US embassy cable - 05TAIPEI1376

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001376 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 03/23/2015 
TAGS: ECON, EINV, EAIR, ETTC, EFIN, CH, TW, Cross Strait Economics 
SUBJECT: CROSS-STRAIT LIBERALIZATION ON HOLD UNTIL MAY 
 
REF: A. STATE 15626 
     B. TAIPEI 709 
     C. TAIPEI 1080 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.5 b/d 
 
Summary 
------- 
 
1. (C) Mainland Affairs Council (MAC) Department of Economic 
Director Fu Don-cheng confirmed that cross-Strait economic 
liberalization and government-sponsored exchanges are on hold 
until at least May.  He said that the recent goodwill 
measures offered by the PRC on passenger charter flights, 
agricultural imports, and the employment of PRC fishermen 
were not enough.  Fu emphasized that Taiwan was disappointed 
the PRC has not responded to Taiwan's proposal on cargo 
charter flights.  Taiwan's implementation of a currency 
exchange pilot program and investment liberalization in IC 
packaging and testing and small-size TFT-LCD panel 
manufacturing are likely to be announced in May.  Other 
possible Taiwan liberalization measures have additional 
problems that require further study.  This is consistent with 
expectations among many outside observers, but MAC officials 
fear that private sector agricultural interests may move 
ahead of the government in responding to Beijing's 
agricultural import proposal.  The delay in unilateral 
liberalization until May indicates that Taiwan won't be using 
such measures to restore goodwill and reinforces the fact 
that Taiwan expects the PRC to make the next move.  End 
summary. 
 
2. (C) In a March 22 meeting with econoff, Mainland Affairs 
Council (MAC) Economics Department Director Fu Don-cheng 
clarified the Taiwan government's plans on cross-Strait 
economic and exchange policies in light of the PRC's passage 
of the Anti-Secession Law.  Fu confirmed that economic 
liberalization continues to be a long-term policy, but 
further relaxation at this point would create "the wrong 
impression."  Unilateral economic liberalization measures are 
on hold.  In addition, Taiwan officials' participation in any 
sort of cross-Strait exchange, including participation in 
conferences held in the Mainland has been cancelled 
temporarily.  Public funding for exchanges by private 
institutions has also been frozen. 
 
Petty Favors 
------------ 
 
3. (C) Fu commented that the three goodwill measures recently 
proposed by the PRC were not enough to bring Taiwan closer to 
a dialogue or allow further progress on unilateral relaxation 
measures.  He disparaged these offers as "petty favors" (xiao 
en xiao hui).  Fu noted that Taiwan airlines are not 
interested in the PRC's proposal for additional holiday 
passenger charter flights, primarily because of the greater 
potential in regularly-scheduled flights elsewhere.  On the 
PRC's offer to legalize agricultural imports from Taiwan, Fu 
pointed out problems that the PRC must correct before such a 
measure will have any impact, namely high tariffs on 
agricultural goods, complicated sanitary inspection and 
quarantine procedures, and closed distribution channels in 
the PRC.  Furthermore, Fu said the PRC's expression of 
interest in legalizing the employment of PRC fisherman on 
Taiwan fishing boats was all talk and no action.  He 
explained that the PRC had unilaterally forbidden employment 
on Taiwan fishing boats in 2002, and if it was serious about 
reversing the policy, it must act first. 
 
4. (C) Fu emphasized the PRC's lack of response to Taiwan's 
proposal for cross-Strait cargo charter flights.  He 
mentioned some of the reasons why the PRC is less interested 
in cargo flights -- PRC airlines don't have the capacity to 
compete with Taiwan carriers and don't need access to Taiwan 
to take advantage of the rapid growth in China's air cargo 
traffic.  He also acknowledged that PRC President Hu Jintao 
had indicated in his speech at the start of the National 
People's Congress (NPC) that industry groups could discuss 
such charters.  Fu called this a sign that there was hope, 
but insisted that the PRC had not yet provided Taiwan with a 
real response to the proposal. 
 
Look for Progress in May 
------------------------ 
 
5. (C) Fu indicated that several liberalization measures, 
which had been very near approval before the controversy 
surrounding the Anti-Secession Law (described ref C), would 
likely receive final approval and be announced in May 2005. 
He said that Taiwan would legalize investment in the Mainland 
in integrated circuit (IC) packaging and testing and 
small-size TFT-LCD panel manufacturing.  In addition, it will 
move forward with the Renminbi-New Taiwan Dollar exchange 
pilot program in Kinmen and Matsu. 
 
Other Problems 
-------------- 
 
6. (C) Other measures on the drawing board still have 
problems that will require further examination.  These 
include Taiwan investment in the PRC in naptha crackers, and 
permission for PRC banks to set up representative offices in 
Taiwan.  Fu said that Taiwan agencies would resume discussing 
timing for these measures in May. 
 
7. (C) On the proposal for a dollar-denominated offshore 
capital (stock) market recently floated by Taiwan's Financial 
Supervisory Commission (FSC), Fu explained that concerns 
about adequate liquidity means that more extensive study of 
the proposal is required.  The concerns revolve around the 
question of whether local investors would be allowed to 
participate in the market.  Fu said that if local investors 
are allowed to buy stocks on the offshore market, it could 
draw too much capital away from the local board.  (Note: BNP 
Paribas Managing Director Peter Kurz recently told econoff 
that if local retail investors are excluded there won't be 
adequate liquidity in the offshore market and the proposal 
would be &desperate and doomed to failure.8  End note.) 
 
8. (C) Fu said the plan to relax the technology restrictions 
for semiconductor manufacturing investment also needs more 
study.  Taiwan has been considering lowering the minimum 
feature size allowed from 0.25 microns to 0.18 microns.  Such 
a change would make Taiwan's regulations more consistent with 
U.S. export regulations and the Wassenaar Agreement. 
However, Fu reported that the nonpaper AIT/T had recently 
provided the Taiwan government on U.S. regulations (ref A) 
appeared  to differ from more restrictive guidance that 
Taiwan's National Security Council had received some years 
ago from U.S. government officials.  (Comment: Fu said that 
MAC was preparing some questions to submit to AIT in order to 
clarify this possible discrepancy.  Fu cited no connection to 
the controversy surrounding Taiwan semiconductor 
manufacturing firm United Microelectronics Corporation's 
(UMC) relationship with Mainland firm He Jian (ref B), but 
this is probably also having an impact on liberalization in 
semiconductor manufacturing.  End comment.) 
 
Private Sector Expectations 
--------------------------- 
 
9. (C) Taiwan government plans appear consistent with the 
expectations of many outside observers.  Chairman of 
Powerchip Semiconductor Corp., predicted to AIT/T that the 
setback in cross-Strait relations caused by the 
Anti-Secession Law would be only temporary.  He foresaw a 
delay in cross-Strait liberalization measures of about three 
months altogether.  Huang went further to say that in the 
final analysis the law would help reduce cross-Strait tension 
by clarifying the PRC's reaction to possible steps Taiwan 
might take toward independence. 
 
10. (C) MAC officials express concern also that their 
attempts to put the onus on Beijing may be undercut by 
opposition and private sector initiatives, especially in the 
agriculture section.  MAC Chief Secretary Jan Jyh-horng told 
AIT that MAC has tried gently to dissuade Taiwan Agricultural 
Cooperative leaders from engaging in talks with the Mainland 
on possible duty-free imports of Taiwan agricultural 
products.  Jan said that MAC is concerned that the PRC plans 
to open its agriculture market in order to increase Taiwan's 
dependency on Mainland trade.  He said that MAC has cautioned 
Agricultural Cooperative leaders that incentives Beijing 
offers today may be arbitrarily withdrawn in the future if 
cross-Strait relations sour. 
 
11. (C) People First Party (PFP) Policy Chief Vincent Chang 
told AIT that the PFP plans to lead a delegation of 
Agricultural Cooperative leaders to the PRC in April to 
negotiate 1) duty-free access for Taiwan agricultural 
exports; 2) a ban on imports of PRC agricultural products 
into Taiwan; and 3) establishment of an agricultural 
technology exchange mechanism.  Chang said that the PFP might 
press the Chen administration to endorse the delegation's 
visit as a condition for holding a second meeting between 
President Chen Shui-bian and PFP Chairman James Soong.  While 
the PFP has downgraded the level of the proposed agricultural 
delegation in light of the enactment of the Anti-Secession 
Law, Chang asserted that it would proceed with or without a 
formal official blessing. 
 
Comment ) Still in the PRC's Court 
---------------------------------- 
 
12. (C) Fu clearly emphasized the Taiwan government believes 
that the PRC had not adequately responded to the Taiwan cargo 
charter proposal and that its offers so far were all but 
meaningless.  With the rhetoric about the Anti-Secession Law 
in Taiwan already beginning to cool, putting off further 
progress on unilateral liberalization measures until at least 
May would reaffirm that Taiwan wants the PRC to make the next 
move.  Unilateral measures will eventually be implemented, 
but the Taiwan government won't be using them as a goodwill 
gesture to restore the positive pre-Anti-Secession Law 
atmosphere and jump start progress toward a dialogue. 
Through all of Fu's presentation runs the familiar MAC theme 
that it will decide what is best for Taiwan business and that 
it will keep business subordinate to cross-Strait political 
concerns.  End comment. 
PAAL