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UNCLAS SECTION 01 OF 04 TAIPEI 000243 
 
SIPDIS 
 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
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:  UNEXPECTED Q4 TAIWAN TRADE SURPLUS PUSHES UP GDP 
 
SUMMARY 
------- 
 
¶1.  As recently as November, Taiwan's official data 
projected a sharp decline in the overall trade surplus. 
However, an unexpected expansion of Taiwan's 2005 trade 
surplus will likely push up real GDP for 2005 and lays the 
basis for growth in 2006.  Exports enjoyed accelerated 
growth as developed nations sought to replenish declining 
inventories.  Import growth slowed in 2005 as firms 
dramatically slowed investment for expansion of industrial 
capacity.  Taiwan's industrial relocation offshore led to 
increases in exports to Greater China and ASEAN and a 
leveling-off of shipments to the United States and Europe. 
Taiwan's trade relationship with Greater China is a key 
factor in maintaining its overall trade surplus.  END 
SUMMARY. 
 
Trade Surplus Grows Unexpectedly 
-------------------------------- 
 
¶2.  Taiwan's 2005 trade surplus expanded an unexpected 27% 
from last year to reach US$7.78 billion.  As recently as 
November, the Directorate General of Budget, Accounting and 
Statistics (DGBAS) predicted that the 2005 trade surplus 
would shrink 24% to US$4.66 billion, and the Taiwan 
Institute of Economic Research (TIER) anticipated that the 
trade surplus would shrink 5% to US$5.8 billion.  The full 
year figures for 2005, though, show that Taiwan's exports 
grew 8.8% from 2004 to US$189.39 billion, while its imports 
rose 8.2% to US$181.61 billion. 
 
Trade Performance Unexpected in Q4 of 2005 
------------------------------------------ 
 
¶3.  Trade performance in Q4 of 2005 far exceeded 
expectations.  Exports in Q4 grew 14.2% from a year ago, 
higher than the 13% growth estimated in November 2005 by the 
DGBAS.  The 14.2% export growth in Q4 was also higher than 
the 12.9% growth projected by TIER.  Meanwhile, Taiwan's 
imports in Q4 inched up 0.9%, far less than the 6.6% growth 
estimated by the DGBAS and the 4% growth expected by the 
TIER. 
 
¶4.  Double-digit growth in exports, together with imports 
leveling-off, drove Taiwan's trade surplus in Q4 of 2005 to 
a new high of US$5.85 billion.  This performance allowed the 
annual figure to make up ground on the practically balanced 
trade picture for the last four quarters.  Q4 of 2004 
produced a US$0.2 billion deficit, while Q1 and Q2 this year 
showed trade surpluses of US$0.28 billion in Q1 and US$0.13 
billion, respectively. 
 
Export Sector Benefits from Asian Integration 
--------------------------------------------- 
 
¶5.  Declining inventory stocks in developed nations and 
Asian economic integration contributed to export growth in 
Q4.  Depletion of excess inventories in developed countries, 
which began to build up in late 2003 and early 2004, 
contributed to accelerated growth in export orders received 
by Taiwan in 2005 from 15% in Q2 to 23% in October and 
November.  The y-o-y growth in orders from the United States 
rose from 5.9% in Q2 to 14% in Oct.-Nov.  Meanwhile, the 
growth rate in export orders from Europe increased from 15% 
to 31.6%.  Export orders from Japan in the first 11 months 
of 2005 were 37% higher than the same period of 2004. 
 
Accelerated Growth in Exports to Asian Nations 
--------------------------------------------- - 
 
¶6.  Taiwan manufacturing firms also increased production of 
export orders in overseas locations (mainly in China and 
Southeast Asia) from 37% to 43% in 2005.  Consequently, 
double-digit growth in export orders last year has been 
translated into an accelerated growth in Taiwan's 2005 
exports (mainly production inputs) to Greater China (Hong 
Kong and China) from 8% in Q1 and 5.5% in Q2 to 23% in Q4. 
Growth in exports to ASEAN also accelerated from less than 
ten percent in Q1 to exceed 20% in Q4. 
 
Shipments from Taiwan to Developed Markets Leveling off 
--------------------------------------------- ---------- 
 
¶7.  As Taiwan firms' increasingly rely on offshore 
production bases, goods shipped directly from Taiwan to 
markets in the United States and Europe did not enjoy the 
same accelerated growth that export orders experienced. 
Exports to Europe in 2005 contracted 0.8% from 2004, while 
exports to the United States in 2005 inched up only 1.4%. 
By quarter, exports to the United States even reversed from 
a y-o-y growth of 7% in Q1 to a contraction of 2.2% in Q3 
and a moderate growth of 0.8% in Q4.  Japan was an exception 
to this pattern as Taiwan's exports to Japan grew ten 
percent in 2005, higher than the average of 8.8% growth in 
exports to the world. 
 
Export Share: More to Greater China, Less to USA 
--------------------------------------------- --- 
 
¶8.  This leveling-off of exports to OECD countries 
contributed to declines in percentage shares of exports to 
these markets.  Taiwan's exports to the United States in 
2005 totaled US$28.5 billion, equivalent to 15% of its 
exports to the world, down from 16.2% in 2004 and 32% in 
¶1990.  The share of exports to Europe also declined from 18% 
in 1990 to 13.5% in 2004 to 12.3% in 2005. 
 
¶9.  Accelerated growth in exports to East Asia has, of 
course, contributed to an increase in the share of exports 
to Greater China from 13% in 1990 to 37% in 2004 and 39% in 
¶2005.  The export share to ASEAN also rose from less than 
ten percent in 1990 to 13% in 2004 and nearly 14% in 2005. 
 
Changing Export Composition 
--------------------------- 
 
¶10.  Electronics, the backbone of Taiwan's manufacturing 
sector, enjoyed better export sales in 2005, while 
information and telecommunication (IT) products continued to 
contract due to industrial relocation.  Growth in exports of 
electronic parts and components in 2005 accelerated from 
below 5% in Q1 and Q2 to 26% in Q4.  Optical components 
(including liquid crystal display (LCD) panels) moved from a 
negative growth in Q2 to expanding in Q3, and the y-o-y 
growth rate in Q4 reached 80% in Q4.  Electronic 
parts/components and optical components in 2005 increased to 
31% of Taiwan's total exports from 29% in 2004. 
 
¶11.  These electronics products expanded at the expense of 
IT goods as those assembly lines have relocated to China. 
Consequently, IT exports in 2005 dropped 18%, even as Taiwan 
firms saw orders for IT products grow 23% in the first 11 
months this year.  IT products' export share in 2005, 
therefore, declined to 5.5% from 7.4% in 2004. 
 
¶12.  Higher petroleum costs have driven up prices of 
petrochemical and plastic products.  Consequently, 
petrochemical exports in 2005 grew 28% to US$9.86 billion, 
and exports of plastic products increased 16.5% to US$12.5 
billion.  The export share for these two categories in 2005 
rose to 13% from 11.6% in 2004. 
 
2004 Capacity Overexpansion Slows Import Growth in 2005 
--------------------------------------------- ---------- 
 
¶13.  Brisk export sales after the SARS crisis in early 2003 
prompted Taiwan's manufacturing sector to start a new round 
of production capacity expansion that has now slowed to a 
crawl.  Private investment reversed from a decline of 0.3% 
in 2003 to grow by 31% in 2004.  The y-o-y growth in imports 
of capital goods even shot up to 55% in Q2 of 2004. 
Overexpansion contributed to an increase in excess 
production capacity in early 2005.  Facility utilization 
rates for semiconductor plants declined from 100% in early 
2004 to 60-75% in Mid-2005, and the average ratio for liquid 
crystal display (LCD) factories also fell from 100% to 75%. 
 
¶14.  Correspondingly, manufacturing plants dramatically 
slowed investment in 2005 in order to better utilize their 
existing facilities.  As a result, private investment growth 
slowed steadily from 38% in Q2 of 2004 to 9% in Q2 of 2005. 
Private investment even contracted in the second half of 
2005, down 2% in Q3 and down 3.2% in Q4. 
 
¶15.  Imports have reflected the investment trend, with a 
steady slowdown in import growth from 40% in Q2 of 2004 to 
0.9% in Q4 of 2005.  Imports of capital goods even 
contracted in the second half of 2005, with the rate of 
decline accelerating from -4% in Q3 to -23% in Q4.  Capital 
goods accounted for 17% of Taiwan's total imports in 2005. 
 
China Replaces USA as 2nd Largest Source of Imports 
--------------------------------------------- ------ 
 
¶16.  While Taiwan increases its exports (mainly production 
inputs) to China, Taiwan also increases its imports from 
China in the process of cross-Strait economic integration. 
Imports from China are partly used as inputs for re-exports 
after simple assembly.  Taiwan's accession to the World 
Trade Organization in early 2002 has also contributed to an 
increase in Taiwan's imports of labor-intensive consumer 
goods from China. 
 
¶17.  Taiwan's imports from China in 2005 grew 19.5% from 
2004 to reach US$19.9 billion.  China supplied 11% of 
Taiwan's imports in 2005, up from 10% in 2004.  In contrast, 
the share of imports from the United States declined from 
13% in 2004 to 11.6% in 2005.  China has surpassed the 
United States to become the second largest source of 
Taiwan's imports in September when the import share from 
China was 10.6% vs. the 10.1% for imports from the United 
States.  The gap between the import shares for these two 
sources broadened in December 2005 to 12.3% for imports from 
China vs. 11% for imports from the United States. 
 
Higher Petroleum Import Cost 
---------------------------- 
 
¶18.  Raw materials and semi-finished goods account for over 
70% of Taiwan's total imports.  Over the past two years, 
higher petroleum prices have had the single biggest impact 
on Taiwan's trade account than any other products. 
Petroleum imports in 2005 surged 40% to US$18.2 billion, and 
this category's share of total imports in 2005 increased to 
10% from 7.8% in 2004 and only 6% in 2002.  Saudi Arabia and 
Kuwait have been Taiwan's two major sources of petroleum. 
Oil imports from these two countries in 2005 shot up 41% to 
reach US$11.7 billion.  Imports of raw materials and semi- 
finished goods in 2005 grew 10% from 2004 to US$130.1 
billion. 
 
Private Consumption Remains Strong 
---------------------------------- 
 
¶19.  Private consumption remained stable in 2005.  Imports 
of consumer goods in 2005 grew 14% to US$15.7 billion. 
Consumer goods accounted for 10% of total imports in 2005, 
up from 8% in 2004. 
 
COMMENT 
------- 
 
¶20.  As recently as January 16, TIER was projecting that 
Taiwan's 2005 real GDP would be 3.54% and that growth in 
2006 would be about 4%.  The unexpected growth in the trade 
surplus in Q4 may push up Taiwan's growth to about 4% for 
2005 and may lay the basis for even higher projections for 
¶2006. 
 
¶21.  Apparently, expansion of cross-Strait trade has 
substantially benefited Taiwan's economy.  Absent the trade 
surplus of US$50 billion with Greater China, Taiwan would 
have run a global trade deficit in 2005.  Without cross- 
Strait trade, Taiwan might well have begun to experience 
trade deficits in the 1990s. 
 
PAAL