VZCZCXRO4537
RR RUEHCN
DE RUEHIN #0910/01 0790730
ZNR UUUUU ZZH
R 200730Z MAR 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 9187
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RUEHBJ/AMEMBASSY BEIJING 4911
RUESLE/AMCONSUL SHANGHAI 8505
RUEHHK/AMCONSUL HONG KONG 6106
RUEHGZ/AMCONSUL GUANGZHOU 9116
RUEHSH/AMCONSUL SHENYANG 5068
RUEHCN/AMCONSUL CHENGDU 1122

UNCLAS SECTION 01 OF 02 TAIPEI 000910 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO USTR 
DEPT FOR EAP/ TC 
USTR FOR TIM WINELAND 
 
E.O. 12958: N/A 
TAGS: ETRD ECON CH TW
SUBJECT: CROSS-STRAIT TRADE INTEGRATION UNBALANCED 
 
 
Summary 
------- 
 
¶1. (SBU) Taiwan's economic prosperity increasingly depends on trade 
with the PRC.  Growth in cross-Strait trade in 2005 outpaced growth 
in Taiwan's total trade.  Trade with the PRC accounted for 19 
percent of Taiwan's global trade up from 18 percent in 2004.  In 
addition, the PRC overtook the United States in September as 
Taiwan's second largest source of imports.  Taiwan manufacturers 
with factories in the Mainland as well as those who have stayed on 
the island depend on cross-Strait supply chains for production 
inputs.  The PRC consumer market is also increasingly important to 
Taiwan firms.  However, even as Taiwan grows more dependent on the 
PRC economy, trade data suggest that the reverse is not true. 
Cross-Strait trade accounts for only 6.4 percent of the PRC's global 
trade and its share continues to decline.  This unbalanced economic 
integration is one of the forces driving efforts in Taiwan to 
tighten cross-Strait economic restrictions under the slogan of 
"active management" as well as interest in a free trade agreement 
with the United States.  End summary. 
 
Cross-Strait Trade Outpacing Taiwan's Global Trade 
--------------------------------------------- ----- 
 
¶2. (U) Even though Taiwan's trade with the PRC grew more slowly than 
in 2004, it continued to outpace Taiwan's global trade performance 
in 2005.  Taiwan's total trade with the PRC grew 16 percent last 
year to US$ 71.7 billion, while Taiwan's total trade rose more 
modestly by 8.5 percent.  Cross-Strait trade growth in 2005 was 
lower than 2004's 33 percent growth.  However, along with Taiwan' 
overall trade, it accelerated toward the end of 2005 with 20 percent 
year-on-year growth in December. 
 
¶3. (U) The PRC was Taiwan's most important trading partner for the 
third year in a row, increasing its share of Taiwan's total trade to 
19 percent in 2005 from 18 percent the previous year.  In 
comparison, Japan accounted for 16 percent of Taiwan's total trade 
in 2005, and the United States accounted for 13 percent. 
 
¶4. (U) Taiwan's trade surplus with the PRC continued to grow in 
2005, rising to US$ 31.84 billion.  This marked 12.6 percent growth 
over Taiwan's US$ 28.28 billion trade surplus with the PRC in 2004. 
The PRC was Taiwan's largest export market for the fourth year 
running.  Taiwan exported goods worth US$ 51.8 billion to the PRC, 
accounting for 27.2 percent of Taiwan's total exports.  The United 
States, Taiwan's second largest export market, accounted for 15 
percent. 
 
PRC Overtakes U.S. in Exports to Taiwan 
--------------------------------------- 
 
¶5. (U) In 2005, the PRC was Taiwan's third largest source of 
imports.  Taiwan bought US$ 19.9 billion worth of imports from the 
PRC, up 19.5 percent from 2004.  The PRC accounted for 11 percent of 
Taiwan's total imports compared to Japan's 25.3 percent and the 
United States' 11.6 percent.  However, imports from the PRC 
surpassed those from the United States starting in September, 2005. 
By December, the PRC's share of Taiwan imports had increased to 12.3 
percent, US$185.9 million more than imports from the United States. 
In 2006, the PRC will likely be Taiwan's second largest source of 
imports.  Imports from the PRC have grown steadily despite Taiwan's 
restrictions on the importation of numerous PRC goods, especially 
agricultural products. 
 
Closely Integrated Supply Chains 
-------------------------------- 
 
¶6. (U) Most of the goods traded across the Strait in both directions 
are manufacturing inputs.  Taiwan's exports to the PRC are mainly 
processed for re-export to other markets, especially the United 
States, Japan and Europe.  Machinery, electrical equipment, and 
optoelectronics constituted nearly 60 percent of Taiwan's total 
exports to the PRC in 2005.  Most of Taiwan's imports from the PRC 
also consist of production inputs.  Machinery, electrical equipment, 
and optoelectronics made up 55 percent of Taiwan's total PRC imports 
in 2005.  These imported components are usually assembled together 
with parts made in Taiwan.  The statistics show that cross-Strait 
supply chains are closely integrated.  Manufacturers on each side 
take advantage of local strengths.  The PRC has cheap labor and 
 
TAIPEI 00000910  002 OF 002 
 
 
land; while Taiwan has advanced technology, abundant capital and 
stronger intellectual property protection. 
 
Consumer Goods Increasingly Important 
------------------------------------- 
 
¶7. (U) A growing demand from Chinese consumers for products made by 
Taiwan firms is expected to drive strong growth in Taiwan's exports 
in 2006 and provide a boost to Taiwan's economy as a whole.  Most 
Taiwan firms with factories in the PRC are export-oriented, but a 
growing number of them have begun to focus on the local market. 
According to Taiwan's Bureau of Foreign Trade, many Taiwan firms in 
the PRC export their products to Hong Kong and Macao and then 
re-import them back into the PRC local market.  This allows the 
firms to maintain the status of an export producer and continue to 
import production inputs duty-free.  The PRC authorities classify 
these shipments as "imports from China," which was the fourth 
largest source of imports into the PRC in 2005.  Growth in "China's 
Imports from China" was 42 percent in 2005, much higher than the 
PRC's 17.6 percent growth in total imports. 
 
¶9. (U) Imports of cheap, labor-intensive consumer goods from the PRC 
into Taiwan have also increased.  Many local industries feel 
threatened by these imports.  Recently, Taiwan initiated safeguard 
and anti-dumping investigations at the request local towel makers. 
 
PRC Less Reliant on Taiwan 
-------------------------- 
 
¶8. (U) China is a very important part of Taiwan's trade picture, but 
Taiwan is a relatively small player in the PRC's overall trade 
picture.  In 2005, Taiwan was the PRC's fifth largest trading 
partner, accounting for 6.4 percent of its global trade.  PRC 
exports to Taiwan in 2005 accounted for just 2.2 percent its global 
exports.  Moreover, the PRC's trade with Taiwan is not growing as 
fast as its global trade.  According to PRC trade data, which differ 
slightly from Taiwan's, cross-Strait trade grew by 16.5 percent 
compared to 23.2 percent growth in the PRC's global trade.  As a 
result, Taiwan's share of the PRC's total trade is declining. 
 
Comment - One-Way Integration 
----------------------------- 
 
¶9. (SBU) Cross-Strait trade data for 2005 show Taiwan's increasing 
reliance on the PRC for economic growth.  The PRC consolidated its 
position as Taiwan' most important trade partner in 2005.  Local 
Taiwan manufacturers depend on Taiwan factories in the Mainland to 
drive their export growth and increasingly depend on imports from 
the PRC for components.  Even Taiwan's firms in the PRC are more 
dependent on the local PRC market.  On the other side of the Strait, 
Taiwan's relatively small and declining share of the PRC's global 
trade indicate that the PRC is becoming less dependent on trade with 
Taiwan.  This unbalanced economic integration has increased the 
perception among some in Taiwan that close cross-Strait economic 
relations are a threat to Taiwan.  It is one of the forces driving 
efforts to tighten cross-Strait economic restrictions under the 
slogan of "active management" as well as the Taiwan government's 
interest in diversifying its economy through a free trade agreement 
with the United States.  End comment. 
 
YOUNG