US embassy cable - 05TAIPEI3931

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003931 
 
SIPDIS 
 
DEPT FOR EAP/TC 
COMMERCE FOR ITA/MAC/ASIA/MBMORGAN CABLE BOX 4431 
 
E.O. 12958: DECL: 09/22/2015 
TAGS: ECON, EINV, ETRD, EWWT, PREL, CH, CT, Cross Strait Economics, Transportation, Trade, Foreign Policy, Cross Strait Politics 
SUBJECT: TAIWAN'S FREE TRADE ZONES - WAITING FOR TENANTS 
AND CROSS-STRAIT LINKS 
 
REF: A. 04 TAIPEI 2997 
     B. 04 TAIPEI 3095 
 
Classified By: AIT Acting Director David J. Keegan, Reason 1.4 d 
 
Summary 
------- 
 
1. (C) Since establishing its first free trade zone (FTZ) 
in Keelung Harbor in October 2004, Taiwan has added four 
more FTZs in the ports of Kaohsiung, Taichung and Taipei, 
as well as Taipei's Chiang Kai-Shek International Airport. 
Many businesses have expressed interest in the zones, but 
relatively few have committed to actually becoming tenants. 
Manufacturing firms, in particular, do not find the zones 
attractive.  The Council for Economic Planning and 
Development/Center for Economic Deregulation and Innovation 
(CEPD/CEDI) emphasizes the lack of direct cross-Strait 
transportation links.  Liberalizing cross-Strait economic 
restrictions is essential for Taiwan to maximize its 
attractiveness as a place to invest.  End summary. 
 
Rapid Expansion 
--------------- 
 
2. (U) In October 2004, Taiwan inaugurated its first FTZ in 
Keelung Harbor.  The program has been quickly expanded to 
four other locations.  The FTZ in the Port of Kaohsiung 
started operations in January 2005.  On January 13, 2005, 
the Executive Yuan (EY) approved the zone in Taichung 
Harbor, which is slated to begin operations by the end of 
the year.  On April 28, 2005, the EY approved the Port of 
Taipei FTZ and the Taoyuan Air Cargo Park FTZ within the 
confines of Taipei's Chiang Kai-shek International Airport. 
Taoyuan Air Cargo Park is a build-operate-transfer (BOT) 
project that has been awarded to Far Glory Group (reported 
ref B).  Several cities and counties have also indicated 
that they want to establish FTZs, including Kaohsiung City, 
Tainan County, and Tainan City. 
 
3. (U) The zones are considered part of the territory of 
Taiwan, but outside of its customs territory.  Therefore, 
goods can be imported into the zones without duty or 
inspection and then exported again with or without 
additional value added.  The zones also offer other 
benefits to tenants.  These include relaxed labor 
restrictions so that firms can hire foreign workers 
amounting to up to 40 percent of their total workforce. In 
addition, Taiwan has a special visa category for visitors 
to the FTZs to facilitate business travel. 
 
Sluggish Response 
----------------- 
 
4. (SBU) Although many businesses have expressed interest 
in the zones, few have committed to actually establishing 
facilities in the zones.  The Port of Kaohsiung FTZ has 
been the most successful in attracting investment.  To 
date, CEPD/CEDI reports that three companies are operating 
in the Kaohsiung FTZ and another four have submitted 
applications to establish facilities in the zone.  Eleven 
companies have paid deposits to reserve sites at Taoyuan 
Air Cargo Park, but none have submitted applications.  One 
company, Tonglit Logistics Co. has been approved for 
operation in the Port of Taipei FTZ.  No firms have made a 
binding commitment to locate in the Keelung and Taichung 
zones. 
 
5. (SBU) That response puts CEPD/CEDI behind its modest 
goals for renting space in the zones.  The targets are 
still realistic for three of the zones.  For Kaohsiung, it 
aims to have seven firms in the zone by the end of the year 
and for the Port of Taipei only one.  The target for 
Taoyuan Air Cargo Park is five tenants.  CEPD/CEDI had 
aimed to place four firms in the Keelung FTZ and 3 in the 
Taichung's FTZ by the end of the year. 
 
6. (C) CEPD/CEDI Executive Director Heng Tso complained to 
AIT/T econoff that he is also disappointed by the kinds of 
firms that have applied to establish facilities in the 
zones.  According to Tso, nearly all are logistics or 
shipping firms.  Only one manufacturing firm has applied to 
build a facility that would perform value-added functions. 
Tonglit Logistics, which plans to set up a factory in the 
Taipei zone, builds auto parts for Taiwan's China Motor 
Corporation.  Tso said that Tonglit will import parts from 
the PRC, assemble them into larger components in the FTZ 
and them sell them to China Motors assembly line in Taiwan. 
He noted that this project was very important because China 
Motor Corp. has been considering moving its assembly lines 
to the PRC. 
 
Cross-Strait Links Still Key 
---------------------------- 
 
7. (C) Some businesses have pointed out that the FTZs do 
not meet the needs of many firms in Taiwan.  Yang Ming 
Maritime Corp. President Huang Huan-hsiu complained 
publicly that the FTZs are not "free."  He complained about 
the inconvenience of the customs operations, noting that 
although firms do not have to declare imported goods, they 
do have to report it to Customs.  He also criticized 
requirements for hiring aboriginal employees, regulations 
governing employment of foreign employees, and rules of 
origin regulations.  The Taiwan government has continued to 
implement additional liberalization measures for the FTZs, 
but has not gone far enough yet for many firms. 
CEPD/CEDI's Tso also noted that the FTZs have had 
difficulty attracting tenants because similar benefits are 
offered in Taiwan's export processing zones and more 
successful science parks. 
 
8. (C) Nevertheless, in Tso's discussion with econoff he 
immediately highlighted the lack of cross-Strait links as 
the major obstacle to attracting more firms to the FTZs. 
CEPD/CEDI's promotional materials for the zones emphasize 
Taiwan's geographic location and proximity to "world 
manufacturing centers" such as the PRC.  As Tso observed, 
these advantages are much reduced without direct 
transportation links to the PRC, Taiwan's number one 
trading partner. 
 
9. (C) Tso told econoff that CEPD/CEDI has urged the 
Mainland Affairs Council to accelerate liberalization of 
cross-Strait policies.  These efforts include seeking 
authorization for firms in the Taichung Offshore 
Transshipment Center to move transshipped goods directly 
between Taichung and the PRC's Xiamen and Fuzhou harbors. 
These firms are currently allowed to ship such goods 
directly to other, more distant ports in the PRC.  However, 
direct transshipment to Xiamen and Fuzhou is still 
prohibited because of security concerns. 
 
Comment - Frustrating Staff and the Economy 
------------------------------------------- 
 
10. (C) CEPD/CEDI officials are clearly frustrated by the 
hand they've been dealt for promoting the FTZs.  As Tso's 
subordinate Jennifer Huang, Chief of External Liaison and 
Policy Promotion, expressed to AIT/T, it has been difficult 
to make the FTZs work.  She claimed that at the time they 
were first proposed, there were many advantages, but 
"hopeful conditions are gone."  She commented that in the 
face of these difficulties CEPD/CEDI could only carry on 
with the program as instructed by senior officials. 
 
11. (C) The frustration at CEPD/CEDI reflects frustration 
by many in Taiwan with the Chen Administration's cross- 
Strait economic policies.  Taiwan is facing increasing 
challenges as it endeavors to compete economically, 
especially in manufacturing.  A tight labor market and high 
prices for land are major disadvantages that Taiwan must 
overcome to attract investment from abroad and keep 
Taiwan's investment at home.  Continuing and sometimes 
growing regulations on business operations only exacerbate 
the problem.  The FTZs could be a useful step in the right 
direction, but Taiwan's cross-Strait restrictions across a 
range of areas, including but not limited to finance, 
transportation and immigration, inhibit Taiwan from 
exploiting its advantages.  Liberalizing these restrictions 
will not be a magic bullet that returns Taiwan to the 
manufacturing powerhouse it was, but in a world of ever 
shrinking margins the additional costs these restrictions 
impose make a difference.  End comment. 
KEEGAN