TAIWAN'S FREE TRADE ZONES - WAITING FOR TENANTS

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003931

SIPDIS

DEPT FOR EAP/TC
COMMERCE FOR ITA/MAC/ASIA/MBMORGAN CABLE BOX 4431

E.O. 12958: DECL: 09/22/2015
TAGS: ECON EINV ETRD EWWT PREL CH CT
SUBJECT: TAIWAN'S FREE TRADE ZONES - WAITING FOR TENANTS
AND CROSS-STRAIT LINKS

REF: A. 04 TAIPEI 2997

B. 04 TAIPEI 3095

Classified By: AIT Acting Director David J. Keegan, Reason 1.4 d

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


1. (C) Since establishing its first free trade zone (FTZ)
in Keelung Harbor in October 2004, Taiwan has added four
more FTZs in the ports of Kaohsiung, Taichung and Taipei,
as well as Taipei's Chiang Kai-Shek International Airport.
Many businesses have expressed interest in the zones, but
relatively few have committed to actually becoming tenants.
Manufacturing firms, in particular, do not find the zones
attractive. The Council for Economic Planning and
Development/Center for Economic Deregulation and Innovation
(CEPD/CEDI) emphasizes the lack of direct cross-Strait
transportation links. Liberalizing cross-Strait economic
restrictions is essential for Taiwan to maximize its
attractiveness as a place to invest. End summary.

Rapid Expansion
--------------


2. (U) In October 2004, Taiwan inaugurated its first FTZ in
Keelung Harbor. The program has been quickly expanded to
four other locations. The FTZ in the Port of Kaohsiung
started operations in January 2005. On January 13, 2005,
the Executive Yuan (EY) approved the zone in Taichung
Harbor, which is slated to begin operations by the end of
the year. On April 28, 2005, the EY approved the Port of
Taipei FTZ and the Taoyuan Air Cargo Park FTZ within the
confines of Taipei's Chiang Kai-shek International Airport.
Taoyuan Air Cargo Park is a build-operate-transfer (BOT)
project that has been awarded to Far Glory Group (reported
ref B). Several cities and counties have also indicated
that they want to establish FTZs, including Kaohsiung City,
Tainan County, and Tainan City.


3. (U) The zones are considered part of the territory of
Taiwan, but outside of its customs territory. Therefore,
goods can be imported into the zones without duty or
inspection and then exported again with or without
additional value added. The zones also offer other
benefits to tenants. These include relaxed labor
restrictions so that firms can hire foreign workers
amounting to up to 40 percent of their total workforce. In
addition, Taiwan has a special visa category for visitors
to the FTZs to facilitate business travel.

Sluggish Response
--------------


4. (SBU) Although many businesses have expressed interest
in the zones, few have committed to actually establishing
facilities in the zones. The Port of Kaohsiung FTZ has
been the most successful in attracting investment. To
date, CEPD/CEDI reports that three companies are operating
in the Kaohsiung FTZ and another four have submitted
applications to establish facilities in the zone. Eleven
companies have paid deposits to reserve sites at Taoyuan
Air Cargo Park, but none have submitted applications. One
company, Tonglit Logistics Co. has been approved for
operation in the Port of Taipei FTZ. No firms have made a
binding commitment to locate in the Keelung and Taichung
zones.


5. (SBU) That response puts CEPD/CEDI behind its modest
goals for renting space in the zones. The targets are
still realistic for three of the zones. For Kaohsiung, it
aims to have seven firms in the zone by the end of the year
and for the Port of Taipei only one. The target for
Taoyuan Air Cargo Park is five tenants. CEPD/CEDI had
aimed to place four firms in the Keelung FTZ and 3 in the
Taichung's FTZ by the end of the year.


6. (C) CEPD/CEDI Executive Director Heng Tso complained to
AIT/T econoff that he is also disappointed by the kinds of
firms that have applied to establish facilities in the
zones. According to Tso, nearly all are logistics or
shipping firms. Only one manufacturing firm has applied to
build a facility that would perform value-added functions.
Tonglit Logistics, which plans to set up a factory in the
Taipei zone, builds auto parts for Taiwan's China Motor
Corporation. Tso said that Tonglit will import parts from
the PRC, assemble them into larger components in the FTZ
and them sell them to China Motors assembly line in Taiwan.
He noted that this project was very important because China
Motor Corp. has been considering moving its assembly lines
to the PRC.

Cross-Strait Links Still Key
--------------


7. (C) Some businesses have pointed out that the FTZs do
not meet the needs of many firms in Taiwan. Yang Ming
Maritime Corp. President Huang Huan-hsiu complained
publicly that the FTZs are not "free." He complained about
the inconvenience of the customs operations, noting that
although firms do not have to declare imported goods, they
do have to report it to Customs. He also criticized
requirements for hiring aboriginal employees, regulations
governing employment of foreign employees, and rules of
origin regulations. The Taiwan government has continued to
implement additional liberalization measures for the FTZs,
but has not gone far enough yet for many firms.
CEPD/CEDI's Tso also noted that the FTZs have had
difficulty attracting tenants because similar benefits are
offered in Taiwan's export processing zones and more
successful science parks.


8. (C) Nevertheless, in Tso's discussion with econoff he
immediately highlighted the lack of cross-Strait links as
the major obstacle to attracting more firms to the FTZs.
CEPD/CEDI's promotional materials for the zones emphasize
Taiwan's geographic location and proximity to "world
manufacturing centers" such as the PRC. As Tso observed,
these advantages are much reduced without direct
transportation links to the PRC, Taiwan's number one
trading partner.


9. (C) Tso told econoff that CEPD/CEDI has urged the
Mainland Affairs Council to accelerate liberalization of
cross-Strait policies. These efforts include seeking
authorization for firms in the Taichung Offshore
Transshipment Center to move transshipped goods directly
between Taichung and the PRC's Xiamen and Fuzhou harbors.
These firms are currently allowed to ship such goods
directly to other, more distant ports in the PRC. However,
direct transshipment to Xiamen and Fuzhou is still
prohibited because of security concerns.

Comment - Frustrating Staff and the Economy
--------------


10. (C) CEPD/CEDI officials are clearly frustrated by the
hand they've been dealt for promoting the FTZs. As Tso's
subordinate Jennifer Huang, Chief of External Liaison and
Policy Promotion, expressed to AIT/T, it has been difficult
to make the FTZs work. She claimed that at the time they
were first proposed, there were many advantages, but
"hopeful conditions are gone." She commented that in the
face of these difficulties CEPD/CEDI could only carry on
with the program as instructed by senior officials.


11. (C) The frustration at CEPD/CEDI reflects frustration
by many in Taiwan with the Chen Administration's cross-
Strait economic policies. Taiwan is facing increasing
challenges as it endeavors to compete economically,
especially in manufacturing. A tight labor market and high
prices for land are major disadvantages that Taiwan must
overcome to attract investment from abroad and keep
Taiwan's investment at home. Continuing and sometimes
growing regulations on business operations only exacerbate
the problem. The FTZs could be a useful step in the right
direction, but Taiwan's cross-Strait restrictions across a
range of areas, including but not limited to finance,
transportation and immigration, inhibit Taiwan from
exploiting its advantages. Liberalizing these restrictions
will not be a magic bullet that returns Taiwan to the
manufacturing powerhouse it was, but in a world of ever
shrinking margins the additional costs these restrictions
impose make a difference. End comment.
KEEGAN