(1)Economic Environmentix

Separate Customs Territory of Taiwan, Penghu, Kinmen and MatsuWT/TPR/S/232
Page 1
WorldTrade
Organization / RESTRICTED
WT/TPR/S/232
31 May 2010
(10-2944)
Trade Policy Review Body
TRADE POLICY REVIEW
Report by the Secretariat
SeparateCustomsTerritory
of Taiwan, Penghu, Kinmen
andMatsu
This report, prepared for the second Trade Policy Review of the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei), has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from Chinese Taipei on its trade policies and practices.
Any technical questions arising from this report may be addressed to
Sergios Stamnas (tel: 022 739 5382) or Martha Lara de Sterlini (tel:0227396033).
Document WT/TPR/G/232 contains the policy statement submitted by ChineseTaipei.

Note:This report is subject to restricted circulation and press embargo until the end of the firstsession of the meeting of the Trade Policy Review Body on the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu.

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CONTENTS

Page

SUMMARYix

(1)Economic Environmentix

(2)Trade Policy Frameworkx

(3)Trade Policy Developmentsx

(4)Sectoral Policy Developmentsxii

(5)Outlookxiii

I.Economic environment1

(1)Introduction1

(2)Recent Economic Developments3

(3)Macroeconomic Policies6

(i)Monetary and exchange rate policies6

(ii)Fiscal policy7

(4)Structural Policies8

(i)Tax reform8

(ii)Financial reform8

(iii)Privatization9

(5)Balance of Payments9

(6)Trade and Investment Flows9

(i)Composition of trade10

(ii)Direction of trade10

(iii)Trade in services13

(iv)Inbound and outbound direct investment13

II.trade policy regime: framework and objectives16

(1)Introduction16

(2)General Institutional Framework16

(3)Structure of Trade Policy Formulation, Implementation and Evaluation18

(i)Executive branches of government18

(ii)Advisory, planning, and other bodies18

(4)Trade Policy Objectives19

(5)Trade Laws, Regulations, and Transparency19

(6)Trade Agreements and Arrangements22

(i)The WTO22

(ii)Preferential trade agreements23

(7)trade disputes andconsultations27

(i)Dispute settlement in the WTO27

(ii)Other27

(8)investment regime27

(i)Direct investment27

(ii)Cross-strait investment31

(iii)Measures to encourage investment33

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III.trade policies and practices by measure34

(1)Introduction34

(2)Measures Directly Affecting Imports35

(i)Registration, documentation, and procedures35

(ii)Customs valuation37

(iii)Tariffs37

(iv)Other charges affecting imports44

(v)Import prohibitions, restrictions, and licensing45

(vi)Contingency measures46

(vii)Government procurement47

(viii)State-trading activities50

(3)Measures Directly Affecting Exports51

(i)Registration, documentation, and procedures51

(ii)Export taxes, charges, and levies51

(iii)Export prohibitions, restrictions, and licensing51

(iv)Export operations of government owned enterprises52

(v)Duty and tax concessions53

(vi)Export finance, insurance, and guarantees53

(vii)Export promotion and assistance53

(viii)Free zones (export processing zones, science-based industrial parks and free-trade zones) 54

(4)Measures Affecting Production and Trade55

(i)Taxation and tax-related assistance55

(ii)Subsidies58

(iii)Trade-related investment measures59

(iv)Standards and other technical requirements59

(v)Intellectual property rights65

(vi)Government-owned enterprises72

(vii)Competition and consumer protection policy73

IV.trade policies by sector76

(1)Introduction76

(2)Agriculture, Livestock, and Fisheries77

(i)Overview77

(ii)Policy objectives77

(iii)Border measures78

(iv)Domestic support measures79

(3)Energy83

(i)Overview83

(ii)Policy objectives83

(iii)Hydrocarbons and natural gas83

(iv)Electricity85

(v)Renewable energies85

(4)Manufacturing85

(i)Overview85

(ii)Policy objectives and measures87

(iii)Selected subsectors88

Page

(5)Services89

(i)Features and multilateral commitments89

(ii)Financial services91

(iii)Telecommunications and postal services98

(iv)Transport101

(v)Tourism103

(vi)Professional services104

REFERENCES107

APPENDIX TABLES111

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CHARTS

i.Economic environment

I.1Product composition of merchandise trade, 2005 and 200811

I.2Direction of merchandise trade, 2005 and 200812

III.trade policies and practices by measure

III.1Tariff escalation by 2-digit ISIC industry, 200941

TABLES

i.Economic environment

I.1Selected macroeconomic indicators, 2005-092

I.2Basic economic indicators, 2005-094

I.3Composition of trade in services, 2005-0913

I.4Inbound and outbound flows of direct investment(approval basis), by source
and destination, 2005-0814

I.5Inbound and outbound flows of direct investment(approval basis), by activity, 2005-0815

II.trade policy regime: framework and objectives

II.1Inbound direct investment prohibitionsand restrictions, 200929

III.trade policies and practices by measure

III.1Tariff structure, 2005 and 200938

III.2Preferential trade agreements, 200942

III.3Adjustment of customs duties in 2009 (for the period from 5 October 2004 to 31December 2009) 43

III.4Procurement by origin, 2004-0848

III.5Procurement share by type of procedure, 2004-0849

III.6Direct and indirect tax revenues, 2004-0955

III.7Domestic standards and their equivalence to international standards, end-March 200960

III.8Commodity inspection, by type, 2004-0961

III.9IPR applications and approvals, 2004-0966

III.10IP cases investigated and concluded by district public prosecutors' offices, 2005-0971

III.11IP adjudication findings, 2005-0972

IV.trade policies by sector

IV.1Developments in domestic support to agriculture and livestock, 2002-0680

IV.2GDP in manufacturing, 2005-0886

IV.3Weighted average interest rates on deposits and loans and spreads, 2005-0893

IV.4Telecommunications market, 2005-0898

APPENDIX TABLES

i.Economic environment

AI.1Merchandise exports by group of products, 2005-08113

AI.2Merchandise imports by group of products, 2005-08114

AI.3Merchandise exports by destination, 2005-08115

AI.4Merchandise imports by origin, 2005-08116

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II.trade policy regime: framework and objectives

AII.1Principal notifications under WTO Agreements, up to 1 March 2010117

III.trade policies and practices by measure

AIII.1Tariff rate quotas and their utilization, 2008 and 2009119

AIII.2Prohibited exports, 2009120

AIII.3Goods subject to commodity tax, 2009121

AIII.4Indicative list of publiclyowned enterprises, 2009123

AIII.5Enforcement statistics related to competition policy, 2004-09124

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SUMMARY

1. An outward-oriented development strategy has brought rapid growth and prosperity to the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu(Chinese Taipei), transforming it into a modern industrial economy and a leading exporter of information technology (IT) products. Since its previous TPR, in 2006, Chinese Taipei has pursued further trade and investment liberalization, mainly in the services sector, and is currently taking steps to restructure its economy and trade by stimulating domestic consumption and investment. It is also attempting to improve the investment climate in order to attract higher inward direct investment. ChineseTaipei's investment rate continues to fall considerably short of its saving rate, a gap that is reflected in persistently large current account surpluses.

(1)Economic Environment

1. Between 2005 and 2008, Chinese Taipei achieved robust economic growth, averaging 4% per year in real terms. Per capita GDP in nominal terms grew steadily during the same period, reaching US$17,507 in 2008, one of the highest in Asia. Nevertheless, as a result of the global economic slowdown, the economy contracted by 1.9% in 2009, per capita income declined, and the unemployment rate rose to 5.9%.
2. Chinese Taipei's growth is heavily dependent on exports, mostly of manufactured goods, which are equivalent to some 72% of GDP. The recent global economic crisis has therefore had an adverse impact on ChineseTaipei's export-oriented economy, to which the authorities have responded with expansionary monetary and fiscal policies to boost domestic demand, while resisting protectionism. Supported by this domestic stimulus package and a strong rebound in Asia's major emerging countries, particularly China, the economy has recovered quickly and is expected to grow by 4.7% in 2010.
3. The sharp drop in global demand owing to the global economic crisis has exposed the risks associated with ChineseTaipei's heavy dependence on a few manufactured exports, prompting the authorities to seek new engines of economic growth and diversify the economy. Improving the international competitiveness of the services industries is now one of the Government's priorities. Further liberalization and deregulation of the services sector could contribute significantly to these efforts. Sustained growth over the long term will require a rebalancing in the composition of growth,with the focus more on domestic consumption and investment.
4. Chinese Taipei has maintained sound macroeconomic policies during the period under review. It has kept inflation low and improved public finances, mainly on account of higher tax revenues. However, the expansionary fiscal policy implemented since 2008 could put renewed pressure on the fiscal balance. During the review period, ChineseTaipei has continued to pursue structural reforms. For example, as part of a broader tax reform plan, the Government has taken steps to streamline its tax structure, by broadening the tax base, seemingly eliminating tax incentives for selected industries and reducing income tax rates, thereby rendering the tax system more neutral with respect to decisions concerning the allocation of resources, especially capital. It has also improved tax collection. As regards capital markets, structural reform has focused on promoting the consolidation and efficiency of the financial industry through market-driven M&As, developing the bond market, and opening capital markets to overseas investors. Restrictions on capital flows to China have also been eased gradually.
5. As cross-strait economic relations have improved during the review period, China has become Chinese Taipei's major export market and its second-largest supplier. Other key trading partners are: Hong Kong, China; Japan; the United States; and the European Union. For more than a decade, Chinese Taipei has been a net investor abroad, with outbound direct investment flows almost double the amount of inbound direct investment; China is by far the main destination for capital outflows. Although the ratio of Chinese Taipei's inbound direct investment to GDP remains low by regional standards, most sectors are open to inbound direct investment. However, inbound direct investment is prohibited or restricted in several major sectors on grounds of essential security and public health; these prohibitions are implemented through a negative list or, in the case of investmentfrom China, a positive list.

(2)Trade Policy Framework

1. Chinese Taipei, a WTO Member since 1January2002, became party to the plurilateral Government Procurement Agreement in July 2009. Despite the implementation of certain basic law amendments, the structure of trade policy formulation and implementation have remained unchanged, except for the establishment of theOffice of Trade Negotiations in March 2007 and the Intellectual Property Court in July 2008.
2. Chinese Taipei's overall trade policy objectives have remained governed by its need to be increasingly integratedinto the global economy through its active participation in multilateral trade and economic organizations, the negotiation of free-trade agreements (FTAs),the strengthening of trade facilitation and promotion activities, the elimination of trade barriers in overseas markets and the diversification of these markets. Since its last TPR, in addition to its existing FTA with Panama, Chinese Taipei has concludedagreements with trading partners in Central America(ElSalvador, Honduras, Guatemala, and Nicaragua) and continues or plans negotiations with others. It would appear that the negotiation of FTAs is becoming motivated primarily by economic considerations. In addition to its contribution to aid-for-trade and trade-related technical assistance activities, Chinese Taipei has provided duty-free treatment to selected imports from leastdeveloped countries (LDCs).
3. Chinese Taipei has made good progress in its regulatory reform programme,which allowed for deregulation in numerous areas including services, investment, and customs. It has continued to take steps to improve regulatory transparency, including the daily publication of an integrated Cabinet Gazette, which is available online. Most laws and regulations are made available through government publications and websites. Chinese Taipei met virtually all its notification requirements under the WTO Agreements on time, except for those relating to import licensing procedures and domestic support in agriculture (2006, 2007, 2008), which have been subject to some delay since its previous Review.

(3)Trade Policy Developments

1. The tariff is Chinese Taipei's main trade policy instrument and a significant, albeit declining, source of tax revenue (4.5% of total taxes collected in 2009). Most tariff lines are subject to applied MFN tariffs no greater than 10%, and 30.1% are duty free. The simple average applied MFN tariff rate remains unchanged, at 7.8%, as no tariff cuts occurred during the reviewperiod. The tariff remains relatively complex, involving a multiplicity of rates (86 ad valorem, 16specific, 48 alternate duties). All tariff lines are bound and most applied MFN rates,including higher seasonal tariffs on some fruit, coincide with bound rates, thereby imparting a high degree of predictability to Chinese Taipei's tariff schedule. Nonadvalorem duties, particularly in agriculture, tend to conceal relatively high advalorem equivalents (AVEs); 75 of the top 100 applied MFN rates involve nonadvalorem rates. The peak applied advalorem MFN rate remains at 500% (deer velvet), while the highest tariff rate consists of an AVErate of 1,069.87% (rolled or flaked rice). The product coverage of tariff rate quotas, mainly for agricultural items, has dropped by about 22%. Customs duties on 30basic items were temporarily reduced mainly to stabilize commodity prices and to help ease inflation. Similar action was taken with respect to the 5% business tax rate on imported wheat, corn, and soybeans; these items are not subject to this tax if produced domestically. The scope of preferential tariff treatment of imports under FTAs now covers an average of 67% of total tariff lines, on top of the lines that are already dutyfree, and reduces the simple average tariff rate applied to beneficiaries by up to 5percentage points. Harbour-service dues on domestic trade remain 60% lower than those for overseas routes, which involve large international cargo freighters requiring costlier equipment and services.
2. Since its previous Review, ChineseTaipei has expanded slightly the scope of its import bans from 56 to 63 (as of October 2008) ten-digit HS items; 24 items remain subject to non-automatic import licensing. No quantitative import restrictions are in place. However, Chinese Taipei still prohibits inbound cross-strait trade involving some 2,243tariff lines on security and/or commercial grounds (mostly agricultural items, but also pharmaceuticals, iron and steel, electrical and electronic equipment, and textile products). Goods originating in, or destined for, China can now be shipped directly. ChineseTaipei has never used countervailing or safeguard measures; however, it maintains five anti-dumping measures on three products. Special safeguards are applied in agriculture.
3. Regulatory changes undertaken over the review periodrelate mainly to dispute settlement cases in government procurement. A margin of preference to local suppliers of up to 3% remains in place for contracts not covered by the GPA, and bidders may be requested to purchase locallyproduced goods. The share of nonChinese-Taipei suppliers rose from 18.1% of the total value of government procurement in 2004 to 28.5% in 2008. Procurement awarded through selective and limited tendering procedures has increased from 25% to 33% of all purchases since 2006.
4. As a result ofthevirtual standstill of the privatization process, which involved only the "release" of some government shares in a few companies during the review period, direct government involvement in the economy persists in several areas (e.g. shipbuilding, petroleum, steel, sugar, tobacco and liquor, banking, insurance, and rail transport) and statutory monopolies remain (notably in electricity, water supply, and postal services). According to Chinese Taipei legislation, government-owned enterprises are only those having de jure monopoly rights and/or in which the Government retains at least 50% of its shares; once the exclusive rights are eliminated, the market is open to other operators and the company is considered privatized and therefore perceived as not subject to WTO notification in this area. Trading activities of government-owned enterprises involve rice, the most important crop, and banknote paper, as well as tobacco, alcoholic beverages, sugar, etc.
5. Chinese Taipei maintains prohibitions and licensing requirements for its exports mainly on grounds of security and public safety; however, the scope of export prohibitions has dropped since its previous TPR. Exports of eel fry (seasonal ban), whale shark, and plants used for pharmaceutical purposes are prohibited; those of fertilizer,whose domestic prices were temporarily frozen, have been subject to prior approvalsince 2008. Exemptions and, on a case-by-case basis, drawbacks are used in order to reduce, if not eliminate, the extent to which import tariffs levied on raw materials (and intermediate goods) used in the production of exports feed through to become, in effect, export taxes. During the review period, total drawbacks varied,reaching an average annual rate of 2.79% of the f.o.b. export value. Similarly, rebates of internal sales taxes are used to facilitate trade by ensuring that exported goods are not subject to double taxation (in both Chinese Taipei and importing countries). Sinceend 2008, a global market expansion plan, including discounted interest rates for loans to exporters, has been in place to assistthose facing declining orders from overseas.
6. Various forms of assistance, including subsidies for production and consequently trade, have continued to be provided for agricultural, fisheries, and industrial products and activities. Following the apparent expiry at the end of 2009 of the Statute for Upgrading Industries, which provided tax incentives to selected industries, the Government plans to implement a new, ostensibly non-industry-specific, incentive scheme aimed at promoting R&D, manpower training, operations headquarters, and international logistics and distribution centres,but this had not been approved by the legislature by the time of completion of this report.
7. The large majority of Chinese Taipei's standards remain voluntary; in 2009, 18% of applied standardswere aligned to international standards, down from 25% in 2005. Maximum residue limit requirements have applied in the area of sanitary and phytosanitary measures, although since 2008 action has been taken to improve the transparency of the risk-assessment procedure for establishing import tolerance, as well as to set and enforce these requirements.
8. Chinese Taipei amended certain laws and regulations to ensure better protection of intellectual property rights, particularly copyrights and patents, where twocases of compulsory licensing occurred over the review period; it has intensified efforts to enforce legislation in this regard. A number of improvements are being undertaken, e.g. with respect to internet piracy and particularly illegal textbook copying on college-campuses.
9. Competition and consumer protection policy has, by and large, remained unchanged. Certain activities, such as export and import cartels, may be exempted from the application of the Fair Trade Law, if approved by the Fair Trade Commission.

(4)Sectoral Policy Developments

1. The structure of the Chinese Taipei economy has not changed significantly since its last Review. The services sector remains the largest contributor to GDP and employment. On the other hand, the manufacturing sector has shown a relative decline in productivity and its contributions to GDP and employment, while the agriculture sector has remained stagnant.
2. Agriculture plays a minor role in Chinese Taipei's economy, which relies heavily on imports of cereals, for example, to meet domestic needs. Agriculture contributes just 1.6%toGDP and 5.3% to employment (2009),so that its labour productivity is only onequarter of the level of the rest of the economy. Despite its low contribution to GDP, agriculture is a major recipient of government assistance, including border protection and domestic support. Import protection involves some of the highest tariffs in the economy, tariff-rate quotas, and special safeguard measures. In 2009, the average applied MFN tariff for agricultural products (WTO definition), including ad valorem equivalents, was 22.1%, compared with 5% for non-agricultural products. Domestic support includes price stabilization measures, subsidized loans and inputs, and income support for senior farmers. Government intervention remains focused on rice. The authorities envisage replacing the guaranteed price system for rice with a direct payment system, but this is still being assessed and no legislation to this effect has been submitted.
3. Chinese Taipei is almost entirely dependent on imports to meet energy demand. Although the oil and gas sectors have been gradually liberalized, the government-owned Chinese Petroleum Corporation remains a dominant player, whose regulated pricing strongly influences the market. The electricity sector is dominated by another government-run enterprise, which holds a statutory monopoly in virtually all segments of the sector. Increasing oil prices, together with price controls, have undermined the profitability of these two companies; their privatization, along with regulatory and price reform, could help to increase competition, and hence efficiency, in both sectors.
4. Manufacturing continues to play a key role in the economy; although its shares in GDPhave declined slightly (24.9% in 2009) and employment (27.2%), it still contributes to 87.5% of merchandise exports. Chinese Taipei is a leading manufacturer and exporter of high-tech electronic products; by contrast, other industries such as textiles and motor vehicles have become less competitive.
5. The services sector remains the largest contributor to GDP (66.1%) and employment (58%). Chinese Taipei has continued the gradual openingand reform of its services sector so as to improve competitiveness and market access. Commercial presence has been liberalized in financial, environmental, health, and tourism services, and regulatory improvements have been made in professional services and telecommunications, all of which could help attract inward direct investment. Nevertheless, some informal barriers remain in certain subsectors, and limits on nonChineseTaipei investment and other restrictions apply in basic telecommunications, audiovisual services, and air and maritime transport. Despite recent privatization measures in banking and telecommunications, the Government retains a strategic position in these sectors, while postal services remain closed to private investment.

(5)Outlook

1. Following the sharp decline in exports, and consequently manufacturing, at the end of 2008 and beginningof 2009, economic activity in Chinese Taipei has quickly recovered owing to expansionary