by Tim Culpan and Brian Asmus

MACROECONOMICS
Trade Surplus Skiyrockets
 

CROSS-STRAIT RELATIONS
Indirect Cargo Flights Proposed

DOMESTIC POLITICS
Chen Advocates New Constitution
Hau Steps Down as EPA Administration
Grand Justices Confirmed
Taiwan Holds war Games

INTERNATIONAL
Taiwan Fails Again in UN Bid
Ex-president to Visit Taiwan
Number of SARS Victims Revised

BUSINESS
VAT Refund Launched
Taipei Property Market Going Up
TSE Rethinks Taipei 101
Firms Plan Applications Centers
Singapore Airlines Settles with Survivor
Optronics 6G Fab Set for 2005
Former AmCham President Spotted at Harvard

Prominent economist speaks out for services
--- By Don Shapiro

by Tim Culpan and Brian Asmus

MACROECONOMICS
Trade Surplus Skiyrockets

Taiwan's trade surplus posted 125% year-on-year growth in September. Strong export performance was the major contributor to the large figure. Although semiconductors and electronics led the surge, overseas sales of telecommunications and cellphone handsets fell by 11%.

Exports in September increased over last year's mark by US$12.56 billion (11.6%) compared to US$12.3 billion (13%) in August. In terms of export destinations, the major growth has been to Southeast Asia, Europe, and China, with sales to the United States registering a decline.

Imports also rose in September, but by a mere 4.1% to US$10.98 billion.

According to the ministry of finance, fourth-quarter exports are projected to rise 8%.


CROSS-STRAIT RELATIONS

Indirect Cargo Flights Proposed

The Mainland Affairs Council has proposed to open up indirect cargo flights to China. The flights would stop in a third location, chiefly Hong Kong or Macau, but the same aircraft could continue through to the final destination, whereas current regulations require reloading on another flight.

Beijing has so far not acted to take up the offer. Political commentators speculate that China is reluctant to hand President Chen Shui-bian an achievement that would bolster his forthcoming campaign for reelection.

The MAC permitted indirect passenger flights on a trial basis during Chinese New Year this year, with aircraft taxiing to the terminal at Hong Kong or Macau for a brief pause before taking off again for the final destination.


DOMESTIC POLITICS

Chen Advocates New Constitution

President Chen used the occasion of the 17th anniversary of the ruling Democratic Progressive Party (DPP) on Sept. 28 to advocate the drafting of a new national constitution for implementation by 2006. The plan aroused immediate controversy because of suspicions among Chen's critics that it was aimed at promoting Taiwan's "independence" -- that is, its permanent separation from China -- by altering the country's formal name from the current Republic of China and redefining the national territory.

The president and his supporters responded that the motivation was not promoting independence but improving the government's efficiency in order to make Taiwan more globally competitive. Despite six rounds of amendments since the early 1990s, they maintain, the current constitution has been the source of constant political turmoil. Among the problems cited are the unclear division of powers between the president and the premier, the maintenance of an unwieldy five-branch government structure, and the unsatisfactory stipulations governing presidential and legislative elections.

Earlier, a "Call Taiwan Taiwan" demonstration on Sept. 6 led by former President Lee Teng-hui attracted 30,000 supporters for the idea of changing the country's formal title from the Republic of China to Taiwan.

The following day, 3,000 marchers hit the streets to show support for keeping the island's official name, while another 4,000 from pro-unification organizations such as the Alliance for the Reunification of China and the Labor Party demonstrated against "independence."

Hau Steps Down as EPA Administration

Hau Lung-bin, head of the Environmental Protection Administration (EPA), has resigned from the cabinet-level post. His deputy, Chang Juu-en, is serving as acting administrator.

Rated in opinion polls as one of the most popular cabinet members, Hau is the son of retired general Hau Pei-tsun, a former premier. The resignation resulted from differences with Premier Yu Shyi-kun over the government's plan for proposed popular referendums on public issues. Hau insisted that the scope should exclude voting on development projects that have already been approved by the EPA, but the premier emphasized that public opinion must be listened to.

As one of the leaders of the small New Party, which backs eventual unification with China, Hau was likely to have faced an increasingly untenable position within the DPP-led government as the March 2004 presidential election approaches.

Grand Justices Confirmed

The Legislative Yuan confirmed 15 nominees to the Council of Grand Justices. The new justices were nominated by the president and required a majority from the LY for the appointments to be confirmed.

Appointees include the Judicial Yuan president and vice president Weng Yueh-sheng and Cheng Chung-mo. The Council of Grand Justices is Taiwan's highest judicial body with responsibilities including interpretation of the national constitution.

The opposition parties had threatened to block confirmation of some nominees, but in the end permitted passage of the entire slate.

Taiwan Holds war Games

The Ministry of National Defense conducted its largest ever live-fire simulation, code-named "Han-kuang 19," with the exercise suffering a number of mishaps. The exercise included testing of sophisticated missiles and other high-tech weapons to counter a mock invasion by China.

President Chen attended the 110-minute drill, held in Taiwan's northeastern Ilan County.

In one incident, a submarine-launched missile went out of control and was lost at sea, with the Navy later asking anyone finding the weapon to let it know. In another incident, a test of a French-made air-to-air missile was cancelled because another Navy missile had shot down the drone it was supposed to attack.

Responding to the setbacks, President Chen told the military to practice "more until you hit the target without fault." Two weeks later, in a further test, the sub-launched missile performed accurately.


INTERNATIONAL

Taiwan Fails Again in UN Bid

Taiwan failed in its 11th bid to rejoin the United Nations, with the world body again refusing to even put the matter on the General Assembly agenda for the new session.

Despite support from its limited number of diplomatic allies, pressure from the PRC kept the issue from even coming to a vote. Those looking for consolation noted that the PRC needed to apply for membership 22 times before it eventually succeeded.

The Republic of China, a founding member of the world body, has not been able to participate in the organization since 1971 when the UN transferred the China seat to Beijing.

Ex-president to Visit Taiwan

Former U.S. president Bill Clinton is slated to visit Taiwan in November.

Clinton has been invited by the government-backed Taiwan Foundation for Democracy to deliver a speech on democracy and human rights in East Asia.

He was previously scheduled to come to Taiwan in September 2001, but the trip was cancelled after the 9/11 terrorist attacks in the US.

In wide demand as a speaker since his retirement, Clinton is believed to receive US$100,000 per engagement.

Clinton's vice president, Al Gore, the unsuccessful Democratic candidate for vice president in 2000, was in Taiwan during October to speak at a technology conference.

Number of SARS Victims Revised

After laboratory tests showed that many of the patients identified as SARS victims during the epidemic this spring were in fact suffering from other diseases, Taiwan's Center of Disease Control revised the number of SARS cases during the outbreak from 682 to 346 and the number of SARS-related deaths from 84 to 37. The World Health Organization has changed its records accordingly.


BUSINESS

VAT Refund Launched

The Ministry of Finance is to allow foreign tourists to receive a value-added-tax refund upon departure from Taiwan.

Under the plan, any foreign tourist who spends more than NT$3,000 (about US$90) is eligible for a refund of the 5% tax. The government projects a net loss in tax revenue of NT$800 million (US$23.7 million) from the move, but expects it will boost tourism in line with a key plank in the current eight-year economic development plan.

Taipei Property Market Going Up

The results of a mid-September auction of ten parcels of Taipei real estate indicate a rebound in the city's property market, according to the National Property Bureau.

The bureau raised NT$1.24 billion (US$36.7 million) from the auctions, almost double the asking price of NT$650 million (US$19.2 million).

A single property -- a 647-ping apartment building on Dunhua North Road -- fetched NT$800 million (US$23.7 million).

TSE Rethinks Taipei 101

The Taiwan Stock Exchange, a Taipei 101 shareholder and major prospective tenant, is reportedly rethinking its space commitment in the new tower, which is due to open next year. The exchange had planned to take six of the tower's 101 floors, but high rental costs and security concerns have forced it to reconsider.

Instead, the TSE is believed to be looking to spread its operations over more than one location to avoid putting all its eggs in one basket.

Firms Plan Applications Centers

The world's fourth-largest semiconductor company, Texas Instruments, has announced plans to open a wireless applications center in Taiwan, which is becoming a dominant force in wireless LAN design and manufacturing. Taiwan is increasing its market share in 2 and 2.5G cellular handsets and is a leader in smartphone and third-generation design and manufacture.

According to TI, the wireless applications center will be a place for designers and manufacturers to see TI's solutions in action and to work on their own implementations of Bluetooth, Wi-Fi, and cellular telephony technologies.

Also planning a presence here in wireless communications is Anadigics, a NASDAQ-listed supplier of leading edge broadband and wireless semiconductors. The company will be opening a Taiwan Application Center to support growing demand for the company's WLAN, CDMA, and GSM radio frequency products.

In another recent development, storage maker Iomega announced that it will open an International Procurement Office (IPO) in Taiwan, indicating the company will boost its sourcing here. Iomega is best known for its Zip and Jazz drives, but is also developing new storage media and has increased its line-up of optical media products, a key Taiwan strength.

Singapore Airlines Settles with Survivor

Singapore Airlines reached the first settlement with a survivor of the plane crash that killed 83 people and injured 57 others three years ago. The crash occurred when Flight SQ006 plowed into construction equipment during take off in a storm.

The amount of the settlement was not disclosed, but the lawyer for the survivor said it was "probably a record sum" for a post-traumatic stress syndrome case without significant injury, while SIA stated that the amount was substantially less than the plaintiff had demanded.

The settlement is seen as significant as it could set a precedent for more than 140 similar lawsuits. The Taiwan Aviation Safety Council attributed the crash largely to pilot error, while Singapore officials pointed to airport deficiencies as contributing to the crash.

Optronics 6G Fab Set for 2005

AU Optronics Corp. announced that a planned sixth-generation thin-film transistor, liquid-crystal display panel factory is set to begin mass production in the first quarter of 2005, two months ahead of schedule. Investment of NT$200 billion (US$5.9 billion) has been earmarked for the project.

Competition is expected to heat up in 2005 when the world's top three TFT-LCD panel companies, including LG-Philips and South Korea's Samsung as well as AU Optronics, all begin 6G mass production.

The plant, which is located in the Central Taiwan Science-based Industrial Park, will have an annual production capacity of 3.84 million large TFT-LCD panels worth NT$180 billion (US$5.3 billion).

Former AmCham President Spotted at Harvard

Jeffrey R. Williams, former Taipei-based banker and AmCham president from 1997 to 1999, is spending the year at Harvard University's Kennedy School of Government. He has been named a Senior Fellow at the school's Center for Business and Government. Fellows are leaders from academic, government, corporate, and non-profit life around the world, who are invited to engage in the ongoing private sector and public policy debate at the Center for Business and Government and become members of the Center's community.

Williams, who holds MBA and undergraduate degrees from Harvard and has published several case studies for the Harvard Business School, will be focusing on corporate governance concerns of multinational firms doing business with China. In Taiwan, he served as general manager for American Express and later as CEO for Standard Chartered Bank. He first came to Taiwan with Citibank in 1982, and later opened that bank's first branch in Shenzhen, China.


Prominent economist speaks out for services

As Taiwan goes through a macro-economic transition, the past success it has achieved in the manufacturing sector can provide an excellent foundation for developing value-added service businesses. But the government needs to alter its "manufacturing-oriented mindset" and revise relevant laws and regulations to promote the growth of service industries.

That was the theme of remarks by Chen Tain-jy, president of the Chung-Hwa Institution for Economic Research (CIER), at AmCham's September luncheon meeting, held at the Grand Formosa Regent Hotel. Chen said that his organization is urging the government to place more emphasis on improving the legal and policy framework to enable the service sector to play its proper role in the economy. In Chen's opinion, government officials' concerns about a hollowing-out in the manufacturing sector represent a "misconception," since service industries "can do as well as manufacturing industries in creating jobs" and providing the propulsion for spurring economic growth.

Although some manufacturing industries may be declining, Taiwan remains strong in certain high-tech sectors where it enjoys a large scale of operation, worldwide recognition, vertical integration, and cost-competitiveness. That industrial base is in fact Taiwan's biggest advantage in developing its service sector, as it provides a ready market for many key services such as finance, logistics, shipping, and insurance. Growth in those sectors can easily take place "as an extension" of the manufacturing activity.

Another strength mentioned by Chen is the Taiwanese talent for innovation. Taiwan companies have gained a good reputation among their Western business partners for their ability to undertake product development and make product improvements. In addition, Taiwan annually ranks fourth in the world in the number of U.S. patents obtained. "If we can accomplish that in manufacturing, we should also be able so in services," said Chen.

In financial services, a good foundation is already in place. Taiwan has a large and active stock market, a bond market that is "already second in Asia and has the potential to overtake Japan," and good experience with venture capital.

A third asset for Taiwan is its international experience, considering that the "service industry today is more and more a global industry." Taiwan's culture is a mixture of Chinese, Western, and Japanese influences, making it relatively easy for Taiwanese to be flexible and adaptable. The rapidity with which the British DIY retailing company of B&Q was able to develop a strong market here shows how receptive the Taiwanese can be to new products.

At the same time, Taiwan faces a number of obstacles to service-sector development, most of them related to government attitudes and practice, the speaker said. Number one is the tendency of government agencies to concentrate on the regulatory or management parts of their jobs, to the near exclusion of what should be their responsibility to promote economic activity. Only the ministry of economic affairs carries out industrial policy, said Chen, whereas the education ministry should be promoting the business of education, the department of health the business of health care, and so on.

The service sector has also been overlooked in the manufacturing-centered legislation providing investment incentives. And the bureaucracy has played an overly intrusive role in such areas as financial services, micro-managing what products banks and insurance companies can offer to their customers. Since "government is always behind the market," Taiwan is invariably slower than its economic rivals in adopting new financial products and approaches, said Chen. "The system kills innovation."

As a solution, CIER is urging the government to shift from a stance of illegal unless approved to one of legal unless prohibited. Another proposal from the institute is to develop Taiwan into a regional assets management center, providing financing for projects throughout the region, including China. Chen said that President Chen Shui-bian has shown great interest in this idea.

The rapid aging of the Taiwan population is also opening increased opportunities for development of the healthcare sector, but again existing government regulations have been a barrier -- particularly rules restricting the provision of healthcare to non-profit institutions. If the business could be opened to private companies, Chen said, it could not only improve the standard of healthcare available in the society but also create a large number of jobs for citizens who may not be easily employable in other industries.

--- By Don Shapiro