CROSS-STRAIT TRADE INTEGRATION UNBALANCED

UNCLAS SECTION 01 OF 02 TAIPEI 000910 SIPDIS SENSITIVE SIPDIS DEPT PASS TO USTR DEPT FOR EAP/ TC USTR FOR TIM WINELAND E.O. 12958: N/A TAGS: ETRD ECON CH TW SUBJECT: CROSS-STRAIT TRADE INTEGRATION UNBALANCED Summary -------------- ¶1. (SBU) Taiwan's economic prosperity increasingly depends on trade with the PRC. Growth in cross-Strait trade in 2005 outpaced growth in Taiwan's total trade. Trade with the PRC accounted for 19 percent of Taiwan's global trade up from 18 percent in 2004. In addition, the PRC overtook the United States in September as Taiwan's second largest source of imports. Taiwan manufacturers with factories in the Mainland as well as those who have stayed on the island depend on cross-Strait supply chains for production inputs. The PRC consumer market is also increasingly important to Taiwan firms. However, even as Taiwan grows more dependent on the PRC economy, trade data suggest that the reverse is not true. Cross-Strait trade accounts for only 6.4 percent of the PRC's global trade and its share continues to decline. This unbalanced economic integration is one of the forces driving efforts in Taiwan to tighten cross-Strait economic restrictions under the slogan of "active management" as well as interest in a free trade agreement with the United States. End summary. Cross-Strait Trade Outpacing Taiwan's Global Trade -------------- -------------- ¶2. (U) Even though Taiwan's trade with the PRC grew more slowly than in 2004, it continued to outpace Taiwan's global trade performance in 2005. Taiwan's total trade with the PRC grew 16 percent last year to US$ 71.7 billion, while Taiwan's total trade rose more modestly by 8.5 percent. Cross-Strait trade growth in 2005 was lower than 2004's 33 percent growth. However, along with Taiwan' overall trade, it accelerated toward the end of 2005 with 20 percent year-on-year growth in December. ¶3. (U) The PRC was Taiwan's most important trading partner for the third year in a row, increasing its share of Taiwan's total trade to 19 percent in 2005 from 18 percent the previous year. In comparison, Japan accounted for 16 percent of Taiwan's total trade in 2005, and the United States accounted for 13 percent. ¶4. (U) Taiwan's trade surplus with the PRC continued to grow in 2005, rising to US$ 31.84 billion. This marked 12.6 percent growth over Taiwan's US$ 28.28 billion trade surplus with the PRC in 2004. The PRC was Taiwan's largest export market for the fourth year running. Taiwan exported goods worth US$ 51.8 billion to the PRC, accounting for 27.2 percent of Taiwan's total exports. The United States, Taiwan's second largest export market, accounted for 15 percent. PRC Overtakes U.S. in Exports to Taiwan -------------- ¶5. (U) In 2005, the PRC was Taiwan's third largest source of imports. Taiwan bought US$ 19.9 billion worth of imports from the PRC, up 19.5 percent from 2004. The PRC accounted for 11 percent of Taiwan's total imports compared to Japan's 25.3 percent and the United States' 11.6 percent. However, imports from the PRC surpassed those from the United States starting in September, 2005. By December, the PRC's share of Taiwan imports had increased to 12.3 percent, US$185.9 million more than imports from the United States. In 2006, the PRC will likely be Taiwan's second largest source of imports. Imports from the PRC have grown steadily despite Taiwan's restrictions on the importation of numerous PRC goods, especially agricultural products. Closely Integrated Supply Chains -------------- ¶6. (U) Most of the goods traded across the Strait in both directions are manufacturing inputs. Taiwan's exports to the PRC are mainly processed for re-export to other markets, especially the United States, Japan and Europe. Machinery, electrical equipment, and optoelectronics constituted nearly 60 percent of Taiwan's total exports to the PRC in 2005. Most of Taiwan's imports from the PRC also consist of production inputs. Machinery, electrical equipment, and optoelectronics made up 55 percent of Taiwan's total PRC imports in 2005. These imported components are usually assembled together with parts made in Taiwan. The statistics show that cross-Strait supply chains are closely integrated. Manufacturers on each side take advantage of local strengths. The PRC has cheap labor and TAIPEI 00000910 002 OF 002 land; while Taiwan has advanced technology, abundant capital and stronger intellectual property protection. Consumer Goods Increasingly Important -------------- ¶7. (U) A growing demand from Chinese consumers for products made by Taiwan firms is expected to drive strong growth in Taiwan's exports in 2006 and provide a boost to Taiwan's economy as a whole. Most Taiwan firms with factories in the PRC are export-oriented, but a growing number of them have begun to focus on the local market. According to Taiwan's Bureau of Foreign Trade, many Taiwan firms in the PRC export their products to Hong Kong and Macao and then re-import them back into the PRC local market. This allows the firms to maintain the status of an export producer and continue to import production inputs duty-free. The PRC authorities classify these shipments as "imports from China," which was the fourth largest source of imports into the PRC in 2005. Growth in "China's Imports from China" was 42 percent in 2005, much higher than the PRC's 17.6 percent growth in total imports. ¶9. (U) Imports of cheap, labor-intensive consumer goods from the PRC into Taiwan have also increased. Many local industries feel threatened by these imports. Recently, Taiwan initiated safeguard and anti-dumping investigations at the request local towel makers. PRC Less Reliant on Taiwan -------------- ¶8. (U) China is a very important part of Taiwan's trade picture, but Taiwan is a relatively small player in the PRC's overall trade picture. In 2005, Taiwan was the PRC's fifth largest trading partner, accounting for 6.4 percent of its global trade. PRC exports to Taiwan in 2005 accounted for just 2.2 percent its global exports. Moreover, the PRC's trade with Taiwan is not growing as fast as its global trade. According to PRC trade data, which differ slightly from Taiwan's, cross-Strait trade grew by 16.5 percent compared to 23.2 percent growth in the PRC's global trade. As a result, Taiwan's share of the PRC's total trade is declining. Comment - One-Way Integration -------------- ¶9. (SBU) Cross-Strait trade data for 2005 show Taiwan's increasing reliance on the PRC for economic growth. The PRC consolidated its position as Taiwan' most important trade partner in 2005. Local Taiwan manufacturers depend on Taiwan factories in the Mainland to drive their export growth and increasingly depend on imports from the PRC for components. Even Taiwan's firms in the PRC are more dependent on the local PRC market. On the other side of the Strait, Taiwan's relatively small and declining share of the PRC's global trade indicate that the PRC is becoming less dependent on trade with Taiwan. This unbalanced economic integration has increased the perception among some in Taiwan that close cross-Strait economic relations are a threat to Taiwan. It is one of the forces driving efforts to tighten cross-Strait economic restrictions under the slogan of "active management" as well as the Taiwan government's interest in diversifying its economy through a free trade agreement with the United States. End comment. YOUNG