DUSTER BHATIA HEARS THAT TAIWAN BUSINESS RESENTS

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001836

SIPDIS

SIPDIS

STATE FOR EAP/RSP/TC, STATE PASS USTR FOR DEPUTY USTR
BHATIA FROM DIRECTOR YOUNG

E.O. 12958: DECL: 05/26/2031
TAGS: ECON TW
SUBJECT: DUSTER BHATIA HEARS THAT TAIWAN BUSINESS RESENTS
UNCERTAINTY

REF: TAIPEI 1727

Classified By: AIT Deputy Director David Keegan, Reason 1.4 b


1. Summary. DUSTR Bhatia met with prominent Taiwan business
leaders May 25. This group characterized Taiwan's
cross-Straits relations as uncertain, noting that this puts
Taiwan firms in limbo while waiting for clarity on President
Chen Shui-bian's plans for the future. Cross-Strait economic
integration is well underway and will continue to be a key
factor for Taiwan firms in the future. They complained about
PRC subsidies while urging Taiwan to focus on developing
stronger economic, political and financial institutions to
support future prosperity. End Summary.


2. AIT Director Young hosted a lunch for Deputy U.S. Trade
Representative Karan Bhatia to meet a group of prominent
Taiwan business representatives. Assistant U.S. Trade
Representative for China Timothy Stratford and AIT Econ Chief
also attended. The guests list consisted of: Morris Chang,
Chairman, Taiwan Semiconductor Manufacturing Corporation;
Nita Ing, Chair, Taiwan High Speed Rail Corporation; Paul
Hsu, President, Phycos Corporation; Ken Yen, Chairman, Yu
Long Motors; David Hong, President, Taiwan Institute for
Economic Research; and Paul Sun, Chairman, Asian Vegetable
Research Development Center.

Cross-Straits Atmosphere is Uncertain
--------------


3. (C) This group had a range of views on almost every issue
discussed, but they did agree that implementing the three
links would benefit business ties substantially. They
generally agreed that cross-Strait policies of the ruling DPP
authorities have created an uncertain atmosphere that is bad
for doing business. Ing described the cross-Strait relations
as "hostile" and thus creating uncertainty for the business
community. She complained that President Chen Shui-bian
controls all the levers of cross-Strait policy and no one
knows what he is thinking. Ing observed that she does not
conduct business in China because so much of it is based on
personal connections. Rather, she said, her construction
firm has consciously decided to seek business opportunities
in India. Yen also viewed the situation as uncertain,
although he emphasized that there are not any overt
restrictions on the type of business that his automobile
company can do with China. David Hong noted that, according
to the numbers, Taiwan only restricts two percent of the
products produced on the island. Morris Chang said, even
though his industry falls in that two percent, his company is
fully committed to complying with the rules as stated. Paul
Hsu tried to sum up the discussion by saying that currently
Taiwan firms are in limbo waiting for direction from the Chen
Administration on cross-Strait policies. While in limbo, he
suggested Taiwan firms are losing ground to competitors from
around the region.

PRC Subsidies
--------------


4. (SBU) Morris Chang said that his team has recently read
newspaper reports of huge subsidies being offered by city and
county-level PRC government agencies. He described it as
officials putting up the funds to build facilities in Science
Parks and then renting to firms such as SMIC (Semiconductor
Manufacturing Incorporated of China) ats nominal rates.
According to the press reports, he said city and country
governments are supplying anywhere from US$300 million to
US$3 billion in subsidies. Chang emphasized that such
subsidies are strictly arranged by local entities and not the
central government. He added that Shanghai (where his single
Mainland chip manufacturing facility is located) definitely
does not/not provide such subsidies. Chang promised to
communicate specific details on these press reports to Tim
Stratford for further review.

Whither Taiwan?
--------------


5. The table had an extensive discussion about what kinds of
policies Taiwan should be pursuing, not just on
cross-Straits, but also for its long-term future. David Hong
suggested that cross-Straits economic integration will take
care of itself over time as market conditions will propel
Taiwan firms to move further into the Mainland or leave it
altogether. He said some Taiwan firms have already begun
relocating out of China to other points in SE Asia and
elsewhere. Chang commented that cross-Strait integration is

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already much farther along than many people realize and said
that it is quite challenging to determine the correct policy
for Taiwan as many people are viewing it as a stark choice
between either independence or reunification. He expected
that Taiwan will continue to evolve slowly over time both in
economic terms and politically.

Planning for the Future
--------------


6. Ing, Chang and Hsu were quite negative on the prospects
of for China to becomeing a democratic country in the near
term, say the next 10-15 years. The tenor of the
conversation suggested that they believe Taiwan could
consider unification only once China has a democratic
political system in place. In the interim, these three
believe Taiwan should concentrate on developing its human and
institutional resources. Chang, in particular, bemoaned the
lack of a first-class university on the island and said the
authorities need to concentrate on developing top notch
political, economic and financial institutions to enable
Taiwan firms to prosper in a global economy. Hong supported
Chang also, fingering human resource development as the key
to Taiwan's future prosperity.

Missed Opportunities
--------------


7. Ing commented that Taiwan has missed its opportunity to
become a regional operations center. Everyone seemed to
chime in on this theme, with Hsu and Hong complaining that
Taiwan made an abortive effort in this direction some 12 or
15 years before, but failed to execute its program. Ing said
that Singapore has taken on this role and it would be very
difficult for Taiwan to play catch up at this point.


8. (U) This cable has been cleared by USTR.
KEEGAN