China, U.S. Keep Watchful Eye on Taiwan Presidential Election

Investors are hopeful that the U.S. and China will continue to improve trade relations in 2020. After a bitter trade war that has lasted two-and-a-half years, the sides have wrapped up a limited trade agreement, known as ‘Phase 1’. The trade agreement is limited in scope, but is an important first step in reducing the trade war – the U.S. has suspended tariffs that were set to take effect in December.

Despite progress on the trade front, relations between the U.S. and China remain strained. A key irritant has been the pro-democracy demonstrations in Hong Kong. Protestors claim that China has eroded democratic rule in Hong Kong, and this has not gone unnoticed in Taiwan, which holds a presidential election on January 11th. President Tsai Ing-wen, who is seeking re-election, has rejected the “one country, two systems” formula for Taiwan, saying that the arrangement had failed in Hong Kong. China claims that Taiwan is part of the mainland, and has warned Tsai not to take any steps towards formal independence.

Tsai has benefited from a strong domestic economy. The country’s GDP grew by 2.9% in the third quarter, which made it the fastest-growing economy among the “Asian Tiger” nations, which include Hong Kong, Singapore and South Korea. Taiwan has been the big winner from the U.S-China trade war, and the slowdown in China has led to a rise in foreign investment in Taiwan, which was up 9.4% in the first three quarters of 2019.

Washington will be delighted if the pro-U.S. Tsai wins re-election, but such a scenario will ruffle feathers in Beijing and could complicate relations between the U.S. and China, at a time that the two largest economies in the world are trying to reduce trade tensions.