US embassy cable - 05TAIPEI1797

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 001797 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W, USTR 
 
E.O. 12958: DECL: 04/14/2015 
TAGS: ECON, EFIN, ETRD, PREL, TW, CH, Cross Strait Politics, Cross Strait Economics 
SUBJECT: VICE PREMIER URGES U.S. TO STUDY FTA WITH TAIWAN 
 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 b/d 
 
Summary 
------- 
 
1. (C) In an April 13 meeting, Taiwan's Vice Premier Wu 
Rong-I told AIT/T Econ Section Chief that Premier Frank 
Hsieh would maintain most of the economic policies of his 
predecessor.  He also outlined the government goals for 
financial reform, which focus on bank consolidation, and 
fiscal policy aimed at reducing Taiwan's budget deficit. 
According to Wu, it is unclear now how well Premier Hsieh 
and the Executive Yuan (EY) will be able to push their 
legislative agenda through the Legislative Yuan (LY) with 
the current level of discord after the PRC's passage of the 
Anti-Secession Law (ASL).  On cross-Strait relations, Wu 
said that the Taiwan government would continue the "active 
opening, effective management" policy, but had put further 
liberalization on hold while assessing how to enhance 
"effective management."  He said that the visit of KMT Vice 
Chairman P.K. Chiang's trip to the PRC had complicated the 
situation, but suggested that the government might be ready 
to resume liberalization efforts in late May.  Wu also 
reiterated Taiwan's desire to negotiate a free trade 
agreement (FTA) with the U.S. in order to encourage other 
countries to enter into trade negotiations with Taiwan.  Wu 
emphasized that even a U.S. commitment to study the 
possibility of an FTA with Taiwan would help change 
attitudes in other countries.  He suggested that the U.S. 
consider the potential strategic impact of a U.S.-Taiwan 
FTA on regional stability.  Finally, Wu inquired about the 
possibility that AIT/W would reconsider the denial of his 
request to attend a Microsoft hosted forum in Washington, 
D.C., on April 26.  End Summary. 
 
Economic Priorities - Staying on Course 
--------------------------------------- 
 
2. (C) Econ Section Chief met with Taiwan's recently 
appointed Vice Premier Wu Rong-I on April 13 to discuss the 
economic priorities of Wu and the new Premier Frank Hsieh. 
Wu's first point was to say that Premier Hsieh would in 
general maintain the economic policies of his predecessor 
Yu Shyi-kun because he does not believe that a new Premier 
should bring new policies.  However, Wu said that policies 
that were unfeasible or difficult to implement would be 
changed.  (Comment: Wu did not say what those "unfeasible" 
policies might be, but they likely include some of the 
cross-Strait policies that are under review after the PRC's 
passage of the Anti-Secession Law.  End comment.)  Wu's 
second point was that when it comes to domestic economic 
policy, it doesn't make much difference whether the KMT or 
DPP was in power.  There was broad consensus on the general 
direction for economic policy. 
 
3. (C) Wu highlighted a few new initiatives in financial 
sector reform.  He noted that Taiwan had entered the second 
stage of financial reforms, many of which had been proposed 
by the Taiwan Institute for Economic Research when Wu was 
its president.  The three primary goals of this stage of 
reform as identified by Wu are to reduce the number of 
government controlled banks; to reduce from 12 to 6 the 
number of financial holding companies; to increase the 
market share for the top three banks in Taiwan to over 10 
percent each; and to sell one government-owned bank to a 
foreign entity by 2006.  Taiwan has already identified 
Changhwa Commercial Bank as the bank to be sold to a 
foreign entity (Note:  the Ministry of Finance is actively 
considering bids and is expected to announce a decision in 
early June.  Econ Section Chief also met with Financial 
Supervisory Commission Chairman Kong Jaw-sheng April 12 and 
Kong identified the same financial sector goals as the Vice 
Premier.  In providing a few more details, Kong said he 
hopes to establish Taiwan as a regional source for asset 
management and fund raising.  To this end, he expects to 
establish an offshore capital market or as he called it "an 
international board" by the end of 2005.  End note.) 
 
4. (C) On fiscal policy, Wu reported that the Executive 
Yuan has a package of reforms, mostly aimed at increasing 
tax revenue, that its hopes to submit to the Legislative 
Yuan for approval before the end of the current session. 
He explained that Taiwan has legislatively mandated budget 
caps that apply both to accumulated debt and annual 
deficits.  The Taiwan government has reached the caps and 
cannot borrow additional money without changing the law. 
The reforms to be proposed will increase tax revenue.  At 
12.6 percent of GDP, Taiwan already has a relatively low 
rate of overall taxation.  Hong Kong's is lower, with 
property leases/sales typically topping up revenues, but 
the U.S. rate is significantly higher at 19 percent and 
several European countries have rates over 20 percent. 
Econ Section Chief noted that there had been much media 
attention to the fact that many high-tech manufacturers 
paid little or no taxes because of government incentives. 
Wu agreed that these policies had been heavily criticized, 
but observed that they are not easy issues to resolve. 
 
5. (C) When asked about the prospects for this kind of 
legislation, Wu described the recent change in the 
political atmosphere after the PRC's passage of the Anti- 
Secession Law.  Previously, relations between Premier Hsieh 
and the opposition in the LY were quite positive.  Wu said 
that the opposition had high regard for Hsieh's corporate 
style, but it was no longer possible to predict how the LY 
would respond to the EY's proposals on economic policy. 
Econ Section Chief noted that some financial sector reform 
initiatives such as bank privatization did not require LY 
approval.  Wu agreed.  He also observed that the overall 
health of Taiwan's financial system was much improved with 
the successful implementation of the first stage of 
reforms.  He noted that the overall non-performing loan 
ratio for Taiwan banks had dropped below 3 percent and 
added that he did not believe that funding for financial 
sector restructuring fund, which requires LY approval, was 
particularly important to Taiwan's reform agenda. 
 
Cross-Strait Relations - Reassessing Options 
-------------------------------------------- 
 
6. (C) Econ Section Chief asked if the expectations among 
many in the business community that the ASL would 
significantly delay cross-Strait liberalization measures 
were accurate.  Wu pointed out that high-level government 
officials had met April 9 and 10 to consider the direction 
of cross-Strait policies.  The Taiwan government has 
pledged to maintain the "active opening, effective 
management" policy with regard to cross-Strait economic 
relations.  However, Wu said that previously the policies 
had not been managed effectively and the ministries of the 
EY would be looking at how to change that. 
 
7. (C) Wu emphasized that the question of the PRC's true 
intentions in passing the ASL would have an important 
effect on the direction of Taiwan's policy.  If, as many 
claimed, the ASL was little more than a tool of rhetoric, 
then, according to Wu, the impact would be small.  Wu, on 
the other hand, believes that the ASL genuinely increases 
the security risks facing Taiwan.  To support this view, Wu 
cited the PRC's pressure on Chi-Mei founder Hsu Wen-lung 
and other pro-Green businessmen.  If his suspicion proves 
correct, liberalization policies will face further delay. 
(Note:  Wu, as president of TIER, had publicly and 
repeatedly warned Taiwan firms about the risks of engaging 
in business ventures on the Mainland.  End note.) 
 
8. (C) The visit to China by KMT Deputy Chairman P.K. 
Chiang had further complicated the situation.  Wu said that 
he understood the political motives, but Chiang's actions 
were not good for the management of relations with PRC.  He 
underscored that any KMT deal with the PRC violated Taiwan 
law on cross-Strait relations.  As a result, the Taiwan 
government must assess the situation and consider next 
steps.  Wu said that the Taiwan government might be ready 
in late May to resume liberalization measures and take 
steps toward a cross-Strait dialogue. 
 
9. (C) Looking at the overall cross-Strait economic 
relations, Wu argued that the current status was very good. 
He claimed that if both formal and informal investments are 
counted, Taiwan is the largest source of foreign direct 
investment in the PRC.  He pointed out that approximately 
10,000 people travel from Taiwan to the PRC via Hong Kong 
and Macao each day. 
 
10. (C) Nevertheless, he lamented the situation of Taiwan 
businessmen in the Mainland.  He noted that because the PRC 
refuses to talk to Taiwan, the Taiwan government could do 
nothing to help Taiwan businessmen who encounter 
difficulties.  Although many businessmen are able to 
resolve their problems on their own, Wu commented that 
perhaps the U.S. could help address this situation. 
 
11. (C) Wu complained that many of the current cross-Strait 
problems were a result of China's rapid emergence as a 
major world power.  According to Wu, China claims it is a 
big country with 1.3 billion people and it does not need 
any help from others, but in reality its development has 
been the result of foreign investment in export 
manufacturing.  He said that China does not understand 
democracy or the rest of the world.  It is rapidly 
increasing military spending and growing as threat to 
others in addition to Taiwan.  Wu cited China's recent 
problems with Japan as an example. 
 
FTA - Asking U.S. to Study the Possibility 
------------------------------------------ 
 
12. (C) Wu reiterated Taiwan's interest in an FTA with the 
United States.  He noted China's FTA negotiations with 
ASEAN and claimed that the PRC's clear intent was to 
isolate Taiwan from its South-East Asian neighbors.  He 
said that Taiwan had hoped three or four years ago that it 
might be able to negotiate an FTA with Singapore, but PRC 
pressure had made Singapore unwilling to proceed.  Taiwan 
also wants an FTA with Japan, but according to Wu, needs 
the U.S. to agree to consider an FTA with Taiwan before 
other countries will follow suit.  He claimed that just a 
U.S. commitment to study an FTA with Taiwan could have the 
desired impact in the region and repeated this suggestion 
more than once later in the meeting. 
 
13. (C) Wu argued that the U.S. should consider an FTA with 
Taiwan for the potential strategic impact in East Asia.  He 
said that the current level of Taiwan economic dependence 
on the PRC is dangerous because of the potential for an 
economic downturn in the PRC and the PRC's hostile 
intentions toward Taiwan.  He speculated that the U.S. must 
have used strategic considerations in deciding where to 
negotiate FTAs, citing the examples of the U.S. FTAs with 
Israel and Jordan. 
 
14. (C) Econ Section Chief agreed to pass on Taiwan's 
interest in an FTA to Washington again, but explained that 
a key factor in U.S. decisions on where to negotiate FTAs 
was the interest of the U.S. business community.  He 
explained that many U.S. businesses were concerned that 
Taiwan's interest in negotiating an FTA with the United 
States was to separate Taiwan economically from the PRC. 
He noted that U.S. firms are strongly opposed to this and 
generally wish to operate in an integrated greater China 
market.  Wu replied that an FTA with the United States 
would make people in Taiwan feel more secure and would, 
therefore, enable them to open the economy further to the 
PRC.  He claimed that right now people in Taiwan do not 
know whether the U.S. would come to Taiwan's aid in a 
crisis.  Econ Section Chief reconfirmed the U.S. 
government's commitment to its obligations under the Taiwan 
Relations Act. 
 
Other Issues - Export Control, Microsoft Forum 
--------------------------------------------- - 
 
15. (C) Econ Section Chief informed Wu that the AIT Acting 
Director had discussed export controls with Minister of 
Economic Affairs Ho Mei-Yueh and Minister of Foreign 
Affairs Chen Tan-sun last week.  He said that the Taiwan 
officials had given a commitment to work on establishing an 
effective export control regime and told Wu that the U.S. 
was happy to help Taiwan in these efforts.  Wu replied that 
U.S. experience would be very helpful and that Taiwan wants 
to follow the U.S. example in this area.  He expressed 
Taiwan's concern about the export of technology to the PRC. 
Econ Section Chief pointed out that exports to other 
countries are also a serious concern and that some 
technology exports transit China on the way to destinations 
such as North Korea. 
16. (C) Wu also asked about the AIT/W refusal of his 
request to visit Washington, D.C., to attend an April 26 
forum hosted by Microsoft.  He still hoped to attend, and 
indicated that TECRO Washington would submit another 
request on his behalf.  He suggested that the U.S. should 
reconsider because Taiwan has such good relations with 
Microsoft; it would be good for U.S. interests for Taiwan 
to be allowed to spread its economic point of view; and 
because the content of the forum would be economic not 
political.  Econ Section Chief told Wu that even though the 
forum would focus on economic issues, anything the Vice 
Premier of Taiwan does has a political aspect.  He also 
noted that the title of the conference was "Government 
Leaders."  Econ Section Chief agreed to relay his request 
for reconsideration to AIT/W. 
 
Comment - True Nature Shines Through 
------------------------------------ 
 
17. (C) Wu's comments consistently echoed the government's 
economic policy, but also revealed much about his instincts 
and personal opinions.  The Vice Premier is Taiwan's senior 
economic official, and Wu's background is primarily that of 
an academic economist.  Nevertheless, his comments on 
relations with the LY, cross-Strait relations after the 
Chiang visit, and U.S. views on FTAs show that he has 
strong political instincts and will use them in his new 
position.  Despite the government's repeated commitment to 
the "active opening, effective management" policy, Wu did 
not hide his suspicions of the PRC's intentions in passing 
the Anti-Secession Law.  In the coming weeks, as the EY 
reassesses the implementation of cross-Strait policies, it 
seems likely that Wu's long history of discouraging cross- 
Strait economic links will have an impact.  Wu did not show 
any signs that he is more strongly committed to financial 
and fiscal reforms than his predecessors.  He reiterated 
the Chen administration's goals, but said nothing to 
suggest that the ruling Democratic Progressive Party will 
start to make good progress on implementing reform measures 
rather than simply talking. 
PAAL