VICE PREMIER URGES U.S. TO STUDY FTA WITH TAIWAN

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 001797

SIPDIS

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W, USTR

E.O. 12958: DECL: 04/14/2015
TAGS: ECON EFIN ETRD PREL TW CH
SUBJECT: VICE PREMIER URGES U.S. TO STUDY FTA WITH TAIWAN


Classified By: AIT Director Douglas H. Paal, Reason 1.4 b/d

Summary
--------------


1. (C) In an April 13 meeting, Taiwan's Vice Premier Wu
Rong-I told AIT/T Econ Section Chief that Premier Frank
Hsieh would maintain most of the economic policies of his
predecessor. He also outlined the government goals for
financial reform, which focus on bank consolidation, and
fiscal policy aimed at reducing Taiwan's budget deficit.
According to Wu, it is unclear now how well Premier Hsieh
and the Executive Yuan (EY) will be able to push their
legislative agenda through the Legislative Yuan (LY) with
the current level of discord after the PRC's passage of the
Anti-Secession Law (ASL). On cross-Strait relations, Wu
said that the Taiwan government would continue the "active
opening, effective management" policy, but had put further
liberalization on hold while assessing how to enhance
"effective management." He said that the visit of KMT Vice
Chairman P.K. Chiang's trip to the PRC had complicated the
situation, but suggested that the government might be ready
to resume liberalization efforts in late May. Wu also
reiterated Taiwan's desire to negotiate a free trade
agreement (FTA) with the U.S. in order to encourage other
countries to enter into trade negotiations with Taiwan. Wu
emphasized that even a U.S. commitment to study the
possibility of an FTA with Taiwan would help change
attitudes in other countries. He suggested that the U.S.
consider the potential strategic impact of a U.S.-Taiwan
FTA on regional stability. Finally, Wu inquired about the
possibility that AIT/W would reconsider the denial of his
request to attend a Microsoft hosted forum in Washington,
D.C., on April 26. End Summary.

Economic Priorities - Staying on Course
--------------


2. (C) Econ Section Chief met with Taiwan's recently
appointed Vice Premier Wu Rong-I on April 13 to discuss the
economic priorities of Wu and the new Premier Frank Hsieh.
Wu's first point was to say that Premier Hsieh would in
general maintain the economic policies of his predecessor
Yu Shyi-kun because he does not believe that a new Premier
should bring new policies. However, Wu said that policies
that were unfeasible or difficult to implement would be
changed. (Comment: Wu did not say what those "unfeasible"
policies might be, but they likely include some of the
cross-Strait policies that are under review after the PRC's
passage of the Anti-Secession Law. End comment.) Wu's
second point was that when it comes to domestic economic
policy, it doesn't make much difference whether the KMT or
DPP was in power. There was broad consensus on the general
direction for economic policy.


3. (C) Wu highlighted a few new initiatives in financial
sector reform. He noted that Taiwan had entered the second
stage of financial reforms, many of which had been proposed
by the Taiwan Institute for Economic Research when Wu was
its president. The three primary goals of this stage of
reform as identified by Wu are to reduce the number of
government controlled banks; to reduce from 12 to 6 the
number of financial holding companies; to increase the
market share for the top three banks in Taiwan to over 10
percent each; and to sell one government-owned bank to a
foreign entity by 2006. Taiwan has already identified
Changhwa Commercial Bank as the bank to be sold to a
foreign entity (Note: the Ministry of Finance is actively
considering bids and is expected to announce a decision in
early June. Econ Section Chief also met with Financial
Supervisory Commission Chairman Kong Jaw-sheng April 12 and
Kong identified the same financial sector goals as the Vice
Premier. In providing a few more details, Kong said he
hopes to establish Taiwan as a regional source for asset
management and fund raising. To this end, he expects to
establish an offshore capital market or as he called it "an
international board" by the end of 2005. End note.)


4. (C) On fiscal policy, Wu reported that the Executive
Yuan has a package of reforms, mostly aimed at increasing
tax revenue, that its hopes to submit to the Legislative
Yuan for approval before the end of the current session.
He explained that Taiwan has legislatively mandated budget
caps that apply both to accumulated debt and annual
deficits. The Taiwan government has reached the caps and
cannot borrow additional money without changing the law.
The reforms to be proposed will increase tax revenue. At
12.6 percent of GDP, Taiwan already has a relatively low
rate of overall taxation. Hong Kong's is lower, with
property leases/sales typically topping up revenues, but
the U.S. rate is significantly higher at 19 percent and
several European countries have rates over 20 percent.
Econ Section Chief noted that there had been much media
attention to the fact that many high-tech manufacturers
paid little or no taxes because of government incentives.
Wu agreed that these policies had been heavily criticized,
but observed that they are not easy issues to resolve.


5. (C) When asked about the prospects for this kind of
legislation, Wu described the recent change in the
political atmosphere after the PRC's passage of the Anti-
Secession Law. Previously, relations between Premier Hsieh
and the opposition in the LY were quite positive. Wu said
that the opposition had high regard for Hsieh's corporate
style, but it was no longer possible to predict how the LY
would respond to the EY's proposals on economic policy.
Econ Section Chief noted that some financial sector reform
initiatives such as bank privatization did not require LY
approval. Wu agreed. He also observed that the overall
health of Taiwan's financial system was much improved with
the successful implementation of the first stage of
reforms. He noted that the overall non-performing loan
ratio for Taiwan banks had dropped below 3 percent and
added that he did not believe that funding for financial
sector restructuring fund, which requires LY approval, was
particularly important to Taiwan's reform agenda.

Cross-Strait Relations - Reassessing Options
--------------


6. (C) Econ Section Chief asked if the expectations among
many in the business community that the ASL would
significantly delay cross-Strait liberalization measures
were accurate. Wu pointed out that high-level government
officials had met April 9 and 10 to consider the direction
of cross-Strait policies. The Taiwan government has
pledged to maintain the "active opening, effective
management" policy with regard to cross-Strait economic
relations. However, Wu said that previously the policies
had not been managed effectively and the ministries of the
EY would be looking at how to change that.


7. (C) Wu emphasized that the question of the PRC's true
intentions in passing the ASL would have an important
effect on the direction of Taiwan's policy. If, as many
claimed, the ASL was little more than a tool of rhetoric,
then, according to Wu, the impact would be small. Wu, on
the other hand, believes that the ASL genuinely increases
the security risks facing Taiwan. To support this view, Wu
cited the PRC's pressure on Chi-Mei founder Hsu Wen-lung
and other pro-Green businessmen. If his suspicion proves
correct, liberalization policies will face further delay.
(Note: Wu, as president of TIER, had publicly and
repeatedly warned Taiwan firms about the risks of engaging
in business ventures on the Mainland. End note.)


8. (C) The visit to China by KMT Deputy Chairman P.K.
Chiang had further complicated the situation. Wu said that
he understood the political motives, but Chiang's actions
were not good for the management of relations with PRC. He
underscored that any KMT deal with the PRC violated Taiwan
law on cross-Strait relations. As a result, the Taiwan
government must assess the situation and consider next
steps. Wu said that the Taiwan government might be ready
in late May to resume liberalization measures and take
steps toward a cross-Strait dialogue.


9. (C) Looking at the overall cross-Strait economic
relations, Wu argued that the current status was very good.
He claimed that if both formal and informal investments are
counted, Taiwan is the largest source of foreign direct
investment in the PRC. He pointed out that approximately
10,000 people travel from Taiwan to the PRC via Hong Kong
and Macao each day.


10. (C) Nevertheless, he lamented the situation of Taiwan
businessmen in the Mainland. He noted that because the PRC
refuses to talk to Taiwan, the Taiwan government could do
nothing to help Taiwan businessmen who encounter
difficulties. Although many businessmen are able to
resolve their problems on their own, Wu commented that
perhaps the U.S. could help address this situation.


11. (C) Wu complained that many of the current cross-Strait
problems were a result of China's rapid emergence as a
major world power. According to Wu, China claims it is a
big country with 1.3 billion people and it does not need
any help from others, but in reality its development has
been the result of foreign investment in export
manufacturing. He said that China does not understand
democracy or the rest of the world. It is rapidly
increasing military spending and growing as threat to
others in addition to Taiwan. Wu cited China's recent
problems with Japan as an example.

FTA - Asking U.S. to Study the Possibility
--------------


12. (C) Wu reiterated Taiwan's interest in an FTA with the
United States. He noted China's FTA negotiations with
ASEAN and claimed that the PRC's clear intent was to
isolate Taiwan from its South-East Asian neighbors. He
said that Taiwan had hoped three or four years ago that it
might be able to negotiate an FTA with Singapore, but PRC
pressure had made Singapore unwilling to proceed. Taiwan
also wants an FTA with Japan, but according to Wu, needs
the U.S. to agree to consider an FTA with Taiwan before
other countries will follow suit. He claimed that just a
U.S. commitment to study an FTA with Taiwan could have the
desired impact in the region and repeated this suggestion
more than once later in the meeting.


13. (C) Wu argued that the U.S. should consider an FTA with
Taiwan for the potential strategic impact in East Asia. He
said that the current level of Taiwan economic dependence
on the PRC is dangerous because of the potential for an
economic downturn in the PRC and the PRC's hostile
intentions toward Taiwan. He speculated that the U.S. must
have used strategic considerations in deciding where to
negotiate FTAs, citing the examples of the U.S. FTAs with
Israel and Jordan.


14. (C) Econ Section Chief agreed to pass on Taiwan's
interest in an FTA to Washington again, but explained that
a key factor in U.S. decisions on where to negotiate FTAs
was the interest of the U.S. business community. He
explained that many U.S. businesses were concerned that
Taiwan's interest in negotiating an FTA with the United
States was to separate Taiwan economically from the PRC.
He noted that U.S. firms are strongly opposed to this and
generally wish to operate in an integrated greater China
market. Wu replied that an FTA with the United States
would make people in Taiwan feel more secure and would,
therefore, enable them to open the economy further to the
PRC. He claimed that right now people in Taiwan do not
know whether the U.S. would come to Taiwan's aid in a
crisis. Econ Section Chief reconfirmed the U.S.
government's commitment to its obligations under the Taiwan
Relations Act.

Other Issues - Export Control, Microsoft Forum
-------------- -


15. (C) Econ Section Chief informed Wu that the AIT Acting
Director had discussed export controls with Minister of
Economic Affairs Ho Mei-Yueh and Minister of Foreign
Affairs Chen Tan-sun last week. He said that the Taiwan
officials had given a commitment to work on establishing an
effective export control regime and told Wu that the U.S.
was happy to help Taiwan in these efforts. Wu replied that
U.S. experience would be very helpful and that Taiwan wants
to follow the U.S. example in this area. He expressed
Taiwan's concern about the export of technology to the PRC.
Econ Section Chief pointed out that exports to other
countries are also a serious concern and that some
technology exports transit China on the way to destinations
such as North Korea.

16. (C) Wu also asked about the AIT/W refusal of his
request to visit Washington, D.C., to attend an April 26
forum hosted by Microsoft. He still hoped to attend, and
indicated that TECRO Washington would submit another
request on his behalf. He suggested that the U.S. should
reconsider because Taiwan has such good relations with
Microsoft; it would be good for U.S. interests for Taiwan
to be allowed to spread its economic point of view; and
because the content of the forum would be economic not
political. Econ Section Chief told Wu that even though the
forum would focus on economic issues, anything the Vice
Premier of Taiwan does has a political aspect. He also
noted that the title of the conference was "Government
Leaders." Econ Section Chief agreed to relay his request
for reconsideration to AIT/W.

Comment - True Nature Shines Through
--------------


17. (C) Wu's comments consistently echoed the government's
economic policy, but also revealed much about his instincts
and personal opinions. The Vice Premier is Taiwan's senior
economic official, and Wu's background is primarily that of
an academic economist. Nevertheless, his comments on
relations with the LY, cross-Strait relations after the
Chiang visit, and U.S. views on FTAs show that he has
strong political instincts and will use them in his new
position. Despite the government's repeated commitment to
the "active opening, effective management" policy, Wu did
not hide his suspicions of the PRC's intentions in passing
the Anti-Secession Law. In the coming weeks, as the EY
reassesses the implementation of cross-Strait policies, it
seems likely that Wu's long history of discouraging cross-
Strait economic links will have an impact. Wu did not show
any signs that he is more strongly committed to financial
and fiscal reforms than his predecessors. He reiterated
the Chen administration's goals, but said nothing to
suggest that the ruling Democratic Progressive Party will
start to make good progress on implementing reform measures
rather than simply talking.
PAAL