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The outcome of presidential elections in January 2012 will set the tone of cross-strait relations for the next few years.

While the Peoples Republic of China (PRC) is known to favour the incumbent, Ma Ying-jeou of the Kuotmintang (KMT), a victory for the Democratic Peoples Party (DPP) candidate Tsai Ing-wen would not represent the popular endorsement of a move towards Taiwanese independence that a DPP win might have signified in the past. Cross-strait tensions should therefore remain low regardless of the outcome of the poll, although ties with the Mainland will undoubtedly be smoother should Ma secure a second term. In mid-December 2011, a month before the vote, the election appeared too close to call.

From a security perspective, even most politicians from the independence-leaning Pan-Green camp now accept that the military balance between the PRC and Taiwan has shifted decisively in the mainlands favour, to the point where a declaration of independence would be extremely reckless. As such, there is little appetite in Taiwan for altering the status quo.

The US, despite its legal obligation to help Taiwan protect itself against invasion, has shown little desire to redress this ever-growing strategic imbalance. In September 2011 the Obama administration announced a US$5.85bn arms package for the island that withheld many of the big-ticket items that Taipei had requested, notably new F-16 C/D fighter aircraft. Instead, the US will help upgrade Taiwans existing fleet of older F-16 A/B models. However, the stalled F-16 sale is a hot topic in Washington as well as in Taipei, and US politicians continue to lobby for the deal to go ahead. An Iraqi order for F-16s, announced in December, means that the F-16 production line, which had been nearing closure, is now guaranteed to stay open until at least 2015, ensuring that the argument over whether to sell Taiwan new jets will rumble on.

The F-16 upgrade programme, which is worth US$5.3bn, will equip Taiwans 145 F-16 A/Bs with AESA radars and new targeting and weapon systems. The fighters may also subsequently be re-engined. By mid- December, however, the upgrade programme faced the prospect of delays, with some lawmakers objecting to the fact that the Ministry of National Defense appeared set to hand the upgrade work to US defence firm Lockheed Martin without putting it out to competitive tender, as required by law.

In December the Taipei Times reported that another long-stalled military programme – submarine procurement – could finally be set to move forwards. The newspaper revealed that after a decade of trying to persuade the US to sell them new submarines, Taiwanese officials had finally given up and were instead preparing to initiate an indigenous submarine development programme. However, the costs and technical challenges involved would be extremely prohibitive, and the chances of any such programme succeeding are questionable.

The PRC, as well as Taiwan, is facing a period of political flux, with President Hu Jintao due to stand down in 2012. However, once the changeovers on both sides of the strait are complete a new phase of diplomacy could potentially begin. In November, Deputy Minister of National Defense Andrew Yang made clear that the Ma administration was willing to reach a peace agreement with the PRC, but that Beijing should first issue a goodwill statement removing the threat of force. Depending on how the political cards fall in Beijing and Taipei, a binding peace deal could perhaps be reached from 2013 onwards.