
Well, I don't think you can ignore the geopolitical risks,
and I think you have to understand that Chijinping, in
my view, is fundamentally different from his predecessors. Think that
the assumption, again to go back to how people were
reading China for decades, was that the most important thing
for the Chinese Communist Party leadership was generating economic growth,
(17:55):
and that if there was ever a trade off that
had to be made, they would choose a favor of
economic growth because the regime legitimacy rested on delivering that
prosperity to the Chinese people. But I think what's becoming
increasingly clear is that the number one priority for Shijinping
is national security, which he defines as regime security, and
(18:19):
if there is a tension between economic growth and national security,
he's going to choose national security. So I don't think
that we can be complacent and say, well, China needs
Taiwan's economy so much, it needs the trade so much,
it needs trade with the West so much, it'll never
use force against Taiwan because that would be lunacy. I
think that he has a different calculus at work here.
(18:42):
We don't really know exactly what it is, and I
don't think that I can sit here and tell you
exactly what he's going to do. But I also think
we can't apply those frameworks that we've been using for
decades because I think that they are flawed and pretty
out of date at this point. So to get back
to your QUO question, there's a risk here, but I
don't think that a conflict is imminent. I think that
(19:05):
deterrence in the Taiwan strad is real. I think that
when you know, Chijinping asks his generals about whether they
can accomplish unification at a acceptable cost to him, the
answer is probably no. And so if Taiwan continues to
invest in its defense, if the United States continues to
take steps to bolster deterrence in the Taiwan strade, if
(19:28):
Japan also is increasingly active in this respect, then I
think deterrence will still hold. So you know, again, I
think that that is what's keeping Sijinping from acting. It
is the question in his mind on whether they can
accomplish their objectives militarily and at an acceptable cost. And we,
(19:49):
the United States as well as Taiwan, can manipulate that variable.
Speaker 2 (19:55):
David, if I could change track. What about the average person,
average VERSI in Taiwan. You know, the world often views
Taiwan through geopolitical risks, a tension between the US and
China and Taiwan is stuck in between. But what about
the average VHOTO Are they really concerned about these foreign
(20:15):
policy risks or are they sort of more concerned about
mundane domestic policies, for example, issues like housing prices.
Speaker 3 (20:23):
That's a really interesting question. So to get back to
the main topic of our conversation, which is lies double
ten speech, we're all focusing on crosstrate issues. That's what
gets the PRC's attention, and that's what gets attention in Washington.
But actually it was a very small proportion of his
speech that dealton crosstraight issues. A lot of it was
(20:44):
on the bread and butter issues that you were talking about,
long term elderly care, youth, unemployment, housing prices. So I
think that that is a core concern for Taiwanese people
and they face a lot of the same challenge the
advanced democracies around the world face. I think one of
(21:04):
the takeaways from the DPP, the ruling party, from the
election is actually the lie underperformed expectations because there was
dissatisfaction with the DPP undertying when in a sense and
how was able to address those quality of life issues.
I mean, if you're young in Taiwan, it's incredibly difficult
(21:25):
to buy a house. Youth unemployment, especially for college educated kids,
is a real issue. Of course, you have, like in
everywhere in East Asia, rapidly aging population and the costs
that are associated with that. So those are real issues
and that's what animates voters. But let me just qualify
what I said, because at the presidential level, when you
(21:47):
have a presidential race in Taiwan, everything is filtered through
a cross straight lens in my view, And so for
the KMT, much of its answer for how you address
that is closer economic relations with the PC. If crosstrate
relations are not so tense. If we have a better
relationship with China, it'll make it much easier to address
these issues. We won't have to invest as much in defense,
(22:09):
you know, we can focus on this and we won't
have to deal with the military intimidation every day. For
the DPP, that is a big vulnerability. How much Taiwan
relies on China and how China can manipulate that whenever
it wants to inflict pain on Taiwan, and so part
of dealing with all these challenges is to diversify the
(22:30):
economy away from China. So crosstraight relations really also are
at the front of mind when you get into a
presidential contest and think about what your vision for the
island's future is.
Speaker 2 (22:44):
Taiwan is obviously home to TSMC, the world's largest semiconductor company.
But outside of technology, and outside of TSMC, what does
Taiwan actually make? Are they famous for anything else? I
heard that they are also the biggest bicycle manufacturer in
the world as well.
Speaker 3 (23:01):
I was about to mention bicycle manufacturing, which was a
surprise to me a long time ago, but actually I
heard something interesting a little while ago, because in Washington
there's a lot of tabletop exercises wargames going on about
Taiwan scenarios if there is a war over Taiwan, what's
vulnerable from the US perspective, where can China inflict pain
(23:23):
on us? And how do we shore up those vulnerabilities?
And one person mentioned to me that Taiwan is actually
the world's second largest producer of screws. His point was
it can be something as mundane as a screw. But
if you run a multinational corporation, you probably rely on
Taiwan for screws, and there are some very specialized screws
out there, and so if you're not getting those anymore,
(23:46):
how easy is it for you to find a substitute
and to source those and get those in your production line. So,
I full disclosure, I wasn't able to independently verify that
Taiwan is the world's second largest producer of screws. But
if that person is right, I think that those are
the types of issues, you know, we need to get
smarter about. And to get back to your point about TSMC,
(24:07):
TSMC is supported by a host of highly specialized Taiwanese
corporations that help service this equipment, that keep it running,
that provide all of these little parts the TSMC needs,
And so that's really also part of the success of TSMC.
And what are the difficulties of attempting to replicate that
in Arizona or Japan. On a lighter note, I think
(24:29):
Taiwan is known as the founder of bubble t which
has now become a worldwide since it's coat And then
of course didn't Taiphung, which is the soup dumpling chain
which just opened its first location in New York. So Taiwan,
you know, specializes in everything from chips to to boba
and soup dumplings.
Speaker 1 (24:49):
I guess, yeah, there's a lot at stake, a lot
more than people think.
Speaker 3 (24:52):
Well, I thought, you know, some of your colleagues at
Bloomberg did a simulation on the economic costs of a
conflict over Taiwan a few months ago, and they put
the price tag at ten trillion dollars, which is roughly
ten percent of global GDP. Makes the war in Ukraine
and the COVID nineteen pandemic look small by comparison. But
what was striking to me is that I think that
(25:13):
they did the same type of simulation about a war
on the Korean peninsula, and they estimated that that shaved
I believed four trillion dollars off of global GDP. So
when you think of a calamitous event like a war
on the Korean peninsula, that's still a fraction of a
war in the Taiwan straight And a lot of that
is driven not just by what Taiwan makes, but because
(25:36):
of the fact that so much global shipping goes through
the Taiwan Straight, which would be closed during a conflict.
And so if you're South Korea, if you're Japan, China
as well, so much of their imports transits the Taiwan
Straight or the South China Sea, and that would obviously
be a zone of conflict, and that drives up these
(25:58):
costs as well.
Speaker 2 (26:00):
Is there anything that globalingus, well, you know, foreigners get
wrong about Taiwan.
Speaker 3 (26:06):
Actually, I think that's an interesting question because I think
a lot of what investors get wrong is the chips question.
I think, on the one hand, you have people who
are convinced that China only wants Taiwan for the chips,
and therefore, if the United States, for instance, says well,
we will destroy the FABS during a conflict, that would
(26:28):
then make China want Taiwan less because that's driving its behavior,
and that's totally false. You know, China wanted Taiwan before
the semiconductor was even invented, and if Taiwan was some rural,
agrarian economy, it would want Taiwan just as much. In
my view, so I think that putting all of your
(26:50):
emphasis on chips is fundamentally wrong. And if I could
just flip that a little bit, I think there's also
similar notion that basically, well, if China takes Taiwan, it
would be calamitous for the United States because it could
just turn on the switch on the TSMC fabs, produce
the most advanced chips in the world, reverse the kind
(27:10):
of export ban on the United States, and we're in
a very vulnerable position. And I also would push back
on that because TSMC needs US equipment, US software, US
persons help operate these things. Presumably a lot of these
engineers would not be in Taiwan after a conflict, and
(27:30):
so I also would say that we shouldn't assume that
the PRC, even if it were able to gain control
of Taiwan, would be able to seize the fabs and
keep them going like they're running now. I think that
there's also flaws in that reason.
Speaker 1 (27:46):
That's a good point. Well, it's been an interesting conversation,
everything from chips to screws, from the US to China
and Taiwan. Thank you so much for joining us.
Speaker 3 (27:57):
Today, David, Sure, thanks for having me.
Speaker 1 (28:00):
I'm Katadmitriyeva in Hong Kong.
Speaker 2 (28:03):
And I'm John Lee, also in Hong Kong.
Speaker 1 (28:05):
This podcast was produced by Clara Chen and you've been
listening to the Asia Centric podcast
You are listening to Asia Centric from Bloomberg Intelligence, the
podcast that explores the big ideas and trends moving money
across the region. My name is Kadid Miitrieva with Bloomberg News.
Speaker 2 (00:13):
In Hong Kong, and I'm John Lee from Bloomberg Intelligence.
The President of Taiwan liking To last week gave it
an important address to his people. The Annual ten tenths Speech,
as it's called, lays out the leader's vision for the
impacts go beyond its borders.
Speaker 1 (00:30):
Yes, it's always closely watched by people around the world,
but especially in the US and China as a kind
of gauge of how relations will shape up in the
coming years with US. To discuss takeaways is David Sachs,
Asia Studies Fellow at the Council on Foreign Relations.
Speaker 3 (00:47):
Welcome David, thanks for having me now.
Speaker 1 (00:50):
The Annual ten tens Speech as it's called, it's important
not just for Taiwan, but also has global implications and
it acts as a guide for US China relations as well.
What were your takeaways from the speech this year?
Speaker 3 (01:05):
Well, if you compare President Lie's Double ten speech to
his inaugural which was delivered in May, I think that
the consensus is. He took a step back on a
few of those points. So, for instance, in his inaugural address,
he called out China by name and was very direct
in his criticisms of China. There was no such direct
(01:25):
criticism in this Double ten speech. Instead, he talked very
vaguely about the threat that authoritarianism poses around the world.
Now there were also olive branches to Beijing, so he
talked about a willingness to work with China on global
issues like climate change and infectious disease, and some members
(01:46):
of Li's administration pointed to a line about hoping that
China will live up to the expectations of the international
community and take up its responsibilities as another signal of
goodwill that he wasn't closing the door on China and
prejudging it, so to speak, as kind of a revisionist power,
(02:07):
but actually expressing hope that China could find its way
in the international system without being disruptive. So those were
some signals that observers in the United States looked to,
as well as reassurances that he would seek to maintain
the status quo, but those were clearly not reciprocated by
Beijing and not recognized by Beijing. They responded to his
(02:31):
Double ten speech by announcing Joint Sword B, a large
military exercise. There was a continuation of Joint Sword A,
which it introduced after his inaugural address. So I think
that the quandary, or the dilemma for observers is that,
on the one hand, I think many believe that this
was a more moderate speech, but on the other hand,
(02:53):
there wasn't really a moderation in Beijing's response, And so
where does cross straight relations go from there?
Speaker 1 (03:00):
So, David, why do you think China stepped up these
military exercises given as you say, President Lai extended these
kinds of olive branches in his speech.
Speaker 3 (03:12):
Yeah, so, you know, we could all analyze the text
of what Lai said, and I'll do that very briefly.
He said that the Republic of China, which is Taiwan's
formal name, and the People's Republic of China are not
subordinate to each other. That's something that the PRC takes
umbrage to, but it's not a new formulation, his predecessor
(03:32):
saying when said the same thing during her twenty twenty
one Double ten speech. He also talked about how essentially
the name of Taiwan didn't really matter. Some people call
it the Republic of China, some people call it the
Republic of China Taiwan, and some people just call it Taiwan.
And of course, you know, for China, that is akin
(03:53):
to talking about independence and a separate identity internationally for Taiwan. Now,
I'll take maybe a bit of a contrarian view on that.
I think what Lie is trying to signal is actually
that he's not going to pursue a formal name change
of the island through the legislature or through other means
that would cause a crisis. And he's essentially saying that
(04:14):
he wants to set aside those divisive issues in the
in favor of national unity. So that's my own view,
but China clearly does not like that formulation. But you
know what I would argue more broadly is that regardless
of what Lie says, China will respond the way that
it has responded. It has a deep distrust of Lie,
(04:36):
and you might even say that it has a visceral
hatred of Lie. This goes back to a statement that
he made years ago that he was a quote pragmatic
worker for Taiwan independence. Now, he said that before he
was the vice president, and obviously before he was running
for president. But if you meet with any Chinese scholar
or official and they bring up lie, they always remind
(04:59):
you of that common that he made now when he
was running for president, and since he's assumed the presidency,
he's had a few other lines that have raised eyebrows
in Beijing. For instance, on the campaign trail, he talked
about how his dream would be to visit the White
House as president, which you know China really objected to,
(05:19):
And since assuming the presidency, just a few days before
his double ten speech, he asked rhetorically, how can China
claim to be the motherland of Taiwan when the People's
Republic of China is younger than the Republic of China,
And so those kind of tweaks of China also really
stick with them. But my overall point is, regardless of
(05:42):
what he says, China's response will be Okay, well you
have to match that with actions. How can we trust
what you say and that you really mean it. So
I think that no matter what the content of his
speech was, they were going to react in a forceful way,
and as you noted at the top, you know he's
going to give three more of these speeches during a
first term, so we should anticipate I think a pretty
(06:05):
robust response from Beijing each of the next three octobers.
Speaker 2 (06:10):
Asia Centric is produced by Bloomberg Intelligence, where more than
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(06:33):
where do we go from here? Do you think geopolitical
risks could escalate or do you think we're at the
height right now?
Speaker 3 (06:41):
I don't think we're at the height, So I think
that the risks will continue to be elevated because I
don't think that Beijing is accepting of the status quo
as most define it, and they continue to see opportunities
to shift the status quo in their favor. So to
give you just one example, a few months ago, there
was a Chinese vessel that capsized off of the offshore
(07:04):
island of gin Men, and some Chinese fishermen died and
others were taken into custody in Taiwan. And China used
that as an opportunity to change what had been practiced
for decades around patrols near Jinmen. And they don't pull
back after they've established a new baseline. Another instance, you know,
(07:25):
China's naval vessels used to only operate really on Taiwan's
west coast. Now on a near continuous basis, you have
pla navy vessels on Taiwan's west coast, it's east coast,
and the north of Taiwan. So the military activity the
new normal is highly elevated, and in my view, China
will continue to elevate the new normal military activity. In
(07:49):
the economic realm, you know, we've seen a few rounds
of tariffs imposed on Taiwanese goods since Li took office.
My own view is that at some point China will
will withdraw the EKFA agreement. They've already tried to lay
the foundation for doing so, saying that Taiwan is in
violation of its commitments under EKFA.
Speaker 1 (08:07):
And just for just for listeners, what is EKFA sure?
Speaker 3 (08:11):
So the Economic Cooperation Framework agreement is essentially a free
trade deal reached under the mind Joe administration in Taiwan
and the PRC, and it gives Taiwanese firms an array
of ways to have preferential access to the Chinese market.
China warned during the presidential election cycle, if you elect
(08:32):
a lie, you know this might come into question. And
the review just so happened to coincide with the day
of the election. And I believe that China is going
to do more to undo that agreement. So I think
that impose more economic costs on Taiwan. The military pressure
will rise, It'll continue to try to isolate Taiwan internationally,
(08:53):
and then of course add into that mix. We don't
really know what a future US administration's policy will be
towards Taiwan. President Trump has said on multiple occasions, Taiwan
hasn't given us anything. Taiwan stole our chips manufacturing. We
are no different than an insurance company, and Taiwan should
(09:13):
pay US for defense. So you could have an element
of instability in the Taiwan straight in my view, if
Trump returns to office and China concludes that the United
States is not committed to Taiwan's defense, and it might
seek to test a Trump administration on its commitments to Taiwan.
On a Harris administration too, I think there's an open
(09:35):
question is Harris more similar to Biden or is it
going back to the Obama approach to China. So I
think there will be a test regardless of what happens
in the US election, in the South China Sea, potentially
the Taiwan Straight and the question is really how that's
navigated and what the takeaways from Beijing are.
Speaker 2 (09:55):
David, what would be an Obama approach to Taiwan.
Speaker 3 (10:00):
Well, it's a very interesting question. I think that what
the Chinese concluded during the Obama administration was that they
could get US restraint on Taiwan by dangling the prospect
of US China cooperation on certain issues, and that they
would present the Obama administration with those trade offs, and
(10:21):
that the Obama administration would choose the US China cooperation
at some point in the future over doing certain things
with Taiwan. And so one tangible result of that is
arm sales. So under the Obama administration you had what
we're referred to as bundles of arm sales. So you
would have arm sales that were not announced for months
or even over a year, and then you would suddenly
(10:44):
have a big package of arm sales announced, so that
there would only be one set of blowback from Beijing.
Under the Trump administration, arm sales were normalized so that
just like we do with all other partners, when Taiwan
makes a request for certain arms, those are reviewed and
then if those are approved, they're notified in the order
that they're approved. And that's continued under the Biden administration,
(11:08):
so you see much more routine arm sales to Taiwan
rather than what we saw under the Obama administration.
Speaker 1 (11:14):
Of the bundling, you're laying out a risky future. I
guess it's always the case with Taiwan. So as an investor,
I guess what should be the takeaways going forward? Because
Taiwan's Semiconductor t SMC, it's the biggest chips company in
the world based in Taiwan, We've seen the company increasingly
(11:35):
look to build plants elsewhere. Other companies are doing the same.
I mean, as an investor who's heard this speech, who's
heard that there are some concessions, but China has still
had this reaction. What is the takeaway what should they
expect in the next couple of years.
Speaker 3 (11:53):
So I'll address the China part first and then the
Taiwan part. I think that for many investors, the assumption
was that a conflict over Taiwan was around zero percent.
For a long time, I think the assumption was, you know,
Beijing talks about potential use of force against Taiwan, but
it's not really serious. It's just doing that to appease
(12:15):
the nationalists at home and show its domestic audience that
it's making progress on this issue. But I think that
that has fundamentally changed over the last four to six years.
Number one, due to what's happened in Hong Kong and
the demolition of one country two systems. Number two, the
war in Ukraine, I think has shown Taiwanese people, but
(12:38):
also people around the world, that when an authoritarian wants
a piece of land, they're going to act potentially aggressively,
and what we might not think is rationally to try
to achieve those geopolitical aims. And if you look at
how Xi Jinping views Taiwan and how Putent views Ukraine,
it's remarkably similar in a sense. So I think that
you have to factor into your investment decisions in China
(13:02):
a not zero percent chance that there is a major
conflict potentially involving the United States. And so you know,
as you well know, that's referred to as a China
plus one model. You can't have all of your eggs
in the China basket because there is a potential future
where there are heavy sanctions levied on China and potentially
major trade restrictions. So if I was running a multinational corporation,
(13:26):
I would not be comfortable with all of my production
occurring in China or with my biggest growing market being China.
And I think that that's what needs to be taken
into account on the Taiwan side of the ledger, you know,
I think that what's striking to me is that there
are some in the United States who do believe that
we're going to achieve autonomy and semiconductors within the next
(13:50):
five to ten years. They look at TSMC's investments in
Arizona and they think, well, basically, at some point we'll
manufacture one hundred percent of our chips and then we
won't have a stake in piece of stability in the
Taiwan straight And I think that that's quite flawed. I
think that we're looking at a future where, regardless of
the investments TSMC makes in Japan, in the United States,
(14:11):
and in Europe, the world is going to be very
reliant on Taiwan for its chip supply. And I think
the best case scenario is that you're able to build
redundancy and resilience for chips that you need for critical
national security applications. So in a worst case scenario, if
there is a conflict between China and Taiwan, you're still
(14:32):
going to be able to get the chips you need
to fight a war and to continue as a society.
So I think that that's the most realistic scenario in
the future. But I don't really see a future at
least in the near to midterm where the world achieves
self sufficiency in chips and doesn't need Taiwan, especially for
(14:55):
the advanced chips that it really does have a stranglehold on.
Speaker 1 (14:59):
David.
Speaker 2 (15:00):
So your point, Taiwan exports to the United States for
this year will likely eclips those to the mainland China
for the first time in over twenty years. And now
this was based on a report by my colleague Marvin
Chen of Bloomberg Intelligence. A lot of this has been
influenced by searching demand for AI chips by the likes
of Nvidia, But you're also seeing US restrictions for Taiwan
(15:23):
sales to these chips to mainland China. Do you see
this as more of a blip or do you see
Taiwan's economy slowly decoupling from mainland China towards the US.
Speaker 3 (15:36):
I think that we do see a decoupling in a sense.
I mean, there's not going to be a full decoupling
because so many of the intermediary goods the China needs
to then manufacture the finished products that are re exported
around the world come from Taiwan, so you know, Taiwan
is deeply integrated into these supply chains. But you can
(15:57):
also look at things like FDI where Taiwanese outbound FDI
into China has gone down, you know, off a cliff
essentially over the last six or eight years. And as
you know it also Taiwan's trade is rebalancing away from
the PRC. Some of this, I think is due to
the COVID nineteen pandemic and fears of the lockdowns that
(16:22):
caused companies to kind of reallocate their manufacturing and refocus
in Southeast Asia. Some of it is due to policies
that the Taiwanese government has undertaken, like the new Southbound
policy under President's side that's sought to build up these
relationships in Southeast Asia. But when you have also events
like a executive of a major Taiwanese company you know,
(16:44):
under an exit ban in the PRC right now, or
you have Taiwanese individuals convicted under these guidelines of promoting
Taiwan independence, a lot of Taiwanese businessmen are going to
be increasingly uncomfortable doing business in China and they're going
to look for other avenues. So I do think that
we're going to continue to see a rebalancing of Taiwan's
(17:05):
economy away from China and more towards Europe, the United
States and Japan.
Speaker 1 (17:11):
Investors are likely thinking about this as well. They're quite optimistic.
It looks like Taiwan stock index, the tai X, is
up almost thirty percent year today. It's the best performing
major stock index in the world. So do you think
investors are correct and sort of ignoring the geopolitical risks,
which it seems is happening.
Speaker 3 (17:35):
Well, I don't think you can ignore the geopolitical risks,
and I think you have to understand that Chijinping, in
my view, is fundamentally different from his predecessors. Think that
the assumption, again to go back to how people were
reading China for decades, was that the most important thing
for the Chinese Communist Party leadership was generating economic growth,
(17:55):
and that if there was ever a trade off that
had to be made, they would choose a favor of
economic growth because the regime legitimacy rested on delivering that
prosperity to the Chinese people. But I think what's becoming
increasingly clear is that the number one priority for Shijinping
is national security, which he defines as regime security, and
(18:19):
if there is a tension between economic growth and national security,
he's going to choose national security. So I don't think
that we can be complacent and say, well, China needs
Taiwan's economy so much, it needs the trade so much,
it needs trade with the West so much, it'll never
use force against Taiwan because that would be lunacy. I
think that he has a different calculus at work here.
(18:42):
We don't really know exactly what it is, and I
don't think that I can sit here and tell you
exactly what he's going to do. But I also think
we can't apply those frameworks that we've been using for
decades because I think that they are flawed and pretty
out of date at this point. So to get back
to your QUO question, there's a risk here, but I
don't think that a conflict is imminent. I think that
(19:05):
deterrence in the Taiwan strad is real. I think that
when you know, Chijinping asks his generals about whether they
can accomplish unification at a acceptable cost to him, the
answer is probably no. And so if Taiwan continues to
invest in its defense, if the United States continues to
take steps to bolster deterrence in the Taiwan strade, if
(19:28):
Japan also is increasingly active in this respect, then I
think deterrence will still hold. So you know, again, I
think that that is what's keeping Sijinping from acting. It
is the question in his mind on whether they can
accomplish their objectives militarily and at an acceptable cost. And we,
(19:49):
the United States as well as Taiwan, can manipulate that variable.
Speaker 2 (19:55):
David, if I could change track. What about the average person,
average VERSI in Taiwan. You know, the world often views
Taiwan through geopolitical risks, a tension between the US and
China and Taiwan is stuck in between. But what about
the average VHOTO Are they really concerned about these foreign
(20:15):
policy risks or are they sort of more concerned about
mundane domestic policies, for example, issues like housing prices.
Speaker 3 (20:23):
That's a really interesting question. So to get back to
the main topic of our conversation, which is lies double
ten speech, we're all focusing on crosstrate issues. That's what
gets the PRC's attention, and that's what gets attention in Washington.
But actually it was a very small proportion of his
speech that dealton crosstraight issues. A lot of it was
(20:44):
on the bread and butter issues that you were talking about,
long term elderly care, youth, unemployment, housing prices. So I
think that that is a core concern for Taiwanese people
and they face a lot of the same challenge the
advanced democracies around the world face. I think one of
(21:04):
the takeaways from the DPP, the ruling party, from the
election is actually the lie underperformed expectations because there was
dissatisfaction with the DPP undertying when in a sense and
how was able to address those quality of life issues.
I mean, if you're young in Taiwan, it's incredibly difficult
(21:25):
to buy a house. Youth unemployment, especially for college educated kids,
is a real issue. Of course, you have, like in
everywhere in East Asia, rapidly aging population and the costs
that are associated with that. So those are real issues
and that's what animates voters. But let me just qualify
what I said, because at the presidential level, when you
(21:47):
have a presidential race in Taiwan, everything is filtered through
a cross straight lens in my view, And so for
the KMT, much of its answer for how you address
that is closer economic relations with the PC. If crosstrate
relations are not so tense. If we have a better
relationship with China, it'll make it much easier to address
these issues. We won't have to invest as much in defense,
(22:09):
you know, we can focus on this and we won't
have to deal with the military intimidation every day. For
the DPP, that is a big vulnerability. How much Taiwan
relies on China and how China can manipulate that whenever
it wants to inflict pain on Taiwan, and so part
of dealing with all these challenges is to diversify the
(22:30):
economy away from China. So crosstraight relations really also are
at the front of mind when you get into a
presidential contest and think about what your vision for the
island's future is.
Speaker 2 (22:44):
Taiwan is obviously home to TSMC, the world's largest semiconductor company.
But outside of technology, and outside of TSMC, what does
Taiwan actually make? Are they famous for anything else? I
heard that they are also the biggest bicycle manufacturer in
the world as well.
Speaker 3 (23:01):
I was about to mention bicycle manufacturing, which was a
surprise to me a long time ago, but actually I
heard something interesting a little while ago, because in Washington
there's a lot of tabletop exercises wargames going on about
Taiwan scenarios if there is a war over Taiwan, what's
vulnerable from the US perspective, where can China inflict pain
(23:23):
on us? And how do we shore up those vulnerabilities?
And one person mentioned to me that Taiwan is actually
the world's second largest producer of screws. His point was
it can be something as mundane as a screw. But
if you run a multinational corporation, you probably rely on
Taiwan for screws, and there are some very specialized screws
out there, and so if you're not getting those anymore,
(23:46):
how easy is it for you to find a substitute
and to source those and get those in your production line. So,
I full disclosure, I wasn't able to independently verify that
Taiwan is the world's second largest producer of screws. But
if that person is right, I think that those are
the types of issues, you know, we need to get
smarter about. And to get back to your point about TSMC,
(24:07):
TSMC is supported by a host of highly specialized Taiwanese
corporations that help service this equipment, that keep it running,
that provide all of these little parts the TSMC needs,
And so that's really also part of the success of TSMC.
And what are the difficulties of attempting to replicate that
in Arizona or Japan. On a lighter note, I think
(24:29):
Taiwan is known as the founder of bubble t which
has now become a worldwide since it's coat And then
of course didn't Taiphung, which is the soup dumpling chain
which just opened its first location in New York. So Taiwan,
you know, specializes in everything from chips to to boba
and soup dumplings.
Speaker 1 (24:49):
I guess, yeah, there's a lot at stake, a lot
more than people think.
Speaker 3 (24:52):
Well, I thought, you know, some of your colleagues at
Bloomberg did a simulation on the economic costs of a
conflict over Taiwan a few months ago, and they put
the price tag at ten trillion dollars, which is roughly
ten percent of global GDP. Makes the war in Ukraine
and the COVID nineteen pandemic look small by comparison. But
what was striking to me is that I think that
(25:13):
they did the same type of simulation about a war
on the Korean peninsula, and they estimated that that shaved
I believed four trillion dollars off of global GDP. So
when you think of a calamitous event like a war
on the Korean peninsula, that's still a fraction of a
war in the Taiwan straight And a lot of that
is driven not just by what Taiwan makes, but because
(25:36):
of the fact that so much global shipping goes through
the Taiwan Straight, which would be closed during a conflict.
And so if you're South Korea, if you're Japan, China
as well, so much of their imports transits the Taiwan
Straight or the South China Sea, and that would obviously
be a zone of conflict, and that drives up these
(25:58):
costs as well.
Speaker 2 (26:00):
Is there anything that globalingus, well, you know, foreigners get
wrong about Taiwan.
Speaker 3 (26:06):
Actually, I think that's an interesting question because I think
a lot of what investors get wrong is the chips question.
I think, on the one hand, you have people who
are convinced that China only wants Taiwan for the chips,
and therefore, if the United States, for instance, says well,
we will destroy the FABS during a conflict, that would
(26:28):
then make China want Taiwan less because that's driving its behavior,
and that's totally false. You know, China wanted Taiwan before
the semiconductor was even invented, and if Taiwan was some rural,
agrarian economy, it would want Taiwan just as much. In
my view, so I think that putting all of your
(26:50):
emphasis on chips is fundamentally wrong. And if I could
just flip that a little bit, I think there's also
similar notion that basically, well, if China takes Taiwan, it
would be calamitous for the United States because it could
just turn on the switch on the TSMC fabs, produce
the most advanced chips in the world, reverse the kind
(27:10):
of export ban on the United States, and we're in
a very vulnerable position. And I also would push back
on that because TSMC needs US equipment, US software, US
persons help operate these things. Presumably a lot of these
engineers would not be in Taiwan after a conflict, and
(27:30):
so I also would say that we shouldn't assume that
the PRC, even if it were able to gain control
of Taiwan, would be able to seize the fabs and
keep them going like they're running now. I think that
there's also flaws in that reason.
Speaker 1 (27:46):
That's a good point. Well, it's been an interesting conversation,
everything from chips to screws, from the US to China
and Taiwan. Thank you so much for joining us.
Speaker 3 (27:57):
Today, David, Sure, thanks for having me.
Speaker 1 (28:00):
I'm Katadmitriyeva in Hong Kong.
Speaker 2 (28:03):
And I'm John Lee, also in Hong Kong.
Speaker 1 (28:05):
This podcast was produced by Clara Chen and you've been
listening to the Asia Centric podcast
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