US embassy cable - 04TAIPEI3996

UNCLAS SECTION 01 OF 02 TAIPEI 003996 
 
SIPDIS 
 
STATE FOR EAP/RSP/TC AND EB/TPP/MTA, STATE PASS AIT/W 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, TW, Cross Strait Politics 
SUBJECT: TAIWAN REACTIONS TO CHINA/ASEAN FTA 
 
 
1.  Summary: Reactions in Taiwan to the announcement of a 
Free Trade Agreement (FTA) between China and the Association 
of Southeast Asian Nations (ASEAN) ranged from dire 
predictions of imminent isolation to suggestions that the 
immediate impact on Taiwan's economy will be minimal.  Most 
analysts, business associations, and officials view the 
China/ASEAN FTA primarily as a political move by China to 
increase its influence in Asia and isolate Taiwan.  Although 
the economic impact may be minimal in the near term, there is 
a shared concern that the agreement represents a trend 
towards regional integration that is excluding Taiwan and 
could eventually lead to the economic marginalization of the 
island.  End Summary. 
 
2.  Taiwan government officials had varying responses to the 
China/ASEAN FTA.  Ministry of Foreign Affairs (MOFA) 
spokesman Michel Lu accused China and ASEAN of seeking to 
exclude Taiwan from trade in east Asia and promised that MOFA 
would try to find a way to participate in the proposed East 
Asian Summit in 2005.  But Chieh Wen-chi, MOFA's Deputy 
Director of International Organizations cautioned that the 
agreement should be carefully studied to determine whether it 
would exclude Taiwan from the ASEAN market before drawing any 
conclusions.  Chieh noted that all FTAs must comply with WTO 
requirements and that Taiwan's chief exports already benefit 
from low tariffs globally. 
 
3.  Minister of Economic Affairs Ho Mei-yueh announced 
December 13 that MOEA was studying the impact on Taiwan of 
the China/ASEAN FTA and recommended Taiwan companies minimize 
the impact of the agreement by promoting industrial upgrading 
and globalization.  She suggested that absent FTAs with 
regional trading partners, Taiwan would need to focus its 
efforts on protecting its access to the ASEAN market through 
the World Trade Organization (WTO) framework.  Deputy 
Minister Steve Chen claimed the China/ASEAN FTA would have 
little effect on Taiwan's economy in the near term, but 
warned that Taiwan would face ever stiffer competition in 
ASEAN once the FTA is actually in place, a process that could 
take years.  Chen also noted that Taiwan investors already in 
China or ASEAN countries would benefit from improved access 
to the markets of the other FTA members. 
 
4.  Economic analysts minimized the immediate economic impact 
on Taiwan, noting that China's motivation for participation 
in the FTA appeared to be mostly political.  According to 
Taiwan Institute for Economic Research (TIER) Vice President 
David Hong, the China/ASEAN FTA will have a small negative 
impact on Taiwan's economy in the near term.  Hong predicted 
2005 GDP growth could be slowed by .05% as a result of the 
agreement.  Labor intensive production in Taiwan would 
suffer, while exports of capital intensive products and 
natural resources could see a small benefit.  Hong added that 
the FTA would increase the pressure for Taiwan to negotiate 
bilateral agreements and improve competitiveness to counter 
the perception that Taiwan was being isolated in Asia. 
 
5.  Academia Sinica Director of American and European Studies 
Lin Cheng-yi sees China focusing on closer relations with 
ASEAN to combat perceived US dominance of the region.  He 
noted that Chinese Premier Wen Jiabao made ten concrete 
recommendations on steps to improve China/ASEAN ties at the 
recent APEC Summit, including making 2006 a year of 
China/ASEAN cooperation, promoting inter-ministerial 
dialogue, backing an East Asian Summit to be held in 
Malaysia, and creating an East Asian Trade Area with a 
prominent role for ASEAN.  Although Taiwan investment in 
ASEAN countries is greater than Chinese investment in the 
region, trade between China and ASEAN, almost US$100 billion 
per year and growing rapidly, is about three times 
Taiwan/ASEAN trade.  This rapid growth in trade flows has 
given China greater influence in the region when compared to 
Taiwan.  Lin also pointed out that Taiwan has not placed much 
emphasis on improving economic ties with Southeast Asia, 
instead focusing on improving relations with Japan and the 
US.  This emphasis will make it difficult for Taiwan to 
counter China's growing economic influence in Southeast Asia 
and make it more imperative for Taiwan to build stronger 
trade ties to Japan and the US. 
 
6.  Vice Chairman Tsai Hong-ming, of the Chinese National 
Federation of Industries (CNFI), one of Taiwan's leading 
industrial associations, believes most business people fear 
the economic marginalization of Taiwan industry.  But he also 
noted that Taiwan does not compete directly with Chinese or 
ASEAN products in most markets.  Most products traded between 
ASEAN and China will not directly affect Taiwan's 
competitiveness, according to Tsai.  Taiwan producers of more 
labor intensive goods may face stiffer competition, but many 
of these have already shifted production to China or ASEAN 
countries and will actually benefit from the FTA. 
 
7.  Tsai suggests that the real concern for Taiwan should be 
on the potential loss of competitiveness resulting from lack 
of regional integration and the growing cross-Strait 
imbalance of trade.  Taiwan's ability to attract investment 
may suffer from the perception that Taiwan is disadvantaged 
in regional trade.  However, he also noted that the ASEAN 
countries will have many reservations in the actual 
implementation of the FTA and that the actual effects on 
regional trade are likely to be delayed. 
 
8.  Comment: Most observers in Taiwan are concerned about the 
potential for marginalization of Taiwan's economy in the 
region.  The China/ASEAN FTA is a potent symbol of a trend 
towards regional economic integration that is excluding 
Taiwan.  But in the near term, the effect of this FTA on 
Taiwan's economy appears to be small.  Taiwan economic 
officials continue to believe Taiwan's economic development 
is best served by creating an environment friendly to 
investment and development of value-added production.  But 
they also are concerned that Taiwan's competitiveness will 
suffer if it continues to be excluded from regional economic 
arrangements.  End Summary. 
PAAL