CROSS-STRAIT ECONOMIC OPENING NOT THE UNALLOYED

S E C R E T SECTION 01 OF 03 TAIPEI 003218 SIPDIS SIPDIS STATE PASS USTR STATE FOR EAP/TC USTR FOR STRATFORD, ALTBACH COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER E.O. 12958: DECL: 09/12/2016 TAGS: ECON PREL ETTC EAGR CH TW SUBJECT: CROSS-STRAIT ECONOMIC OPENING NOT THE UNALLOYED BENEFIT TO U.S. INTERESTS YOU MIGHT THINK REF: A. 05 TAIPEI 1343 ¶B. 05 TAIPEI 4851 ¶C. TAIPEI 2376 ¶D. TAIPEI 2919 ¶E. TAIPEI 3147 Classified By: AIT Director Stephen M. Young, Reason 1.4 b ¶1. (S) Summary: Further opening of economic RELATIONS between Taiwan and the PRC would benefit the United States both by improving Taiwan's investment environment for U.S. businesses and enhancing cross-Strait stability. Such opening, however, would not be an unalloyed benefit to us, and preservation of some of Taiwan's restrictions might actually be in American interests. For example, lifting bans on imports of PRC agricultural products could hurt U.S. exports to Taiwan, a key market for U.S. agricultural goods. The United States also has a strong interest in ensuring Taiwan maintains significant restrictions on the transfer to the PRC of dual-use technologies. Nor should cross-Strait economic opening be allowed to compromise efforts to strengthen Taiwan's export control regime. End summary. Further Opening is in U.S. Interests -------------- ¶2. (C) The economies of Taiwan and the PRC are deeply and increasingly linked by trade, investment and the movement of people across the Taiwan Strait. However, Taiwan continues to maintain a broad range of restrictions on cross-Strait economic activities. These include import bans, investment limits, financial controls and restrictions on the movement of people across the Strait. Further liberalization of these and other cross-Strait restrictions will have important benefits for Taiwan's economy and for U.S. economic and security interests as well (ref B). ¶3. (C) U.S. businesses in Taiwan are strong advocates of Taiwan's further opening to the Mainland. The American Chamber of Commerce in Taipei (Amcham) is among the most vocal proponents of cross-Strait economic liberalization, repeatedly including it as a high priority in its annual White Paper. Amcham has been so outspoken, in fact, that last week Amcham got into a highly publicized spat with the "deep-Green" (pro-independence and anti-cross Strait opening) Taiwan Solidarity Union (TSU) political party. Amcham accused the TSU of holding Taiwan's cross-Strait policy hostage to its own POLITICAL interests. Amcham may have oversold the economic benefit of cross-Strait opening, claiming it would enable Taiwan to become a regional hub and pave the way to a free trade agreement with the United States. Nevertheless, U.S. firms have told us they would like to use Taiwan as a base for greater China operations, but are prevented from doing so by lack of direct links and limits on trade, investment and financial flows. These restrictions have caused some foreign businesses to reduce the role Taiwan plays in their broader Asia-Pacific strategy. ¶4. (C) Improved cross-Strait economic RELATIONS would also enhance China-Taiwan RELATIONS and the prospects for regional stability. In the short-term, economic issues provide less controversial areas for cooperation across the Strait, as we have seen recently with ongoing discussions on charter flights and tourism (ref C and E). In the medium term, increasing economic integration diminishes the ability of either side to provoke a military conflict without also harming its own economy. In the long term, common economic interests could contribute to a POLITICAL settlement of the cross-Strait conflict. Some Restrictions Benefit U.S. Interests TAIPEI 00003218 002 OF 003 -------------- ¶5. (S) There are notable exceptions, however, to the general theme that cross-Strait liberalization unerringly benefits the United States and U.S. businesses. In some cases, Taiwan restrictions actually assist U.S. businesses by reducing or eliminating competition from the PRC. In others, they help protect U.S. security interests. Import Controls on Agricultural Goods -------------- ¶6. (C) Bans on the import of many PRC agricultural products are key examples of restrictions that help give U.S. businesses an advantage in the Taiwan market. Given the size of its economy, Taiwan is a disproportionately important market for U.S. agricultural goods. It is the United States' sixth largest market for agricultural exports and the second highest per capita consumer of U.S. agricultural goods after Canada. Taiwan imported US$2.7 billion worth of agricultural goods from the United States in 2005. Were it not for Taiwan prohibitions on China's imports in 37 percent of agricultural product categories, U.S. exporters would face much stiffer competition on trade in agricultural products. (Comment: Amcham's unambiguous message in support of relaxation of cross-Strait restrictions is due in part to the fact that none of its members are U.S. exporters of agricultural goods. End comment.) ¶7. (SBU) U.S. exporters of fresh vegetables are major beneficiaries of these restrictions. Four of the top five U.S. vegetable exports to Taiwan -- cauliflower and broccoli, onions, lettuce, and celery -- face no competition from the PRC because PRC products are banned. The total value of U.S. exports of these products to Taiwan was approximately US$25 million in 2005. ¶8. (SBU) U.S. exporters of fruits and nuts also benefit from Taiwan's restrictions, but often these restrictions are sanitary/phytosanitary requirements that PRC producers cannot meet rather than an outright ban on PRC products. For example, cherries were the most valuable U.S. fruit export to Taiwan in 2005 earning US$36 million. Cherry imports from the PRC are not banned entirely, but PRC cherries have so far not been able to meet Taiwan quarantine requirements. Technology Transfer Restrictions -------------- ¶9. (S) Restrictions on the transfer of advanced technology to the Mainland also frequently benefit U.S. interests. The most controversial technology transfer controls are limits on high-tech industry investment in the Mainland. Taiwan's semiconductor manufacturers have long campaigned for relaxation of restrictions to permit investment in manufacturing technology that can produce semiconductor chips with feature size of 0.18 microns. Currently, they are limited to 0.25-micron technology. The relaxation that industry proposes would be entirely consistent with the guidelines of the Wassenaar Arrangement. The United States already permits semiconductor equipment manufacturers to export equipment to the PRC that is significantly more advanced than 0.18- micron manufacturing technology. It appears that Taiwan authorities will permit such investment soon (ref D). ¶10. (S) Although approval of investment using 0.18-micron and even more advanced technologies would be consistent with U.S. controls, further relaxation could eventually have negative security implications for the United States. Taiwan's semiconductor design and manufacturing firms are among the most advanced in the world. They invest TAIPEI 00003218 003 OF 003 heavily in research and development as they pioneer new technologies. Industry concerns about intellectual property protection in the PRC would keep many of the most advanced processes and research in Taiwan. However, the PRC semiconductor market is growing dramatically. Increasing competition would maintain pressure on Taiwan firms to move ever more advanced processes closer to Mainland customers. ¶11. (C) The Taiwan government is reluctant to lift restrictions for fear the entire industry will move across the Strait just as Taiwan's laptop PC makers and many other IT hardware manufacturers have done over the past few years. Taiwan companies dominate the laptop PC manufacturing industry, producing more than 70 percent of global laptop production. Until 2002, Taiwan investment in laptop PC manufacturing in the PRC was completely prohibited. After Taiwan lifted the restrictions, all manufacturing operations for the entire industry moved to the Mainland within four years. By the end of 2005, practically all laptop PCs manufactured by Taiwan firms were assembled in the PRC. ¶12. (S) Extensive Taiwan high-tech investment in the Mainland could give the PRC easy access to a wide range of dual-use technologies. The large-scale transfer of Taiwan's semiconductor manufacturing cluster and other high-tech manufacturing industries could jeopardize secure sources for technologies that the United States requires. ¶13. (S) Within the broader framework of technology transfer policies, Taiwan's investment restrictions are also linked to its export control system. The United States through AIT is currently engaged in a critical effort to strengthen Taiwan's export controls. Some measures that would strengthen controls on sensitive technology exports could also limit the Taiwan authorities' ability to relax investment regulations and other cross-Strait restrictions for high-tech industries. For example, AIT has encouraged Taiwan to pass a "Sensitive Technology Protection Act" that would bar the export of key intangible technologies, as well sensitive commodities to certain territories, including the PRC. The bill is stuck in the Taiwan Legislature, where some legislators want to use it as a tool to attack companies that are investing in China (ref A). Depending on the final language of the legislation, it could codify some of Taiwan's cross-Strait restrictions, including limits on investment. Comment - Keeping the Whole Picture in Focus -------------- ¶14. (S) Overall, further liberalization of Taiwan's restrictions on cross-Strait trade and investment will benefit not only Taiwan and China but also the United States. It is important to note, however, that the lifting of some restrictions is likely to have an impact on specific U.S. economic and security interests. In some cases, we may need to argue against excessive liberalization, especially related to export controls. Moreover, we must work to ensure that such liberalization meets WTO standards of non-discrimination against "third- country" products and services. Our ongoing dialogue with Taiwan on cross-Strait economic RELATIONS should take into account the fact that cross-Strait liberalization is a complicated matter with a varied range of repercussions. YOUNG