U.S. $5.3 Billion Arms Sale for Taiwan Likely Deal China Can ‘Live With’

The U.S. rejected Taiwan’s request for new Lockheed Martin Corp. (LMT) F-16 fighters, offering to sell $5.3 billion in upgrades for existing jets in a move likely to avoid a repeat of the Chinese backlash from earlier sales.

The retrofitting for the 145 F-16 A/B models is part of a package including advanced radar, guided bombs and other technology and training, the Pentagon said yesterday. Taiwan said it needs new jets to replace an aging fleet as China deploys missiles across the strait separating the civil war foes as part of Asia’s biggest military spending program.

The U.S. proposal aims to meet the government’s legal obligation to provide Taiwan arms without undoing repairs to relations with China that were damaged by a weapons sale two years ago. China condemned the announcement, stopping short of threatening action that would mar a planned U.S. visit by Vice President Xi Jinping this year.

“China should view this as, if not an outright victory, then an outcome that they can live with,” said Frank Lavin, a former U.S. ambassador to Singapore and chairman of public affairs at Edelman Asia Pacific, a communications firm. “It doesn’t behoove them to escalate this.”

China’s Ministry of Foreign Affairs urged the U.S. to withdraw its offer, spokesman Ma Zhaoxu said in comments posted on its website. U.S. “wrong actions” will damage China-U.S. relations and military ties, he said. Ambassador Gary Locke was summoned to the foreign ministry, the U.S. Embassy said.

No Surprise

The U.S. decision was widely expected, according to Douglas Paal, vice president for studies at the Carnegie Endowment for International Peace in Washington.

“The U.S. did not surprise China,” said Paal, former Asia director at the National Security Council. “Since late 2010, Beijing has been avoiding unnecessary friction. This time Washington reciprocated.”

Obama, facing an election next year and a 9.1 percent unemployment rate, was criticized by Republican challengers over the agreement. Kurt Campbell, assistant secretary of state for Asia, said the more than $12 billion of weapons the Obama government has sold to Taiwan equals or exceeds sales in any other period in U.S. relations with Taiwan.

“President Obama has ignored Taiwan’s request and caved in to the unreasonable demands of China at the cost of well-paying American jobs,” former Massachusetts Governor Mitt Romney said in a statement.

20,000 Jobs

U.S. Senator John Cornyn, a Texas Republican, said Sept. 20 he’d seek to force the sale of 66 new F-16 C/D jets built in his state by attaching a provision to a trade bill. The sale would support more than 20,000 jobs, Rupert Hammond-Chambers, president of the U.S.-Taiwan Business Council, said in a Sept. 14 telephone interview.

Lockheed, based in Bethesda, Maryland, builds the F-16 fighter in Fort Worth, Texas. The company had said that a Taiwan sale would help keep the production line open past 2013. Lockheed rose $1.22, or 1.7 percent, to $73.87 at 1:40 p.m. in New York Stock Exchange composite trading after falling 3.7 percent yesterday.

Taiwan’s President Ma Ying-Jeou, who has sealed historic trade agreements with China during his term, encounters an election in January. His call in May for the U.S. to provide new fighters was designed “to remedy his domestic reputation as too friendly to China,” said Jaushieh Joseph Wu, a former Taiwan ambassador to the U.S.

‘Blame the U.S.’

“By focusing only on F-16 C/Ds, Ma might be able to sideline his responsibility as commander in chief and place the blame on the U.S.” for not providing the fighters, he said. “The general public image of President Ma is that he doesn’t pay too much attention to Taiwan’s defense.”

Taiwan’s Deputy Defense Minister Andrew Yang called the upgrades a “very significant symbol indicating the United States is pretty much fully committed” to supporting the island’s self-defense. The upgrades will take about 12 years to complete, and Taiwan still wants new F-16 C/D jets to replace its aging F-5 and Mirage aircraft, Yang said in an interview in Washington today.

“We still continue to pursue this objective,” Yang said. “The United States also made it abundantly clear the issue is still under consideration.”

Taiwan also is interested in joining the list of potential buyers of Lockheed’s F-35 Joint Strike Fighter in the longer term, Yang said. The island nation had sought unsuccessfully in the past to participate in the fighter’s development, he said.

Marine Corps Jet

The most appropriate model probably would be the U.S. Marine Corps’s short-takeoff, vertical landing version, Yang said. Then-Defense Secretary Robert Gates put that version on probation in January to resolve problems with its lift system.

When the U.S. announced arms sales to Taiwan in January 2009, China said it would “seriously damage” relations. The government later suspended military talks and said it would punish companies involved in the $6.4 billion package, which included Boeing Co. (BA) Harpoon missiles.

This year, on the same day the new sales were disclosed, Boeing Senior Vice President Ihssane Mounir said in Beijing that the Chicago-based company was in discussions with “at least a couple” of Chinese airlines on orders for the 787 Dreamliner.

Xi Succession

The 1979 Taiwan Relations Act requires the U.S. to arm Taiwan for its self-defense. Congress has 30 days to object to the proposed sale. As of December, China’s military had as many as 1,200 short-range ballistic missiles deployed opposite Taiwan, according to the U.S. Defense Department’s annual review of the mainland’s military.

Xi is in line to succeed President Hu Jintao as head of the ruling Communist Party next year. Hu, before assuming the top job starting in 2002, made a trip to the U.S. as vice president.

Xi doesn’t want to appear “soft” before coming to power, Jing Huang, a professor at the Lee Kuan Yew School of Public Policy in Singapore, said in an e-mail.

“Although his position has become indisputable, his leadership as well as his ‘team’ have yet to be established,” he wrote. “I am not so optimistic this time.”

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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