Cablegate: Trade Figures Signal Economic Improvement

VZCZCXRO6904
RR RUEHGH RUEHHM
DE RUEHIN #1622/01 2000855
ZNR UUUUU ZZH
R 190855Z JUL 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6063
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3765
RUEHBJ/AMEMBASSY BEIJING 7039
RUEHUL/AMEMBASSY SEOUL 8776
RUEHGP/AMEMBASSY SINGAPORE 6943
RUEHKO/AMEMBASSY TOKYO 8931
RUEHML/AMEMBASSY MANILA 0101
RUEHJA/AMEMBASSY JAKARTA 4099
RUEHKL/AMEMBASSY KUALA LUMPUR 3779
RUEHHI/AMEMBASSY HANOI 3348
RUEHBY/AMEMBASSY CANBERRA 4557
RUEHWL/AMEMBASSY WELLINGTON 1827
RUEHHM/AMCONSUL HO CHI MINH CITY 0108
RUEHHK/AMCONSUL HONG KONG 8285
RUEHGH/AMCONSUL SHANGHAI 1234
RUEHGZ/AMCONSUL GUANGZHOU 0411

UNCLAS SECTION 01 OF 03 TAIPEI 001622

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH and Stratford
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 AND NY FRB MARIA
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR ETRD TW
SUBJECT: Trade Figures Signal Economic Improvement

SUMMARY
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1. In the first half (H1) of 2007, Taiwan's exports grew faster
than imports, leading to a 36% increase in the trade surplus.
Imports of capital goods in the second quarter (Q2) shifted to
growth, signaling an increase in domestic investment. Higher energy
prices in June drove up Taiwan's imports from oil producing
countries. While Greater China (PRC and Hong Kong) remained
Taiwan's largest trading partner in H1 of 2007, trade with Vietnam
and India gained in relative importance. END SUMMARY.

Trade Surplus Broadened
-----------------------

2. In H1 of 2007, Taiwan's trade surplus increased 36% from the
same period a year ago to US$10.5 billion, as exports continued to
grow faster than imports. Taiwan's exports in the six-month period
grew 7.5% from a year ago to US$113.9 billion, while its imports
rose 5.3% to US$103.4 billion, according to statistics recently
published by the Ministry of Finance.

Accelerating Import Growth
--------------------------

3. Import growth accelerated from a y-o-y 3% in Q1 to 7% in Q2.
The Q2 growth rate for materials and semi-finished goods, which
account for three-quarters of Taiwan's total imports, rose to 8%, an
indicator of growing demand for production inputs by the island's
export sector. Expansion of manufacturing capacity has prompted
imports of capital goods to shift from a decline of 2% in Q1 to
growth of 7.6% in Q2. Capital goods accounted for 16% of Taiwan's
total imports.

Crude Oil Price Hikes
---------------------

4. Crude oil prices, after declining early this year, began to rise
in June and exceeded US$70 per barrel in mid-July. Consequently,
Taiwan's imports from the United Arab Emirates, Saudi Arabia, and
Iran in June surged 45% from a year ago to US$1.7 billion. In the
first five months, the value of crude oil imports declined 14%.

Trade with Greater China
------------------------

5. Greater China is Taiwan's largest trading partner. In H1 of
2007, Greater China took 40% of Taiwan's total exports, far more
than the 13.5% share for the United States, 14% for ASEAN, and 11%
for the European Union. Taiwan's exports to China are principally
production inputs required by Taiwan firms operating in China.
Machinery and optoelectronic equipment accounted for 60% of Taiwan's
total shipments to Greater China, while materials and semi-finished
goods occupied another 30-35%.

6. Greater China replaced the United States as the second largest
source of Taiwan's imports in 2005. In H1 of 2007, 14% of Taiwan's
imports came from Greater China, less than the 21% from Japan but
more than the 12% from the United States. Taiwan's imports from
China are basically cheap consumer goods and parts/components which
are re-exported after simple processing into finished goods.

7. Taiwan's chronic trade surplus with Greater China increased to
US$31 billion in H1 of 2007, triple Taiwan's global trade surplus of
US$10.5 billion.

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USA Remains Major Market for Taiwan Firms
-----------------------------------------

8. The United States was still a major market for Taiwan companies,
although the U.S. share of Taiwan's exports in H1 of 2007 declined
to 13.5% from 14.6% a year earlier and from nearly 50% 20 years ago.
One main cause behind the drastic decline has been many Taiwan
firms' relocation of their export bases to China. Many of them
receive orders in Taiwan and ship the products directly from their
factories in China.

9. The United States remains a major supplier of grains, beef,
production inputs and production technologies to Taiwan. However,
technology transfer over the past five years has reduced Taiwan's
reliance on imports from the United States. Even so, Taiwan is
still a major importer of U.S. corn, wheat, soybeans, and beef.
Consequently, the U.S. share of Taiwan's imports in H1 of 2007 was
12%, slightly up from 11% a year ago but far less than 18% in 2000.

10. Taiwan enjoyed a chronic trade surplus with the United States.
However, the trade surplus in H1 of 2007 dropped 44% to US$2.8
billion from a year ago, resulting from a 19% growth in imports and
a 1% decline in exports to the United States. The 19% growth in
imports from the United States could be attributed to shipment of
three jumbo jets, semiconductor manufacturing equipment, and
chemical goods.

Japan: Taiwan's Major Source of Imports
---------------------------------------

11. In its trade with Japan, Taiwan's large chronic trade deficit
declined 7.4% in H1 of 2007 to US$14 billion. Taiwan's exports to
Japan inched up 2% from a year ago to US$8 billion. However,
Taiwan's imports declined 4% to US$22 billion because some
production inputs and technologies from Japan were substituted by
sources from the United States and Europe as semiconductors and
optoelectronics emerged as the backbone of Taiwan's industrial
sector over the past ten years. Consequently, Japan's share of
Taiwan's imports in H1 of 2007 declined to 21% from 23% a year
earlier. Japan's share in the mid-1990s was 30%.

Two Emerging Trading Partners: Vietnam and India
--------------------------------------------- ---

12. Taiwan enjoyed an increase in its trade surplus with Vietnam
from US$1.8 billion in 2002 to US$4 billion in 2006.

13. In H1 of 2007, Taiwan's exports to Vietnam increased 28% from a
year ago to US$3 billion, while its imports from Vietnam rose 26% to
US$0.5 billion. Vietnam has become Taiwan's sixth-largest export
market, rising steadily from 15th in 2000. Gasoline, diesel fuel,
and other fuel represented 26% of Taiwan's total exports to Vietnam,
while machinery, iron & steel, plastics, man-made fibers, and
organic chemicals accounted for another 35%.

14. Taiwan's efforts to promote trade with India have also paid
off. Over the past four years, Taiwan's exports to and imports from
India both grew average of 24% per year. In H1 of 2007, Taiwan's
exports to India surged 73.5% from a year ago to US$1.1 billion,
while its imports from India shot up 62% to US$0.9 billion.

15. India was Taiwan's 16th export market and 12th largest source
of imports. About 80% of Taiwan's exports to India in H1 of 2007
were machinery, electrical & electronic equipment, organic
chemicals, plastics, and fuel. Diesel fuel accounted for 10% of
Taiwan's exports to India. Meanwhile, three-quarters of Taiwan's

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imports from India were naphtha minerals, copper, organic chemicals,
iron & steel, and cotton.

COMMENT
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16. Taiwan turned in a solid trade performance in the first half of
2007. The double-digit rise in export orders signals that the good
news should continue throughout the rest of the year. Even though
China makes up an ever-larger percentage of Taiwan's total trade,
Taiwan still relies heavily on the U.S. market, even if much of what
Taiwan firms sell to the U.S. is shipped from Taiwan-owned factories
in China, and, increasingly, from Taiwan-owned factories in India
and Vietnam.

YOUNG

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