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Pedestrians wearing face masks in New Taipei City

SAM YEH / AFP / Getty Images

It is not just Chinese fighter jets that cross the 160 km strait between China and Taiwan. Huge flows of trade, investment and critical technologies also link the two countries. These could either curb Beijing’s “reunification” ambitions, or provide an alternative weapon to achieve them.

Trade and investment relationships aren’t just for fools in this corner of the world. For a few years after the two countries entered the World Trade Organization in the early 2000s, Taiwan’s technology and capital seemed to correspond to paradise with low labor costs and the discipline of production. China. Manufacturers love

Foxconn technology

(ticker: 2354. Taiwan) has created millions of jobs on the mainland to supply Apple and other global electronics powers.

Semiconductor manufacturing in Taiwan

(TSM) provided the micro-brains for the rise of Chinese telecom providers like Huawei and


(1810. Hong-Kong).

Chinese Communist leaders hoped the economic symbiosis would bring Taiwan peacefully into their embrace, said David Sacks, a researcher at the Council on Foreign Relations. “Beijing hoped to make the economies so closely linked that the two countries would be all but one,” he said.

Taiwanese voters shattered those hopes in 2014 with explosive protests against a proposed services free trade deal with the mainland. This “Sunflower Movement” led to the election of President Tsai Ing-wen two years later. It has radically changed course to move away from reunification.

Tsai pushed for economic disengagement through a “southward policy” for investments in Southeast Asia and an “Asian Silicon Valley” in Taiwan. It didn’t work too well either. Taiwan’s trade with China hit a record high last year. Exports to the continent represent more than 15% of gross domestic product, explains Matt Gertken, geopolitical strategist at BCA Research.

“The disengagement has been very marginal,” said Rory Green, chief economist for China at TS Lombard. “The status quo is still a massive investment in China. ”

The exhibit gives China an economic weapon it could deploy before Taiwan’s next presidential election in May 2024, Gertken believes. Tsai is not allowed to run for a third term. Beijing would like to defeat any successor to its Progressive Democratic Party. “The easiest way for the whole game to change is for Beijing to cause a recession in Taiwan that would cause the DPP to fall from power,” he said.

It’s a weapon with significant recoil potential, however. China’s advancement in a range of high-tech industries, the cornerstone of its competitive strategy with the United States, is heavily dependent on semiconductors and other inputs from Taiwan, and will do so for the foreseeable future. . “At best, China can become a reliable producer of low-end semiconductors over the next three to five years,” Green said.

The use of Xi Jinping & Co.’s economic might against other neighbors has largely backfired. China has restricted shopping or tourism from Japan, South Korea and Australia in recent years for alleged political offenses. The result: minimal political gains and notably more hostile populations. “Intervening in the upcoming elections in Taiwan could be quite tricky,” Green concludes.

An X factor in this situation is a free trade agreement between the United States and Taiwan, which Tsai and a bipartisan coalition in Congress have been pushing for. But the Taiwanese might deny this themselves in December, because of the pork of all things. They are voting in a referendum to overturn Tsai’s green light on importing American meat with the additive ractopamine, a surprise sticking point for a decade or more. (Trade negotiations are proceeding on their own unhurried schedule.)

The Biden administration, always on the lookout for Chinese policy, also seems lukewarm about free trade with Taipei. “It’s not a priority for the USTR,” Sacks said, referring to the US trade representative.

The economic entanglement of China and Taiwan is likely to diminish the chances of an armed invasion in the short term. Stability-loving Beijing would rather impose its will economically than resort to an amphibious occupation.

But it adds an additional layer of complexity to the risk nexus around Taiwan’s outstanding companies and the global supply chains they support. Investors take note.

Write to editors@barrons.com