TAIWAN MAKES PROGRESS TOWARD CROSS-STRAIT TRADE

C O N F I D E N T I A L AIT TAIPEI 000170


STATE FOR EAP/TC
STATE PASS USTR FOR STRATFORD AND ALTBACH, TREASURY FOR
OASIA/WINSHIP AND JEWELL, NSC FOR LOI, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN, USDA FOR FAS/OSTA BLUM, BEAN,
AND DAWSON AND FAS/OCRA RADLER, BURNETT, AND BEILLARD

E.O. 12958: DECL: 02/11/2020
TAGS: ECON ETRD EINV EFIN PGOV PREL EAGR TW CH
SUBJECT: TAIWAN MAKES PROGRESS TOWARD CROSS-STRAIT TRADE
PACT

Classified By: Bill Stanton, AIT Director, for reasons 1.4 (b) and (d).


1. (C) SUMMARY: Taiwan officials confirmed that Taiwan and
the PRC have formally agreed to pursue a bilateral Economic
Cooperation Framework Agreement (ECFA). Following January 26
talks in Beijing, the two sides plan to conclude an ECFA
during the fifth round of cross-Strait economic talks,
tentatively slated to take place before June. Taiwan hopes
the agreement will include enhanced PRC market access for
five "early harvest" industrial sectors and several service
industries, including banking and finance. The PRC has not
yet given Taiwan its own market access priorities, but
reportedly understands that domestic Taiwan political
sensitivities will put agricultural products off the table
for the foreseeable future. PRC officials have provided
informal indications that they may not object to Taiwan's
pursuit of free trade agreements (FTAs) with other partners.
Although it is publicly denying any timetable for signing
ECFA, the Ma administration may believe the political window
to sign an ECFA will close as the highly partisan December
municipal elections approach. END SUMMARY.

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Formal Agreement to Pursue ECFA
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2. (C) During a February 11 meeting with econ chief, Ministry
of Economic Affairs (MOEA) Bureau of Foreign Trade (BOFT)
Director General Franco Huang, who led Taiwan's delegation
during January 26 ECFA talks with PRC counterparts in
Beijing, provided a readout on the agreement's status.
According to Huang, the January 26 meeting was the formal
culmination of four previous informal exchanges on ECFA.
During the Beijing meeting, the two sides reviewed their
respective economic impact assessments and formally agreed to
pursue an ECFA. Taiwan deflected a PRC request that Taiwan
open its market to Chinese agricultural exports, and the two
sides agreed to shelve the issue pending future discussions.
Huang explained that there was also agreement to characterize
ECFA as a pact between "both sides of the Taiwan Strait."
Taiwan, using the "customs territory" nomenclature under
which it joined the WTO, would then inform the WTO that it
planned to enter into an ECFA with the PRC. The Straits
Exchange Foundation would sign the ECFA on behalf of Taiwan,
Huang added.

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ECFA on Docket for Spring Talks
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3. (C) Huang noted that Taiwan and the PRC would continue
informal ECFA negotiations in late February or early March,
with the goal of reaching a final agreement in time for the
next round of talks between the SEF and the PRC's Association
for Relations Across the Taiwan Strait (ARATS),tentatively
slated to take place in the PRC sometime before June. The
fifth round of SEF-ARATS talks, he explained, should result
in signed bilateral agreements on taxation, intellectual
property rights protection, and the ECFA itself.

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ECFA to Include Priority Commodities...
--------------


4. (C) Elaborating on ECFA, Huang confirmed that the
agreement would encompass enhanced market access for Taiwan
firms in five "early harvest" sectors: petrochemicals,
textiles, machine tools, autos and auto parts, and flat panel
displays. Taiwan was also requesting lower tariff on other
commodities beyond those five sectors, Huang noted. There
remained, however, a "big gap" between Taiwan proposals and
what the PRC was willing to accept. At the same time, Huang
added, the PRC had not yet provided its own priorities for
enhanced access to the Taiwan market. Ideally, he said,
Taiwan would grant reciprocal access to all PRC products. In
practice, however, since Taiwan was the smaller economy, it
would receive relatively more favorable treatment.

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...and Services
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5. (C) In addition to industrial commodities, Huang
explained, Taiwan was also using the ECFA to seek improved
market access in several service sectors, including computer
maintenance, retail distribution, and financial services.
Since the existing bilateral financial services MOU did not
cover market access, he observed, Taiwan was trying to
address that issue through the ECFA. As with the "early
harvest" sectors and other industrial commodities, the PRC
had not yet given Taiwan its own list of service sector
priorities.

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PRC Understands Taiwan Political Realities
--------------


6. (C) Huang's readout largely echoed that provided by
Mainland Affairs Council (MAC) Economic Department Director
Lee Li-jane on February 10. Lee noted that during the
January 26 Beijing talks, ARATS Vice Chairman Zheng Zhong-li
said the ECFA must benefit both sides equally, unlike
previous cross-Strait economic agreements, which he
maintained have disproportionately favored Taiwan. Lee
added, however, that the PRC realized Taiwan's domestic
political realities prevent President Ma from removing import
restrictions on a wide range of mainland agricultural
products.


7. (C) Lee noted that the PRC was concerned that Taiwan's
Legislative Yuan (LY) might seek to alter the text of ECFA
once it was signed. Managing the LY's approval of ECFA will
be a difficult political challenge for President Ma, she
noted. Lee observed that the Ma administration will have
difficulty reporting to the LY on the status of ECFA
negotiations, since the PRC will insist on keeping the
details secret until the agreement is signed. She believed
this was, in part, why SEF Chairman P.K. Chiang told
reporters that cross-Strait relations had entered a more
difficult phase, and why President Ma stated publicly that
there was no deadline for signing ECFA.


8. (C) Providing more detail on services discussions, Lee
said ECFA will also contain general statements that both
sides will seek to reduce trade barriers in services, and
commit both sides to establish rules of origin and dispute
settlement mechanisms, protect investment and intellectual
property, and harmonize tax regulations.

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PRC Willing to Accept Other Taiwan FTAs?
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9. (C) According to Lee, PRC negotiators have never
officially expressed their views on Taiwan's interest in
pursuing bilateral free trade agreements (FTAs) with other
trading partners. In a number of private meetings, however,
PRC officials have suggested that pursuing such FTAs was a
matter for Taiwan to decide. The PRC had implied that it
would not oppose Taiwan efforts to negotiate FTAs with
economies that already have trade agreements with China.
Lee said she expected the PRC would make its formal position
on FTAs known only after the ECFA was signed.

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Political Concerns Push Toward Early Signing
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10. (C) In a February 10 meeting with poloff, KMT Mainland
Research Department Director Chang Jung-kung said it was
important to sign the ECFA during the first half of the year,
since the issue would become too politicized with the
approach of the December municipal elections. In Chang's
view, any delay in signing the ECFA would be seen as an
example of President Ma's incompetence, and inability to
deliver results on his priority issues. Like MAC's Lee,
Chang said he believed the PRC understood Ma's domestic
political pressures, and was therefore optimistic that an
ECFA deal could be struck by June. He noted that Legislative
Yuan (LY) Speaker Wang Jin-pyng supported efforts to form an
LY committee to oversee cross-Strait affairs, but added that
the initiative garnered little support among KMT lawmakers.

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Shanghai, Hubei Officials to Visit
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11. (C) According to Chang, Shanghai Mayor Han Zheng will
visit Taiwan on April 6, and Hubei Provincial Party Secretary
Luo Qingquan is slated to visit at the end of April. Chang
said it was possible that Han could make an announcement
concerning direct flights between Taipei's Songshan Airport
and Shanghai's Hongqiao Airport, although it was not clear if
such flights could begin in time for the opening of the
Shanghai World Expo on May 1. Han might also invite Taipei
Mayor Hau Long-bin to attend the Expo, as Taipei City will
have an exhibit there.


12. (C) COMMENT: Since the agreement was first mooted, Taiwan
officials have repeatedly expressed very optimistic views
about when an ECFA could actually be signed. Although there
appears to be significant ongoing progress in bilateral trade
talks, our own recent experience with beef highlights the
unpredictability of Legislative Yuan (LY) reaction. Ma
administration efforts to solidify LY support for the
proposed pact will be crucial in allowing ECFA to move
forward. END COMMENT.

STANTON