CROSS-STRAIT POLICY/TIFA - ECONOMIC CONFERENCE

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001644

SIPDIS

SIPDIS

DEPT FOR EAP/TC

E.O. 12958: DECL: 05/12/2016
TAGS: ECON ETRD EFIN EINV PREL CH TW
SUBJECT: CROSS-STRAIT POLICY/TIFA - ECONOMIC CONFERENCE
COULD HAVE IMPACT

Classified By: AIT Acting Deputy Director Charles E. Bennett, Reason 1.
4 b/d


1. (C) Summary. Taiwan will host the Economic Sustainable
Growth Conference (ESGC) June 18 and 19 to discuss long-
term strategies to maintain Taiwan's economic growth.
Discussion topics will include cross-Strait liberalization,
long-term economic competitiveness, and the social welfare
system. With opposition participation in the conference
and a possible shift in the Chen administration in favor of
further economic opening with the Mainland, there is the
potential for important cross-Strait economic
liberalization measures. The conference could also help
Taiwan implement commitments to the U.S. that could result
from the TIFA talks later this month. End summary.


2. (C) Taiwan is planning a major conference to discuss
long-term strategies for Taiwan's economic growth. It will
take place June 18 and 19 and be chaired by Premier Su
Tseng-chang. The conference will be similar to the

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Economic Development Advisory Conference convened in August
2001 but will be named the Economic Sustainable Growth
Conference (ESGC - jingji yongxu zengzhang huiyi). The
goal of the conference is to look at Taiwan's long-term,
structural economic challenges and recommend solutions.
The Executive Yuan's (EY) Council for Economic Planning and
Development (CEPD) has been charged with organizing the
conference. The EY has not yet publicly announced the
conference, but CEPD Chairman Hu Sheng-cheng described
current plans to AIT on May 12.

Planning Process - Tsai in Charge
--------------


3. (C) Vice Premier Tsai Ing-wen is the intellectual author
of the conference and will oversee its planning. She will
co-chair the conference preparatory committee, which will
meet for the first time on Monday, May 15. The preparatory
committee has 20 members and includes bi-partisan
participation. Her co-chairman will be Legislative Yuan
(LY) Vice President Chung Jong-chi of the pan-Blue People
First Party. Other participants in the preparatory
committee were nominated by opposition parties. Seven
members represent EY agencies. Three categories of topics
will be addressed: cross-Strait economic relations, long-
term competitiveness, and the social welfare system.

Topics - Looking for Cross-Strait Consensus,...
-------------- --


4. (C) According to CEPD's Hu, cross-Strait economic
relations is the only issue where there is strong partisan
disagreement. Because of the controversy, cross-Strait
liberalization efforts must be discussed in conjunction
with economic structural reform to ensure that Taiwan stays
competitive. Further opening must be accompanied by
incentives to encourage firms to invest more in Taiwan as
well as third economies, such as India or Southeast Asia.
Using similar logic, Hu argued President Chen's
announcement of the "active management" policy for economic
relations with the Mainland was a necessary preliminary
step toward further cross-Strait economic opening. Chen
had to first convince conservative constituencies that the
Taiwan authorities had a plan to ensure that further
opening would not represent a concession nor harm Taiwan's
economy.

Structural Reform to Enhance Competitiveness,...
-------------- ---


5. (C) Under the broad topic of Taiwan's long-term
competitiveness, Hu highlighted four issues. First, the
conference will look at ways to find a balance between
environmental protection, economic growth and energy needs.
He noted a steel mill and petrochemical plant already
approved for Yunlin County (combined investment of US$ 15
billion) will challenge Taiwan's unilateral commitment to
comply with the Kyoto Protocol. Hu observed that the
projects will address Taiwan's economic needs and enhance
its competitiveness in the short term, but steel and

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petrochemicals are not Taiwan's economic future.


6. (C) The second issue related to long-term
competitiveness is structural reform of Taiwan's
agricultural industry. Hu said Taiwan must move away from
rice production to goods with higher value added. While Hu
was not aware of what kind of products Taiwan wants to
produce, he said the Council of Agriculture has proposals
on this topic and will be an active participant in the
conference.


7. (C) The third and fourth issues under long-term
competitiveness are reform of the financial sector and
reform of other service industries. In both areas, Taiwan
seeks to improve competitiveness by opening to foreign
competitors. The conference will preserve the Taiwan
authorities' existing goals for financial sector reform,
but will refine the timetable and approach. Hu pointed out
successes that Taiwan has already had in attracting foreign
firms, including GE, New York Insurance, and other U.S. and
Japanese firms, to invest in Taiwan banks. He also
commented that the conference will provide a forum to
address criticism that some financial reform policies,
specifically the goal of cutting the number of holding
companies in half, have liquidated state assets at below
market prices and have unfairly benefited a handful of
wealthy families in Taiwan.

...and Fixing Social Welfare System
--------------


8. (C) The final topic of Taiwan's social welfare system
will address problems in the national health insurance
program and pension system. The health insurance system
has been plagued by financial shortfalls and been
criticized for a controversial drug pricing scheme. Taiwan
implemented a new national pension program in July 2005.
Although many workers never benefited from the old plan,
businesses and some academics have criticized the new
program because of the cost for businesses and the
potential for mismanagement.

TIFA Impact - Setting the Agenda, Providing Leverage
-------------- --------------


9. (C) Hu believes that the outcome of the U.S.-Taiwan
Trade and Investment Framework Agreement (TIFA) talks
scheduled for May 25-26 will be useful in helping set the
agenda for the ESGC and will give the Taiwan government
additional leverage to overcome resistance to some
proposals. For example, Taiwan can use the conference to
convince farmers of the necessity of structural changes in
Taiwan's agricultural industry in order comply with
commitments from the TIFA talks. Hu made a pitch for a
free trade agreement (FTA) by saying it would be easier to
overcome domestic political resistance if the authorities
can point to important benefits to the broader economy such
as the possibility of an FTA with the United States. Econ
Chief responded by saying that Washington Agencies are
certainly prepared to listen to Taiwan's proposals on an
FTA, but that arguments based on desirable political
outcomes would not be as strong as ones well grounded in
economic benefits for both sides.

Comment - Cross-Strait and TIFA Opportunities
--------------


10. (C) There is reason to be optimistic that the ESGC will
yield positive results even on the contentious topic of
cross-Strait economic liberalization. According to Hu's
description, the opposition parties have already bought
into the conference process. A string of recent events
(including the announcement of possible unilateral opening
to PRC tourists, liberalization of semiconductor packaging
and testing and TFT-LCD manufacturing investment, and the
visit by the PRC Vice Minister of Information Industry to
discuss cooperation on technology standards) suggest the
Chen administration has decidedly shifted toward further
economic opening to the Mainland. Consensus at the ESGC
and companion proposals to enhance Taiwan's competitiveness

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could give the administration political cover to implement
even bolder opening measures. By the same token, the
conference may give the administration political cover to
implement commitments to the U.S. that could result from
the TIFA talks later this month. End comment.
YOUNG