US embassy cable - 05TAIPEI1107

UNCLAS SECTION 01 OF 03 TAIPEI 001107 
 
SIPDIS 
 
DEPT PASS TO AIT/W AND USTR 
 
DEPT FOR EAP/RSP/TC, EAP/EP, EB/TPP/BTA 
 
USTR FOR SCOTT KI 
 
TREASURY FOR OASIA - WISNER 
 
USDOC FOR 4430/ITA/MAC/AP/MBMORGAN 
USDOC FOR 4420/ITA/IEP/AP/OCEA/CMCQUEEN 
USDOC FOR 3132/USFCS/OIO/EAP/ABACHER/ADESARRAN 
 
USDA FAS FOR ITP/AAD, MTND 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, KTDB, TW 
SUBJECT: TAIWAN: 2004 TRADE PERFORMANCE 
 
1.  Summary:  Taiwan's global trade in 2004 totaled USD 
341.9 billion, a record.  Both global exports and 
imports registered historic highs of USD 174 billion 
and 167.9 billion, respectively, according to Taiwan's 
Ministry of Finance (MOF).  However, due to a faster 
rate of growth in imports than in exports, Taiwan's 
2004 trade surplus posted a six-year low of USD 6.1 
billion, down 63.8 percent from a year ago. 
 
2.  Domestic industry's strategy of shifting production 
to the PRC and ASEAN has increased Taiwan's reliance on 
trade within Asia (especially the PRC and ASEAN).  On 
the other hand, the PRC's pursuit of Regional/Free 
Trade Agreements with ASEAN, Japan and South Korea 
could significantly affect Taiwan's trade 
competitiveness in coming years.  Finding ways to 
counter this threat has become the focus of Taiwan's 
economic and trade officials. 
 
3.  Commodity trade with the U.S. and Europe was 
stagnant.  Taiwan's heavy reliance on key components 
supplied in 2004 by Japanese and South Korean 
manufacturers generated a significant trade deficit 
with these two nations.  Japan and South Korea are 
Taiwan's strongest competitors in the mainland market 
due to product similarities.  End Summary. 
 
GLOBAL TRADE: DOUBLE-DIGIT RISE IN EXPORTS & IMPORTS 
--------------------------------------------- ------- 
 
4.  According to statistics compiled by the Taiwan 
Ministry of Finance (MOF), Taiwan's global trade in 
2004 totaled USD 341.9 billion, growing 25.9 percent 
from 2003.  Taiwan's global imports of USD 167.9 
billion and exports of USD 174 billion grew at a double- 
digit rate, up 31.9 percent and 20.7 percent 
respectively from 2003.  International price increases 
in agricultural and industrial raw materials, mainly 
crude oil and iron/steel, contributed to the 31.9- 
percent growth in imports.  Due to a much faster growth 
in global imports than exports, Taiwan's trade surplus 
plunged 63.8 percent from USD 16.9 billion in 2003 to 
USD 6.1 billion, a six-year low. 
 
5.  Taiwan's export markets continue to move away from 
developed country trading partners like the U.S. and 
Europe and towards developing countries like the PRC 
and ASEAN; and from high-tech finished product exports 
to advanced countries to semi-finished products, 
components, and raw material exports to developing 
countries.  This reflects Taiwan industry's recent 
strategy of setting up low cost production bases 
overseas, primarily in the PRC, Vietnam and Thailand. 
MOF statistics show that over 52 percent of Taiwan's 
2004 exports were machinery and electronics, up 16.6 
percent from 2003.  However, for the first time, the 
growth of Taiwan's machinery/electronics exports fell 
behind the rate of its overall rise in global exports. 
 
6.  One consequence of Taiwan's shifting patterns of 
trade is that the trade surplus with the U.S. and 
Europe shrank significantly.  The trade surplus with 
the U.S. dropped 28.9 percent and with Europe 49.3 
percent.  Nevertheless, its trade surplus with Hong 
Kong, composed largely of transshipments to the PRC, 
surged 21.5 percent. 
 
Trade with U.S. Grew, but Trade Reliance on U.S. Fell 
--------------------------------------------- -------- 
 
7.  Two-way trade with the U.S. in 2004 grew 16.3 
percent from 2003 to USD 49.8 billion.  Imports from 
the U.S. rose 28.6 percent from 2003 to USD 21.6 
billion, stimulated by Taiwan's demand for capital 
goods, including machinery, electrical machinery and 
precision instruments.  Taiwan's exports to the U.S. 
grew only 8.4 percent to USD 28.1 billion.  Mainland 
China has become Taiwan's largest IT production base 
for meeting export orders from developed countries like 
the U.S., Europe and Japan.  This substitution effect 
was further driven by Taiwan's recent decision to 
further liberalize regulations governing investment in 
high tech production facilities on the mainland, 
especially for notebook PCs and TFT-LCD panel assembly. 
MOF statistics showed over 53 percent (or USD 15 
billion) of Taiwan's 2004 exports to the U.S. were 
machinery and electronics, which merely inched up 1.8 
percent from 2004.  Noticeably, information and 
communication exports to the U.S. (USD 3 billion) 
plunged 29 percent from 2003, largely replaced by high- 
tech exports from Taiwan manufacturers in the PRC. 
 
8.  Despite the 16.3-percent increase in U.S. two-way 
trade with Taiwan in 2004, Taiwan's trade reliance on 
the U.S. declined from 15.7 percent in 2003 to 14.5 
percent in 2004.  Over the past five years, Taiwan's 
exports to the PRC have continued to rise steadily and 
its trade reliance on the PRC posted a significant 
increase (2004 data is not available): in 2003 Taiwan's 
exports to the PRC accounted for 24.5 percent of 
Taiwan's global exports, versus 22.6 percent in 2002, 
19.6 percent in 2001, 17.6 percent in 2000, 17.5 
percent in 1999, and 16.6 percent in 1998.  In 
contrast, U.S.-bound exports accounted for only 16.2 
percent of Taiwan's global exports in 2004, versus 18 
percent in 2003, 20.5 percent in 2002, 22.5 percent in 
2001, 23.5 percent in 2000, 25.4 percent in 1999, and 
26.6 percent in 1998. 
 
9.  Beginning in 2003, the U.S. fell from the top spot 
on the list of Taiwan's largest trading partners, 
surpassed by both the PRC and Japan.  Japan maintained 
its influential trade ties with Taiwan, remaining its 
largest import supplier.  The PRC was Taiwan's largest 
export market followed by the U.S. 
 
62 percent of Taiwan's Exports to Asia, Mainly the PRC 
--------------------------------------------- --------- 
 
10.  Taiwan's 2004 exports to Asia accounted for 62 percent 
of Taiwan's global exports, growing 26.1 percent from 2003 
and posting a higher percentage increase than the growth of 
global exports.  Nearly 60 percent of Taiwan's exports to 
Asia in 2004 went to Hong Kong and the PRC.  But these 
exports face strong competition from Japan and South Korea 
as well as from domestic PRC suppliers.  A Chung-hua 
Institution for Economic Research (CIER) report showed that 
PRC imports from Taiwan as a percentage of the PRC's global 
imports dropped, while that of Japan and South Korea 
continues to rise.  The PRC's pursuit of Regional/Free Trade 
Agreements with ASEAN, Japan and South Korea could 
significantly affect Taiwan's trade competitiveness in 
coming years (septel).  Finding ways to counter this threat 
has become the focus of Taiwan's economic and trade 
officials. 
 
Source of Taiwan's Trade Deficit: Japan and S. Korea 
--------------------------------------------- ------- 
 
11.  Japan has been the chronic source of Taiwan's trade 
deficit for many years and since 1998 South Korea has 
emerged as the second largest contributor to Taiwan's trade 
deficit.  In 2004, Taiwan's trade deficit with Japan and 
South Korea expanded more than 45 percent from 2003 to USD 
30 billion and USD 6.3 billion, respectively.  Taiwan's 
Board of Foreign Trade (BOFT) commented that factors 
contributing to Taiwan's trade deficit with South Korea and 
Japan are similar, i.e., Taiwan's heavy reliance on South 
Korean key components like integrated circuits (ICs), micro- 
components, petrochemicals and computer peripherals. 
According to BOFT, ICs and micro-component imports from 
South Korea in 2004 accounted for 39 percent of Taiwan's 
imports from South Korea.  Other important imports from 
South Korea included radio-telephone transmission equipment 
and computer peripheral parts. 
 
COMMENT - TRIANGULAR TRADE & OTHER COMPLEXITIES 
--------------------------------------------- -- 
 
12.  Due to Taiwan's heavy reliance on the PRC as an IT 
production base, much of Taiwan's trade with the U.S. 
is now cycled through the PRC for final assembly and 
onward shipment to the U.S.  As a result, the U.S. 
trade relationship with Taiwan has grown more complex 
and involves a triangle relationship between the U.S., 
Taiwan and China.  Taiwan has been trying to free its 
key IT industries, mainly semiconductors and flat-panel 
displays, from technology dependency on advanced 
countries like the U.S. and Japan by providing 
investment incentives to business, strengthening R&D 
and training new talent.  However, its reliance on key 
component imports has not eased.  On the contrary, 
since Taiwan issued its `Challenge 2008' national 
development plan in 2002, announcing its intention to 
upgrade its star-industries, semiconductors and flat- 
panel displays, imports of related key components from 
Japan and South Korea have increased significantly. 
Unless Taiwan officials can develop domestic sources 
for key components, Taiwan's trade deficit with Japan 
and South Korea likely will continue to grow. 
 
13.  Tables with detailed data on Taiwan's foreign trade in 
2004 are available on our website: 
http://taipei.state.gov/ait_s/econ/econ_web/T aiwans%20Foreig 
n%20Trade.htm 
PAAL