Showdown In Taiwan

As the contested election causes turmoil, the economy will suffer -- and the impact will be felt around the globe

It felt more like a pep rally than a revolution. In the days following President Chen Shui-bian's narrow reelection on Mar. 20, thousands of demonstrators gathered in a Taipei square to denounce what they called election fraud. Backers of Chen's rival, Lien Chan, donned campaign-issue white-and-blue baseball caps and waved flags, while lasers flashed slogans on the walls of the nearby presidential palace. In the evening, the crowds swelled as workers and their families arrived to lend support -- and snack on the corn dogs and steamed buns offered by street vendors.

Make no mistake, though: Despite the carnival atmosphere, the protesters had plenty of passion. Most believed that Chen's camp had conspired to keep thousands of Lien's supporters from voting and then tossed out hundreds of thousands of ballots of those who managed to vote. They were convinced that a gunshot attack on Chen and his Vice-President, Annette Lu, the day before the election was a cynical ploy to win sympathy votes. So Lien's allies demanded not only a recount but also an independent investigation into the mysterious events surrounding the shooting. "Our democracy is dying," 24-year-old student Wang Ning-hsuan shouted, trying to make herself heard over the din of protesters' air horns. Added Sun Yu-ming, a 48-year-old homemaker: "We are doing this because the government doesn't listen to us."

ECONOMIC FALLOUT. Leaders on both sides are plenty angry, too. Lien accuses Chen's government of rigging the vote. Although Chen has agreed to a recount, he and his supporters insist they have done nothing wrong and that Lien is simply a sore loser. As the two sides trade allegations, there is little sign that the standoff will be resolved quickly: On Mar. 23, brawls broke out in the legislature, and Lien's camp planned a Mar. 27 protest it hoped would draw a half-million people and ultimately topple Chen.

Whatever the outcome, the economy will probably suffer. Following the election, the local stock market saw its worst two-day fall since September, 2001. If the protests drag on, the instability could continue to roil financial markets. And even if Chen's victory is confirmed, that's not likely to please the thousands of Taiwan businesses that are becoming ever more dependent on trade with China, and whose leaders generally back Lien's party, the Kuomintang (KMT). One example: Shares of Taiwan Semiconductor Manufacturing Co. (TSMC) plunged after Chen's reelection. The markets had been betting that Lien would win -- and quickly approve a $1 billion chip plant TSMC wants to build on the mainland.

The impact of the crisis will be felt far beyond Taiwan. China's leaders would deal with Lien, but they so dislike Chen -- whom they see as an advocate of Taiwan independence -- that the next four years hold little chance of a thaw in relations. Although President Hu Jintao has toned down the angry rhetoric Chinese leaders normally aim at Taipei during elections, continued protests could encourage hard-liners in Beijing who favor a tougher stand toward both Taiwan and Hong Kong. And in Hong Kong, Taiwan's strife is providing ammunition in the propaganda fight against advocates of democracy. In the aftermath of the Taiwanese election, democrats "should reflect on whether Hong Kong has the political maturity for universal suffrage now," says Raymond Wu, a Hong Kong delegate to the National People's Congress in Beijing.

The uncertain outcome also will complicate relations between China and the U.S. -- at a time when ties are already strained because of election-year pressures on the White House to get tough with Beijing. Chen's reelection, in fact, is an annoyance for an Administration that wants to focus on U.S. trade with China, not deal with a crusade for Taiwan independence. "People in Washington realize that American interests and Taiwan's interests are not the same," says Susan Shirk, an Asia hand in the State Dept. during the Clinton Administration and now a professor at the University of California at San Diego.

No doubt about it: Plenty of powerful people would like to see Chen lose a recount. Yet the combative Chen is likely to prevail: His 0.02% margin may be thin, but it won't be easy to overturn. Chen's supporters say they have explanations for any apparent irregularities, and finding the 30,000 votes Lien would need to win will be tough.

If Chen does emerge as the victor, he faces some high hurdles. Most important is handling the volatile issue of independence. The canny Chen, even while courting voters who want an independence vote, says that for the moment he opposes full-fledged separation from the mainland and the creation of a new stand-alone state. "The President has promised we will not get into the area that will cause conflict" with China, says Joseph Wu, a top adviser. "We have formally recognized the status quo."

But while a studied ambiguity would doubtless work best for the embattled President, his most radical supporters may not let him sit on the fence. An early test will be in December, when the Taiwanese vote for a new legislature. If his Democratic Progressive Party (DPP) -- now in the minority -- wins a strong mandate, Chen could come under increased pressure from some of the DPP's more extreme factions to declare independence from China, something Beijing has long said is grounds for war.

The pro-independence forces may have an opening, thanks to Chen's pledge to write a new constitution. "You can't talk about a new constitution without talking about the name of the country," says Emile Sheng, a professor at Soochow University in Taipei. Today, that name is the Republic of China, a reflection of Taipei's insistence that it was the legitimate government of all China. Chen maintains that the constitution needs to be revamped to reform an archaic political structure, a legacy of the authoritarian regime of Chiang Kai-shek, who fled to the island in 1949 after being driven from the mainland by the communists. But there will be plenty of opportunity in such an exercise to codify ideas that push Taiwan toward independence.

Chen's plan is to hold a referendum on the constitution in 2008, to coincide with the next presidential election. If the charter contains language effectively declaring Taiwan a republic, it could provoke Beijing into military action. And with hundreds of missiles aimed at Taiwan, a few targeted strikes could cripple the island's infrastructure. "There will be real tension," Sheng says.

Beijing has less violent options, too. The island has few natural resources -- Taiwan imports nearly all its oil, for example -- and its economy is highly dependent on trade. "China's first option would be an economic blockade," says Bruce Gale, an analyst with risk consultancy Hill & Associates in Singapore. "That could bring Taiwan to its knees pretty quickly."

China's most effective long-term strategy, though, may be to kill the island with kindness. Taiwanese have invested more than $100 billion in the mainland, and a half-million Taiwanese now live there. Many companies, such as electronics powers Quanta Computer Inc. and Hon Hai Precision Industry, do the bulk of their manufacturing and much of their research in China. And many Taiwanese companies today also see China as a key market. So instead of launching its missiles, Beijing could woo companies to give up on Taiwan altogether. China "will do something further to get Taiwanese businesses permanently in China," says Sun Kauo-hwa, a legislator from Lien's KMT.

EASING TENSIONS. It wouldn't take much pressure. Consider cell-phone manufacturer DBtel Inc., which since 2001 has been trying to to build up its brand name among Chinese consumers. "China is like our home market," says Chairman Michael Mou. DBtel has 1,000 engineers in China and is spending $25 million on a new China headquarters in Shanghai. Another company, D-Link Corp., a maker of wireless networking gear, sells primarily in the U.S., Europe, and China, and does its manufacturing and research worldwide. So President J.C. Liao says that, while no move is imminent, he could see quitting Taiwan in case of increased tension. "We don't think we need to be headquartered in Taiwan," he says. "We can move anywhere we like."

Some, however, say such moves won't be necessary because Chen will work to improve cross-strait ties rather than increase tensions. "President Chen will definitely make some goodwill gestures," says Philip Yang, a politics professor at National Taiwan University in Taipei. Some possibilities: easing restrictions on Chinese imports, increasing educational exchanges, and boosting tourism. "But," Yang says, "I don't think Beijing will take them seriously." Like Lien's supporters massed in front of the presidential palace, China's leaders simply don't trust Chen. If the President survives the attempts to topple him, figuring out a way to win that trust will be his biggest challenge.

By Bruce Einhorn in Taipei, with Dexter Roberts in Hong Kong and Stan Crock in Washington

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