US embassy cable - 05TAIPEI2420

UNCLAS SECTION 01 OF 03 TAIPEI 002420 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EAP/ TC 
 
DEPT PLEASE PASS TO AIT/W 
 
PLEASE PASS TO PETER SU IN THE BUREAU OF LEGISLATIVE 
AFFAIRS (H) 
 
E.O. 12958: N/A 
TAGS: OREP, AMGT, ASEC, AFIN, OTRA, TW 
SUBJECT: SCENESETTER FOR CONGRESSMAN KENNEDY 
 
REF: STATE 90490 
 
Summary 
------- 
 
1. (U) The United States has maintained unofficial relations 
with Taiwan under the Taiwan Relations Act (TRA) of 1979. 
The TRA commits the United States to offer defensive weapons 
to Taiwan, now the second largest purchaser of U.S. weapons 
systems in the world.  Taiwan is governed by a multi-party 
democracy.  In 2000, the independence leaning opposition 
party, the Democratic Peoples Party (DPP) won the presidency 
from the Nationalist Party (KMT), which had ruled since it 
moved to Taiwan from the Mainland in 1947.  Since 2000, 
Taiwan has suffered from gridlock with the DPP controlling 
the presidency and the KMT controlling the legislature.  One 
result of that gridlock has been an inability to approve a 
USD 18 billion appropriation for the purchase of defensive 
equipment approved by the United States in 2001.  Taiwan's 
economy, long one of the most successful in Asia, hit its 
first recession in 2001; and growth has been slow with 2005 
GDP growth expected to be below 4 percent.  Outstanding 
trade issues between the U.S. and Taiwan include 
intellectual property rights, market access for 
pharmaceuticals, telecommunications, and rice.  Despite 
cross-Strait tensions, the economy increasingly depends on 
exports to Taiwan's PRC-based manufacturing.  (End summary.) 
 
U.S.-Taiwan Relations - Security and Trade 
------------------------------------------ 
 
2. (U) On January 1, 1979, the United States changed 
diplomatic recognition from Taipei to Beijing.  In the U.S.- 
P.R.C. Joint Communique announcing the change, the United 
States recognized the Government of the People's Republic of 
China as the sole legal government of China and acknowledged 
the Chinese position that there is but one China.  The Joint 
Communique also stated that within this context the people 
of the United States would maintain cultural, commercial, 
and other unofficial relations with the people of Taiwan. 
In April 1979, Congress passed the Taiwan Relations Act 
(TRA) creating the legal authority for the establishment of 
the American Institute in Taiwan (AIT), a private nonprofit 
corporation. 
 
3. (U) Under the TRA, the United States is committed to 
offer defensive military weapons to Taiwan.  A USD 18 
billion Special Defense bill to purchase diesel submarines, 
P-3C anti-submarine patrol aircraft, and PAC-III anti- 
missile batteries has been under consideration by the LY for 
a full year.  Political bickering and the resulting 
legislative gridlock have thus far kept the bill bottled up 
in the procedural committee. 
 
4. (SBU) Market access and trade issues are the main 
concerns in U.S.-Taiwan economic relations.  Taiwan joined 
the WTO in 2002 and committed to reduce barriers to trade in 
several areas, including telecommunications and government 
procurement.  Many of these commitments remain incomplete. 
For several years, intellectual property rights have also 
been a key point of contention.  Taiwan has been a center 
for piracy of optical media and has seen an influx of 
counterfeit products, including pharmaceuticals and branded 
goods, from China. 
 
5. (SBU) However, in the last year, Taiwan has improved 
enforcement of its intellectual property laws, passed an 
amended Copyright Law, and proposed legislation to create a 
data-protection regime for pharmaceuticals.  These 
improvements led the U.S. Trade Representatives office to 
recognize progress by shifting Taiwan from the Special 301 
Priority Watch List to the Watch List in an out-of-cycle 
review in early 2005.  The U.S. still has concerns about 
market access for pharmaceuticals and telecommunications 
service providers.  In a major step forward on trade 
relations, on April 16, 2005 Taiwan lifted its ban on 
imports of U.S. beef.  Taiwan health authorities led the way 
for Asian economies by following a careful and credible 
review of procedures following the detection of BSE in the 
U.S.  We also continue discussions with Taiwan on its tariff 
and quota regime for rice imports.  On November 29, the U.S. 
and Taiwan resumed talks under the Trade and Investment 
Framework Agreement to further progress toward resolving 
outstanding issues. 
Politics:  Divided Government, Legislative Gridlock 
--------------------------------------------- ------ 
6. (U) Chen Shui-bian's election as President of Taiwan in 
2000 marked the first transfer of political power between 
parties in Taiwan since World War II and the consolidation 
of multi-party democracy in Taiwan in the 1990s.  Over the 
past five years, Chen's independence-leaning Democratic 
Progressive Party (DPP) has asserted increasing control over 
the executive branch bureaucracy, which had been dominated 
for decades by the Kuomintang (KMT).  In March 2004, Chen 
was narrowly reelected with less than 50.1 percent of the 
popular vote.  A controversial shooting incident the day 
before the election, in which Chen and Vice President 
Annette Lu were mildly injured, and the KMT's refusal to 
accept the results of the 2004 election created a bitter 
partisan environment in the run up to the December 2004 
Legislative Yuan (LY) election. 
 
7. (SBU) The December 2004 LY election constituted a setback 
for President Chen and his DPP's hopes for winning a 
majority of LY seats.  The DPP and its "Pan-Green" coalition 
partner, the pro-independence Taiwan Solidarity Union (TSU), 
had hoped to take control of the legislature for the first 
time.  Instead, the "Pan-Blue" coalition, consisting of the 
former ruling Kuomintang (KMT) and the People First Party 
(PFP), won a razor-thin majority of LY seats, but promptly 
split, leaving no workable majority in the LY.  As a result, 
the first LY session (February-May 2005) was characterized 
by gridlock, with few pieces of legislation enacted. 
Efforts to form ad-hoc legislative alliances to pass 
specific legislation have been episodic and only 
occasionally fruitful. 
 
8. (SBU) The DPP's December election setback also showed the 
limits of Taiwan voter support for the radical pro- 
independence DPP campaign platform.  Since then, President 
Chen has followed a more moderate course, trying to appeal 
to the majority of voters who support continuation of the 
status quo rather than immediate unification or 
independence. 
 
Economy - Slowing Growth 
------------------------ 
 
9. (U) Taiwan is the 17th largest economy in the world.  For 
nearly 50 years before 2001, Taiwan experienced rapid 
economic expansion, low unemployment, and low inflation -- 
often called "Taiwan's Economic Miracle."  In 2001, the 
economy contracted for the first time since 1952, largely 
due to fallout from the global high technology industry 
downturn that reduced demand for exports in the key markets 
of the U.S., Europe and Japan.  After two more years of 
disappointing growth in 2002 and 2003, double-digit export 
growth propelled the economy to nearly 6 percent real GDP 
growth in 2004.  Export growth has fallen, and economists 
now predict that Taiwan's economy will slow significantly in 
2005 with growth below 4 percent.  This is low historically 
for Taiwan and disappointing compared to the performance of 
its neighbors and competitors. 
 
10. (U) Exports of information technology and other high- 
tech goods continue to be one of the main drivers of 
Taiwan's economy, even as many firms move manufacturing 
operations to China or Southeast Asia.  In 2004, Taiwan's 
exports grew more than 20 percent over the previous year. 
Semiconductors have been an especially important component 
of Taiwan's economic success.  According to some estimates 
the integrated circuit industry by itself accounts for 3 
percent of Taiwan's GDP, excluding the suppliers and 
customers who rely on the industry.  Today, flat panel 
displays are also playing an increasing role.  Taiwan's 
manufacturers of thin film resistor liquid crystal display 
(TFT-LCD), the most widely used type of flat panel display, 
control more than 40 percent of the TFT-LCD global market. 
Taiwan's government has plans to continue to stimulate the 
growth of these high-tech sectors, as well as to develop new 
technologies such as biotechnology and nanotechnology. 
Taiwan's government also hopes to diversify Taiwan's economy 
beyond manufacturing into digital content, logistics, 
finance and other services. 
 
11. (U) Taiwan's macroeconomic policy has sought to maintain 
stable exchange rates, low inflation and low interest rates. 
Taiwan, after China and Japan, has the third largest stock 
of foreign exchange reserves in the world.  It has made 
progress in strengthening a banking system that was in 
serious trouble in 2001 and 2002 and improving the 
supervision of financial institutions.  However, the Taiwan 
government has yet to fully deal with a number of insolvent 
institutions.  Taiwan's eroding tax base, a "no new taxes" 
pledge (which it broke last week), and growing social 
welfare costs have left the Chen administration with a large 
budget deficit and limited options to pursue new spending on 
key economic and defense objectives.  In the context of the 
continuing legislative gridlock, the budget crunch will 
continue unless Taiwan manages to choose between the 
politically difficult options of raising taxes, cutting 
popular social programs, or running historically high 
deficits. 
 
Cross-Strait Tension and Economic Integration 
--------------------------------------------- 
 
12. (SBU) While strained political relations with Beijing 
dominate both Taiwan's domestic politics and national 
security issues, investment in the Mainland and trade across 
the Strait are increasingly the driving forces in Taiwan's 
economy.  The recent visits to Mainland China by "Blue" 
opposition party leaders Lien Chan (KMT) and James Soong 
(PFP) have been hailed as an opportunity to improve cross- 
Strait relations and have raised expectations in Taiwan. 
The U.S. Government praised the visits and urged Beijing to 
start direct contacts with the elected representatives of 
Taiwan.  However, PRC authorities and the Chen 
administration have not been able to find a mutually 
acceptable basis for direct contacts. 
 
13. (U) In 2003, China replaced the U.S. as Taiwan's number 
one trading partner.  Exports to the PRC and Hong Kong make 
up 35 percent of Taiwan's total exports.  Many of these 
exports are inputs destined for Taiwan-owned manufacturing 
facilities in the Mainland.  The PRC accounted for more than 
67 percent of Taiwan's outward foreign investment in 2004. 
Much of Taiwan's labor-intensive manufacturing has moved to 
the Mainland, especially in industries like textiles, shoes, 
toys, furniture, etc.  In information technology and other 
high-tech industries, the manufacture of the most advanced 
and capital-intensive components has in large measure stayed 
in Taiwan, while downstream assembly of final products has 
moved to Mainland China.  However, increasingly Taiwan 
investors are moving the manufacture of upstream high-tech 
components to the PRC as well.  Currently, about 70 percent 
of information technology products produced by Taiwan firms 
are assembled in the PRC.  The Taiwan government continues 
to restrict investment in the Mainland for certain 
categories of high-tech manufacturing.  However, Taiwan 
firms have been strongly urging the government to liberalize 
investment in more advanced semiconductor manufacturing 
technologies, semiconductor packaging and testing, and small- 
size TFT-LCD panels.  Most of the electronics consumer goods 
manufactured by Taiwan firms in the PRC are still exported 
to the U.S., Japan, or Europe.  However, Taiwan economic 
dependence on PRC domestic markets is growing across a range 
of industries. 
 
PAAL