US embassy cable - 04TAIPEI3991

UNCLAS SECTION 01 OF 03 TAIPEI 003991 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, TW 
SUBJECT: Taiwan Economic Review for November 2004 
 
 
1.  This cable summarizes selected economic events in Taiwan 
in November 2004: 
 
- S&P Rating 
 
- China-ASEAN FTA 
 
- Economic Performance 
 
- WTO 
 
- Cross-Strait Economic Normalization 
 
- Environment 
 
S&P Downgrades Taiwan's Debt Outlook 
------------------------------------ 
 
2.  At the end of November Standard & Poor's downgraded the 
its outlook for Taiwan's debt from "stable" to "negative." 
The rating on the debt remains at AA-, but S&P changed its 
outlook based on a growing budget deficit and increased 
cross-Strait tension.  Taiwan officials reacted quickly to 
express continued confidence despite the downgrade. 
Taiwan's debt rating remains second only to Singapore in 
Asia, higher than South Korea and Hong Kong and four steps 
above China.  Earlier in November, Morgan Stanley increased 
its weighting for Taiwan as a destination for investment 
funds, and its well-connected office manager called the 
Standard & Poor announcement "a non-event." 
 
Impact of China-ASEAN FTA on Taiwan 
----------------------------------- 
3.  The November 29, 2004 announcement that China and 10 
Association of Southeast Asian Nations (ASEAN) member 
countries signed a free trade agreement (FTA) fueled local 
concerns about Taiwan being marginalized politically as well 
as economically.  In response, both Minister of Economic 
Affairs Ho Mei-yueh and Council for Economic Planning and 
Developments Vice Chairman Yeh Ming-feng quickly issued 
statements downplaying the short-term importance of the 
agreement.  Ho noted that there were still many difficulties 
for China and ASEAN to overcome before they could achieve 
free trade.  Yeh noted Taiwan's sound economic fundamentals 
and strength in international trade and investment as 
reasons Taiwan would not be ignored.  Kung Ming-hsin, the 
Director of Mainland Affairs Division at Taiwan Institute of 
Economic Research, said that the type and scale of 
production in Taiwan is different from that of China and 
ASEAN, and the short-term economic impact on Taiwan would be 
slight. 
Economic Performance Thru October 2004 
-------------------------------------- 
 
4.  According to official forecasts released in November, 
Taiwan's economic growth is expected to slow from 7.3 
percent in the first half to 4.7 percent in the second half 
of 2004 and drop further to 4.5 percent in the second half 
of 2005.  The slowdown follows declines in the growth of 
exports, industrial production, and private investment. 
Factors behind the economic slowdown include lower U.S. 
demand for Taiwan's exports and higher oil prices.  Export 
orders continue to grow, albeit at a slower rate than 
earlier in the year, but Taiwan's overseas production bases 
in China now fill a large share of these orders. 
WTO 
--- 
 
5. At the APEC Ministerial Meeting in Santiago, Chile on 
November 19 Taiwan Economic Minister Ho Mei-yueh and her 
Russian counterpart completed bilateral negotiations on 
Russia's WTO accession.  In the first eight months of 2004, 
the two-way trade between Taiwan and Russia amounted to 1.93 
billion US dollars, exceeding the 2003 total for the entire 
year.  In 2003, the two-way trade totaled 1.61 billion US 
dollars, 35.7 percent growth over 2002 and 5.9 percent of 
Taiwan's total external trade. 
 
6. Taiwan's representative office in Geneva filed a motion 
with the WTO Dispute Settlement Body (DSB) on November 18 
against India's anti-dumping tariffs on seven Taiwan 
products.  Jeremy Shen, Director of the Multilateral Trade 
Affairs Division in the Ministry of Economic Affairs (MOEA), 
claimed that the Indian government did not conduct any 
investigation prior to levying the tariffs and that the 
tariffs were unfair and unjustified.  This is the first time 
Taiwan has used the WTO DSB mechanism. 
 
PRC Blocks Cross-Strait Investment 
---------------------------------- 
 
7.  In late November 2004, the Mainland Affairs Council 
(MAC) announced a plan to permit securities firms to set up 
subsidiaries in China. The plan set a minimum capital 
requirement of NT$7 billion, a minimum capital adequacy 
ratio of 200% and stipulated that the investment in China 
may not exceed 10% of the net worth of the securities firm. 
Sixteen securities firms met these requirements and were 
deemed qualified for investment in China.  China requires 
economies to sign a memorandum of understanding (MOU) before 
allowing that economy to invest in China's securities firms. 
Such an MOU between Taiwan and China is unlikely.  China is 
therefore unlikely to allow Taiwan securities firms to 
establish subsidiaries in China. 
 
Environmental 
------------- 
 
8.  At the annual International Commission on the 
Conservation of Atlantic Tuna (ICCAT) meeting in New Orleans 
(Nov 14-21), ICCAT warned that Taiwan needed to improve its 
adherence to fishing allocations next year, or risk losing 
its "cooperating non-contracting party" status.  Taiwan's 
Deputy Administrator James Sha who attended the meeting 
agreed that his fleet had a problem and set out a multi-year 
payback scheme, whereby Chinese Taipei would harvest fewer 
bigeye tuna than its share, in order to pay back its 
overharvest. 
 
9.  AIT ESTOFF attended theThe American Institute in Taiwan 
and the Taiwan Economic and Cultural Office held  AIT/TECRO 
technical environmental talks in San Francisco from November 
21-23.  The two sides reviewed Oongoing cooperative projects 
were reviewed and it was agreed to establish criteria for 
deciding on future cooperative projects.  Participants also 
agreed that two priority areas for future cooperation are 
assessing mercury levels in Taiwan's air, food and water and 
analyzing levels of air pollution from the Mmainland. in 
Taiwan were two priority areas for future cooperation. 
KEEGANPAAL