Written by Michael Turton and C. Donovan Smith.

1. Ma’s China Economic Policies will continue
The Ma Administration has pursued policies of economic engagement with China, conventionally presented as “free trade agreements” ostensibly designed in response to Taiwan’s “faltering economy” under Chen Shui-bian. These polices have become unpopular as incomes stagnate and the economy slows. For example, since the “landmark” ECFA agreement, Taiwan’s trade surplus with China has fallen almost every year, moving towards 2007 levels at the moment. The Ma Administration’s overall policy of putting the island in China’s orbit is a key factor in the KMT’s current decline. Do not expect these polices to change much with the new DPP administration.

First, these policies have generated important local constituencies. Consider the east coast. At present it is the site of hotel and other leisure infrastructure erected in recent years to serve the flood of Chinese tourists. This infrastructure has powerful local backers. Moreover, the DPP is attempting to make inroads in the solidly KMT east coast and will not want to anger local potentates. The DPP might take a few potshots at symbolic targets, but Chinese tourism on the east coast will remain. Similar local issues may be found across Taiwan.

Further, the Taiwanese businessmen in China are important, but among the many Taiwanese with investments in China are DPP politicians and their local supporters. A critical beneficiary of Ma’s China turn is local organized crime, tightly linked to local factions, which is exploiting the China connection in myriad ways. The factions are less important than they used to be, but they are not without power. Local businessmen also front for Chinese investors (major sources of FDI in Taiwan are the various island offshore finance centers) and of course, the real estate industry is hoping for Chinese investment to keep prices up. This will put bottom-up pressure on the DPP to maintain these linkages.

In addition to the new local connections, Taiwan is dependent on China in a number of critical areas. For example, China is a key source of gravel, the lifeblood of the construction-industrial state that dominates the domestic political economy. Imports first began in 1997. In March of 2007, during the run-up to 2008 election, China banned gravel exports to Taiwan. The results were devastating:

The ban on gravel exports has produced economic ripples on both sides of the strait. Immediately after imports stopped, the price of gravel in Taiwan initially skyrocketed from US$13.8 to US$30.8 per cubic meter, and no longer having access to Taiwan’s lucrative market means that gravel exporters in China’s Fujian Province have been hit hard as well. High prices and the suspension in trade left Taiwan with a shortfall of 25 million cubic meters of sandstone this year. As a consequence, overall economic development has naturally slowed and many large-scale public construction projects have been forced to halt due to the lack of materials.

As infrastructure construction halted, KMT election propaganda that the economy was failing under Chen Shui-bian (it was actually peaking, and would reach 6% growth in the opening months of 2008) resonated with the public in many local areas. Despite imports from Vietnam and Philippines, China remains an important source of gravel, giving it leverage in Taiwan’s domestic political economy. China also buys fruit and other items in obvious political buying expeditions, and supplies many upstream inputs to Taiwanese manufacturers, from steel to chemicals.

The DPP will find that disturbing this web of links is perilous and unprofitable. Rather, the Tsai Administration is likely to let them slowly shrivel while ensuring that fewer tentacles from China are inserted into the Taiwan economy, and continuing the DPP policies of moving investment to SE Asian countries and diversifying exports. Thus, there won’t be any rapid reversals of China policies.

2. The KMT is going to save Taiwan
Yes, you read that right. Beijing doesn’t appear to understand what is going on in Taiwan. Its sources are primarily agents on the island, Taiwanese businessmen in China, and the KMT, and all of them lie. When the KMT loses, it will assure the leadership in China that it will bounce back in 2020, and Beijing, its view obscured by a thick layer of self-interest and propaganda, will believe them. The KMT will thus buy Taiwan another four years without a Chinese attack.

3. KMT can look forward to a massive internal struggle
Current Chairman and Presidential Candidate Eric Chu has promised to resign if he loses the election, which is almost certain. Whether or not he steps down, a vicious multi-cornered fight over the KMT and its future is going to break out.

Demographics augur ill for the KMT. The Party has long been led by an elite core of post-1949 Chinese, the “mainlanders” whose children stepped up to continue the Party’s colonial rule of Taiwan. There is no third generation and no obvious heir to the Chiang Kai-shek mantle. Its base of True Believers, the old soldiers who came over in 1949 and their second generation, is shrinking fast, and their grandchildren have emigrated or become Taiwanese. Few young Taiwanese support the KMT and its overall party ID is crashing over time. The local factions it depends on for its local power base are less important than they used to be, and will likely shift to the DPP over time since that party administrates 60% of the population and will be running the central government soon. Moreover, while in previous elections the public opposed particular candidates, in the last few years the public has lost faith in the KMT as an institution. The KMT is now Jurassic Park: it has all the problems of a declining major political party, and all the problems of a declining hereditary monarchy.

And as the gruel gets thin, the knives get sharper…

The obvious path to survival for the KMT is to make Wang Jin-pyng, the Taiwanese Speaker of the Legislature and unofficial leader of the Taiwanese KMT, the Chairman, and then gradually become a local Taiwanese party, so that something called the KMT will survive. However, the old soldiers, bitter-enders to the core, have blocked the option of a Taiwanese to head the KMT. Hence, the next Chairman — assuming Chu gives up the position — will be a mainlander. Hau Lung-bin, the son of former Premier and General Hau Pei-tsun is one likely candidate. But current President Ma Ying-jeou may want to resume the Chairmanship, and will certainly stick his hand in the game. Former presidential candidate Hung Hsiu-chu, still popular with conservatives, is a long shot (supported by Beijing?). This internecine combat will likely be most intense in the immediate post-election period, when Chu resigns and Ma still retains the power and prestige of the Presidency. But it will be conducted against the backdrop of the coming political asset laws…

4. KMT assets are going to be hit less than you think
The DPP has long promised to pass laws to end the KMT’s control of its large base of financial, real estate, and other assets, which the DPP considers to have been stolen from the people of Taiwan. Recall, however, that the partisan divide in the legislature is criss-crossed by numerous friendships and guanxi relationships. Expect the new laws to go after mostly obvious assets as legislators placate their counterparts by leaving much untouched. No matter — whatever escapes the asset law is likely to be looted by party heavyweights and insiders as they increasingly come to realize the KMT is a party without a future.

5. The Legislature is going to be less cooperative than you think
During the Chen Shui-bian administration the legislature, controlled by the KMT and its allies, largely refused to cooperate with the president. Many were surprised when, during the Ma Administration, the legislature, controlled by the KMT, remained recalcitrant, petulant, and ineffective. Expect more of the same, explains a wonderful piece at Ketagalan Media, unless the DPP (1) gains a strong majority and (2) has the will to make major changes in the way the legislature does business. There will be pushback against reforms: many in the DPP will remember the days spent in the wilderness, and caution the party against making changes it might rue if the KMT comes back, while others will wish to preserve legislative prerogatives. Don’t expect too much, especially after the initial flurry of legislation.

6. The Third Force is going to turn on the DPP
Here is another reason the legislature isn’t going to be very cooperative: some of it will be allies of the DPP. These smaller parties, the “Third Force”, are comprised largely of longtime social activists, not politicians. They have long been suspicious of the DPP, which many consider a sell-out Establishment party. Protest comes naturally, and when the pace of reform doesn’t meet expectations, they will stop cooperating and come out in the streets again. Indeed, some Third Force supporters argue that their real role is to hold the DPP accountable.

7. Pushed and Pulled, the DPP will begin to fracture 
The DPP is a big tent Taiwanese nationalist party that brings together people of widely varying social and economic views. The party is staying together partly out of anticipation of victory, and partly out of Chairwoman Tsai Ing-wen’s iron will clamping down on faction politics. The party’s notorious factions were formally banned years ago, but factionalization itself could not be. These factions are likely to reassert themselves in the struggle for power, while individuals who feel they didn’t receive rewards they feel they deserve will leave. The party is also likely to fracture over specific political issues, from gay marriage to Constitutional reform to how to deal with local faction politicians (many ex-KMT) in the DPP. Thus, there are both structural and personal internal “push” effects that will lead the DPP to fracture.

The pull effect is the space to the DPP’s left and center that will be created in the next few election cycles. Though we’ll continue to amuse ourselves by reading in the international media that Taiwan is “divided”, for locals the blue-green divide is a settled question, especially for the under-40 population: green won, and everyone is Taiwanese. What kind of politics will this new Taiwanese identity have? As the KMT continues to fade, the DPP is likely to move to the right economically as businessmen pragmatically shift funds away from the KMT to the DPP, turning the DPP into a kind of right-wing neoliberal party with a token aura of progressiveness. This will create space on the left which will tempt individual politicians to leave the DPP to erect new parties, or to join parties attempting to fill that space. This will become even more possible if the legislature returns to some form of proportional representation that encourages small and single issue parties to proliferate.

Michael Turton owns The View From Taiwan. Donovan Smith is correspondent for ICRT.