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Cablegate: Hsieh Outlines a Pragmatic Economic Policy

VZCZCXRO1187
PP RUEHCN RUEHGH RUEHVC
DE RUEHIN #2461/01 3120925
ZNR UUUUU ZZH
P 080925Z NOV 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC PRIORITY 7344
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHBK/AMEMBASSY BANGKOK 3881
RUEHBY/AMEMBASSY CANBERRA 4641
RUEHML/AMEMBASSY MANILA 0191
RUEHGP/AMEMBASSY SINGAPORE 7054
RUEHKO/AMEMBASSY TOKYO 9229
RUEHWL/AMEMBASSY WELLINGTON 1907
RUEHCHI/AMCONSUL CHIANG MAI 0324
RUEHHM/AMCONSUL HO CHI MINH CITY 0152
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 TAIPEI 002461

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
ALTBACH, TREASURY FOR OASIA/TTYANG, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL PGOV TW
SUBJECT: HSIEH OUTLINES A PRAGMATIC ECONOMIC POLICY

TAIPEI 00002461 001.2 OF 003


1. (SBU) SUMMARY. During a November 8 presentation to the
American Chamber of Commerce in Taipei, DPP presidential
candidate Frank Hsieh (Chang-ting) balanced an emphasis on
Taiwan's underlying "sovereignty" with an espousal of greater
economic openness. He called for strengthening the
manufacturing sector, liberalizing tax policy and capital
markets to increase Taiwan's international competitiveness,
and boosting tourism. On cross-Strait economic policy, Hsieh
advocated establishing regular charter flights and easing
investment restrictions, including allowing Chinese
investment in Taiwan. In response to a question, Hsieh hailed
Taiwan's close economic relationship with its American "best
friend," and called for a regular high-level policy dialogue
with the U.S. and a bilateral free trade agreement. END
SUMMARY.

------------------------------------
Support for the manufacturing sector
------------------------------------
2. (SBU) Opening his remarks by speaking in slightly halting
English, Hsieh stressed the DPP's "focus on national
security", said "nothing is more important than protecting
the sovereignty of Taiwan's status quo," and identified
"national identity" issues as "extremely important."
Shifting to Mandarin, he described his economic platform as a
"golden triangle" combining economic prosperity, sustainable
development, and social justice, and said his remarks would
focus on the first of the three. In Hsieh's view, Taiwan's
economic policy should not focus solely on GDP growth at the
expense of developing key industries, and he identified
biotechnology and biomedical services as among the new
sectors on which Taiwan should focus. Taiwan industry, he
explained, should use enhanced IPR protection and advanced
technology to move beyond original equipment manufacturing
(OEM) and expand its presence in high value-added industries.

3. (SBU) Asserting that Taiwan's manufacturing sector has
been declining too rapidly, Hsieh argued that although
manufacturing now accounts for only about 23% of Taiwan's
GDP, the sector plays a disproportionately more important
role in employment. The authorities, he said, should create
an environment in which technology, capital, and labor can
help support the manufacturing sector. According to Hsieh,
manufacturing sector job loss has helped make Taiwan an
"M-shaped" society of increasing social disparity and a
weakening middle class. Worsening social equality, he
continued, can be blamed on the policy inadequacies of both
the KMT and the DPP over the past twenty years.

--------------------------------------------
Financial, tourism, and development policies
--------------------------------------------
4. (SBU) Hsieh supported shifting tax policy from a focus on
"fairness" to an emphasis on "competitiveness," and should
look to Hong Kong, Singapore, and South Korea as models.
Specifically, he advocated resolving double taxation
problems, reducing inheritance and gift taxes, and attracting
capital back to Taiwan by pardoning previous infractions
involving overseas investments not legally registered with
the authorities. An 18-24 month amnesty period should apply
to all who have not fully reported their overseas
investments, explained Hsieh, and not only those who have
invested in China. Hsieh underscored the importance of
strengthening Taiwan's capital markets, which he described as
"very weak," despite the relatively good performance of the
stock market. Taiwan should attract a greater number of
IPOs, he added, and allow the stock market to increase its
links with global counterparts. Hsieh bemoaned the fact
that, despite massive foreign exchange reserves, Taiwan runs
a capital account deficit.

5. (SBU) Calling for expansion of the Taiwan tourism sector,
Hsieh said he would support allowing up to 1,000 Chinese
tourists a day to visit Taiwan for stays of up to ten days.
As part of a comprehensive policy to stimulate domestic
demand, Hsieh advocated improving public infrastructure.
Such efforts should not, however, necessarily focus on the

TAIPEI 00002461 002.2 OF 003


highways, industrial plants, and other large public projects
of the past, but should instead concentrate on more
environment-friendly areas such as flood control and care for
children and the elderly. Hsieh also mentioned the
importance of reducing the urban/rural development gap.

---------------------------------
Cross-Strait economic integration
---------------------------------
6. (SBU) Returning to English as he began his remarks on
cross-Strait economic policy, Hsieh said he would adopt a
"more open attitude," but also observed that "protecting the
sovereignty of Taiwan's status is more important than many
things," and said cross-Strait economic integration must not
proceed to the point that "Taiwan becomes a local government
of the PRC." Instead, he stated, Taiwan should "combine
openness with individuality." Hsieh said he supported direct
cross-Strait flights, but added that such flights should
begin as charter flights during holidays, and then gradually
expand in frequency. "Charter" status will help avoid bitter
disputes over whether the flights are "domestic" or
"international", he added, before observing that "both sides
are too preoccupied with ideology and need to be more
practical" on the issue.

7. (SBU) Hsieh said he would "welcome foreign capital to
Taiwan," including investment from China. Investment must be
"based on the principle of mutual benefit," and if Taiwan
businesses and investors can go to China, then a similar flow
should be possible in the other direction. Taiwan's strong
"rule of law" would help address concerns about Chinese
investors buying up the island, he added. In Hsieh's view,
Taiwan should relax the current 40 percent-of-net worth limit
on companies' investment in China, but must also retain
"active management" and review investments on a case-by-case
basis, rather than allow what he characterized as the KMT's
proposed "wide open" policy. In national defense,
agriculture, and other sensitive sectors, technology transfer
to China must be carefully regulated. Industry
representatives should take part in the transfer evaluation
process, said Hsieh.

8. (SBU) During a brief question and answer session after his
remarks, Hsieh responded to a query about Taiwan's lack of
bipartisanship by saying that, if elected, he would like to
form a coalition government. He predicted that neither the
DPP nor the KMT would be able to win an outright majority in
the LY. Answering a question about apparent discrepancies
between Hsieh's relatively liberal cross-Strait economic
policy and Chen Shui-bian's more conservative views, Hsieh
promised that if elected he would move ahead on cross-Strait
economic integration, despite expected political pressures.
In response to another question, Hsieh expressed general
support for the concept of a bureaucratic "one stop shop" for
Taiwan-based investors doing business on the mainland. In
reply to a query on how Taiwan can maintain a vibrant
manufacturing sector in the face of low-cost regional
competition, Hsieh acknowledged the long-term trends that
favor moving manufacturing to cheaper locations offshare, but
argued that Taiwan's manufacturing sector has eroded too
quickly, and must adapt by increasing value-added.

-----------------------
Relations with the U.S.
-----------------------
9. (SBU) Replying to a final question on the U.S.-Taiwan
economic relationship, Hsieh noted that the U.S. remains a
leading export market for Taiwan, especially because many
Taiwan-owned factories in China rely on American demand. The
U.S. and Taiwan enjoy a "very close" economic relationship,
he continued, and the U.S. is Taiwan's "best friend." Hsieh
called for establishing a regular series of high-level
U.S.-Taiwan exchanges to exchange ideas and ensure openness
in economic and other policy areas, and also expressed
support for a bilateral free trade agreement (FTA).

10. (SBU) COMMENT. Hsieh's speech was clearly designed to

TAIPEI 00002461 003.2 OF 003


appeal to the local as well as foreign business sector.
Relaxed and confident, he appeared to be aware that the
largely business-oriented audience was most interested in
hearing about cross-Strait and other economic liberalization
issues, and tailored his remarks accordingly. In elaborating
on his own cross-Strait policy views, Hsieh also sought to
distinguish his positions from those of the current
administration. He came across as pragmatic, engaged, and
comfortable with his economics brief. END COMMENT.

YOUNG

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