Taiwan Speech Shows US-China Risk Can't Be Ignored

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 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,

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 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, there wasn't really a moderation in Beijing's response, And so where does cross straight relations go from there?

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 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 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, 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 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, 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 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 robust response from Beijing each of the next three octobers.

where do we go from here? Do you think geopolitical risks could escalate or do you think we're at the height right now?

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, 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 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.

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, 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

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 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.

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 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, so you see much more routine arm sales to Taiwan rather than what we saw under the Obama administration.

had this reaction. What is the takeaway what should they expect in the next couple of years.

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 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 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, 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 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, 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 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 the advanced chips that it really does have a stranglehold on.

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.

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 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, 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 economy away from China and more towards Europe, the United States and Japan.

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, 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 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. 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 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 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, the United States as well as Taiwan, can manipulate that variable.

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 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 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 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, 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

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.

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, 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, 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 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.

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 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 costs as well.

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

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 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 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.