CROSS-STRAIT FTA A POSSIBILITY?

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 001080

SIPDIS

E.O. 12958: DECL: 04/15/2019
TAGS: ECON ETRD PGOV PREL TW CH
SUBJECT: CROSS-STRAIT FTA A POSSIBILITY?

REF: A. BEIJING 691

B. TAIPEI 416

C. TAIPEI 415

D. TAIPEI 360

Classified By: Economic Minister Counselor Robert S. Luke. Reasons 1.4
b/d


1. (C) Summary. Taiwan is intent on negotiating with Beijing
a comprehensive Economic Cooperation Framework Agreement
(ECFA),equivalent to an FTA, according to a contact who met
recently with top officials from both sides. Beijing is
amenable to reaching a deal with Taipei that will advance
cross-Strait economic linkages. Taiwan officials suggested
an ECFA would be rolled out in stages, with an "early
harvest" that would include reduced tariffs on select Taiwan
exports to the mainland that would be otherwise hurt by the
initiation on January 1, 2010 of the China-ASEAN FTA. Taiwan
officials said a more comprehensive tariff and non-tariff
agreement would be pursued to go into effect by 2012, and a
services agreement by 2014. Economic modeling is underway to
show what benefits both sides could reap from an ECFA.
Beijing officials told our contact the PRC is motivated by
"love of country" to ink a deal whereas Taiwan's motivation
stems from fears of being marginalized in its economic
relations with both the mainland and the region. End Summary.


2. (C) The PRC and the Ma administration seem intent on
pursuing a comprehensive ECFA, equivalent to an FTA, despite
protests from the opposition Democratic Progressive Party
(DPP),Peterson Institute for International Economics
Visiting Fellow (and former Clinton Administration National
Economic Council staffer) Daniel H. Rosen told EmbOffs April

13. Rosen, who is conducting a study on a potential ECFA,
recently met with top ranking officials in Taiwan and Beijing
to discuss this subject, including Taiwan Vice President
Vincent Siew, P.K. Chiang, Chairman of the quasi-government
Straits Exchange Foundation (SEF) in charge of negotiating
with Beijing, and, in Beijing, with Taiwan Affairs Office
Deputy Chairman Sun Yafu.

Comprehensive Is Key
--------------


3. (C) Rosen stated PRC and Taiwan officials emphasized the
need for a comprehensive agreement to be phased in over time.
Over the short term, the two sides would focus on
establishing a framework for the negotiations and completing
an "early harvest" agreement by January 1, 2010. The latter
will allow Taiwanese companies to export goods to the
mainland under the same reduced tariff terms negotiated under
the China-ASEAN FTA to which Taiwan is not a party (ref. A).
Without an early harvest, Taiwan's petrochemical, textile,
auto parts, electronic components and machinery exports to
China will be subject to higher tariffs than exports from
ASEAN nations, Rosen explained.


4. (C) Over the longer term, a more comprehensive tariff and
non-tariff agreement would be completed by 2012, with a
services agreement completed by 2014. Rosen said both sides
want the final product to cover tariff and non-tariff
barriers, investment, services and trade, financial
cooperation, intellectual property rights, dispute
resolution, and trade safeguards.

"KMT Blew It"
--------------


5. (C) The public controversy in Taiwan surrounding the ECFA
is largely due to the Kuomingdang's (KMT) "clumsy" management
of public perception, Rosen opined. The Taiwan authorities
tried to keep details of its plans and goals for the
agreement close hold, he said. The DPP took advantage of
this, whipping up public opposition with suggestions that an
ECFA would lead to Taiwan being economically and politically
subsumed by the mainland. Taiwan officials have only
recently started to do public outreach to explain the goals
of an agreement but such efforts have had limited effect thus
far. "The KMT blew it," Rosen lamented.

Economic Modeling in the Works
--------------


6. (C) Rosen noted that he was surprised to learn from his
meetings in Taiwan that no reliable economic modeling has yet
been done to forecast what benefits both sides could reap
from an ECFA. Numbers cited by the press are based on a
faulty 2005 study, he said. President Ma understands the
economic imperative of an agreement, however, and Taiwan
recently commissioned a study to model potential results.

BEIJING 00001080 002 OF 002


The Peterson Institute is also modeling an ECFA and expects
to have results sometime in May. Rosen promised to share
those results with us when they become available.

What Motivation?
--------------


7. (C) Rosen's mainland interlocutors told him the PRC and
Taiwan have very different motivations for completing an
economic agreement. Beijing's motive is subjective, they
claimed, arising from a "love of country." They said Beijing
wants Taiwan's commitment to the principle of "normalization"
of the economic relationship, but will not demand any
specific concessions from Taipei in the short-term. Taiwan,
however, fears being marginalized in its economic relations
with both the mainland and the region, they claimed. Rosen
believes that, if the two-sides cannot sign an early harvest
agreement by the January 1, 2010 deadline, Beijing would
still find a way, through decree or otherwise, to reduce
tariffs on Taiwan exports to the PRC to prevent that
marginalization.

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


8. (C) Rosen is a well-respected and well-connected scholar
with close relations to key officials on both sides of the
strait. His overall impression was that the Taiwan
authorities want to move quickly towards an ambitious deal
and that China welcomes the opportunity to advance
cross-Strait economic integration. While there seems to be
no hesitation on Beijing's part, the politics in Taiwan on
any agreement, however, remain a wildcard.
PICCUTA