More breathing room, please!

l  After being granted approval by Taiwan's Ministry of Economic Affairs (MOEA) last week to set up a US$3 billion manufacturing plant in China, AU Optronics (TWSE AUO 2409) urged the government this week to relax restrictions over Taiwan LCD panel-display makers’ investment in China so that they can better compete with South Korean suppliers in the mainland market.

l  Furthermore, AUO suggested that the current ban on the display-panel manufacturers’ investments in their Chinese counterparts should also be removed. In response, the MOEA has pledged to review and consider such a request.

l  Since its investment plan was eventually approved after under MOEA review for almost a year, AUO felt the island’s LCD flat-panel makers have already missed the most timely period for setting up production facilities in China.

l  Worse yet, while Chinese authorities were expected to give swift approval to investment plans like AUO’s when the application was first submitted to MOEA nearly a year ago, China could now delay the process of approval because the mainland already has its own LCD display plants with relatively advanced technologies.

l  Other Taiwanese industries, particularly petrochemical and solar energy, may experience the same fate if the current ban on investment in China continues.

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Are changes imminent in DPP's China policy?

l  Democratic Progressive Party (DPP) Chairwoman Tsai Ing-wen recently announced plans to set up a party think tank for research primarily on how the party should formulate its cross-Strait policies in the future.

l  Once operational, the DPP think tank will draft proposals concerning its China policy. Although the DPP will not exclude the possibility of dialogue with China, such talks can take place only when there is no precondition attached.

l  Furthermore, in contrast with the ruling Kuomintang (KMT), the DPP does not plan to establish a party-to-party platform for dialogue with the CPC.

l  Under Tsai, DPP's fundamental position in managing cross-Strait ties in the future will likely be based upon: (1) the relationship between China and Taiwan must be.....

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Room for a "third force?"

l  Former President Lee Teng-hui is in the news again---this time calling for a “viable alternative” beyond just the ruling Kuomintang (KMT) and the opposition Democratic Progressive Party (DPP) in the next presidential contest. Lee also declared that the primary objective for consolidating all opposition forces is to “vote the incumbent ‘China-leaning’ regime out of office” and put a stop to the government's ongoing “pro-China” policies.

l  The former president also identified some key criteria for the suitable candidates that included, first and foremost, the ability to defeat Ma to win the 2012 presidential election, safeguard Taiwan as an independent political entity, lead Taiwan on its own path, uphold and preserve justice, restore social values, and give the people of Taiwan a sense of belonging.

l  Among the people identified by local media that might become part of Lee’s “third force,” Legislative Yuan (LY) Speaker Wang Jin-pyng, former DPP Chairman Shih Ming-teh, former Vice President Annette Lu, People First Party (PFP) Chairman James Soong, and Winston Wang, son of Formosa Plastics Group founder Wang Yung-ching have captured the most attention and interest. Many of these people, however, have either declined to respond to Lee’s proposed idea or have categorically denied related reports.

l  Lee’s remarks also put the DPP in an awkward position since the party has not begun internal discussions on the presidential nomination mechanism for 2012, and despite frequent media reports on the potential candidates, none of the speculated names, including former Premier Su Tseng-chang and Chairwoman Tsai Ing-wen, have announced plans to run.

l  On the other hand, it is no secret that Lee has not been happy with the rapid progress in cross-Strait economic relations since President Ma assumed power in May 2008. From direct air links, Chinese tourists to Taiwan, to the ECFA, Lee has been critical of the Ma administration for making Taiwan’s economy overly dependent on China.

l  If Lee moves ahead with this proposed “third force” scheme, the KMT will like adopt a wait-and-see attitude and make sure it will split the opposition and enhance the ruling party’s own prospects in the next presidential showdown.

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The Sixth Cross-Strait Summit: What to Look for?

l  The new round of cross-Strait talks between China's ARATS and Taiwan's SEF is set to take place in Taipei during December 20-22. This is the sixth ARATS-SEF summit since President Ma Ying-jeou took over in May 2008.

l  Though most were disappointed that the proposed investment protection agreement will not be signed as originally planned, it seems to be a good idea---particularly from Taiwan's domestic political perspective---for the proposed pact to be shelved aside until terms acceptable to both sides can be worked out.

l  The two semiofficial government agencies are, however, expected to ink a medical and health cooperation agreement during the two-day meeting. On the other hand, though the two sides will continue negotiations, there is no guarantee that differences over the investment protection pact will be resolved by the next ARATS-SEF summit in mid-2011, which will likely occasion the start of the 2012 presidential campaign in Taiwan.

l  Since this will be the first cross-Strait summit that is “thin on substance,” the opposition DPP does not plan to organize any mass demonstration or street protest. Only a few pro-independence groups plan to demonstrate outside of Taipei's Grand Hotel, where Chen and the ARATS delegation are staying. 

l  The DPP is also in the midst of re-formulating its China policy to become more moderate and appealing to Taiwan’s middle-of-the-road voters. Another violent clash with the police, as was the case in November 2008 when Chen visited Taipei for the first time, will likely hurt the party's image and undermine public confidence in its abilities to deal with China if returned to power.

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Taiwan's economic development in 2011

l  With average monthly salary expected to reach NT$44,453—which is a new high—this year, Taiwan will likely place a stronger emphasis on increasing domestic demand next year. Instead of relying heavily on exports as in the years past, therefore, economic officials are now calling for more domestic demand to stimulate Taiwan’s economic growth in 2011.

l  The government, in turn, is drafting plans to: (1) identify, at least, three key industries for each city and county on the island, (2) promote these designated industries to attract foreign and domestic investment, and (3) coordinate among the cities and counties to provide multiple choices for foreign and domestic investors to invest in.

l  On paper, the proposed plan appears plausible. However, a lot of coordination and teamwork between local and central governments are needed for the proposal to work as planned. Moreover, given the recent election of new “super-mayors” for the five special municipalities last month, the task could become more complicated since local authorities will have more autonomy in formulating their own path of economic growth and development.

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Foreign investment following the signing of ECFA

l  German automaker Volkswagen is expected to announce investment plans for Taiwan soon after its board meeting last week. However, because automobile was not included in ECFA’s “early harvest list” (EHL) last June, economic officials here do not expect a sizable investment from Volkswagen or other car manufacturers who had once planned to substantially increase investments in Taiwan to take advantage of the ECFA and penetrate the massive Chinese car market.

l  Among those foreign corporations that might have been interested in cross-Strait economic links, this wait-and-see attitude is indicative of the heightened uncertainty in China-Taiwan ties following the KMT’s disappointing performance in the metropolitan elections last month.

l  At the same time, with the presidential election just 15 months away, Taipei will likely toughen its stance toward Beijing in future negotiations to avoid being labeled as too “China-leaning.” Anything that could be perceived as being “soft” toward Beijing would be politically costly during the presidential campaign.

l  Moreover, the recent decision by the Ma administration to: (1) postpone the ARATS-SEF summit until December 21-22, (2) delay the planned signing of mutual investment protection agreement unless, and until, it meets domestic political and economic expectations, and (3) prepare for possible political repercussions since the December summit may be “thin on substance,” had send a clear message—to both the opposition DPP and Beijing alike—that domestic political factors will likely supersede all other considerations from now on.

l  In fact, the KMT administration would not rush into signing anything with China in the next 15 months unless: (1) there is enough domestic support and consensus, and (2) the popular perception has to be that “Taipei outmaneuvered Beijing” in the negotiation process. This approach, however, could put pressure on Beijing and test the limits of its patience.

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No cross-Stait agreement on investment protection

l  It is now official: the long-anticipated investment protection agreement will not be signed at the next cross-Strait summit between China’s Association for Relations Across the Taiwan Strait (ARATS) and Taiwan’s Straits Exchange Foundation (SEF), now scheduled to take place in Taipei toward the end of December.

l  Since the investment protection agreement was seen as a natural follow-up to the historic "Economic Cooperation Framework Agreement" (ECFA) signed between China and Taiwan in late June, the news has been most disappointing to the business community on both sides, which has been aggressively pushing for the agreemnet to be signed at this month's ARATS-SEF summit.

l  According to government statistics, Taiwanese businesses have invested some US$150 billion in China over the past 20 years, while Chinese enterprises have invested US$127 million in Taiwan since the island opened the door to mainland investment in June 2009. The signing of the ECFA, in turn, will most likely expand and accelerate the flow of both capital and personnel between China and Taiwan, making the investment protection agreement a necessity.

l  Since one of the primary goals of the investment protection agreement was to give investors from both sides a legal framework to seek redress, it is definitely a priority issue for both China and Taiwan in cross-Strait negotiations. Without such a signed agreement in place, the flow of capital—particularly those from China to Taiwan—will likely remain limited, at least for the first half of 2011.

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The state of the Taiwanese economy: The perception "on the ground"

l  According to a recent study conducted by the National Central University (NCU), Taiwan’s consumer confidence index (CCI) came in at 81.66 in November, which was the sixth consecutive monthly increase and the highest in six years.

l  Respondents to the NCU study were particularly optimistic in the categories of “employment prospects” and “overall economic outlook” in the next six months, providing the much-needed psychological boost to Taiwan's ongoing economic expansion.

l  The NCU study results also suggested that private spending and investment will continue to increase and become one of the engines of economic growth for Taiwan in 2011.

l  However, respondents were apparently “neutral” towards the purchase of durable goods in the next six months. The consecutive interest rate increases—once each in June and September—by Taiwan’s Central Bank were identified as being largely responsible for the conservative view towards the purchases of durable goods.

l  The increases in CCI could mean the “perception on the ground” is improving as most of Taiwan’s economic and trade numbers continued to show a sustained recovery. With the metropolitan elections now over, the sense of uncertainty once permeated the market is quickly dissipating.

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Tension on the Korean Peninsula: Does it mean opportunities for Taiwanese businesses?

l  The conflict between North and South Korea in the last three weeks may bring some good news for Taiwanese manufacturers in the petrochemical, LCD display panel, and DRAM (dynamic random access memory) sectors. Since no one knows how the already-tense situation on the Korean Peninsula would evolve next, many foreign buyers have been contemplating switching their orders from South Korea to Taiwan if the military conflicts worsen.

l  Taiwan's trade organizations like the Petrochemical Industry Association of Taiwan (PIAT) have been urging its member companies to aggressively pursue orders that might have originally been given to South Korean firms. However, most expect the military conflicts between North and South Korea would be settled soon and won't escalate into a full-scale and protracted war. Accordingly, relevant industries should not be overly optimistic about the possible shift of orders from South Korea to Taiwan.

l  Given the unpredictable nature of the North Korean regime, the wishful thinking in Taiwan is to make the switch of orders, if any, permanent. However, since many foreign clients have a wait-and-see attitude toward whether to shift their orders from South Korea to Taiwan—as they don't think the recent skirmishes will escalate into a war—many expect firms in Taiwan to benefit from the conflict on the Korean Peninsula for the short term only.

l  As for the long term, any shortfall in the supply can be covered by the production facilities of South Korean companies outside the Korean Peninsula, including those in mainland China. On another cautionary note, if the South Korean won keeps depreciating against the US dollar due to the worsening of the ongoing conflicts, South Korea's export competitiveness will be boosted significantly, which, in turn, will be detrimental to Taiwan's exports of electronic goods and other related consumer products.

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Why the delay: Possible reasons behind the postponement of ARATS-SEF summit

l  The semiannual summit meeting between China's Association for Relations Across the Taiwan Straits (ARATS) and Taiwan's Straits Exchange Foundation (SEF) was originally planned to take place in Taipei during December 15-17. Both sides had hoped that ARATS President Chen Yun-lin and SEF Chairman Chiang Pin-kung would sign an agreement on mutual investment protection and another one on health and medical cooperation during the two-day meetings. However, differences over the dispute resolution mechanism, particularly the option of settling disputes in an international arbitration tribunal, forced a last-minute postponement until, at the earliest, the end of December.

l  Since the signing of ECFA in late June, Beijing and Taipei have primarily been negotiating two agreements—one each on mutual investment protection and medical and health cooperation—in the hope that they can be signed at the December’s ARATS-SEF summit. Though the prospects are not particularly bright, the substantive negotiations in the coming months will crucial to how, and if, the remaining differences between the two sides can be resolved in time for the signing to take place at the next summit, possibly scheduled for late spring 2011. Besides patience, the success of these negotiations will depend largely on if both Beijing and Taipei are prepared and ready to address, at least indirectly, the sensitive issue of sovereignty and political status of each.

l  As the sixth cross-Strait summit since President Ma Ying-jeou assumed power in May 2008, Chen and Chiang had originally planned to review cross-Strait relations since the signing of the “Economic Cooperation Framework Agreement” (ECFA) in June and identify the priority issues for future negotiations until, at least, Taiwan’s next presidential election in March 2012. Though both Beijing and Taipei are trying to downplay the unexpected postponement, differences between the two sides are getting more difficult to resolve since non-economic considerations have, and will continue to, assumed more importance.

l  For the mutual investment protection agreement, for example, Beijing disagrees with Taipei's proposal to designate the International Center for the Settlement of Investment Disputes (ICSID) under the World Bank as the arbitration organization for cross-Strait economic and trade disputes. This is primarily because the ICSID is designed to address disputes between private investors and foreign governments, and applying such a mechanism in the cross-Strait context would invariably imply that Taiwan is a sovereign state. Similar considerations also apply to the negotiations over health cooperation agreement since sovereignty issue is also involved when it comes to the recognition of each other's drug certifications. As Beijing had repeatedly stated in the past, any plans or steps to perpetuate the appearance of “two Chinas” or “one China, one Taiwan” internationally is simply unacceptable.

l  The signing and the implementation of ECFA was, of course, a historic breakthrough in cross-Strait economic relations. However, as both sides are intensifying efforts to expand exchanges and deepen cooperation in the post-ECFA period, China and Taiwan will inevitably touch upon highly sensitive issues like sovereignty and political recognition. Though this may not be a priority for the ruling KMT following the disappointing showing at the metropolitan elections on November 27, how to broaden domestic consensus and formulate a strategy in future cross-Strait negotiations will continue to demand attention from political leaders of both political parties in Taiwan, especially since the once-considered “easy matters” are no longer easy as cross-Strait relations intensify.

l  Finally, in spite of the summit delay, the format and structure of the proposed “Cross-Strait Economic Cooperation Committee” (CSECC, 兩岸經濟合作委員會), which will operate under the ARATS-SEF framework, is expected to be formed and operational by mid-December. The CSECC will be headed by a vice-ministerial economic official each from China and Taiwan, with primary responsibilities in addressing problems related to the implementation of ECFA and other trade-related disputes.

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