Cablegate: Taiwan: Time to Move Forward On a Bilateral

VZCZCXYZ0527
PP RUEHWEB

DE RUEHIN #2536/01 3320904
ZNR UUUUU ZZH
P 280904Z NOV 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC PRIORITY 7459
INFO RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS AIT TAIPEI 002536

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, STATE FOR EAP/TC AND EEB/IFD/OIA; USTR FOR
STRATFORD AND KATZ, COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD TW
SUBJECT: TAIWAN: TIME TO MOVE FORWARD ON A BILATERAL
INVESTMENT AGREEMENT

REF: A. A) TAIPEI 2505
B. B) TAIPEI 2303

Summary
-------------
1. (SBU) U.S. investment flows into Taiwan are significant
and accelerating. With both of Taiwan's presidential
candidates calling for more economic opening to China, we
expect even greater interest by U.S. firms in Taiwan. While
U.S. firms see a number of investment opportunities in
Taiwan, they cite critical problems with the current
investment climate and are strong proponents of a bilateral
investment agreement. While bilateral discussions on a
possible bilateral investment agreement advanced this summer,
they have progressed little since early August. We see such
an agreement as key to further expanding U.S. access in a
number of major sectors in the Taiwan market.

U.S. Direct Investment Increasing Fast
--------------------------------------------- ------
2. (U) Taiwan, which attracted US$16 billion in U.S. direct
investment through 2006, remains a major destination for U.S.
investment. In 2006 alone, U.S. investments in Taiwan
increased by more than US$1.5 billion, according to USG
figures. The actual number is probably larger, since U.S.
firms are also likely investing in Taiwan via subsidiaries
outside the U.S. These investments are not captured in these
figures. (ref A)

3. (U) This year, U.S. direct investment appears to be
accelerating dramatically. Although we do not have U.S. data
split out from aggregate figures, in the first nine months of
this year, Taiwan has attracted $10 billion in foreign direct
investment (from all sources worldwide). According to local
investment contacts a significant portion is from U.S.
investors.

4. (SBU) We expect that these numbers will continue to grow
over the next few years. Regardless of who wins the
election, next May will bring a new Taiwan president with a
more open, pragmatic attitude toward cross-Strait economic
integration. Improved cross-Strait business links will
reinforce Taiwan's attractiveness as a destination for U.S.
investment, and we are likely to see an upswing in investment
activity and business opportunities for U.S. firms.

Problems with the Investment Climate
--------------------------------------------- -----
5. (U) Although Taiwan's investment climate is relatively
open to foreign investment compared with many economies in
the region, U.S. firms confront specific regulatory issues
that limit U.S. investors' ability to take full advantage of
business opportunities in Taiwan. In a number of sectors,
Taiwan has statutory limits on the participation of foreign
investors. Restricted lines of business include
telecommunications, radio and television broadcasting,
electricity, gas and water supply, air and water
transportation, air cargo and catering services, airport
ground services, truck leasing and rental, and parts of the
educational sector.

6. (SBU) Outside of these restricted sectors, Taiwan's
investment climate is sometimes less than ideal. Based on
the difficulties many U.S. and other foreign investors are
having in obtaining approvals, Amcham has expressed concern
about the transparency and predictability of Taiwan's
investment approval process.

7. (SBU) The most high-profile recent case is Carlyle
Group's failed bid for ASE, the world's largest semiconductor
packaging and testing firm. The regulator insisted that
differences over price scuttled the deal, but the deal fell
through only after the regulator delayed the deal for months.
This was likely due in part to the political sensitivity of
one of Taiwan's leading high tech firms being bought by
foreigners and facing the possibility of de-listing from the
Taiwan Stock Exchange. In another case, a cable television
investment was recently approved, but only after a six month
delay. Many of Taiwan's relatively new regulatory
commissions, not the relatively more experienced bureaucracy,
Amcham reps argue, are causing these problems. They have
claimed that the commissions "operate by press conference,
not by regulation."

Other Problems on the Agenda
-----------------------------------------
8. (SBU) Amcham is a strong advocate of a bilateral
investment agreement and hopes that bilateral investment

discussions will provide a context in which to raise a number
of regulatory difficulties faced by U.S. firms. These issues
include:

--Industry associations, without foreign participation,
exercise regulatory power. Taiwan industry associations,
such as the Bankers Association or the Securities Investment
Trust and Consulting Association, have been given regulatory
power to supplement official Taiwan regulators with respect
to approval of financial products, sanctions for regulatory
violations and other matters. Foreign firms are frequently
barred from leadership positions in these associations and
sometimes even from membership. U.S. firms have charged that
association leaders routinely formulate protectionist
policies at closed-door meetings with Taiwan officials.

--Limits on Capital Outflows. Although Taiwan's central bank
denies any such activity, U.S. financial services firms argue
that the bank uses its political leverage to informally
"discourage" American companies from providing
legally-permitted financial services. New offshore
investment funds registrations are delayed arbitrarily, and
the marketing of global investments is actively discouraged.
U.S. firms have a significant competitive advantage in
managing offshore portfolio investments. (ref B)

--Prohibition of PRC shareholders. Taiwan prohibits any
direct or indirect investment by a company having PRC
shareholders. U.S. firms applying for approval of a new
investment are often required to certify that none of its
beneficial owners is a PRC citizen or company. A U.S.
publicly listed company has no way to control or even to
know, who owns its shares.

--Visas and Work permits for key staff and managers. The
Council of Labor Affairs informally requires that a company
employ at least five Taiwan nationals for every non-citizen
it wishes to hire. Firms are also unable to hire foreign
staff with less than two years of experience, which means
that firms can not hire recent MBA graduates from abroad.
Significant barriers exist for companies wanting to bring PRC
citizen employees to Taiwan to work or as short-term business
visitors. This is a serious challenge to any firm with an
integrated regional operation.

Moving Forward on a BIA
----------------------------------
9. (SBU) The proposed bilateral investment agreement (BIA)
is the centerpiece of our efforts to expand market access and
business opportunities for U.S. firms under TIFA. Despite
encouraging progress earlier in the year, in which Taiwan
agreed in principle to the U.S. model agreement and tabled a
draft list of non-conforming measures (NCMs), recent progress
has been slow. Taiwan submitted an initial list of proposed
NCMs on June 15. Our last bilateral exchange occurred on
August 2 via DVC. Following that meeting, Taiwan submitted a
revised NCM list on August 10. There has been no substantive
exchange since that time. Washington has yet to comment on
Taiwan's draft list of NCMs.

10. (SBU) We are concerned that the current pace of
preparation and exchange will not allow our business
constituency to take full advantage of the opportunities
likely to be offered with the advent of the new Taiwan
administration. We would therefore like to work closely with
Washington to explore strategies for moving the BIA process
forward, possibly to include:

--accelerating the completion of the NCM review in Washington,

--scheduling a DVC before the Christmas/New Year holidays to
address Taiwan's NCMs and other pending U.S. concerns, and/or

--arranging a visit to Taiwan, probably in January, by USTR,
State, and other Washington-based staff to discuss investment
concerns with Taiwan and U.S. business counterparts in more
detail.

Comment
-------------
11. (SBU) No one from State or USTR has visited Taiwan to
address TIFA-related issues since June. We think that an
interagency visit in the next month or two would be useful,
including by many of those new to the Taiwan account from
USTR and State. In addition to finding a way forward on BIA
discussions, such a visit would be most welcome and add
traction to our efforts to advance the TIFA process in other
areas.

YOUNG

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