Cablegate: Scenesetter for Dot a/S Bhatia's Trip to Taiwan

This record is a partial extract of the original cable. The full text of the original cable is not available.







E.O. 12938: N/A
SUBJECT: Scenesetter for DOT A/S Bhatia's Trip to Taiwan



1. (U) The United States' unofficial relations with Taiwan
focus on regional security and trade. Taiwan is considering
the purchase of USD 18 billion in military equipment from
the U.S. Outstanding trade issues include intellectual
property rights, pharmaceuticals and telecommunications
market access, and rice imports. December 11 legislative
elections will determine if President Chen's Democratic
Progressive Party will gain control of Taiwan's legislature
for the first time. The economy is returning to strong
growth after Taiwan's first recession in half a century.
Despite the impact of cross-Strait political tensions, the
economy increasingly depends on exports to Taiwan's PRC-
based manufacturing. The primary concern of Taiwan's
aviation industry is the lack of direct air links with the
PRC. (End summary.)

U.S.-Taiwan Relations - Security and Trade

2. (U) On January 1, 1979, the United States changed its
diplomatic recognition from Taipei to Beijing. In the U.S.-
P.R.C. Joint Communique that announced 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 on Taiwan. In April 1979 the Taiwan Relations
Act (TRA) created the legal authority for the establishment
of the American Institute in Taiwan (AIT), a private
nonprofit corporation. U.S. Government visitors to Taiwan
are considered AIT consultants while conducting USG business
in Taiwan and must travel on a tourist passport. Travel by
USG senior officials to Taiwan is carefully controlled and
rare; your visit will attract attention.

3. (U) Under the Taiwan Relations Act, the United States is
committed to offering military equipment that Taiwan needs
to defend itself. The Legislative Yuan is currently
considering a USD 18 billion special budget, which will
allow Taiwan to purchase diesel submarines, P-3C anti-
submarine patrol aircraft, and PAC-III anti-missile
batteries. Consideration of the budget bill has been
delayed until after the December 11 elections.

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. 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-exclusivity regime for pharmaceuticals. These
improvements have led the U.S. Trade Representatives office
to open an out-of-cycle review to consider Taiwan's status
on the Special 301 Priority Watch List. The U.S. still has
concerns about market access for pharmaceuticals and
telecommunications service providers. We also continue
discussions with Taiwan on its tariff and quota regime for
rice imports. On November 29, the U.S. and Taiwan will
resume talks under the Trade and Investment Framework
Agreement to further progress toward resolving some of these
outstanding issues.

Politics - More Divided Government?

5. (U) When Taiwan's President Chen Shui-bian was first
elected in 2000, it marked the first transition of political
power in Taiwan since World War II and the consolidation of
democracy in Taiwan. 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 candidates'
refusal to accept the results of the 2004 election have
contributed to a particularly bitter partisan environment.

6. (SBU) Legislative elections scheduled for December 11,
2004, will determine whether Taiwan will have another three
years of divided government. The KMT, with its opposition
partner the People First Party (PFP), forms the "Pan-Blue"
alliance, which controls the Legislative Yuan, Taiwan's main
legislative body. The DPP with its "Pan-Green" partner, the
strongly pro-independence Taiwan Solidarity Union (TSU),
hopes to take control of the legislature for the first time.
Many observers predict that neither camp will have a strong
majority. Both camps will need to form ad-hoc alliances to
move legislation. That could slow passage of needed
economic and financial reforms, but it could also discourage
legislation that might increase cross-Strait tensions.

Economy - Resurgent Growth

7. (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, the economy has
boomed this year with double-digit export growth.
Economists predict that Taiwan's economy will once again
return to strong growth in 2004, with real GDP growth
reaching nearly 6 percent.

8. (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 the first half of
2004, Taiwan's exports grew 26 percent over the same period
last year. Semiconductors have been an especially important
component of Taiwan's economic success. Today, flat panel
displays are also playing an increasing role. 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.

9. (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, 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. The budget crunch will continue unless Taiwan
manages to choose between the politically unfeasible options
of raising taxes, cutting popular social programs, or
running historically high deficits. None of these
alternatives will be politically palatable, especially if
political power is evenly divided in the Legislative Yuan.

Cross-Strait Tension and Economic Integration

10. (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 ruling DPP promised early on in the current
election season to keep cross-Strait relations and issues of
sovereignty out of the legislative elections. Nevertheless,
political rhetoric is again increasingly focused on the
government's and the president's approach to cross-Strait
relations. The official name of the Republic of China and
President Chen's proposal to write a new constitution for
Taiwan are also sensitive domestic political issues that
threaten to increase cross-Strait tension. Taiwan companies
that have supported the DPP have found their activities in
the PRC subject to increased scrutiny.

11. (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. The PRC accounted
for more than 70 percent of Taiwan's outward foreign
investment in the first half of 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 technology 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. Despite pressure from businesses, the
Taiwan government continues to restrict investment in the
Mainland for certain categories of high-tech manufacturing.
Most of the electronics consumer goods manufactured by
Taiwan firms in the PRC are subsequently exported to the
U.S., Japan, or Europe. In that sector, Taiwan's economy is
not reliant on domestic demand in the PRC. Other Taiwan
industries that have high levels of Mainland trade and
investment, especially the cement, petrochemical and steel
industries, are more strongly influenced by changes in the
PRC economy.

Aviation Issues -Direct Links, ICAO, Cargo 7ths
--------------------------------------------- --

12. (U) The lack of direct aviation links between Taiwan
and the PRC is the primary concern of Taiwan's aviation
industry and the largest remaining obstacle to deeper
economic relations across the Strait. In February 2003
during the Lunar New Year, Taiwan airlines were permitted to
conduct charter flights between Taipei and Shanghai with
stops in Hong Kong. The Chen government has indicated that
it wants to negotiate direct charter flights in 2005 for
both Taiwan and PRC carriers with no stopovers as the next
step toward regular direct aviation links (reported
reftels). On both sides of the Strait this is a highly
charged political issue. To date, the PRC government has
not accepted Chen's invitation to negotiate charter flights,
insisting that Taiwan first accept the "one-China" principle
and its corollary that cross-Strait flights would be

13. (U) Taiwan seeks to join the International Civil
Aviation Organization (ICAO) as a full member or observer.
Because it is not a sovereign state, Taiwan is excluded from
such UN organizations and many other international
organizations. Entry into organizations such as ICAO and
the World Health Organization that focus on economic and
health issues has been a key priority of Taiwan's foreign
policy. The U.S. supports Taiwan's efforts to gain
increased access to ICAO discussions and technical
information to improve its flight safety efforts.

14. (U) In 2003, AIT urged Taiwan to add "seventh freedom"
rights for all-cargo services to our bilateral open skies
agreement and to join the Multilateral Agreement on
Liberalization of International Air Transportation, which
includes cargo sevenths. The Taiwan government rejected
both proposals. Taiwan's carriers rely heavily on cargo
shipments to make them profitable and support continued
restrictions of international participation in Taiwan's
cargo routes. Taiwan's recently concluded bilateral air
services agreement with South Korea excludes cargo fifth
freedom rights. Taiwan and South Korea signed the new
agreement on September 1 after a dozen years without direct
air links.


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