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P 312336Z MAY 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC PRIORITY 0422
INFO RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001843 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/RSP/TC, STATE PASS USTR FOR DEPUTY USTR 
BHATIA FROM DIRECTOR YOUNG 
 
E.O. 12958: DECL: 05/26/2031 
TAGS: ECON TW
SUBJECT: DUSTR BHATIA'S MEETING WITH NSC SEC-GEN CHIOU 
 
REF: TAIPEI 1727 
 
Classified By: Director David J. Keegan reasons: 1.4 B/D 
 
¶1.  (C) Summary:  National Security Council Secretary General 
Chiou I-jen told Deputy USTR Bhatia that President Chen 
values highly Taiwan's friendship and close economic 
partnership with the U.S.  He is eager to put the recent 
transit problems behind him.  Chiou said Taiwan's efforts to 
improve economic links with China had been frustrated by 
Beijing's insistence on the "One China" principle.  A 
U.S.-Taiwan FTA would pressure China to become more flexible 
in negotiating expanded cross-Strait links with Taiwan, Chiou 
said, and it would reassure other south Asian countries that 
an FTA with Taiwan was feasible.  Ambassador Bhatia urged 
Taiwan to refrain from politicizing the FTA issue and to 
focus instead on cooperative efforts that would yield 
tangible economic benefits.  He also stated that although an 
FTA was not possible now, he was not taking it off the table 
for the future.  Taiwan and the U.S. should concentrate now 
on meaningful, incremental steps to strengthen their economic 
ties.  Assistant USTR Stratford noted there is little support 
in the U.S. business community for a Taiwan FTA because 
Taiwan is small and its economy is not well-integrated with 
China or the larger ASEAN market.  If Taiwan is able to 
remove travel and transport limitations into the PRC, Bhatia 
said, Taiwan's competitiveness and attractiveness as a 
regional center for U.S. business operations could both 
increase.  This could in turn increase U.S. business support 
for a Taiwan FTA.  End Summary. 
 
¶2.  (C) On May 25, Deputy USTR Bhatia, Assistant USTR 
Stratford, and AIT Director Steve Young met with National 
Security Council Secretary General Chiou I-jen, Vice Minister 
of Economic Affairs Steve Chen, and NSC Senior Advisor Connie 
Yang.  Sec-Gen Chiou said President Chen and the DPP 
government valued their close friendship and economic 
relationship with the U.S.  Chiou remarked that President 
Chen had stressed the importance of the TIFA talks to his 
senior staff well before the transit incident had occurred, 
and was hopeful that lingering difficulties from the transit 
issue would pass quickly. 
 
"One China" Principle Stalemates Economic Progress 
--------------------------------------------- 
 
¶3. (C) Taiwan has tried repeatedly to engage the PRC to 
liberalize cross-Strait economic links, Chiou said, only to 
be stymied by PRC insistence on the "One China" principle. 
The Macau model is not stable, he continued, but Taiwan is 
hopeful that it can be used to reach at least a partial 
agreement on direct passenger flights within the year.  Chiou 
said it is possible the two sides could reach agreement on 
"special" cargo charter flights as well.  Ambassador Bhatia 
responded that, from an economic standpoint, direct transport 
links would enable Taiwan businesses to get to their largest 
market in less than six hours, as well as provides additional 
multiplier benefits.  Ambassador Bhatia also suggested that 
U.S. carriers might be interested in entering this potential 
market and offered USTR assistance to find out.  Chiou said 
he hoped the USG would urge the PRC to speed negotiations on 
direct cross-Strait air links. 
 
¶4.  (C) Ambassador Bhatia remarked that strong cross-Strait 
economic relations are important and beneficial to both 
Taiwan and the PRC.  He told Chiou that he had pushed this 
point with Beijing during his recent visit.  Chiou said he 
believes the PRC understands the mutual advantage of improved 
economic links.  Ambassador Bhatia opined that, if direct 
cross-Strait flights do go through, Taiwan should push for 
the inclusion of third-country nationals.  Chiou said the PRC 
is opposed to allowing third-country nationals or airlines to 
fly, for fear the flights could be billed as "international." 
 Director Young asked rhetorically why flights between 
Beijing and Taipei should be treated any differently than 
flights between Beijing and Tokyo or Beijing and Guangzhou. 
Chiou said the problem is PRC politics; for example, Beijing 
has halted cross-Strait flights discussions over taxation 
questions, arguing that since China and Taiwan are the same 
country, there was no need to discuss taxation schemes. 
 
¶5.  (C) Ambassador Bhatia commended Taiwan for finding 
creative ways to preserve its competitiveness despite 
cross-Strait difficulties.  He said Taiwan must now improve 
and expand its links to China if it wishes to remain 
competitive vis-a-vis other south Asian countries with strong 
ties to the Chinese economy.  The U.S. is willing to help 
Taiwan where it can, he continued but many issues can only be 
resolved by Taiwan and China.  Chiou repeated his hope that 
 
TAIPEI 00001843  002.2 OF 003 
 
 
the U.S. would push China to be more flexible in its dealings 
with Taiwan on cross-Strait economic issues, and noted that 
Chinese efforts to marginalize Taiwan economically have only 
increased the difficulty of finding middle ground.  Taiwan is 
less confident of proposing new ideas, said Chiou, because it 
is preoccupied with preserving what economic space it has, 
and for this reason needs U.S. help to soften China's 
resistance. 
 
Taiwan-PRC Economic Integration Could Attract US Business 
--------------------------------------------- ------------ 
 
¶6.  (C) Ambassador Bhatia responded that in reality Taiwan's 
economy was doing quite well, with exports to both the PRC 
and the U.S. continuing to grow.  Nonetheless, the US 
understands Taiwan's concerns about economic marginalization, 
and is willing to grow its economic relationship with Taiwan. 
 Bhatia said an FTA could not be contemplated at this time, 
with only one year left of fast-track Trade Promotion 
Authority left, but would not rule it out for future 
discussions.  Bhatia also explained that in the current U.S. 
political environment, even straightforward trade agreements 
like CAFTA are controversial, and to have any chance of 
passage, an FTA must promise clear economic benefits and 
attract broad political support.  Moreover, Bhatia said, to 
secure passage of a Taiwan FTA it is essential that it have 
broad support from the U.S. business community, which it does 
not have now. 
 
¶7. (C) Assistant USTR for China Affairs Timothy Stratford 
explained the two reasons why there is little demand among 
the American business community for a Taiwan-U.S. FTA. 
First, U.S. Businesses want access to the large Asian market, 
of which China is the largest part.  Because Taiwan is not as 
well-integrated into the Asian marketplace as other 
countries, businesses centered in Taiwan cannot exploit 
regional economic opportunities as well as they might 
elsewhere.  The cross-Strait restrictions on travel and cargo 
also damage Taiwan's  competitiveness.  Removing these 
restrictions would make Taiwan much more appealing to U.S. 
companies looking to establish a base in Asia.  Second, U.S. 
companies are hesitant to champion a Taiwan FTA for fear of 
PRC pressure.  Taiwan should consider ways to make an FTA 
less threatening and more beneficial to China, Stratford 
said, to remove this disincentive for U.S. companies. 
Stratford also reminded Chiou that the U.S. has repeatedly 
made clear to Beijing that the U.S. rejects Beijing's 
argument that FTAs can only be executed between sovereign 
states, and that Beijing does not have a veto over U.S. trade 
policy with respect to Taiwan. 
 
Don't Politicize FTA Issue 
-------------------------- 
 
¶8. (C) Chiou said China's inflexibility leaves almost no room 
for Taiwan to improve cross-Strait economic relations. 
However, he argued, if the U.S. were to sign an FTA with 
Taiwan it would make Taiwan a more attractive trade partner 
for other south Asian nations, and increase pressure on China 
to become more flexible in dealing with Taiwan on 
cross-Strait economic issues. Bhatia urged Chiou and the 
Taiwan authorities to think about an FTA strictly in terms of 
economic, not political, benefits to Taiwan, and to avoid 
turning the FTA issue into a "political football." 
 
An FTA By Another Name? 
----------------------- 
 
¶9. (C) NSC Senior Advisor Connie Yang responded by arguing 
that blame for the cross-Strait economic impasse lay with 
China, and its repeated rejection of Taiwan's overtures. 
Taiwan should be perceived by U.S. companies as a "big 
economy" because of Taiwan's extensive trade and investment 
links in the region, but Chinese efforts to marginalize 
Taiwan have been effective in stifling that perception.  Yang 
said U.S. leadership is still important in the region, and if 
the U.S. were willing to lead the way by agreeing to an FTA 
with Taiwan, other countries in the region would feel safer 
to do the same.  If an FTA is not possible, she suggested, 
then perhaps the U.S could use nomenclature less 
objectionable to the PRC, like the "Closer Economic 
Partnership Agreement" (CEPA) concept used by the PRC with 
Hong Kong.  Yang also suggested the U.S. could convince China 
that a U.S.-Taiwan FTA would help stabilize the Strait, and 
therefore would be good for China. 
 
¶11. (C) Ambassador Bhatia remarked that the U.S. was openly 
and loudly proclaiming its strong support for Taiwan and its 
economy by initiating this new round of TIFA talks and by 
 
TAIPEI 00001843  003 OF 003 
 
 
publicly reserving the possibility of a future U.S.-Taiwan 
FTA.  He reminded Chiou and Yang that in order for USTR to 
push an FTA forward, it had to be based on the promise of 
solid economic benefits, not political reasons.  Bhatia and 
Stratford suggested that for the time being, the U.S. and 
Taiwan should investigate the possibility of incremental, but 
still economically significant steps, like bilateral 
investment or tax agreements, to preserve and improve 
Taiwan's international economic living space.  Although these 
steps may have symbolic use to Taiwan, Bhatia said, the U.S. 
must focus on practical reasons to go forward, like better 
protections for U.S. businesses in Taiwan. 
 
¶12. (C) Yang said South Korea's FTA with the U.S. increases 
pressure on the Taiwan government to explain to its business 
community why Taiwan is not also included.  Stratford replied 
that the U.S.-South Korea FTA is not necessarily a negative 
for Taiwan, and that if Taiwan can prepare an economic study 
that demonstrates how Taiwan is economically disadvantaged by 
it, USTR would consider it carefully. 
KEEGAN