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

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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

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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

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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

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"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

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competitiveness. Notable among those is its investment in
needed infrastructure (a step he said India has failed to
successfully implement).
YOUNG