MA ECONOMIC POLICY PRESENTS CHALLENGES - AND

C O N F I D E N T I A L AIT TAIPEI 000268


STATE FOR EAP/TC
STATE PASS USTR FOR STRATFORD AND ALTBACH, TREASURY FOR
OASIA/WINSHIP AND PISA, NSC FOR LOI, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN,USDA FOR FAS/OCRA RADLER AND
BEILLARD, FAS/OSTA WETZEL, HAMILTON, DAWSON, AND SHNITZLER,
FAS/ONA BERTSCH, AND FAS/OFSO WAINIO

E.O. 12958: DECL: 03/10/2019
TAGS: ECON ETRD PGOV PREL EAGR EFIN PINR TW CH
SUBJECT: MA ECONOMIC POLICY PRESENTS CHALLENGES - AND
OPPORTUNITIES - FOR U.S. INTERESTS

REF: A. 08 TAIPEI 808 (NOTAL)

B. TAIPEI 206 (NOTAL)

C. TAIPEI 221 (NOTAL)

D. 08 TAIPEI 1428 (NOTAL)

E. 08 TAIPEI 1490 AND PREVIOUS (NOTAL)

Classified By: Stephen M. Young, AIT Director, for reasons 1.4 (b) and (d).



1. (C) SUMMARY. Entering office last May determined to build
cross-Strait economic ties and recharge Taiwan's economic
growth, the administration of President Ma Ying-jeou has
instead been confronted with an unprecedented global economic
downturn. Nearly a year into its tenure, the Ma
administration can point to enhanced cross-Strait economic
ties as a clear policy success. In the midst of a
deteriorating economy, however, Ma's team has few options to
highlight the specific economic benefits of its cross-Strait
policy. The Ma Cabinet's problems are compounded by a
diffuse economic policy structure that has led critics to
accuse the President of lacking a clear economic vision. In
practice, a shifting amalgam of public opinion, underlying
principle, and special interests have been key factors in
determining Ma's economic policy on key bilateral priorities
with the U.S.


2. (C) The Ma administration has responded positively to U.S.
advocacy when benefits are deemed to outweigh disadvantages,
as in GPA accession, but has acted with extreme caution when
our priorities are seen as invoking domestic political risk,
as with beef market access. At the same time, the Ma
administration has now determined to embark on the
domestically controversial course of pursuing a bilateral
Economic Cooperation Framework Agreement (ECFA) with the PRC.
In addition to enhancing ties with China, such an agreement
is seen in Taiwan as a necessary precursor to improving
economic relations with ASEAN and other major trading
partners - including the U.S. Even as we continue to press
for prompt resolution of individual trade disputes, Taiwan's
emerging cross-Strait policy presents important opportunities
for advancing our own comprehensive economic interests with
the U.S.' twelfth-largest economic partner. END SUMMARY.

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WHO DOES WHAT ON ECONOMIC POLICY?
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3. (C) According to Taiwan's constitution, the President is
responsible for defense, foreign affairs, and cross-Strait
issues. The appointed Premier, as head of the Executive Yuan
(EY),handles essentially everything else, including economic
policy. In practice, however, President Ma has taken an
active personal role on many economic issues. Ma holds
weekly policy meetings with Vice President Vincent Siew,
Premier Liu Chao-shiuan, Vice Premier Paul Chiu, and National
Security Council Secretary General Su Chi. Other officials
may also join, depending on the issues at hand. Since the
Premier has relatively little experience with economic
affairs, the Vice Premier, a former Minister of Finance with
a long economic policy resume, is often charged with
coordinating and implementing specific economic policies.
Chiu has been asked, for example, to chair a host of
important economic policy committees addressing such topics
as tax reform, price stability, financial reform, and
unemployment. Regardless of formal responsibilities,
decisions on most important economic policies appear to be
made by President Ma himself.


4. (C) Given his extensive experience on economic issues,
including stints as Premier, Chairman of the Council for
Economic Planning and Development (CEPD),Chairman of the
Mainland Affairs Council (MAC),and Minister of Economic
Affairs, Vice President Siew was widely expected to play a
prominent economic policy role. In fact, Ma's choice of Siew
as his running mate reinforced the KMT's campaign criticism
of what Ma characterized as the DPP administration's
lackluster economic record. In practice, however, Siew thus
far seems to be playing a relatively minor economic policy
role, both publicly and behind the scenes. In one summer
2008 meeting with a U.S. visitor, for example, Siew indicated
that his time was dominated by the ceremonial
responsibilities traditionally associated with his post (ref
a). Partially in response to criticism of an incoherent and
ineffective administration economic effort, in late 2008 Siew
begain convening a series of economic policy discussions with
private economists, businesspeople, and other experts. One
participant, however, told us privately that she found the
sessions poorly organized and a waste of time. After an
initial media splash, the public side of the intermittent
meetings seems to have faded.


5. (C) In addition to the Vice President, Premier, and Vice
Premier, President Ma holds a separate weekly meeting with
Central Bank Governor Perng Fai-nan. In his current position
since 1998, Perng enjoys a strong reputation for nonpartisan
competence. In contrast to the Chen administration, the
National Security Council (NSC) under Secretary General Su
Chi plays a prominent role on international economic policy.
Su enjoys a close personal working relationship with the
President, and both Su and his deputy, Ho Sze-yin, have been
among our principal interlocutors on the beef market access
and GPA accession issues. The Mainland Affairs Council's
relative influence has been eclipsed to some extent by that
of the Straits Exchange Foundation, headed by KMT Vice
Chairman P.K. Chiang. This situation may result in part from
the fact that MAC Chairwoman Lai Shin-yuan, a former Taiwan
Solidarity Union (TSU) legislator, is not part of the KMT.
In addition, the proliferation of other avenues of
cross-Strait policy coordination is simply leaving the MAC
with the same slice of an expanding pie.


6. (C) In the meantime, no policy stars have emerged from
among the individual line ministers. In what is no doubt a
reflection of Taiwan's deteriorating economy, Minister of
Economic Affairs Yiin Chi-ming, Finance Minister Lee
Sush-der, and CEPD Chairman Chen Tain-jy often appear near
the bottom of public popularity polls, while Financial
Supervisory Commission (FSC) Chairman Sean Chen only recently
took office after the November 2008 resignation of his
predecessor over a political dispute. In past
administrations, the Council for Economic Planning and
Development (CEPD) has sometimes enjoyed a prominent
interagency coordination function. Current CEPD Chairman
Chen, however, has privately complained about excessive
bureaucratic interference in CEPD efforts to devise the
"consumption voucher" and other economic stimulus programs.
Finally, the KMT-dominated Legislative Yuan (LY) plays a
relatively minor role in economic policy. Individual KMT
legislators sometimes disagree strongly with specific
administration proposals, and LY Speaker Wang Jin-pyng is no
fan of President Ma. Regardless, in practice, the
KMT-controlled LY virtually always approves legislation
proposed by the EY, usually without major amendment.

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ECONOMIC CRISES CONTRIBUTE TO LACK OF FOCUS
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7. (C) Taiwan economic policymaking includes prominent formal
roles for the Premier, Vice Premier, "line" and "without
portfolio" ministers, and the CEPD, as well as important ad
hoc roles for the President, NSC, and SEF. Overall, this
hydra-like structure has contributed to a lack of focus and
coordination in Ma administration economic policy. At the
same time, global events have dealt Ma's cabinet an
especially daunting economic policy hand. Partially as a
result, the administration has sometimes given the impression
that it is lurching from crisis to crisis, and can appear to
have limited ability to address more than one priority issue
at a time. Right after Ma's May 2008 inauguration, economic
policy focused on removing the financially unsustainable
gasoline and electricity price controls imposed by the Chen
administration, as well as starting direct cross-Strait
passenger flights and other measures to expand economic ties
with China. The economic policy team then concentrated on
addressing last summer's surge in inflation, a threat that
quickly seemed quaint in comparison with the gyrating
stockmarket and swooning global economy that dominated
attention in the fall. Although Taiwan's financial system
has remained essentially sound, the economy has been struck
by a collapse in export demand. As a result, the spotlight
has shifted to economic stimulus measures and, increasingly,
combating growing unemployment. The cross-Strait agenda has
moved ahead, including the November 2008 establishment of
direct cross-Strait transportation and postal links. In
recent weeks, business sector concerns have brought plans for
a Taiwan-PRC "Economic Cooperation Framework Agreement" to
the fore.

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ANALYZING MA AND HIS ECONOMIC TEAM
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8. (C) According to Minister-without-portfolio Chu Yun-peng,
President Ma becomes personally involved in major economic
policy planning, especially when a proposal requires
legislative approval. Otherwise, individual ministers can
enjoy a strong degree of autonomy, under the overall
coordination of the Vice Premier. Charles Kao is founder of
the Common Wealth publishing group, whose journals and books
often influence the economic policy debate, and has close
ties to the Vice President and other KMT policymakers. In
his view, President Ma is a "long distance runner" with a
cautious decision-making style based largely on consensus.
Kao said Ma's economic team suffers from lack of leadership,
and does not have a dominant minister who dares to make
difficult policy decisions in the face of public criticism.
Kao implied that there is widespread disappointment with the
performance of Vice Premier Chiu, in particular, and noted
that Chiu's courtly demeanor leaves him reluctant to make
tough choices and risk alienating constituents.


9. (C) Kenneth Lin, a National Taiwan University professor
and advisor to 2008 DPP presidential candidate Frank Hsieh,
told us he declined an offer to advise Ma on economic policy
after the election. Lin critizes Ma's economic team as a
collection of individuals pursuing separate agendas. The
President, he asserts, listens to his formal advisors, but
also absorbs information from outside sources, and then makes
decisions while ostensibly remaining "behind the scenes" on
policy issues. Lin believes Ma's Cabinet has been
ineffective at publicly explaining economic policy, and lacks
an effective economic spokesperson. Some of Lin's criticisms
are echoed by Christina Liu, a private economist and former
People First Party (PFP) legislator who writes frequently on
economic policy. In her view, the Ma Cabinet suffers from
lack of an overarching economic policy vision.

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WHAT DOES IT MEAN FOR INTERNATIONAL ECONOMIC POLICY?
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10. (C) The Ma team's economic decisionmaking appears to be
based on a calculus that includes adherence to an established
economic platform, sensitivity to opposition and media
criticism, the imperative of pressing crises, and response to
interest group pressure. With the important exception of
cross-Strait economic ties, economic policy traditionally
musters a relatively high degree of consensus in Taiwan. Ma
campaigned on a platform of reducing unemployment to 3%,
raising GDP growth to 6% per annum, and increasing per capita
GDP to USD 30,000. The global economic crisis has dashed any
near-term hope for realizing those goals, which were
ambitious to begin with. In addition, Ma's economic platform
emphasized enhancing cross-Strait economic links as part of a
broader effort to revive Taiwan's growth after what he
publicly described as the "stagnation" of the Chen years. Ma
is not a Thatcher-style "conviction politician" on economic
issues, however, and his economic policy views are firmly in
line with the pragmatic, business-friendly philosophy that
characterized KMT policy during its previous years in power.


11. (C) Thus far, greatly expanded cross-Strait economic ties
are the Ma team's biggest economic policy success. Direct
air, shipping, and postal links have all been implemented,
while restrictions on the number of PRC tourists allowed to
visit Taiwan have been relaxed. Limits on Taiwan investment
in China have been eased, and cross-Strait business
cooperation is proliferating (ref b). The Ma administration
appears to be getting relatively little public credit for its
cross-Strait successes, however. The administration itself is
partially to blame for engendering unrealistic public
expectations of dramatic progress, although most experts
believe the real benefits from enhanced economic relations
with China will take years to be realized. Meanwhile, the
severe global downturn has made it impossible for Ma to point
to quickening growth as the fruit of direct links.


12. (C) The administration's recent announcement that it
plans to negotiate an Economic Cooperation Framework
Agreement (ECFA) with the PRC (ref c) stems from immediate
concerns by petrochemical and other specific industry sectors
about their possible regional marginalization after the
advent of ASEAN 1 in 2010 (ref c). More broadly, the Ma
administration sees conclusion of an ECFA with China as a
necessary precursor to closer economic relations with
Taiwan's other major trading partners, starting with ASEAN
(ref d),but also extending to the U.S. In addition to an
agreement with ASEAN as a body, Taiwan is especially
interested in a bilateral FTA with Singapore. Singapore, in
turn, has made it clear that it will explore enhanced
economic ties with Taiwan only in the context of improved
cross-Strait economic relations.


13. (C) In the midst of a sharp economic downturn, with a
public approval rating of about 35% in February, Ma pressed
ahead with announcing Taiwan's intention to negotiate an
ECFA. Originally modeled on the PRC's framework agreement
with ASEAN, the ECFA proposal has immediately become a
controversial domestic political issue, especially since it
was first named CECA (Comprehensive Economic Cooperation
Agreement),which to some in Taiwan sounded suspiciously like
the PRC-Hong Kong CEPA (Closer Economic Partnership
Arrangement). The opposition, in particular, has raised the
spectre that China might use economic means to draw Taiwan
into its fold politically.


14. (C) Taiwan joined the WTO in 2002, but the Chen
administration long cited nomenclature concerns in failing to
fulfill its commitment to accede to the WTO Government
Procurement Agreement (GPA). Less focused on symbolic
nomenclature issues, the Ma administration responded to
coordinated lobbying by the U.S. and the EU in Taipei and
Geneva, and finally agreed to accede in late 2008. The
decision to accede is poised for approval in the LY, and has
thus far elicited no serious domestic political controversy.
On the more technical WTO issue of interpreting the
Information Technology Agreement (ITA),Taiwan was willing to
support the U.S. position, especially since it dovetails with
the interests of Taiwan's technology sector.


15. (C) In contrast to the GPA issue, however, the Ma
administration has invoked fears of a domestic backlash in
pursuing a cautious policy on opening Taiwan's market to the
full range of U.S. beef imports. Taiwan has no domestic beef
industry, and the island's consumers have already shown a
clear willingness to buy boneless U.S. beef. Nevertheless,
President Ma was alarmed by last year's South Korean protests
against U.S. beef imports, drawing immediate parallels
between his own status as a newly-elected right-of-center
leader pledged to implement economic reform, and the similar
profile of South Korean President Lee. Ma is doubtless also
wary about taking any steps that could further damage his
current low standing in public opinion polls. Taiwan's fall
2008 panic over melamine-tainted dairy imports from the PRC
highlighted the reality of a nervous Cabinet, publicly
embodied by then-Minister of Health Lin, who resigned under
LY fire, and his skittish successor, current-Minister of
Health Yeh. The result was the government's immediately
kowtowing to perceived public demands for a "zero tolerance"
melamine standard (ref e),regardless of sound science, trade
implications, or prevailing international practice.


16. (C) The melamine experience only reinforced Taiwan's
inherent caution in addressing the beef issue, which Ma and
Health Minister Yeh continue to see as potentially explosive
with the general public. This risk aversion is also seen on
other agricultural market access issues, especially the
setting of maximum residue levels (MRLs) for pesticides and
animal drug residues. The January 2009 publication of a
Department of Health risk assessment report attesting to the
safety of U.S. beef, thus far with virtually no perceivable
public outcry, has helped ease administration fears.
Regardless, however, the Ma team has thus far decided that
the potential risks of rapidly opening Taiwan's market to all
U.S. beef products have simply not been worth the immediate
perceived benefit. Preoccupied with cross-Strait and
domestic concerns, and confronted with the change in U.S.
administration in January, Ma and his team have not yet been
willing to take the political risk to adopt a potentially
controversial decision. There is some evidence now that Ma
is reevaluating this decision, in part as he weighs the value
of removing the beef irritant from bilateral relations with
the Obama administration. We will only know for sure when he
acts, however, and that has not happened yet.

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CONCLUSION: TAKING ADVANTAGE FOR U.S. INTERESTS
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17. (C) The Ma administration wants to expand Taiwan's
economic relations with all of its trading partners,
including the U.S. Ma's initial efforts have concentrated on
enhancing ties with the PRC, Taiwan's largest trading partner
by far. Despite arousing domestic sensitivities about
potential damage to sovereignty or the "hollowing out" of
Taiwan's economy, improvements in cross-Strait economic
relations are embraced by the majority of Taiwan's business
community. They are also seen by policymakers and commercial
interests alike as a necessary first step in building
Taiwan's economic ties to ASEAN, Japan, the U.S., and other
important trading partners.


18. (C) Meanwhile, a cautious and diffuse economic policy
apparatus, at times hobbled by a dearth of firm leadership,
complicates our advocacy on beef and other issues. Perhaps
ironically, Taiwan's current economic and trade initiatives
with the PRC now surpass its similar efforts with the U.S.,
although the Ma administration may be driven by a sense it
has considerable catch-up work to do with China. Taiwan's
vibrant democracy will inevitably inject sometimes-volatile
public opinion into our bilateral economic policy mix. At
the same time, Ma and his advisors have underscored to us the
need to strengthen our bilateral ties in order to balance or
counter the fact and perception of Taiwan's over-reliance on
the Mainland. Hence, the near-term prospect of dramatically
expanded China and ASEAN economic links for our
twelfth-largest trading partner presents the U.S. with a
fresh impetus to pursue our own comprehensive economic
interests with Taiwan.


19. (C) Agricultural and other market issues will continue to
crop up, sometimes unpredictably. The U.S. must remain
aggressive in addressing specific trade irritants as they
arise. We must also, however, remember our own practical
interests in exploiting Taiwan's growing links to the Chinese
and other regional economies. After economic growth resumes,
Taiwan's traditional importance as a U.S. trading partner and
investment destination will be enhanced by its emerging role
as an economic gateway to China. The U.S. is already the
biggest foreign investor here. Improving Taiwan's investment
climate, including through a bilateral investment agreement,
remains the top priority of the U.S. business community. In
large part due to sustained U.S. engagement, Taiwan has
become a regional leader on IPR enforcement. From e-commerce
to reducing pollution in ports, our ongoing cooperation is
also showing clear signs of progress in advancing U.S.
priorities. The reality of Ma administration economic
policymaking may make Taiwan a difficult partner on some
specific irritants. At a deeper level, however, this reality
also presents valuable opportunities to pursue broader U.S.
goals.

YOUNG