The results of the elections have important implications for the Taiwanese economy.

Firstly, the need for consensus in policies, including economic policies, is larger than in the previous two administrations of the Democratic and Progressive Party (DPP). The DPP will need to accept that its powers are now more limited, including how it interacts with mainland China. A softer approach to the mainland and more economic cooperation will likely emerge. The other important consequence is the deceleration, or one wonders even reversal, of the diversification drive which has characterized the Taiwanese economy for the last eight years.

In its campaign, the DPP made it clear that further geographical diversification of the Taiwanese economy away from the mainland is in Taiwan’s interest. Geographical diversification has happened faster for Taiwanese outbound foreign direct investment (FDI) than for trade. Taiwan’s FDI decreased from 65% during the KMT's last administration (from 2008-2016) to 35% during DPP’s last two terms under President Tsai Ing-wen. While the government did push for the so-called ‘New Southbound Policy’ to invest in ASEAN countries and in India, the big increase in FDI into Japan, the United States and Germany in the semiconductor space is likely more market-driven.

For trade, the diversification process began more recently. Exports to the mainland have been very resilient, even during Trump’s trade war. Trade exports increased in 2020 to more than 40% of total exports. Exports to the mainland have decreased since then and stand at 35% today. How much this diversification process should be seen as a geopolitical move or as a move to ‘de-risk’ trade is yet unknown. The surge in Taiwan’s outbound FDI – through large investments in semiconductor labs in the US, Japan and Germany – could put Taiwan’s famous silicon shield at risk, especially if the technology to produce the world’s most advanced semiconductors is transferred out of Taiwan. So far, the EU has not benefitted much from Taiwan’s trade and investment diversification, at least when compared to the US and the rest of Asia. The lack of a trade or investment deal could be considered important, but some of Taiwan’s other trading partners are also in this position. Considering that the EU is the largest foreign direct investor in Taiwan, one wonders whether the EU and Taiwan should attempt to foster more bilateral economic relations.

Down the line, the DPP will face an uphill battle to further diversify its economy away from the mainland for two reasons. First, the DPP must collaborate with the opposition on economic policies, and this may mean strengthening relations with China. Second, President Tsai did not manage to strike a single trade deal during his tenure, mostly because of her handling of the Covid pandemic and Taiwan’s position on the war in Ukraine. Furthermore, Taiwan’s official application to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2021 seems to have been frozen, according to comments made by Australia's Prime Minister Albert Albanese. In the same vein, Biden did not include Taiwan in his economic initiative for the region, the Indo-Pacific Economic Framework, which was launched in Tokyo in May 2022. It seems that the US, Japan and Australia are unwilling to close trade deals with Taiwan.

All in all, Taiwan’s elections show that the Taiwanese want to maintain a democratic society while also mitigating hostilities with mainland China. The DPP has been chosen for a third mandate, but it now faces tighter checks and balances. The DPP's economic policies need to reflect this new reality, and as such, trade and investment diversification away from the mainland may slow down. This could be a missed opportunity for the EU because not much can be changed on the institutional front, based on what countries closer to Taiwan like the US, Japan and Australia are doing. One would expect that European companies might still push for opportunities in Taiwan given its growth track record, technological comparative advantage in key sectors like semiconductors, and large outbound investment. Still, the turn towards increasing relations with the mainland, which the KMT will surely push, might not leave much space for the EU to build a strong partnership.