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Cablegate: Taipei Economic Brief for June

VZCZCXRO7147
RR RUEHGH
DE RUEHIN #2364/01 1940024
ZNR UUUUU ZZH
R 130024Z JUL 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 1073
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3327
RUEHBJ/AMEMBASSY BEIJING 5397
RUEHUL/AMEMBASSY SEOUL 7922
RUEHGP/AMEMBASSY SINGAPORE 6501
RUEHKO/AMEMBASSY TOKYO 7816
RUEHML/AMEMBASSY MANILA 9752
RUEHJA/AMEMBASSY JAKARTA 3881
RUEHKL/AMEMBASSY KUALA LUMPUR 3520
RUEHHI/AMEMBASSY HANOI 3090
RUEHBY/AMEMBASSY CANBERRA 4238
RUEHWL/AMEMBASSY WELLINGTON 1522
RUEHHK/AMCONSUL HONG KONG 6605
RUEHGH/AMCONSUL SHANGHAI 0223
RUEHGZ/AMCONSUL GUANGZHOU 9405

UNCLAS SECTION 01 OF 03 TAIPEI 002364

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/TC, EAP/EP
USTR FOR ALTBACH
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taipei Economic Brief for June


1. This cable summarizes selected recent economic events
in Taiwan in June 2006:

--Inflationary pressure building
--Cross-Strait integration fuels trade expansion
--Taipei AmCham issues white paper
--MOEA's white paper response
--Cross-Strait agreement on charter flights
--Restrictions on foreign student interns relaxed
--FDI up 196%
--Efforts to reduce carbon dioxide emissions
--Semiconductor association forced to change name

Inflationary Pressure Building
------------------------------

2. Consumer prices in May rose by 1.58%, the highest
increase in four months. Inflation is expected to
accelerate because higher oil prices and higher metal
import costs have driven the wholesale price index in May
up 6.2% from the same month a year ago, the largest
increase in the past year and a half. Rising oil prices
have caused the state-owned Chinese Petroleum Corporation
(CPC) and Taiwan Power Company (TPC) to suffer losses in
2005 that appear to be growing in 2006. Consequently, CPC
and its competitors in the private sector raised gasoline
prices in February and April by 12.3% and again by 3.6% to
NT$28.6 per liter (about US$3.27 per gallon) on July 7.
TPC, Taiwan's monopoly power supplier, increased power
charges by an average of 5.8% on July 1.

Cross-Strait Integration Contributes to Trade Expansion
--------------------------------------------- ----------

3. Taiwan's exports and imports in May both expanded by
double-digit rates to new monthly highs of US$18.9 billion
and US$18.2 billion. In the first five months of the year,
exports grew 12% to US$87.9 billion, and imports rose 9% to
US$81.4 billion. The growth was mainly due to rising
levels of cross-Strait trade. Taiwan's exports to China
(including Hong Kong) in the first five months increased
from 38% of Taiwan's total exports a year ago to 40%,
compared to a 14.8% share for the United States and 7.4%
for Japan. Taiwan's exports to China are mainly production
inputs shipped to Taiwan-owned factories and then assembled
into consumer goods that are re-exported to the United
States, Japan, and Europe. Taiwan investment in Mainland
China continues to grow. Approved investment in the first
five months grew 46% from the same period of last year.

4. During the same period, imports from China also
increased from 12% of Taiwan's total imports a year ago to
12.5%, still less than the 23% for shipments from Japan but
higher than the 10.8% from the United States. The
percentage share for imports from China will continue to
increase as Taiwan further relaxes restrictions on imports
from China. Recent relaxation of restrictions on apparel
and cell phone imports from China caused imports in these
two categories to shoot up by 440%.

AmCham's 2006 Taiwan White Paper
--------------------------------

5. The Taipei American Chamber of Commerce (AmCham) issued
its 2006 Taiwan White Paper on May 30. In the report,
AmCham affirmed: (1) most economic indicators are better
than they were several years ago; (2) Taiwan authorities

TAIPEI 00002364 002 OF 003


are displaying a more proactive attitude towards direct
cross-Strait passenger and cargo flights; (3) Taiwan
authorities are paying more attention to financial reform,
opening government procurement to foreign suppliers, better
protection of intellectual property rights, and
rationalizing the pharmaceutical pricing system. However,
AmCham reminded Taiwan's authorities that restrictions on
flow of manpower, capital, and merchandise across the
Taiwan Strait diminish Taiwan's natural advantages of
proximity and cultural affinity with Mainland China and
drive businesses to relocate. AmCham urged Taiwan to
implement the following improvements: (1) reduce
restrictions on business hiring decisions; (2) upgrade
Taiwan's public health and healthcare system; (3) further
improve intellectual property protection; (4) accelerate
economic integration with China; (5) thoroughly eradicate
corruption; (6) establish a world-class infrastructure; and
(7) complete essential financial reforms.

Taiwan Authorities' Respond
---------------------------

6. As in the past, Taiwan authorities responded quickly to
AmCham's white paper. The Ministry of Economic Affairs
(MOEA) said that it had addressed many of AmCham's past
recommendations, coordinated with other government agencies
to seek solutions, and done its utmost to press for
recommended reforms. MOEA noted that during the past year,
it had (1) promoted establishment of an intellectual
property court to better protect intellectual property
rights; (2) lifted bans on foreign investment in financial
institutions, land transportation, and the leasing industry;
and (3) allowed employment of foreign students as interns.
MOEA said it would continue to actively implement other
reforms proposed by AmCham.

Cross-Strait Charter Flights
----------------------------

7. Taiwan and the PRC reached an agreement on cross-Strait
charter flights which was announced on June 14. For
passengers, charter flights will be available during Lunar
New Year (late January/February), Tomb Sweeping Day (April
5), Dragon Boat Festival (late May/June), and Mid-Autumn
Festival (September/early October) holidays. There will be
168 charter flights a year, and each carrier will operate
14 flights. The agreement also included special charter
flights for emergency medical and humanitarian needs.
Cargo flights will also be approved on a case-by-case basis
for capital equipment shipped to Taiwan firms in the
Mainland. Taiwan's carriers praised the agreement as a
first step in the right direction but called the number of
charter flights insufficient to meet demand.

Restrictions on Foreign Student Interns Relaxed
--------------------------------------------- --

8. In response to AmCham's request, MOEA announced on May
25 that it was lifting restrictions on foreign students
serving short-term paid internships in Taiwan. State-owned
enterprises, foreign companies, and foreign chambers of
commerce are eligible to hire foreign student interns.
Private Taiwan companies are eligible only if their sales
exceeded NT$10 million (US$312,500) the previous year.
Interns must be students at the university level or higher.
They will be granted a six-month stay which may be extended
once by another six months. MOEA's Investment Commission

TAIPEI 00002364 003 OF 003


will establish a dedicated service window to handle
applications for hiring foreign student interns.

FDI Up 196%
-----------

9. According to statistics compiled by MOEA, foreign
direct investment (FDI) approved in the first five months
of this year amounted to US$6.64 billion. FDI excluding
Philips' recent purchase of Philips Taiwan's shares in
Taiwan Semiconductor still registered an increase of 196%
over the same period a year ago. The approved investment
projects include foreign participation in mergers and
acquisitions in Taiwan's financial services, logistics and
other service industries.

Efforts to Reduce Carbon Dioxide Emission
-----------------------------------------

10. On June 16, MOEA set up the Taiwan Industrial
Greenhouse Office (TIGO) with the goal that Taiwan's
greenhouse gas emissions in 2015 will be reduced to 90% of
the 2000 level (from 25.76 kg per NT$1,000 GDP to 23.20 kg).
In 2005, MOEA signed greenhouse gas emissions reduction
voluntary agreements with manufacturers associations of the
iron & steel, petrochemical, man-made fibers, cement, paper,
and textiles & dyeing industries. In 2006, electronics,
semiconductors, and flat-panel display industry
associations signed similar voluntary agreements with MOEA.
Under these agreements, carbon dioxide emissions in 2008
should be reduced to 95.5 percent of 2004 levels, a decline
of 4.02 million metric tons.

Semiconductor Association Forced to Change Name
--------------------------------------------- --

11. With the entry of the China Semiconductor Industry
Association into the World Semiconductor Council (WSC), the
WSC has forced the Taiwan Semiconductor Industry
Association (TSIA) to change its name to the Semiconductor
Industry Association in Chinese Taipei (SIACT). TSIA
Chairman Frank Huang commented that the organization will
continue to use the TSIA name, but will be called SIACT in
certain international events.

YOUNG

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