Taipei Economic Brief for June

UNCLAS SECTION 01 OF 03 TAIPEI 002364 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/TC, EAP/EP USTR FOR ALTBACH USDOC FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER TREASURY PLEASE PASS TO OCC/AMCMAHON TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Taipei Economic Brief for June ¶1. This cable summarizes selected recent economic events in Taiwan in June 2006: --Inflationary pressure building --Cross-Strait integration fuels trade expansion --Taipei AmCham issues white paper --MOEA's white paper response --Cross-Strait agreement on charter flights --Restrictions on foreign student interns relaxed --FDI up 196% --Efforts to reduce carbon dioxide emissions --Semiconductor association forced to change name Inflationary Pressure Building -------------- ¶2. Consumer prices in May rose by 1.58%, the highest increase in four months. Inflation is expected to accelerate because higher oil prices and higher metal import costs have driven the wholesale price index in May up 6.2% from the same month a year ago, the largest increase in the past year and a half. Rising oil prices have caused the state-owned Chinese Petroleum Corporation (CPC) and Taiwan Power Company (TPC) to suffer losses in 2005 that appear to be growing in 2006. Consequently, CPC and its competitors in the private sector raised gasoline prices in February and April by 12.3% and again by 3.6% to NT$28.6 per liter (about US$3.27 per gallon) on July 7. TPC, Taiwan's monopoly power supplier, increased power charges by an average of 5.8% on July 1. Cross-Strait Integration Contributes to Trade Expansion -------------- -------------- ¶3. Taiwan's exports and imports in May both expanded by double-digit rates to new monthly highs of US$18.9 billion and US$18.2 billion. In the first five months of the year, exports grew 12% to US$87.9 billion, and imports rose 9% to US$81.4 billion. The growth was mainly due to rising levels of cross-Strait trade. Taiwan's exports to China (including Hong Kong) in the first five months increased from 38% of Taiwan's total exports a year ago to 40%, compared to a 14.8% share for the United States and 7.4% for Japan. Taiwan's exports to China are mainly production inputs shipped to Taiwan-owned factories and then assembled into consumer goods that are re-exported to the United States, Japan, and Europe. Taiwan investment in Mainland China continues to grow. Approved investment in the first five months grew 46% from the same period of last year. ¶4. During the same period, imports from China also increased from 12% of Taiwan's total imports a year ago to 12.5%, still less than the 23% for shipments from Japan but higher than the 10.8% from the United States. The percentage share for imports from China will continue to increase as Taiwan further relaxes restrictions on imports from China. Recent relaxation of restrictions on apparel and cell phone imports from China caused imports in these two categories to shoot up by 440%. AmCham's 2006 Taiwan White Paper -------------- ¶5. The Taipei American Chamber of Commerce (AmCham) issued its 2006 Taiwan White Paper on May 30. In the report, AmCham affirmed: (1) most economic indicators are better than they were several years ago; (2) Taiwan authorities TAIPEI 00002364 002 OF 003 are displaying a more proactive attitude towards direct cross-Strait passenger and cargo flights; (3) Taiwan authorities are paying more attention to financial reform, opening government procurement to foreign suppliers, better protection of intellectual property rights, and rationalizing the pharmaceutical pricing system. However, AmCham reminded Taiwan's authorities that restrictions on flow of manpower, capital, and merchandise across the Taiwan Strait diminish Taiwan's natural advantages of proximity and cultural affinity with Mainland China and drive businesses to relocate. AmCham urged Taiwan to implement the following improvements: (1) reduce restrictions on business hiring decisions; (2) upgrade Taiwan's public health and healthcare system; (3) further improve intellectual property protection; (4) accelerate economic integration with China; (5) thoroughly eradicate corruption; (6) establish a world-class infrastructure; and (7) complete essential financial reforms. Taiwan Authorities' Respond -------------- ¶6. As in the past, Taiwan authorities responded quickly to AmCham's white paper. The Ministry of Economic Affairs (MOEA) said that it had addressed many of AmCham's past recommendations, coordinated with other government agencies to seek solutions, and done its utmost to press for recommended reforms. MOEA noted that during the past year, it had (1) promoted establishment of an intellectual property court to better protect intellectual property rights; (2) lifted bans on foreign investment in financial institutions, land transportation, and the leasing industry; and (3) allowed employment of foreign students as interns. MOEA said it would continue to actively implement other reforms proposed by AmCham. Cross-Strait Charter Flights -------------- ¶7. Taiwan and the PRC reached an agreement on cross-Strait charter flights which was announced on June 14. For passengers, charter flights will be available during Lunar New Year (late January/February),Tomb Sweeping Day (April 5),Dragon Boat Festival (late May/June),and Mid-Autumn Festival (September/early October) holidays. There will be 168 charter flights a year, and each carrier will operate 14 flights. The agreement also included special charter flights for emergency medical and humanitarian needs. Cargo flights will also be approved on a case-by-case basis for capital equipment shipped to Taiwan firms in the Mainland. Taiwan's carriers praised the agreement as a first step in the right direction but called the number of charter flights insufficient to meet demand. Restrictions on Foreign Student Interns Relaxed -------------- -- ¶8. In response to AmCham's request, MOEA announced on May 25 that it was lifting restrictions on foreign students serving short-term paid internships in Taiwan. State-owned enterprises, foreign companies, and foreign chambers of commerce are eligible to hire foreign student interns. Private Taiwan companies are eligible only if their sales exceeded NT$10 million (US$312,500) the previous year. Interns must be students at the university level or higher. They will be granted a six-month stay which may be extended once by another six months. MOEA's Investment Commission TAIPEI 00002364 003 OF 003 will establish a dedicated service window to handle applications for hiring foreign student interns. FDI Up 196% -------------- ¶9. According to statistics compiled by MOEA, foreign direct investment (FDI) approved in the first five months of this year amounted to US$6.64 billion. FDI excluding Philips' recent purchase of Philips Taiwan's shares in Taiwan Semiconductor still registered an increase of 196% over the same period a year ago. The approved investment projects include foreign participation in mergers and acquisitions in Taiwan's financial services, logistics and other service industries. Efforts to Reduce Carbon Dioxide Emission -------------- ¶10. On June 16, MOEA set up the Taiwan Industrial Greenhouse Office (TIGO) with the goal that Taiwan's greenhouse gas emissions in 2015 will be reduced to 90% of the 2000 level (from 25.76 kg per NT$1,000 GDP to 23.20 kg). In 2005, MOEA signed greenhouse gas emissions reduction voluntary agreements with manufacturers associations of the iron & steel, petrochemical, man-made fibers, cement, paper, and textiles & dyeing industries. In 2006, electronics, semiconductors, and flat-panel display industry associations signed similar voluntary agreements with MOEA. Under these agreements, carbon dioxide emissions in 2008 should be reduced to 95.5 percent of 2004 levels, a decline of 4.02 million metric tons. Semiconductor Association Forced to Change Name -------------- -- ¶11. With the entry of the China Semiconductor Industry Association into the World Semiconductor Council (WSC),the WSC has forced the Taiwan Semiconductor Industry Association (TSIA) to change its name to the Semiconductor Industry Association in Chinese Taipei (SIACT). TSIA Chairman Frank Huang commented that the organization will continue to use the TSIA name, but will be called SIACT in certain international events. YOUNG