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UPDATE 1-US business group accuses Obama of shorting Taiwan

(adds further comments from letter, background on 1979 law, 9-14)

WASHINGTON, Jan 1 (Reuters) - The head of a prominent U.S. business group accused President Barack Obama of compromising Taiwan’s security to promote U.S. ties with China.

Self-ruled Taiwan, which China deems a wayward province, is watching “with increased exasperation,” said Rupert Hammond-Chambers, president of the U.S.-Taiwan Business Council.

The council’s board chairman is Paul Wolfowitz, a former World Bank president and former U.S. deputy secretary of defense. The group long has advocated arms sales to Taipei, including meeting its wish to buy 66 advanced Lockheed Martin F-16C/D fighter jets to update its F-16 fleet.

The council represents scores of companies doing business with Taiwan, including Lockheed Martin LMT.N, the Pentagon's No. 1 supplier by sales; Boeing Co BA.N; and Raytheon Co RTN.N. China strongly opposes all U.S. arms sales to Taiwan.

Hammond-Chambers said the U.S. departments of state and defense, as well as the U.S. Trade Representative, appeared interested in building closer U.S. ties to Taipei despite resulting complications in the U.S.-China relationship.

“Regrettably, this effort runs smack into a White House that clearly views Taiwan as a barrier to U.S. interests in Asia,” he wrote in an annual year-end report dated Thursday and distributed Friday.

Taiwan has improved its ties with China since the election of President Ma Ying-jeou, of the China-friendly Nationalist Party, or KMT, who took office in May 2008.

Obama, much like his predecessor, George W. Bush, has slowed the submission of proposed Taiwan arms sales to Congress, both for what analysts say is fear of disrupting China-Taiwan rapprochement and to avoid angering Beijing.

Hammond-Chambers said the council would press in 2010 to end such “packaging” of arms sales, a practice begun by Bush in 2007 in “a vain attempt to reduce Chinese ire” over what it regards as interference in its domestic affairs.

The alternative is to send arms sales notifications one by one to Congress, which has the power by law to block them. The United States is bound by the 1979 Taiwan Relations Act to provide Taiwan “defense articles and services” needed for its self-defense.

The stacking of notifications is “significantly weakening Taiwan force modernization,” Hammond-Chambers wrote.

“If the Obama administration balks at providing replacement F-16 fighters to Taiwan, China will have won a major victory in the Taiwan Strait without firing a shot,” the council president said. The updating of Taiwan’s F-16 fleet was a “material response” to Beijing’s own fighter modernization, he added.

The White House declined to comment on the criticism, which echoed the group’s unhappiness with Bush’s delay in meeting Taiwan’s arm requests. Washington has placed more importance in recent years on working with China, a veto-wielding U.N. Security Council member, including on such matters as North Korea, Iran and global warming.

Vance Chang, a spokesman for the de facto Taiwan embassy in Washington, had no immediate comment.

Hammond-Chambers said several other arms deals in the works -- including UH-60 Black Hawk tactical transport helicopters built by United Technologies Corp's UTX.N Sikorsky Aircraft unit and Patriot Advanced Capability-3 missile batteries and missiles built by Lockheed and Raytheon -- have been ready for notification to Congress for more than a year.

The business council had expected those sales would move forward after trips Obama made to China in November and a climate change conference in Copenhagen in December, he said.

“But it now appears as if that timetable is slipping,” Hammond-Chambers wrote.

“The Chinese government can view these extended periods of delay, angst and commensurate half-decisions and non-decisions as important improvements in their position on this issue,” he said.

Hammond-Chambers, in a follow-up e-mail to Reuters, said the council sees the sale of updated F-16s as a top priority in the U.S.-Taiwan relationship in 2010 “and will work with the Obama Administration to achieve this goal.”

Reporting by Jim Wolf; Editing by David Gregorio