TAIWAN ECONOMIC MINISTER OPTIMISTIC ON TIFA AND

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 000227

SIPDIS

SIPDIS

STATE FOR EAP/TC,
STATE PASS TO USTR FOR STRATFORD, ALTBACH, AND BOLLYKY,
USDOC FOR 4431/ITA/MAC/AP/OPB/TAIWAN/JDUTTON

E.O. 12958: DECL: 01/30/2032
TAGS: ECON EFIN ETRD KIPR TW EINV
SUBJECT: TAIWAN ECONOMIC MINISTER OPTIMISTIC ON TIFA AND
ECONOMY


Classified By: AIT Director Stephen Young for reasons 1.5 (b) and (c)


Summary
--------------

1. (C) Minister of Economic Affairs Steve Chen reminded AIT
Director January 26 his major goal is a bilateral FTA, but he
is more than willing to pursue a robust TIFA agenda in the
nearer term. He promised some points on the Bilateral
Investment Agreement in a few days, welcomed our decision to
engage on a bilateral GPA, and committed to working with us
on outstanding IPR problems. Chen was upbeat about economic
performance for 2007, believing that strong consumption and
investment rates will keep growth at about the same level as
last year. End Summary.


2. (SBU) On January 26, AIT Director Young called on
Minster of Economic Affairs Steve Chen (Ruey-long). When the
Director asked how Chen was enjoying the job, he replied with
a laugh "I'm exhausted," but eagerly jumped into a lengthy
discussion of the full range of economic issues and
optimistic forecasts. Chen was accompanied by Franco Huang,
Director General of the Bureau of Foreign Trade (BOFT) and
staff. Director Young was accompanied by EconOff.

U.S. Appreciates Export Controls, Megaports Cooperation
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3. (SBU) The Director first thanked Taiwan for its
excellent cooperation on export control issues, which Taiwan
manages under the direction of BOFT. The Director said the
U.S. is pleased to help Taiwan enhance its export control
regime. He cited the export control seminar on advanced
licensing sponsored by AIT that concluded on January 26,
which will be followed by about one seminar per month through
August. Chen noted that MOEA encourages the necessary
interagency cooperation and recognizes the importance of
export control measures. The Director said the Megaports and
CSI initiatives are true success stories in bilateral
cooperation.

Both Sides Committed to Progress on TIFA
--------------

4. (C) The Director noted that both Deputy USTR Karan
Bhatia and AUSTR Tim Stratford were pleased with Stratford's
December visit to Taiwan. They are planning for the U.S. to
host the next round of Trade Investment Framework Agreement
(TIFA) talks later this year, but are not yet ready to
discuss timing. Bhatia does not exclude the possibility of
visiting Taiwan later this year, and Frank Lavin,
Undersecretary of Commerce, and a senior USDA figure might
also be prepared to visit, the latter in connection with an
inaugural CCA (Consultative Committee on Agriculture)
meeting.


5. (C) The Director and Minister Chen reviewed the status
of the three main agreements progressing under the TIFA
process:

-- Bilateral Tax Agreement - The Director noted the U.S. side
needs to make the next move and is currently involved in
interagency discussions on the issue.

-- Bilateral Investment Agreement - Chen stated that Taiwan
was nearly ready to provide AIT with comments on the draft
agreement. The non-paper was on his desk and Chen said the
non-paper raised five points, including two very minor
issues. He expected to pass this non-paper to the U.S. side
in the next couple of days.

-- Government Procurement Agreement - Although the U.S. had
hoped Taiwan would accede to the GPA in the WTO, the U.S. is
ready to engage Taiwan on a bilateral GPA, the Director said.
Specifics will be forthcoming shortly, and he asked that the
Minister please inform Vice Premier Tsai. Chen replied that
a bilateral would be even more advantageous to U.S. firms.
He added that Taiwan is telling the EU that a bilateral GPA

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could be discussed in terms of an FTA.

He Had Hoped for FTA - We Both Hope for Doha
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6. (SBU) Chen added with a smile that he had hoped the U.S.
and Taiwan would be discussing an FTA, not a GPA. He
expected trade promotion authority (TPA) would be extended,
at a minimum, to allow the Doha round to continue. The
Director replied that even if TPA was not extended Doha would
remain a U.S. priority. The Director noted that Agriculture
Secretary Johanns told him earlier this month that President

SIPDIS
Bush is still committed to Doha and that Taiwan will be a key
player in any reinvigorated Doha round.

IPR Legislation Important, so is Pushing Ministry of Education
-------------- --------------

7. (SBU) The Director reiterated U.S. support for pending
legislation regulating peer-to-peer (P2P) file sharing as
well as legislation establishing Taiwan's Intellectual
Property Court. He noted that there had been some confusion
regarding a letter from Amcham which had asked the
Legislative Yuan to delay action on IPR legislation until
there was time for industry to comment. Although broadly
written, this letter was an attempt to delay a specific bill
which would expand compulsory licensing for patents, an issue
of great concern to industry and to AIT. Chen was aware of
the incident. He stated that MOEA would "do its best" to
make sure both the IP Court and P2P legislation pass as soon
as possible. He anticipated that these two bills would pass
in March, after the Chinese New Year holiday.


8. (SBU) The Director also noted that the Special 301
Review evaluation process had commenced and that AIT would be
talking with various stakeholders and working closely with
the Taiwan Intellectual Property Office (TIPO),which falls
under the MOEA. Chen hoped that Taiwan could be removed from
the Watch List this year, claiming that as Taiwan remains on
the list year after year in spite of substantial progress in
IPR enforcement, there is less and less interest on the
Taiwan side in enhancing cooperation.


9. (SBU) Director Young asked that MOEA help with the
Ministry of Education, which has not been responsive to U.S.
concerns about IPR protection on campus and on TANet, the
ministry's island-wide computer network. Chen replied that
he would seek more action on both issues, although he
believed that fewer textbooks are being copied illegally. He
noted that the MOE had agreed to add IPR protection to the
criteria for evaluating school performance, which should
cause university administrators to take more interest in IPR
issues.

Confident the Budget will Pass
--------------

10. (SBU) Chen was confident that the government's budget
will pass, if not in special session (Note: This did not
happen.),then when the Legislative Yuan reconvenes after
Chinese New Year. Even if the budget does not pass
immediately, the government still can still function by using
previously approved funding. Director Young said the
uncertainty and political fighting over the budget will
affect the military procurement bill. Further delay calls
into question Taiwan's commitment, particularly in the face
of an unambiguous military build up by the PRC. Our hope,
continued the Director, is for the Executive Yuan to work
with the Legislative Yuan to move forward on a supplemental
budget to raise Taiwan's defense spending to 2.85% of GDP in
2007, up from the current 2.4% and re-insert funding for
patriot missiles.


11. (SBU) Chen reassured the director that even on the last
day of the legislative session on January 19, the National
Security Council was trying to insert a supplemental budget,
but the chaos on the floor (Note: which included locking the
Speaker out of the Chamber, demonstrations on the floor, and
fisticuffs among legislators. End note.) prevented any

TAIPEI 00000227 003 OF 003


legislative business moving forward.


Optimistic for 2007 Economy
--------------

11. (U) Chen predicted that 2007 would be "a good year for
Taiwan" in economic terms, estimating that economic growth
would be slightly lower than in 2006 (Note: 2006 real GDP
growth is currently projected to be 4.4%). This year, Chen
stated the economy will get a boost from domestic
consumption. Last year consumption was dampened by an
overhang of credit card debt now largely resolved and the
unusual appearance of two "ghost months" in the Chinese lunar
calendar. Superstitious shoppers avoid major purchases such
as cars and homes during this time. Chen pointed out
consumer confidence is up, boosted in part by the rising
local stock market. He also forecast private sector
investment will be as good as or better than last year and
was optimistic about continued export growth. Low inflation,
helped by the drop in oil prices, would also help. The
high-tech sector was still very strong.

Limited impact of Rebar Case
--------------

12. (SBU) Chen stated that the Rebar case would have
limited impact on the economy, but did express concern about
any increase in unemployment caused by the collapse of weak
parts of the business group. He noted that some of the
businesses, such as the Idee Department Store chain and a
cement company, were in good financial shape. Others, such
as the aluminum and petrochemical businesses, were on far
shakier ground. It was possible, he speculated, that foreign
investors might purchase some of the Rebar assets, in
particular the Asia Pacific Telecom Group which controls some
sought-after licenses.


13. (SBU) The Vice Premier, according to the Director,
noted a possible silver lining to the Rebar case: the case
may stimulate second tier financial reforms. Chen hoped
that the U.S. would expel Wang You-theng, founder of Rebar
Group, who is currently in the U.S. The Director assured
Chen that the U.S. Department of Justice was working with its
Taiwan counterparts reviewing this case.

"Small, but Steady Steps" on Cross-Strait Policy
-------------- ---

14. (C) Turning to cross-strait economic policy, Director
Young praised Chen for relaxing investment restrictions on
semiconductor production of semiconductors with feature size
of 0.18 microns in China. This was a positive step, he said,
even though this is already old technology. Firms in Taiwan
are currently talking about bringing into production 45
nanometer (.045 micron) chips, the director noted. Chen
responded that Taiwan was taking "small, but steady steps" on
cross-strait economic issues and expected that within 6
months to one year MOEA would be looking at approving
investment in manufacturing of 0.13 micron chips in China.


Comment
--------------

15. (C) Chen is still firmly committed to bilateral
economic engagement with the U.S. While FTA is still his
goal, he is ready to move forward in the near term on the
full range of TIFA issues. Lower-level MOEA contacts tell
AIT that MOEA is planning to suggest making TIFA even more
robust by creating new task forces or working groups under
the TIFA umbrella to aggressively pursue TIFA goals, in the
hopes, of course, of bringing Taiwan a few steps closer to an
eventual FTA.
YOUNG