Booming Cross-Strait Trade Benefits Taiwan Economy but

UNCLAS SECTION 01 OF 02 TAIPEI 000568

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR
STATE FOR EAP/ TC, EAP/EP
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: N/A
TAGS: ETRD ECON PREL CH TW
SUBJECT: Booming Cross-Strait Trade Benefits Taiwan Economy but
Could Feed Concerns of Dependence

Ref: Taipei 516

06 Taipei 910


1. (SBU) Summary: Taiwan's trade with China grew by 15.4 percent
last year, faster than its overall trade. Imports from the PRC grew
at even faster rate, up 23.3 percent. China was Taiwan's largest
trade partner and export market. It passed the United States as
Taiwan's second largest source of imports for the first time in
annual data. Taiwan's share of the PRC's total trade declined even
as the PRC's share of Taiwan trade continued to increase. Although
Taiwan's economy benefits from growing trade with China, some worry
that the island's economy is too dependent on China. End summary.

Outpacing Overall Trade Growth
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2. (U) Taiwan's total trade with the PRC in 2006 grew 15.4 percent
to US$88.1 billion. Trade with China outpaced Taiwan's overall
trade, which rose by 12.0 percent. Imports from China were up an
impressive 23.3 percent to US$24.8 billion. Taiwan's total imports
rose 11.0 percent. Taiwan's exports to China grew 12.5 percent to
US$63.3 billion, a slightly slower pace than global exports, which
rose by 12.9 percent.


3. (U) Taiwan's trade surplus with China rose to US$38.5 billion,
growing by 6.6 percent. However, this was the slowest pace of
growth since 2001. Growth in exports to China declined from 15.0
percent in 2005 to 12.5 percent last year. Growth in imports, on
the other hand, rose from 19.7 percent in 2005 to 23.3 percent.

Largest Trade Partner and Export Market
--------------


4. (U) The PRC was Taiwan's most important trading partner for the
fourth year in a row, increasing its share of Taiwan's total trade
to 20.7 percent. This is a slight increase from 20.0 percent in

2005. Japan was the second largest, accounting for 14.7 percent of
Taiwan's total trade in 2006; and the United States was third with
12.9 percent. China was also Taiwan's largest export market.
Exports to China in 2006 accounted for 28.3 percent of Taiwan's
total exports, which is a slight drop from 28.4 percent in 2005.
This marked the first decline in China's share in at least five
years. The United States, Taiwan's second largest export market,
accounted for 14.4 percent of exports, down from 14.7 percent in

2005.

PRC Overtakes U.S. in Exports to Taiwan
--------------


5. (U) In 2006, China surpassed the United States to become Taiwan's
second largest source of imports. (Note: China first surpassed the
United States in monthly trade data in September 2005, but still
ranked third overall in 2005. Last year was the first time China
was the second largest source of Taiwan's imports in annual trade
data. End note.) The PRC accounted for 12.2 percent of Taiwan's
total imports compared to 22.8 percent for Japan and 11.2 percent
for the United States. Imports from the PRC have grown
substantially in recent years even though Taiwan maintains
restrictions on the import of certain PRC goods, especially
agricultural products.

Integrated Cross-Strait Supply Chains
--------------


6. (U) Taiwan trade with China reflects complex cross-Strait supply
chains. Machinery, electrical equipment, and optoelectronics
equipment (including equipment used in the manufacture of flat-panel
displays and digital cameras) accounted for 62.9 percent of Taiwan's
total exports to the PRC in 2006. These same categories accounted
for 55 percent of Taiwan's total imports from the PRC. Many of
these goods are components for information technology (IT) hardware
and other consumer electronics that are assembled in China and are
subsequently exported to the United States, Europe and Japan. Three
of China's top four exporters in 2005 were Taiwan IT hardware
manufacturers.

PRC Less Reliant on Taiwan Trade
--------------


7. (U) China's share of Taiwan's total trade continues to grow.
However, Taiwan's share of the PRC's total trade declined again last

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year. Trade with Taiwan accounted for 5.05 percent of China's total
trade for the first 11 months of 2006, down from 5.37 percent in

2005. Although the decline is small, Taiwan's share has fallen
gradually from a peak of 8.21 percent in 1996. Taiwan is the PRC's
fifth largest trade partner and third largest source of imports. As
recently as 2004, it was the PRC's second largest source of imports
but was overtaken in 2005 by South Korea.

Troubling News for Some
--------------


8. (SBU) Comment: Cross-Strait trade has benefited many Taiwan firms
and been an important driver of the island's economic growth in
recent years. Nevertheless, some people in Taiwan are concerned
that China's share of Taiwan's total trade continues to grow even as
Taiwan's share of China's trade shrinks. Even though Taiwan's trade
surplus with China is unlikely to turn into deficit any time soon,
some will be troubled by strong growth in imports from China. These
trade statistics will do nothing to allay concerns that Taiwan's
economy is too dependent on China.

YOUNG