Taiwan: the ‘most sensitive’ issue, linchpin to US-China relations


The issue will also be watched closely by key U.S. allies, Japan and South Korea.

Taiwan: the ‘most sensitive’ issue, linchpin to US-China relations

A helicopter flies with the Taiwan national flag during National Day celebrations held in front of the Presidential Building in Taipei, Taiwan, Tuesday, Oct. 10, 2023.

The leaders of the world’s two biggest economies emerged from a high-profile summit with a conciliatory and consensual commitment to find a forward path of managing competition that benefits the United States and China, but one issue still remains as the linchpin: Taiwan. 

While pundits would not have expected the meeting between President Joe Biden and his Chinese counterpart Xi Jinping this week to have moved the needle as far as Taiwan is concerned, the issue was tabled and discussed, with both sides posturing as they always have.

Biden reiterated the U.S.’s agreement to a One China policy and its position that Taiwan maintains its sovereignty despite China’s claims to the contrary. Xi, according to Xinhua news agency, called for the U.S. to take concrete actions to show that it is not supporting “Taiwan’s independence,” stop arming Taiwan and back China’s reunification.

“China will realize reunification, and this is unstoppable,” Xi said during the summit, which nonetheless resulted in both sides agreeing to a dialogue on artificial intelligence, set up a working group to combat precursors for fentanyl, as well as resume high-level military-to-military communications.

The self-governed democratic island has been the flashpoint amid the increasingly tense bilateral relationship between China and the U.S. The two have disputed the Taiwan issue for years, especially since the previous administration of Donald Trump. Beijing has claimed numerous times that it could resort to using force to reclaim the island if necessary.

The escalated diplomatic stand-off, coupled with China’s apparent increased inward-looking and restricting investment environment for foreign investors to be topped by Beijing’s tightened grip on Hong Kong have triggered an outflow of capital. 

“Taiwan was really an essential part of the summit,” pointed out Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis.

“The well-crafted speech by Xi during the business summit referring to the fact that China will not engage in any cold war, or that China is looking for a military conflict is very important. I think China knows well that the Taiwan issue is top on the agendas of business executives. And that risk is now one of the reasons actually why some people aren’t investing either in Taiwan for that matter or the mainland. So I think that is a big statement.”

“Peaceful coexistence”

The evening after his summit with Biden, Xi addressed a room full of top U.S. business leaders in San Francisco, where he called “peaceful coexistence” a baseline for China and the U.S. to uphold as two major countries.

Xi stressed that China never bets against the U.S. or interferes in its internal affairs. “Likewise the United States should not bet against China, or interfere in China’s internal affairs.”

He added, “aggression and expansion are not in our genes.”

To what extent Xi’s remarks will help de-escalate tensions in the Taiwan Strait, and by virtue the broader South China Sea, will likely be watched closely by analysts, but more importantly by Taiwan’s neighbors Japan and South Korea which are key allies of the U.S. in the region. At the same time, it also raises the question of how reassuring it would be to investors to bring fresh capital back to China.

The U.S., Japan and South Korea have expressed their objection to what they saw as threats from Beijing, as China conducted military exercises around Taiwan to assert its sovereignty over the island. The Chinese navy has also been engaging in aggressive maneuvers in the South China Sea in a standoff with the Philippines.

The dispute between the two major powers over the island amplified when Beijing issued a strong criticism following the visit of the then-Speaker of the House of Representatives, Nancy Pelosi, to Taiwan in August 2022. Since the event, the Chinese side had suspended its military communication channels with the U.S., a critical channel considered a last resort to prevent an unintended military confrontation.

According to Zhang Baohui, professor of government and international affairs at Hong Kong-based Lingnan University, although the resumption of military communication channels between the U.S. and China will have a limited effect on the Taiwan issue, it is still a stabilizer to the high-risk relations between the two.

“The US achieved its goal of reopening military to military ties and secured Chinese cooperation, while China achieved the goal of stabilizing the strategic rivalry, preventing it from getting worse,” said Zhang.

“I think the outcome is positive for both countries. Both gained the image that they can work together to enhance global welfare.”

Financial implications 

On the financial and business front, investors are taking a wait-and-see approach to the impact of the summit. For one, the U.S. did not lift any export controls on high-end semiconductors, an issue that China raised in the summit, criticizing the Americans for attempting to deny Chinese people the right to development.

“The meeting should prove to have little long-term impact on financial markets. Xi did receive a very positive reception from business leaders, but here he was preaching to the choir,” said Brock Silvers, chief investment officer of Kaiyuan Capital. 

“Little was said or agreed that would convince recalcitrant investors that China was now prepared to tackle systemic or deflationary pressures, make necessary reforms, or meaningfully address investability concerns.

“For investors, very few minds were likely changed.” 

Garcia-Herrero is more optimistic. Overall, the Xi-Biden meeting could prompt the foreign business community to see that “maybe China’s not so uninvestable,” she said. 

“I’m expecting inflows into China because of this meeting, even though nothing concrete was decided in terms of lifting export controls or promises of lifting import tariffs. But it does show that maybe humbly for once, compared to the past, China is realizing that it’s on the wrong path in terms of attracting investment if it continues to show such an aggressive posture.”

Garcia-Herrero added that it’s too soon to gauge direct foreign investment inflows, but she expects portfolio flows into the stock markets to increase soon. 

James Downes, head of the Politics and Public Administration Programme at Hong Kong Metropolitan University, believes the meeting provided a positive economic starting base and foundation to move forward with.

“The [Taiwan] issue is a complex long-term geopolitical problem. It is best for both sides that the issue remains off the table for the time being, with a focus on economic issues, tech and AI instead dominating the agenda going forward.”

The Chinese would have agreed. Afterall, even Xi conceded that Taiwan remains “the most important and most sensitive issue” in U.S.-China relations.

Edited by Taejun Kang and Mike Firn.

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