A HSIEH PRESIDENCY WOULD LIKELY ACCELERATE

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 001202

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SIPDIS

STATE PASS USTR
STATE FOR EAP/TC
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN/MCHOI
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: DECL: 05/31/2017
TAGS: ECON EINV EAIR PGOV PREL CH TW
SUBJECT: A HSIEH PRESIDENCY WOULD LIKELY ACCELERATE
CROSS-STRAIT ECONOMIC OPENING


Classified By: AIT Director Stephen M. Young, Reason 1.4 d


1. (SBU) Summary: Economic scholars and a political
advisor close to Frank Hsieh describe the Democratic
Progressive Party presidential candidate as "flexible"
and "pragmatic" in his approach to cross-Strait economic
relations. They believe that, as President, Hsieh would
be more willing to open Taiwan economically to China than
Chen Shui-bian has been. Hsieh's record as Premier in
2005 further suggests more opening. The pressure for
cross-Strait economic liberalization will continue after
the 2008 election, and some of the constraints that the
Chen administration has faced may be less severe for
Hsieh, if elected. Hsieh would likely continue cross-
Strait discussions on charter flights and tourism and
might face better prospects for success. His approach to
investment restrictions is less clear. End summary.

Hsieh Will Be Flexible, Pragmatic
--------------


2. (SBU) As Taiwan's presidential election in early 2008
approaches, the two candidates' approach to cross-Strait
relations will be a defining economic issue. Many voters
will be attempting to gauge how far the DPP candidate,
Frank Hsieh, might break from the policies of President
Chen Shui-bian, which have mitigated the pace of cross-
Strait economic opening by preserving many restrictions.


3. (C) Wu Rong-i, the Chairman of the Taiwan Futures
Exchange and former Vice Premier when Hsieh was Premier,
told AIT he believed Hsieh as President would be
"flexible" on cross-Strait issues. According to Wu,
Hsieh believes that Taiwan should have self-confidence in
dealing with China. He surmised that Hsieh would be
generally more open to lifting cross-Strait economic
restrictions than President Chen has been.


4. (C) Kenneth Lin, a Professor of Economics at National
Taiwan University (NTU),who has been described in the
media as one Hsieh's few economic advisors, called
Hsieh's approach to cross-Strait relations "pragmatic."
Lin told us that any Taiwan President faces a trade off
in managing cross-Strait relations between balancing
prosperity and security. They also face the same
constraints in developing relations. However, Lin
assessed that Hsieh would be less likely than President
Chen to take provocative political actions that could set
back cross-Strait economic relations.


5. (C) Corey Chen, a long-time assistant and close
advisor to Hsieh, echoed Lin's analysis of the
environment facing Taiwan's leaders in managing cross-
Strait economic relations. He described the trade-off as
one between opening and autonomy. However, he emphasized
that Hsieh believes Taiwan can enjoy both. Chen believes
that Hsieh would pursue further opening that appeals to
Taiwan's centrist voters, but would continue to exert
managerial control over the cross-Strait economic
relationship.

Hsieh Already Has His Own Ideas
--------------


6. (C) Lin observed that Hsieh does not rely on advisors
to help him develop his cross-Strait policies because he
already has his own ideas. Chen separately concurred
with this assessment. He emphasized that Hsieh has
longstanding consistent opinions about Taiwan-China
relations. As president, Hsieh would pursue the same
approach to cross-Strait issues that he has taken
throughout his political career, according to Chen.

Record Suggests More Rapid Opening
--------------


7. (C) Hsieh's record also suggests that he would pursue
a policy of more rapid cross-Strait economic opening than

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has been the case under President Chen. During Hsieh's
tenure as Premier from January 2005 to January 2006,
Taiwan entered cross-Strait negotiations with China on
cross-Strait charter flights and the further opening of
Taiwan to PRC tourists. Taiwan agreed to conduct these
discussions under the "Macao model" where each side is
nominally represented by industry associations with
government officials as advisors. Corey Chen pointed out
to us that Hsieh's successor, Su Tseng-chang, was
criticized by pro-independence supporters for the "Su
revisionist line" in favor of cross-Strait economic
opening. Chen argued that this approach to economic
opening was actually initiated by Hsieh. He indicated
that the "active management" policy for cross-Strait
economic relations that President Chen announced in
January 2006 just before replacing Hsieh was a rebuke of
Hsieh's support for further opening.

Conditions Will Continue to Drive Further Opening
-------------- --------------


8. (C) NTU's Professor Lin emphasized that any Taiwan
President will face most of the same domestic and
international conditions that currently drive cross-
Strait policy decisions. These conditions have
contributed to a slight acceleration in cross-Strait
economic liberalization during the final years of the
Chen administration, as marked by negotiations on charter
flights and tourism and liberalization of investment
policy for some high-tech industries. Many of the
conditions that Chen Shui-bian faced as President would
remain the same under a Hsieh administration.


9. (SBU) For example, some polling suggests that popular
support for further economic opening is growing. Polls
sponsored by the State Department's Office of Research
showed that 62 percent of those polled thought direct
links would be good for Taiwan in March 2007 compared to
49 percent in 2005. The Mainland Affairs Council's (MAC)
own polling data show more support for cross-Strait
economic opening. From a low point in November 2003 of
18.1 percent, support for reducing regulations on
investment in China has topped 30 percent in the last
three polls (September 2006, December 2006 and April
2007). In December 2006, support for increased
regulation dropped below 50 percent (49.7 percent) for
the first time since MAC began publishing the poll. It
rose again slightly to 52.5 percent in April.


10. (U) Pressure from Taiwan's business leaders to lift
economic restrictions will also remain high. Many of
Taiwan's most prominent business leaders, including some
former supporters of Chen Shui-bian, criticize the
administration's cross-Strait economic policies. These
include industrial elites such as Taiwan Semiconductor
Manufacturing Company founder Morris Chang, Acer Computer
founder Stan Shih, and Evergreen Group founder Chang
Yung-fa.

Some Constraints Could Relax
--------------


11. (C) Despite Professor Lin's hypothesis that
conditions will remain basically the same; some
constraints that limit the President's ability to lift
cross-Strait economic restrictions could be reduced under
a Hsieh presidency. Chen Shui-bian has been restrained
by opposition to cross-Strait opening from "Deep-Green,"
pro-independence supporters. The political influence of
some Deep Green supporters may be diminished after the
2008 presidential election. The small Taiwan Solidarity
Union (TSU),which has resisted cross-Strait economic
liberalization, is likely to be marginalized in upcoming
legislative elections in late 2007 or early 2008, at
which time the size of the Legislative Yuan (LY) will be
cut in half.


12. (C) TECRO's Corey Chen told us that Hsieh's camp is

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also hoping to neutralize potential opposition from Deep-
Green politicians by emphasizing Hsieh's close, long-
standing ties to Deep-Green leaders and their movement.
Former Vice Premier Wu separately concurred that Hsieh's
Deep-Green ties would help mitigate such opposition,
noting Hsieh's key role in founding the DPP. Lin
believes that Hsieh's Green credentials will make it
easier for him to endure criticism for engaging China.


13. (C) Another important factor will be Beijing's
attitude toward the next President. Any initiatives that
require bilateral cooperation like cross-Strait charter
flights and further opening Taiwan to PRC tourists need
Beijing's active cooperation. Many observers believe
that Beijing holds a relatively positive opinion of Hsieh
among DPP politicians. This perception stems in part
from Hsieh's unsuccessful attempt in 2000 when he was
mayor of Kaohsiung to arrange a visit to Xiamen in China.
In addition, former Vice Premier Wu argued that after a
third DPP presidential election victory, Beijing, facing
the prospect of another four years of DPP administration,
would be more willing to work with Hsieh than it was with
Chen.

Hsieh's Vision - The New Silk Road
--------------


14. (C) Hsieh has recently described his approach to
cross-Strait economic relations by calling for Taiwan to
create a "New Silk Road." Hsieh believes that Taiwan
should use its connections to China's rapidly growing
market to attract foreign capital to Taiwan. Corey Chen
told us that Hsieh's thinking on this concept was
strongly influenced by Toyota's experience in Taiwan,
which it has used as a base to develop and test market
products for the greater China market.


15. (SBU) Hsieh's New Silk Road concept suggests that he
would probably work toward direct transportation links
that would make it easier for people to move back and
forth across the Strait. This would include continuing
negotiations on cross-Strait charter flights and tourism
(initiatives that begun under Hsieh's premiership) if no
agreement is reached during the last year of the Chen
administration.


16. (SBU) Hsieh's writings on the New Silk Road give a
less clear indication on how he would handle cross-Strait
investment policies. Liberalizing restrictions on
capital and technology flows to China are among the
highest priorities of the Taiwan business community.
Freer capital flows across the Strait could make Taiwan
businesses more attractive partners for foreign investors
looking to use the island as a greater China platform.
However, in discussing the New Silk Road, Hsieh has cited
the need to avoid capital outflows from Taiwan.


17. (C) Wu and Lin separately told us that Hsieh had
tried to relax the "40 percent" capital ceiling on
investment when he was Premier in 2005 but had not
succeeded. (Note: Many Taiwan firms strongly object to
what is widely referred to as the "40 percent" ceiling.
The 40 percent ceiling is actually a graduated scale of
limits that restricts many smaller firms from investing
more than 40 percent of their paid-in capital in China.
Larger firms are permitted to invest a smaller percentage
of their total capital. End note.) Corey Chen said that
Hsieh would look to relax both capital and industry-based
restrictions on investment while focusing on preventing
exports of sensitive technology to protect Taiwan's
security. Wu conjectured that although Hsieh would
likely seek to adjust the 40 percent ceiling to allow
exceptions for certain firms, he might be unwilling to
lift industry-based restrictions.

Comment - Faster than Chen, but How Fast?
--------------


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18. (SBU) It appears likely that Hsieh, if elected
President, would accelerate cross-Strait economic opening
from the sluggish pace we've observed during the Chen
administration. He might cross some of the red lines
that Chen has avoided like relaxation of the 40 percent
limit on investment in China. However, Hsieh would
likely proceed more cautiously in economic opening
compared to what we might see under a Kuomintang
administration led by Ma Ying-jeou. (On the other hand,
Hsieh may be better positioned to counter Deep-Green
opposition than KMT's Ma.) Key factors might be Hsieh's
ability to neutralize Deep Green opposition and Beijing's
willingness to work with a DPP administration led by
Hsieh.
YOUNG