US-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 002432 SIPDIS SIPDIS E.O. 12958: DECL: 07/18/2031 TAGS: ECON ETRD PGOV PREL TW SUBJECT: US-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION VISIT TO TAIWAN: ECONOMICS Classified By: Director Stephen M. Young, Reason(s): 1.4 (B/D). ¶1. (C) Summary: Vice-Premier Tsai Ing-wen told the U.S.-China Economic and Security Review Commission (USCC) delegation that Taiwan is in generally good economic health, but must create new industries and jobs and must preserve its competitive advantages over China. Mainland Affairs Council (MAC) Chairman Joseph Wu told the delegation that Taiwan needed an FTA with the U.S. to prevent Taiwan's economic isolation. Wu also called for direct communication between senior U.S. officials and their Taiwan counterparts, and the lifting of U.S. travel restrictions for senior Taiwan government representatives. Bureau of Foreign Trade representatives identified China as Taiwan's largest trade partner, receiving 37 percent of Taiwan's exports. Approved Taiwan investments in the PRC now total US$50 billion, but the actual figure may be three to six times that. Thinktank economists say Taiwan must concentrate on higher-value-added processes, must normalize relations with the PRC, and should use globalization strategies to counter China's growing regional influence. American business leaders and representatives from the entertainment and software industries praised Taiwan's progress on IPR protections, but the American Chamber of Commerce lamented the ongoing lack of direct cross-Strait transportation links. For the time being, lack of R&D capability prevents Chinese companies from threatening Taiwan's IT market share. End summary. ¶2. (U) From June 27-29, USCC Commissioners Patrick Mulloy and Kerri Houston and Executive Director Scott Bunton met with Chen administration officials, ruling and opposition party leaders, prominent Taiwanese and American business people, and political and economic specialists from Taiwan's academic community. AIT officers accompanied the delegation to all of their meetings. This cable covers economic highlights; political issues are addressed septel. Vice Premier Tsai Ing-wen -------------- ¶3. (C) Vice Premier Tsai Ing-wen explained to the commissioners that Taiwan's economic situation is "generally OK" but with some potential problems that result mainly from the flow of manufacturing to the PRC at a rapid pace. She commented that Taiwan needs to create new industries and jobs to replace those lost to China, but the quality of jobs currently being created is too low. She noted political difficulties currently facing the Chen administration, pointing out that Taiwan is still in transition to a fully-developed democracy. The PRC is deliberately creating a political challenge for Taiwan with a "united front strategy" that Tsai described as updated and very sophisticated. She argued that many mistakenly believe that Taiwan is reluctant to move forward on establishing direct links, but she suggested that the PRC is also reluctant because Taiwan airlines are more competitive in the cargo market and direct links could reduce the need for high-tech companies to transfer operations to the PRC. ¶4. (C) Tsai admitted that many believe Taiwan's controls on investment in the PRC are too harsh. She said that relaxation of those controls must be an interagency decision and added that the Ministry of National Defense is concerned about technology transfers. According to Tsai, Taiwan must maintain a technology gap with the PRC because that is the only way Taiwan can compete. She noted that Taiwan's technological strength comes not so much from creating new technologies but from management of advanced technological processes in manufacturing. Tsai emphasized the importance of the semiconductor industry in particular. ¶5. (C) Without mentioning a free trade agreement with the United States, Tsai presented many of Taiwan's arguments for such an agreement. Many countries in Asia are feeling they must choose between the United States and China, she suggested, adding that the United States must develop a strategy for this situation. She explained that Taiwan is developing its own strategy by expanding to Southeast Asia, India and the Middle East and with large Taiwan companies TAIPEI 00002432 002 OF 004 expanding their global operations. Linking U.S. security to Taiwan's economic security, Tsai said the United States should help Taiwan to integrate into the regional economy. She noted that Taiwan's economic relationship with the United States is more important than the security relationship, and that U.S. efforts to make Taiwan economically secure in the region are the best way to assure Taiwan's security. MAC Chairman Joseph Wu -------------- ¶6. (C) Mainland Affairs Council Chairman Joseph Wu suggested to the USCC delegation that there are three ways in which U.S.-Taiwan relations could be enhanced. First, he suggested a U.S.-Taiwan free trade agreement that would prevent Taiwan from becoming isolated in Asia. Second, acknowledging that Taiwan needs to do more to strengthen its defense, Wu asked the U.S. government to send a message to Taiwan's opposition parties that they should support this effort. Finally, Wu spent much of the meeting arguing that restrictions on U.S. travel and meetings with senior U.S. officials placed on senior Taiwan officials should be lifted. Wu claimed that additional channels of communication for Taiwan officials would prevent misunderstandings. As an example of such a misunderstanding, Wu mischaracterized Deputy Secretary Zoellick's recent Congressional testimony as suggesting that the Deputy Secretary believed that Chen Shui-bian was pursuing independence. The AIT officer at the meeting corrected Wu's notion, explaining that in his remarks the Deputy Secretary had explained the consequences of Taiwan independence. The AIT officer also noted that the AIT Director is the established channel for communication between senior Taiwan officials and Washington. BOFT and Investment Commission -------------- ¶7. (SBU) Bureau of Foreign Trade (BOFT) Director General Franco Huang told the commissioners that the PRC is Taiwan's largest trade partner accounting for 37 percent of exports, while only 15-16 percent go to the United States. He explained that Taiwan's US$40 billion surplus with the PRC was caused by Taiwan prohibitions of certain PRC imports and PRC investment in Taiwan. He described China's constructive participation in Chinese Taipei's trade policy review at the World Trade Organization June 20 and 22, in which China offered comments on Taiwan's trade policy that were mostly free of political attacks. Huang also suggested that a free trade agreement would be mutually beneficial for both Taiwan and United States. At the Investment Commission, Executive Secretary Huang Chin-tan noted that although Taiwan's SIPDIS official data on approved investment in the PRC show only US$ 50 billion, the Taiwan authorities believe that Taiwan's actual investment in the PRC may be as high US$ 150 billion and the Wall Street Journal recently estimated it at US$ 280 billion. Economic Thinktanks -------------- ¶8. (C) At the Taiwan Institute for Economic Research (TIER), TIER President David Hong told the commissioners that Taiwan faces three major challenges. First, Taiwan must change its industrial structure. According to Hong, Taiwan cannot compete with the PRC on labor costs so it must base its economy on higher-value-added processes and globalize by improving logistics capabilities. Second, Taiwan must normalize its relations with China. Hong said that despite Taiwan's increasing economic reliance on the Mainland, it need not sacrifice national security to improve cross-Strait relations. Taiwan must take a step-by-step approach first liberalizing economic relations and only then attempting to resolve political issues. Finally, Hong said that domestic political stability will continue to be a challenge facing Taiwan. ¶9. (C) Ko Chen-en, President of the Chung Hua Institute of Economic Research (CIER),commented that the Taiwan authorities focus too much on relations with China. He argued that Taiwan must go global to transform itself and use TAIPEI 00002432 003 OF 004 "globalization instead of localization to counter sinicization" Taiwan needs more confidence before it can open up economically to the PRC, Ko observed. He said a free trade agreement with the United States would give Taiwan that confidence. Because Taiwan cannot be a member of international organizations, bilateral agreements like a free trade agreement are the only way that Taiwan can demonstrate international support. Amcham -------------- ¶10. (SBU) In a breakfast with members of the American Chamber of Commerce in Taipei, U.S. businessmen focused on intellectual property rights, human resource issues, cross-Strait relations and Taiwan's campaign for a free trade agreement with the United States. The U.S. businessmen praised Taiwan's progress on the protection of intellectual property, citing new regulations, improved enforcement and good channels of communication with Taiwan officials in charge of IPR. However, problems remain such as the rampant photocopying of textbooks on college campuses with the tacit approval of the Ministry of Education, and penalties imposed by courts on violators too often are inadequate, equating to "hand slaps." They complained that there is a shortage of skilled personnel in Taiwan and argued that the Taiwan authorities need to do more to develop an internationally competitive workforce, especially one with a better command of English. Restrictions on transfers of Mainland personnel of multinational firms to Taiwan also contribute to this problem. More generally on cross-Strait relations, the businessmen said that Taiwan needs to establish some kind of normalized relationship with the PRC, and emphasized the importance of implementing direct transportation links. According to the Amcham representatives, U.S. businesses are not clamoring for a U.S.-Taiwan free trade agreement, but many would support one if they had more information about the likely content. They commented that the Taiwan government needs to do more to show the benefits of such an agreement. Intellectual Property -------------- ¶11. (U) Representatives from the Taiwan Intellectual Property Association (TIPA) said that the Taiwan authorities have implemented many successful anti-piracy measures and other IP protections, including the creation of a 220-member IP task force. Piracy and sale of CDs and DVDs have dwindled, but have been replaced by internet piracy. TIPA is working with the government Intellectual Property Office to establish regulations for internet service providers (ISPs). TIPA urged closer cooperation between Taiwan and US authorities to crack down on US and Taiwan ISPs violating IP laws. ¶12. (U) According to TIPA representatives, the Judicial Yuan is establishing a special IP court to hear patent infringement cases and trademark/copyright appeals. TIPA wants the IP court to preside over trademark and copyright trials, not just appeals. The Legislative Yuan (LY) prefers to leave IP trials to non-specialized courts, to avoid overwhelming the IP court. TIPA also wants IP violation cases to be handled by a special IP prosecutor's office. The LY thinks most IP violators are small-time, low-income vendors whose cases don't warrant that expense. TIPA has pushed to criminalize IP violations, but legislators think existing civil remedies are sufficient. Taiwan IT Business and the PRC -------------- ¶13. (U) Chairman Frank Huang of Taiwan semiconductor manufacturer Powerchip said the PRC lags far behind Taiwan in research and development capability, and for that reason it does not pose a threat to Taiwan in the IT market. The profitability of doing IT business in the PRC is threatened, however, by market saturation by domestic Chinese companies with generally poor product quality. This, Huang said, could damage the reputations of established companies doing business in the Mainland. Huang noted that China had taken several important steps to increase its high tech TAIPEI 00002432 004 OF 004 competitiveness. Notable among those is its investment in needed infrastructure (a step he said India has failed to successfully implement). YOUNG