Geopolitics – more significant now than ever

by Sean Tweedie | August 31, 2023

Over the past decade we have seen the transition from a world which, (post World War II), was characterised by globalisation and the realisation of the need for the strengthening of international trade regimes, to one centred around geopolitical risk and the slow but steady fragmentation into rival economic blocs. Geopolitical risk (which is defined as the potential political, economic, military, and social risks that can emerge from a nation’s involvement in international affairs) is widely regarded by business as the greatest threat to the global economy. Tensions between Russia and NATO, and China and the U.S, have been some of the geopolitical factors which have been at the fore of this risk.

The invasion of Ukraine by Russia brought into question the future of Taiwan. Taiwan, officially part of the Republic of China, is an island separated from mainland China by the Taiwan Strait, and which has been governed independently of mainland China since 1949. See Figure 1.

Figure 1

China views Taiwan as a renegade province and seeks to unify Taiwan with the mainland. Whether Taiwan should be seen as part of China or not is a contentious debate. Following years of civil war in mainland China, the ruling nationalist government was overthrown by the Communist Party in 1949. The Communist Party took control in Beijing, and Chiang Kai-shek (the leader of the previous regime) and what was left of the nationalist party fled to Taiwan, where they ruled for the next several decades. China asserts that Taiwan is part of China, however Taiwan argue that they were never part of the modern Chinese state and so views themselves as a sovereign country. China exerts considerable diplomatic pressure on other countries not to recognise Taiwan, or to do anything which implies recognition. In a 2019 speech, President Xi reiterated China’s long-standing proposal for Taiwan: that it be incorporated into the mainland under the formula of “one country, two systems.” This is the same formula used for Hong Kong, which was to guarantee the ability to preserve its political and economic systems while granting a “high degree of autonomy.”

Taiwan’s economy is extremely important for the rest of the world. Much of the everyday electronic equipment in our lives contains a computer chip from Taiwan. The Taiwan Semiconductor Manufacturing Company dominates roughly 55% of the global market. It is easy to understand why China is so keen to gain control over Taiwan, as doing so would give them control over one of the world’s most important industries.

A top concern among U.S. analysts is that China’s growing military capabilities and assertiveness, as well as the deterioration in cross-strait relations, could spark a conflict. Such a conflict has the potential to lead to a U.S.-China confrontation. That’s because China hasn’t ruled out using force to achieve Taiwan’s “reunification” and the United States hasn’t ruled out defending Taiwan if China attacks. Until now, Washington’s policy of “strategic ambiguity” has meant the US has been deliberately unclear about whether or how it would defend Taiwan in the event of an attack. Diplomatically, the US currently sticks to the “One-China” policy, which recognises only one Chinese government – in Beijing – and has formal ties with China rather than Taiwan.

Earlier this year China unveiled their new government restructuring plan which focused on financial regulation and technological self-sufficiency. Clearly the administration’s main priority is to prevent the property bubble from taking down the economy and to prevent the Americans from cutting off China’s access to technology. See Figure 2.

Figure 2

This focus on self-sufficiency implies that China currently assesses that it is not self-sufficient, and hence that it is vulnerable to outside influence in the event of a conflict with Taiwan. The regime is preparing for war precisely because it believes it is not ready yet.

Taiwan is set to hold their elections in January 2024. The Democratic Progressive Party has been in power since 2016. The Chinese Nationalist Party or Kuomintang (KMT) is their greatest rival and stands a chance of winning the election. If this is the case, it would mean a renewed period of dialogue and potentially easing tensions with China. China’s strategic objectives would be advanced without any conflict. China has an interest in seeing power shift out of the ruling Taiwanese party’s hands, and so it could be one of the reasons why China has not rushed to provide major economic stimulus. The slowdown in the global economy is the single biggest risk to the current ruling party.

The next 4 months will be an important period in the geopolitical landscape. Policy uncertainty will certainly escalate in the run up to the election. The outcome of the election will also determine whether tensions rise or fall and will be important when looking at global risk aversion. Any material escalation in tension between China and Taiwan will likely see similar tensions rise elsewhere, which can cause a period of renewed risk-off sentiment.


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