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Cablegate: Eu Advocates Improved Taiwan-China Ties

VZCZCXRO5997
RR RUEHGH
DE RUEHIN #3723/01 3050816
ZNR UUUUU ZZH
R 010816Z NOV 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 2853
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3449
RUEHBJ/AMEMBASSY BEIJING 5862
RUEHUL/AMEMBASSY SEOUL 8205
RUEHGP/AMEMBASSY SINGAPORE 6659
RUEHKO/AMEMBASSY TOKYO 8167
RUEHML/AMEMBASSY MANILA 9827
RUEHJA/AMEMBASSY JAKARTA 3933
RUEHKL/AMEMBASSY KUALA LUMPUR 3580
RUEHHI/AMEMBASSY HANOI 3150
RUEHBY/AMEMBASSY CANBERRA 4356
RUEHWL/AMEMBASSY WELLINGTON 1582
RUEHHK/AMCONSUL HONG KONG 7082
RUEHGH/AMCONSUL SHANGHAI 0496
RUEHGZ/AMCONSUL GUANGZHOU 9675

UNCLAS SECTION 01 OF 03 TAIPEI 003723

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SIPDIS

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

E.O. 12958: N/A
TAGS: ETRD EINV EFIN ECON PINR TW
SUBJECT: EU Advocates Improved Taiwan-China Ties


SUMMARY
-------

1. (U) The just-published European Chamber of Commerce in Taipei
(ECCT) 2006-2007 White Paper urges Taiwan to take immediate action
to improve cross-Strait relations or suffer bleak economic
consequences. The report also urges Taiwan to abide by its WTO
commitments, and provide better tax incentives to attract foreign
investment. In response, Taiwan authorities have noted that the EU
has its own restrictions on trade with China, and that the number of
ECCT members has more than doubled over the past four years. END
SUMMARY.

White Paper Urges Taiwan to Face Reality
----------------------------------------

2. (U) On October 26, the ECCT published its 2006-2007 Position
Paper (White Paper). The ECCT urges Taiwan to "Face Reality!" and
normalize cross-Strait economic relations. As in last year's paper,
the ECCT covers five priority issues: 1) cross-Strait economic
relations, 2) restrictions on European enterprises, 3) Taiwan's
compliance with its WTO commitments, 4) development of the financial
sector, and 5) tax incentives for foreign investors.

Cross-Strait Economic Relations
-------------------------------

3. (U) The ECCT asks Taiwan to permit direct cross-Strait air and
sea navigation, lift restrictions on PRC nationals visiting and
working in Taiwan, remove bans on imports of PRC-made products, and
relax the 40% limit on investment in China by Taiwan firms. It
notes these limits have restricted expansion of joint ventures in
China between European firms and their Taiwan partners.

Normal Relations Would Transform Taiwan's Economy
--------------------------------------------- ----

4. (U) The White Paper includes the executive summary of a
ECCT-sponsored impact study on cross-Strait business normalization
which describes the enormous positive benefit that key sections of
Taiwan's economy could derive from improved relations with China.
According to the study, normalized relations with China would enable
Taiwan to achieve its economic goal of transforming itself into a
regional corporate services center, and thereby ensure continued
prosperity for the Taiwan people. The study concludes that removal
of bans on imports from China will benefit Taiwan's retail
industries by increasing Taiwan's GDP by an amazing 3.5%.

Excessive Regulations
---------------------

5. (U) European companies believe excessive regulations have
hindered them from getting full market access in Taiwan. The report
complains of long and non-transparent product approval procedures in
banking services, Taiwan-only safety regulations for cars, multiple
licensing requirements for retail stores, and lack of recognition of
international standards. For example, the reports notes that in the
automotive industry Taiwan does not recognize foreign testing
results and does not accept the original English version of
technical data. Taiwan's automobile parts marking requirements are
not harmonized with international practice and standards.

WTO Compliance
--------------

6. (U) The ECCT White Paper indicates that Taiwan has made little
progress in resolving outstanding WTO non-compliance issues or in
accession to the WTO Government Procurement Agreement. Taiwan

TAIPEI 00003723 002 OF 003


continues to maintain import bans on over 2,000 products from China
and restrict PRC visitors of foreign companies not registered in
Taiwan.

Development of Service Sector
-----------------------------

7. (U) The White Paper suggests Taiwan should increase
infrastructure construction and the upgrading of key service
industries is lagging behind plans. It notes that consolidation of
the banking sector has attracted only a limited number of foreign
investors. In the logistic sector, the free trading zone program
has attracted only a handful of investors. Taiwan has made little
progress in promoting inbound tourism due to lack of effective
marketing plans and outdated infrastructure.

Tax Incentives
--------------

8. (U) The ECCT report notes that Taiwan has adopted restrictive
tax regulations and reduced tax incentives over the past year and
that the unfavorable tax climate may cause foreign and domestic
companies to reduce their investment in Taiwan or move their
business elsewhere. It complains that the 40% maximum income tax is
far higher than the 17% average income tax in Hong Kong.

Harsh Criticisms
----------------

9. (U) The ECCT report states that without normalization of
cross-Strait relations and without further economic liberalization,
a growing number of European firms will leave Taiwan. The report
notes that the number of European firms going out of business in
Taiwan increased from 15 in 2005 to 33 so far this year. The ECCT
Banking Committee said that Taiwan will become a "regional bad debt
center" if policies hindered Taiwan banks from moving along with
their customers across the Taiwan Strait.

Taiwan Responses
----------------

10. (U) In response to the ECCT report, Hu Sheng-cheng, Chairman of
the Council for Economic Planning and Development (CEPD), publicly
observed that the ECCT has not shrunk, but has expanded from some
300 members four years ago to more than 700 members today, and that
Europe has surpassed the United States and Japan as the top source
of Taiwan's foreign direct investment. Chairman Hu noted that
Taiwan is more open towards cross-Strait exchanges than in the past,
and that both sides retain some barriers to cross-Strait economic
exchanges, just as the EU restricts a range of products from China.

11. (SBU) During a dinner on October 24, Wu Rong-I, President of
Taiwan Futures Exchange and former Vice Premier in the Chen
Administration, criticized the ECCT Paper and press conference. He
said the Europeans had no ground for describing Taiwan's economic
prospects in such bleak terms. As the former head of Taiwan
Institute of Economic Research and a leading professor of economics,
Wu's views are based on a sound understanding of economics.
However, Wu is also widely known for his strong support of a
separate Taiwan identity and for pushing a cautious policy on
engaging economically with China. While Vice Premier, he publicly
called on the Taiwan business community to invest in markets other
than China and to be wary of becoming overly dependent on ties with
China.

COMMENT
-------


TAIPEI 00003723 003 OF 003


12. (SBU) The ECCT report echoes this year's AmCham report in
providing strong economic reasons why Taiwan should normalize
relations with China. China's pending free trade agreements with
ASEAN and other regional economies make the arguments even more
compelling: to preserve its economic prosperity and growth Taiwan
needs to normalize relations with China. However, the ECCT report
does not address the implications for EU and U.S. economic and other
interests of an ASEAN plus China, plus Taiwan free trade area that
excludes the EU and U.S., nor does it address the strategic
implications of a Taiwan business community convinced (by the U.S.
and the EU) that its economic interests are best served by closer
alignment with China.

YOUNG

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