Beijing’s and Washington’s show of restraint in response to the January victory of Democratic Progressive Party (DPP) candidate Lai Ching-te contradicted widespread fears that Lai's victory would lead to immediate military escalation. While uncertainty persists, the real focus for companies should be on the constraints that will determine Lai’s domestic and foreign policy influence on Beijing-Taipei dynamics.
- Control Risks maintains a low conflict risk for Taiwan
- Lai’s policy success will depend on his alignment with the Taiwan People’s Party (TPP) in the legislature, where his party is in a weaker position compared to its longtime rival opposition party, Kuomintang (KMT).
- To maximise its options, the TPP is likely to avoid a formal alliance with the DPP or the KMT but will likely align with the KMT in opposition to more radical cross-Strait policies.
- Although Lai’s term is likely to see periods of heightened cross-Strait tensions, companies should not focus solely on war risks and should be prepared for increased forms of non-military escalation. Though less extreme, these are more likely and potentially as consequential for everyday business operations.
Since the election, Beijing has maintained its now regular military activities around Taiwan. However, the scale and intensity of Beijing’s activities have not exceeded previous levels and are noticeably well below the 2023 average. Beijing instead appears to be focusing on traditional diplomatic and economic tactics to pressure Taipei through its persistent diplomatic isolation campaign and further trade restrictions, with additional measures along these lines likely in the coming months.
Beijing's restraint in its immediate response to the election results does not necessarily lower the likelihood of future escalation. Control Risks maintains a low conflict risk for Taiwan. However, there is uncertainty over Lai’s political positioning, his likely more outspoken stance on cross-Strait relations, and his known preference for deepening US-Taiwan relations.Tensions that increased during his predecessor Tsai Ing-wen’s tenure will continue to rise with greater frequency and intensity.
But in the short term, Beijing may have assessed that Lai’s victory alone does not necessarily warrant a change in the cross-Strait status quo. This assessment has so far been matched by Lai’s relatively restrained post-election rhetoric on cross-Strait relations and Washington’s quick reaffirmation that it does not support Taiwan’s independence. As a result, Beijing seems more willing to wait and see how Lai and his administration shape their political positioning and cross-Strait policy before calibrating its response.
While all eyes are on the geopolitics of cross-Strait relations, Lai’s immediate priority lies at home. Over the next four years, Lai will have to contend with a divided Legislative Yuan (LY, Taiwan’s legislature). The extent of Lai's success in pushing through his policy agenda will be determined for the first time by a “third force” outside Taiwan’s polarised traditional politics. With the DPP holding 51 seats and the KMT holding 52 in the 113- member LY, neither party dominates. This means that the TPP, and the chairman Ko Wen-je, will play the role of kingmaker. The KMT won recent elections for both the legislative speaker (former KMT presidential candidate Han Kuo-yu) and the deputy speaker, strengthening the opposition party’s' ability to define the legislative agenda.
The composition of the Legislative Yuan means that the DPP will have to compete fiercely with the KMT for Ko’s support if it wants to pass any major legislation. At the same time, Ko’s history with both parties and his ambiguous line on domestic and foreign policy puts him and his party in a strong negotiating position with the two established parties. Instead of forming a firm alliance with either party, Ko will most likely act across party and policy lines to maximise his options and his own political interests, such as his proposal for legislative reforms.
Similar fluidity of political alignment will test Lai’s ability to push major economic and foreign policy agendas through the LY. While Ko is largely sympathetic to the DPP's position on strengthening Taiwan’s self-defence and relations with the US, he prefers more stable relations and closer communication with mainland China. Ko is thus more likely to join the KMT in opposing Lai’s more radical cross-Strait policies, which pursue greater independence from the mainland. In energy policy, including decarbonisation processes, and social and labour reforms, similarly the DPP and KMT are likely to co-operate on legislation.
Contending with adverse scenarios
Any meaningful change to Taiwan’s political status quo – for example, a constitutional revision or a referendum – will require a super majority in the LY. It is therefore impossible for Lai to enact any such changes with the bodies current composition, even if he embraces a radical agenda. Barring such political upheaval, it is highly unlikely that Beijing will resort to military options against Taiwan, which would come at enormous cost. This is one reason Control Risks maintains that war risks for Taiwan remain low.
Nonetheless, the outlook is certainly not optimistic. Continuing cross-Strait tensions and likely more frequent and intensifying escalation cycles mean that businesses must continue contending with persistent uncertainty and an increased risk of miscalculation in the coming years. Taipei, Washington, and Beijing are all unwilling to abandon their respective agendas on the Taiwan issue, and Taiwan remains a critical arena for US-China strategic competition. It is perhaps only a matter of time before the next “mini crisis” erupts, such as the one that followed then-US House Speaker Nancy Pelosi’s August 2022 visit to Taiwan.
While Lai’s term is likely to see periods of heightened cross-Strait tensions, companies should not focus solely on war risks but prepare for increased forms of gradual, non-military escalation. Beijing could put pressure Taiwan’s trade, maritime shipping, and airspace through regulatory measures, or by interfering with maritime traffic and inspection enforcement. More dramatically, Beijing could impose a partial quarantine or temporary blockade, as implied and partially rehearsed during military drills following Pelosi’s visit. Organisations should assess how their operations and markets would be impacted by these developments, and plan to mitigate or manage these risks through better preparedness and resilience.