VZCZCXRO9897
RR RUEHGH
DE RUEHIN #0319/01 0700545
ZNR UUUUU ZZH
R 100545Z MAR 08
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 8294
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 4082
RUEHBJ/AMEMBASSY BEIJING 7902
RUEHUL/AMEMBASSY SEOUL 9383
RUEHGP/AMEMBASSY SINGAPORE 7230
RUEHKO/AMEMBASSY TOKYO 9639
RUEHML/AMEMBASSY MANILA 0361
RUEHJA/AMEMBASSY JAKARTA 4267
RUEHKL/AMEMBASSY KUALA LUMPUR 3942
RUEHHI/AMEMBASSY HANOI 3527
RUEHBY/AMEMBASSY CANBERRA 4807
RUEHWL/AMEMBASSY WELLINGTON 2073
RUEHHK/AMCONSUL HONG KONG 9159
RUEHGH/AMCONSUL SHANGHAI 1801
RUEHGZ/AMCONSUL GUANGZHOU 0985

UNCLAS SECTION 01 OF 05 TAIPEI 000319 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR KATZ AND STRATFORD 
USDOC FOR 3132/USFCS/OIO/EAP 
TREASURY FOR OASIA/TTYANG AND HAARSAGER 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI 
BOLIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON SENV TW
SUBJECT: Taipei Economic Brief for February 2008 
 
¶1.  (U) Summary.  Following are the highlights of February 2008 
economic events in Taiwan:  Better-than-expected export performance 
prompted upward adjustment of economic growth in 2007.... 
Forecasters anticipate economic slowdown in 2008....  Economic 
performance in January remained strong despite heavy inflationary 
pressure....  Private investment exceeds 2007 goal....  Industrial 
park renewals with low land costs are designed to accommodate 
returning Taiwan firms....  Earnings by science industrial park 
based firms increase....  Taiwan's tourism potential highlighted.... 
Tax reform program introduced three weeks before the presidential 
election....  Multinational corporations to set up training and R&D 
facilities....  Waste recycling industry grows....  END SUMMARY. 
 
2007 Economic Growth Adjusted Upward 
------------------------------------ 
¶2. (U) Better-than-expected trade performance in the fourth quarter 
(Q4) of 2007 prompted forecasters to revise Taiwan's 2007 economic 
growth rate upward.  Taiwan's exports in Q4 posted a year-on-year 
growth of 15%, higher than the 9% projected in November 2007 by the 
Directorate General of Budget, Accounting and Statistics (DGBAS). 
Taiwan's trade surplus in the quarter, therefore, set a new high of 
US$10 billion, 27% more than forecast.  In response, in late 
February, DGBAS raised Taiwan's real GDP growth for Q4 to 6.4%, 
overall 2007 economic growth from 5.4% to 5.7%.  The private Taiwan 
Institute of Economic Research (TIER) also raised Taiwan's estimated 
2007 economic growth to 5.1% from the 4.4% it forecast in November 
¶2007. 
 
Economic Slowdown Projected for 2008 
------------------------------------ 
¶3. (U) Both DGBAS and TIER expect the U.S. sub-prime mortgage 
problem will dampen growth in developed economies which, in turn, 
will adversely affect the performance of Taiwan's export-oriented 
economy in 2008.  According to DGBAS, export growth will slow from 
10% in 2007 to 6% in 2008, and real GDP growth will decline to 
barely above 4%, although private consumption will grow faster in 
2008 as businesses distribute dividends to their shareholders. 
 
Performance in January Remains Healthy 
-------------------------------------- 
¶4. (U) Taiwan's economy, nevertheless, continued to perform well in 
January 2008.  Export value grew 12% year-on-year to US$22.14 
billion, mainly driven by stronger demand from Taiwan's Asian 
neighbors, where many Taiwan exporters have located their production 
bases.  Strong foreign demand remained in January, manifested by 17% 
growth in export orders.  Double-digit manufacturing growth spilled 
over from the second half of 2007 to January 2008.  The unemployment 
rate in January 2008 declined to an 11-month low of 3.8%. 
 
Import-Driven Inflation 
----------------------- 
¶5. (U) Higher energy, grain, and basic metal costs, which 
contributed to 15% import growth, fueled inflationary pressure in 
January as Taiwan's consumer price index rose at a year-on-year rate 
of 3%.  The wholesale price index in January 2008 increased 10.2% 
year-on-year, the highest rate since November 2004.  Higher oil 
prices caused the January import price index to surge to an 18-year 
high of 16.94%.  Crude oil import costs in January averaged US$88 
per barrel, up 70% from January 2007. 
 
¶6. (U) With higher import costs likely to persist, local forecasters 
predict inflation will stay at almost 3% during the first half of 
the year, even though money supply leveled off in January.  To 
stabilize prices, Taiwan authorities will reduce the 5% business 
transaction tax on imported grains and grain products, in addition 
to the freeze in gasoline prices implemented in January. 
 
 
TAIPEI 00000319  002 OF 005 
 
 
Private Investment Exceeds MOEA's 2007 Goal 
------------------------------------------- 
¶7. (U) Private investment figures in 2007 surpassed targets set by 
the Ministry of Economic Affairs (MOEA).  According to the MOEA's 
Cooperative Office for Investment Promotion (COIP), investment in 
private projects completed in 2007 totaled NT$1.17 trillion (US$37.3 
billion), surpassing the MOEA-set target of NT$900 billion (US$28.6 
billion) by 30%.  There were 1,466 new private projects launched in 
2007, the investment value of which was NT$1.65 trillion (US$52.4 
billion), exceeding the MOEA's target of NT$1.1 trillion (US$35.2 
billion) by 50%.  The MOEA's 2008 new private investment target is 
NT$1.77 trillion (US$56 billion), up 7.3% from 2007. 
 
Industrial Park Renewal Program 
------------------------------- 
¶8. (U) The Executive Yuan recently approved a 2008-2010 "Industrial 
Park Renewal Demonstration Plan."  Initially, two old unused 
industrial parks will be renovated, and the plan will eventually be 
expanded to cover all aging industrial parks.  Demand for industrial 
land has been strong due both to the expansion of science parks, and 
to a growing number of returning Taishangs (Taiwanese companies 
abroad), many of which are manufacturers in traditional industries. 
According to the Industrial Development Bureau (IDB), nearly half of 
Taiwan's industrial parks are over 30 years old and lack sufficient 
infrastructure. 
 
Additional Funding for Industrial Land Program 
--------------------------------------------- - 
¶9. (U) The Executive Yuan approved an additional NT$20 billion 
(US$625 million) for the '006688' program, which provides businesses 
with industrial land for lease at discounted rates.  The program 
aims to encourage Taishangs abroad to invest in Taiwan.  The funds 
will be available through December 31.  The Industrial Development 
Bureau expects the program to attract 300 manufacturing plants to 
invest NT$106 billion (US$3.3 billion) in Taiwan's industrial parks, 
create NT$120 billion (US$3.75 billion) in production, and increase 
tax revenue by NT$1.8 billion (US$56 million).  Under the program, 
industrial land will be rent-free for the first two years, 
discounted by 40% in the next two years, and discounted by 20% for 
the fifth and sixth years. 
 
Taishangs Returning Home 
------------------------ 
¶10. (U) A growing number of Taishangs are returning to Taiwan, 
mostly from China, where legal changes have resulted in relatively 
less positive investment climate for some Taiwan firms.  Labor, 
land, and utilities costs in China have risen and drastically 
narrowed the gap with Taiwan.  The PRC has also reduced or 
eliminated some tax incentives for foreign investors.  According to 
Taiwan's Department of Investment Services (DOIS), over the past 
year, 102 Taishangs have expressed interest in returning to Taiwan, 
and many of them have returned in clusters.  Ten bolt and nut 
manufacturers in China, for example, have located their plants at 
the Gangshan Benjhou Industrial Park in Kaohsiung County.  PCB 
manufacturer Unitech and Process Advance Technology Ltd. have set up 
factories at the Litze Industrial Park in Ilan.  The recently opened 
Kaohsiung Software Science-based Industrial Park has accommodated 
ten returning companies.  Cheng Shin Rubber Inc. Co., the largest 
tire supplier in China and 12th-largest tire supplier in the world, 
will invest NT$15 billion (US$461.5 million) in Taiwan.  A number of 
Taishangs who maintain operations in China prefer to remain low-key 
about their investment in Taiwan to avoid any potential 
repercussions in the PRC. 
 
¶11. (U) When delivering a keynote speech to the Taiwan business 
community's Lunar New Year Party in late February, President Chen 
Shui-bian announced that he plans to grant amnesty to Taiwan 
 
TAIPEI 00000319  003 OF 005 
 
 
business firms illegally investing in China because these firms are 
suffering from a deteriorating investment environment in China. 
Minister of Economic Affairs Steve Chen has outlined the following 
assistance to Taishangs in China: 
--setting up a Taiwan firms service office in July 2006; 
--encouraging Taiwan firms to return to Taiwan through industrial 
land rental waivers and discount programs; 
--offering sufficient financing; 
--reducing the tax burdens on foreign expatriates employed in 
Taiwan; 
--relaxing restrictions on employment of foreign blue-collar 
workers; 
--providing Taishangs with capital for investment in Latin America; 
and 
--planning to lower the corporate income tax from 20% to 17.5%, 
verse the PRC's 25%. 
 
Science Industrial Parks 
¶12. (U) In 2007, the sales revenue of business firms in Taiwan's 
science industrial parks grew 12.3% from 2006 to a new high of 
NT$1,966.4 billion (US$60.5 billion).  The number of business firms 
in science industrial parks as of December 2007 totaled 686, up 6% 
from 2006.  The workforce in the science industrial parks grew 10.5% 
to 201,608 persons. 
 
Taiwan: 30th in Tourism 
----------------------- 
¶13. (U) In its 2007 Travel and Tourism Competition Report, the World 
Economic Forum (WEF) ranked Taiwan the 30th-best tourism destination 
of 124 economies surveyed, and fourth in Asia.  With further 
development, Taiwan will become an "important tourism destination" 
for overseas tourists.  In terms of human, natural, and cultural 
resources, Taiwan ranked second in Asia and 23rd in the world 
because of destinations, such as Taroko Gorge, Sun Moon Lake, and 
the National Palace Museum.  Taiwan's tourism promotion efforts have 
paid off.  Following growth of 4.2% in 2006, the number of inbound 
passengers in 2007 rose 5.6% to a new high of 3.7 million.  This led 
to a 10% increase in 2007 tourism revenue to US$38 billion, 
according to a survey by the World Tourism and Travel Council 
(WTTC). 
 
Tax Reform 
¶14. (U) In mid-February, the Executive Yuan (EY) approved a tax 
reform proposal submitted by the Ministry of Finance (MOF).  The 
proposal requires Legislative Yuan approval.  The EY will phase out 
tax incentives offered by the Statute for Industrial Upgrading 
(SIU), which will expire at the end of December 2009.  The phase-out 
of all tax incentives will increase the annual tax revenue by NT$148 
billion (US$4.6 billion).  The EY will use the increased revenue to 
make up losses arising from the planned tax cuts, which are 
estimated to cost NT$150 billion (US$4.7 billion).  For corporate 
income, the 10% tax on retained earnings will be dropped and the 
corporate income tax will be reduced from 25% to 17.5%.  For 
personal income, the tax rates will be lowered from 6-40% to 
5.5-37.5%.  The across-the-board deductible will increase from 
NT$46,000 to NT$60,000 (US$1,875) per unmarried taxpayer and from 
NT$92,000 to NT$120,000 (US$3,758) per couple.  In addition, the 
deductible for each wage earner will increase from NT$78,000 to 
NT$100,000 (US$3,125), the deductible for a disabled person will 
increase from NT$77,000 to NT$100,000 (US$3,125), and the deductible 
for education will increase from NT$25,000 per household to 
NT$25,000 (US$781) per student. 
 
Biotechnology Training Center 
----------------------------- 
¶15. (U) Merck Group, a German pharmaceutical and chemical 
conglomerate (not directly related to the U.S. pharmaceutical firm 
 
TAIPEI 00000319  004 OF 005 
 
 
of the same name), and Taiwan's state-owned Development Center for 
Biotechnology (DCB) will set up the Asia Technology Training Center 
(ATTC) joint venture.  Through the joint venture, Merck will develop 
a platform for protein-based drugs by promoting its manufacturing 
processes in the Asian market.  ATTC is Merck's first training 
center in the Asia-Pacific region, and third in the world, with the 
other two located in the United States and Germany.  ATTC will be 
located in the DCB compound in Taipei County.  DCB will provide 
manpower and logistic resources, while Merck will supply systems, 
lab technicians, and a technical manager to handle clients in Asia. 
Initial investment in the project will be a modest NT$10 million 
(US$312,500).  Improved manufacturing processes for protein-based 
drugs, nevertheless, will generate annual revenue of US$100 million, 
according to Merck.  The ATTC will benefit small pharmaceutical 
firms by providing top-notch consulting services for the production 
of protein-based drugs. 
 
HP to expand R&D center in Taiwan 
--------------------------------- 
¶16. (U) HP, the world's largest personal computer (PC) supplier, 
will expand its Product Development Center (PDC) in Taiwan by 
doubling the size of the PDC's workforce.  This will make the Taiwan 
PDC the largest among HP's R&D centers in the world.  The center 
will add 600 new employees by the end of this year.  HP's PDC in 
Taiwan started with only 24 employees in 2002.  The Taiwan PDC 
offers a number of advantages, including relatively low R&D costs 
and proximity to Taiwan's original design manufacturers (ODMs) of 
PCs and handheld devices, which will improve HP communications 
efficiency.  With its focus on notebook computers over the past five 
years, HP's PDC in Taiwan has developed 50 product lines for 100 
different specifications, including its first MCE (multimedia center 
edition) notebook computer.  In 2008, software will be an area of 
focus for HP Taiwan.  The company's global software business 
revenues grew by 306% in 2007.  According to the Ministry of 
Economic Affairs, HP maintained its position as the world's top 
seller of notebook computers, shipping 23.3 million units worldwide 
in 2007, up 58% from 2006. 
 
Sony Computer Entertainment to Establish R&D Center 
--------------------------------------------- ------ 
¶17. (U) Sony Computer Entertainment (SCE) has signed a letter of 
intent with the Ministry of Economic Affairs (MOEA) to develop 
digital media.  Under this arrangement, SCE will set up an R&D 
center and offer game development training in Taiwan.  SCE will 
cooperate with Taiwan educational organizations to implement 
training programs, which will be aimed at college/university 
students.  Lecturers will include SCE's own gaming R&D experts, as 
well as leading game developers in Japan.  The ultimate goal is to 
build Taiwan's capability to produce universal, world-class game 
software. 
 
Vestas to Form Wind Power Subsidiary in Taiwan 
--------------------------------------------- - 
¶18. (U) Vestas Wind Systems A/S of Denmark announced it will form a 
subsidiary in Taiwan.  Vestas, one of the major wind turbine 
suppliers in Taiwan, accounts for over 30% of the global wind power 
market and 70% of the offshore wind turbines market.  Vestas has 
supplied Taiwan with over 70 wind turbines, and its major customers 
is the state-owned Taiwan Power Company, which has built several 
wind generators in Yunlin County.  Vestas' potential customers 
include Aerospace Industrial Development Corporation and Star 
Electric Power Corporation.  Meanwhile, Vestas will be an important 
source of technologies for Taiwan's wind turbine component 
manufacturers, including TECO Electrical Engineering.  Under 
Taiwan's long-term wind power development plan launched in 2001, TPC 
will build 200 wind turbines in three stages, at an estimated cost 
of NT$100 million (US$3.1 million) to NT$150 million (US$4.7 
 
TAIPEI 00000319  005 OF 005 
 
 
million) for each stage. 
 
Solar-Power Generation Program 
------------------------------ 
¶19. (U) On February 1, the state-owned Taiwan Power Company (TPC) 
announced a NT$3.57 billion (US$110 million) solar-power generation 
program.  Under the program, TPC will build solar-power generators 
to provide electricity to local authorities and primary/middle 
schools.  Each generator will have a capacity of 1,000 kwh, and the 
annual power generated under the program will reach 12.5 million kw, 
which will reduce carbon dioxide emissions by 7,750 tons. 
 
Industrial Wastes Recycling 
--------------------------- 
¶20. (U) Taiwan began to promote recycling of industrial wastes in 
¶2001.  The number of industrial waste recycling firms increased from 
305 in 2002 to 915 in 2007.  The amount of industrial waste recycled 
surged from 8.04 million tons in 2002 to 11.82 million tons in 2007, 
and the output value grew from NT$24.9 billion (US$778 million) to 
NT$42 billion (US$1.3 billion) during the same period. 
 
YOUNG