The COVID-19 pandemic and geopolitical tensions have exposed global supply chain vulnerabilities, leading the European Union (EU) to diversify its critical supply sources, particularly semiconductors. Taiwan, producing 60% of global semiconductors and 90% of advanced chips, is an ideal partner whose democratic values align with EU principles.
As Taipei seeks an economic partnership deal with the EU, deepening supply chain and financial links makes sense, given the EU’s characterization of China as “an economic competitor and a systemic rival.” This partnership would align with the EU’s pursuit of strategic autonomy in its trade policy.
The EU’s emphasis on sustainable development and ethical trade standards in its free trade agreements, including human rights, labor standards, and environmental regulations, could provide a framework for Taipei’s economic partnership with the EU.
A strengthened partnership would be beneficial, particularly given current trade tensions with China, the EU’s second-largest trade partner for goods. However, the EU-China relationship is critically unbalanced due to asymmetrical market openings and unequal trade flows and investment
China’s economic model has also created systemic distortions, negatively impacting trading partners. The IMF notes that China’s industrial policies, particularly its support for priority sectors, have significant effects on trading partners. This has led to the EU seeking reciprocity from China and an even playing field to address asymmetries in the relationship.
A partnership with Taiwan could help the EU promote its values and interests, while also reducing its dependence on China and mitigating the negative impacts of China’s economic model. This makes Taiwan a natural choice for the proposed EU-Taiwan Resilient Supply Chain Agreement (RSCA). Adding a Capital Markets Link (CML) to the RSCA would strengthen this partnership by expanding investment opportunities, boosting market liquidity, and improving business capital access in both regions.
Connecting the Taiwan Stock Exchange (TWSE) with European exchanges in Frankfurt, Paris, and Amsterdam would also enhance cross-regional investment diversification and support the EU’s Capital Markets Union initiative.
The proposed RSCA and CML combination leverages Taiwan’s semiconductor expertise while advancing shared democratic values, offering the EU an opportunity to strengthen both its economic security and geopolitical position.
For the TWSE, the benefits would lie in:
- Enhanced Capital Access: European investors, particularly institutional ones, can provide Taiwanese companies with diversified funding sources, supporting their growth and innovation.
- Increased Market Visibility: Strengthening ties with major European financial hubs raises the international profile of Taiwan’s capital markets, attracting more foreign investments.
- Knowledge Exchange: Collaborations facilitate the sharing of best practices in market operations, regulatory frameworks, and technological advancements, contributing to the TWSE’s development.
For the European stock exchanges in these cities, the major financial nodes of the EU, the benefits lie in:
- Investment Opportunities: European investors gain access to Taiwan’s dynamic industries, such as technology and manufacturing, allowing for portfolio diversification.
- Market Expansion: European financial institutions can extend their services to Taiwanese markets, fostering cross-border financial activities.
- Strategic Partnerships: Collaborations open avenues for joint ventures, dual listings, and other cooperative ventures, enhancing global market integration.
For the EU, this partnership offers multiple strategic advantages beyond mere economic benefits. Access to Taiwan’s semiconductor technology would strengthen Europe’s technological capabilities, while diversified supply chains would enhance economic security and strategic autonomy.
Taiwan, in turn, would benefit from reduced economic dependence on single markets, enhanced international recognition, and improved access to European capital markets. These stronger economic ties with the EU could also serve as a deterrent against potential coercion
EU-Taiwan Capital Markets Link
The proposed trading link between the Taiwan Stock Exchange and major European bourses at Amsterdam, Frankfurt and Paris can build on models like the London-Shanghai and China-Switzerland Stock Connect programs. These programs enable cross-border investment through depository receipts (DRs), where companies can list on partner exchanges to expand their investor base.
The Stock Connect framework is workable. Shanghai-listed companies can issue Global Depository Receipts (GDRs) on the London Stock Exchange and vice versa, while the China-Switzerland connection launched in 2022 allows Chinese firms to list GDRs on the SIX Swiss Exchange.
However, for various reasons, the London-Shanghai stock market link never gained traction. Meanwhile, the Swiss-China link failed to build momentum due to a combination of global investor interest, China’s regulatory concerns and a host of other factors.
A similar program between Taiwan and European exchanges would give European investors direct access to Taiwanese equities while increasing market liquidity and trading volumes in both regions. This formal trading link would strengthen Taiwan-EU economic ties and drive mutual growth. While the Stock Connect model offers a structured pathway for market integration, alternative methods could also be considered. These are:
- Mutual Recognition of Funds (MRF) would allow investment funds domiciled in one jurisdiction to be sold in another, subject to regulatory approval, thereby broadening investment options without direct market linkage.
- Cross-Border Exchange-Traded Funds (ETFs) could also provide indirect exposure and promote investment flows by facilitating the listing of ETFs that track indices comprising stocks from both regions.
Implementing this trading link requires addressing key challenges: harmonizing regulatory standards between Taiwan and EU markets, developing compatible trading and settlement systems, and navigating geopolitical considerations.
To establish an effective TWSE-European exchange connection, both sides should begin with bilateral discussions and thorough feasibility studies. This measured approach will help create a sustainable trading link that benefits both regions.
The EU-Taiwan RSCA and CML would create ripple effects across Asia. Japan would gain enhanced supply chain security, India could better integrate into global value chains, and ASEAN nations would benefit from more stable economic networks.
For the Quad nations (US, Japan, India, and Australia), this partnership offers strategic advantages in their quest to diversify critical supply chains, particularly for semiconductors. The agreement would strengthen technological collaboration and help buffer against economic coercion while advancing the Quad’s vision of a free and open Indo-Pacific.
ASEAN countries would gain from increased investment flows as companies expand their manufacturing networks to complement Taiwan’s capabilities. The capital market connections would stimulate regional financial activity, while knowledge transfer in supply chain management and innovation would enhance ASEAN’s global competitiveness. However, this partnership faces a significant challenge: potential Chinese opposition and economic retaliation. This reality necessitates careful strategic planning.
Countering China’s Opposition
The EU-China relationship is characterised by a dual nature: economic partnership and strategic competition. While China is a vital economic partner, providing critical goods such as pharmaceuticals and electronics, this dependency has exposed vulnerabilities, particularly during times of crisis like the COVID-19 pandemic. On the other hand, the EU and China are systemic rivals, with China’s state-capitalist model and assertiveness challenging the EU’s commitment to liberal norms, human rights, and democratic values.
The EU-China relationship is a delicate balance between economic interdependence and ideological and strategic tensions. To navigate this complex dynamic, the EU must diversify its economic relationships, address the normative challenges posed by China’s rise, and manage the geopolitical implications of China’s expansion. A nuanced approach combining pragmatic diplomacy, strategic maneuvering, and continuous engagement can promote a more balanced and sustainable partnership.
However, China may employ economic coercion to deter EU-Taiwan collaboration, particularly through the proposed RSCA and capital market connections. Beijing’s past actions, such as its economic coercion against Lithuania, suggest that it may use similar tactics to constrain Taiwan’s international space. The EU must be prepared to address these challenges and prioritize its values and interests while maintaining economic cooperation and stability.
These coercive measures against Lithuania had a negligible impact on the country’s economy, they affected sectors with significant exposure to the Chinese market, such as the high-technology laser industry. However, Beijing’s actions ultimately backfired in Europe, eroding trust in China as a reliable economic partner and accelerating the adoption of the EU Anti-Coercion Instrument. The campaign against Lithuania shares similarities with other instances of Chinese coercion, including:
- Informal and opaque economic measures allowing for plausible deniability
- Combination of economic measures with diplomatic pressure
- Escalation of pressure over time
However, the Lithuania case also differs in key ways. Firstly, China had limited economic leverage over Lithuania due to minimal trade ties, which led to novel tactics. Secondly, Lithuania received significant backing from the EU, a major economic power, and secured diplomatic and commercial support from like-minded partners. To counter comparable moves that could emerge, partners should implement a coordinated defensive strategy:
- Build Collective Resilience: A coalition of like-minded nations should pledge mutual support during economic pressure, leveraging shared dependencies to deter coercive actions. This unified approach reduces individual vulnerabilities to economic threats.
- Diversify Supply Chains: The EU, ASEAN, Quad members, and Taiwan should create alternative supply networks for critical goods, reducing dependency on single sources and limiting the impact of potential trade restrictions.
- Strengthen International Frameworks: Partners should work through the WTO and other international bodies to establish stronger legal protections against economic coercion, promoting a rules-based order that discourages unilateral punitive actions.
- Deepen Regional Partnerships: Enhanced bilateral and multilateral agreements among partner nations should include specific provisions for mutual assistance during economic pressure, creating a more unified response to coercive tactics.
- Improve Intelligence Sharing: Establishing clear channels for sharing information about coercive practices will help nations anticipate and coordinate responses to economic threats, while preventing misunderstandings among partners. This coordinated approach would help safeguard the benefits of EU-Taiwan cooperation while promoting a more stable international economic order.
The proposed EU-Taiwan RSCA and CML represent more than bilateral cooperation – they offer a blueprint for strengthening global economic resilience amid regionalisation. By combining Taiwan’s semiconductor expertise with European financial infrastructure, this partnership would create a more robust international supply chain while deepening capital market integration.
The benefits extend well beyond the immediate partners. For ASEAN nations, this framework promises increased investment flows and technological advancement. For Quad members, it reinforces their vision of a rules-based order in the Indo-Asia Pacific while diversifying critical supply chains. This multilateral impact underscores the proposal’s strategic importance in building a more resilient global economy.
While Chinese opposition poses a significant challenge, a coordinated response from partner nations can effectively address potential economic coercion. Through collective resilience strategies, strengthened international frameworks, and deeper regional partnerships, participating nations can safeguard their shared economic interests while promoting a rules-based international order.
The EU-Taiwan partnership thus stands as a crucial step toward a more stable, diversified, and interconnected global economy. By balancing economic opportunities with strategic considerations, this initiative could help shape a more resilient international trading system for the 21st century.
