Cablegate: Taiwan Reactions to China/Asean Fta

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




E.O. 12958: N/A

1. Summary: Reactions in Taiwan to the announcement of a
Free Trade Agreement (FTA) between China and the Association
of Southeast Asian Nations (ASEAN) ranged from dire
predictions of imminent isolation to suggestions that the
immediate impact on Taiwan's economy will be minimal. Most
analysts, business associations, and officials view the
China/ASEAN FTA primarily as a political move by China to
increase its influence in Asia and isolate Taiwan. Although
the economic impact may be minimal in the near term, there is
a shared concern that the agreement represents a trend
towards regional integration that is excluding Taiwan and
could eventually lead to the economic marginalization of the
island. End Summary.

2. Taiwan government officials had varying responses to the
China/ASEAN FTA. Ministry of Foreign Affairs (MOFA)
spokesman Michel Lu accused China and ASEAN of seeking to
exclude Taiwan from trade in east Asia and promised that MOFA
would try to find a way to participate in the proposed East
Asian Summit in 2005. But Chieh Wen-chi, MOFA's Deputy
Director of International Organizations cautioned that the
agreement should be carefully studied to determine whether it
would exclude Taiwan from the ASEAN market before drawing any
conclusions. Chieh noted that all FTAs must comply with WTO
requirements and that Taiwan's chief exports already benefit
from low tariffs globally.

3. Minister of Economic Affairs Ho Mei-yueh announced
December 13 that MOEA was studying the impact on Taiwan of
the China/ASEAN FTA and recommended Taiwan companies minimize
the impact of the agreement by promoting industrial upgrading
and globalization. She suggested that absent FTAs with
regional trading partners, Taiwan would need to focus its
efforts on protecting its access to the ASEAN market through
the World Trade Organization (WTO) framework. Deputy
Minister Steve Chen claimed the China/ASEAN FTA would have
little effect on Taiwan's economy in the near term, but
warned that Taiwan would face ever stiffer competition in
ASEAN once the FTA is actually in place, a process that could
take years. Chen also noted that Taiwan investors already in
China or ASEAN countries would benefit from improved access
to the markets of the other FTA members.

4. Economic analysts minimized the immediate economic impact
on Taiwan, noting that China's motivation for participation
in the FTA appeared to be mostly political. According to
Taiwan Institute for Economic Research (TIER) Vice President
David Hong, the China/ASEAN FTA will have a small negative
impact on Taiwan's economy in the near term. Hong predicted
2005 GDP growth could be slowed by .05% as a result of the
agreement. Labor intensive production in Taiwan would
suffer, while exports of capital intensive products and
natural resources could see a small benefit. Hong added that
the FTA would increase the pressure for Taiwan to negotiate
bilateral agreements and improve competitiveness to counter
the perception that Taiwan was being isolated in Asia.

5. Academia Sinica Director of American and European Studies
Lin Cheng-yi sees China focusing on closer relations with
ASEAN to combat perceived US dominance of the region. He
noted that Chinese Premier Wen Jiabao made ten concrete
recommendations on steps to improve China/ASEAN ties at the
recent APEC Summit, including making 2006 a year of
China/ASEAN cooperation, promoting inter-ministerial
dialogue, backing an East Asian Summit to be held in
Malaysia, and creating an East Asian Trade Area with a
prominent role for ASEAN. Although Taiwan investment in
ASEAN countries is greater than Chinese investment in the
region, trade between China and ASEAN, almost US$100 billion
per year and growing rapidly, is about three times
Taiwan/ASEAN trade. This rapid growth in trade flows has
given China greater influence in the region when compared to
Taiwan. Lin also pointed out that Taiwan has not placed much
emphasis on improving economic ties with Southeast Asia,
instead focusing on improving relations with Japan and the
US. This emphasis will make it difficult for Taiwan to
counter China's growing economic influence in Southeast Asia
and make it more imperative for Taiwan to build stronger
trade ties to Japan and the US.

6. Vice Chairman Tsai Hong-ming, of the Chinese National
Federation of Industries (CNFI), one of Taiwan's leading
industrial associations, believes most business people fear
the economic marginalization of Taiwan industry. But he also
noted that Taiwan does not compete directly with Chinese or
ASEAN products in most markets. Most products traded between
ASEAN and China will not directly affect Taiwan's
competitiveness, according to Tsai. Taiwan producers of more
labor intensive goods may face stiffer competition, but many
of these have already shifted production to China or ASEAN
countries and will actually benefit from the FTA.

7. Tsai suggests that the real concern for Taiwan should be
on the potential loss of competitiveness resulting from lack
of regional integration and the growing cross-Strait
imbalance of trade. Taiwan's ability to attract investment
may suffer from the perception that Taiwan is disadvantaged
in regional trade. However, he also noted that the ASEAN
countries will have many reservations in the actual
implementation of the FTA and that the actual effects on
regional trade are likely to be delayed.

8. Comment: Most observers in Taiwan are concerned about the
potential for marginalization of Taiwan's economy in the
region. The China/ASEAN FTA is a potent symbol of a trend
towards regional economic integration that is excluding
Taiwan. But in the near term, the effect of this FTA on
Taiwan's economy appears to be small. Taiwan economic
officials continue to believe Taiwan's economic development
is best served by creating an environment friendly to
investment and development of value-added production. But
they also are concerned that Taiwan's competitiveness will
suffer if it continues to be excluded from regional economic
arrangements. End Summary.

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