CROSS-STRAIT SHIPPING - INEXPENSIVE, NOT

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003406

SIPDIS

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W

E.O. 12958: DECL: 10/27/2014
TAGS: EWWT ECON ETRD PREL CH TW
SUBJECT: CROSS-STRAIT SHIPPING - INEXPENSIVE, NOT
INSIGNIFICANT


Classified By: AIT Economic Section Chief Daniel K. Moore, Reason 1.4 (
B/D)

Summary
--------------


1. (U) Businesses on both sides of the Taiwan Strait look
forward to the possibility of direct marine cargo links
between the Mainland and Taiwan. However, they have also
been very resourceful at taking advantage of small openings
and the flexibility of Taiwan, PRC and other authorities to
ship goods inexpensively through different routes across the
Strait. As a result, the additional expense imposed by the
lack of direct links on sea freight is very small. As one
observer put it, Taiwan and the PRC already have virtual
direct shipping links; they,re only indirect on paper.
Establishing direct shipping links will have a positive
impact on Taiwan,s economy. Initially the impact will be
small, but the importance of direct shipping will grow in the
long run. Taiwan,s experience with various methods of
indirect shipping provides a good base for making progress on
direct marine links and improved cross-Strait relations.
(End Summary)

Gradual Liberalization Stills Falls Short
--------------


2. (U) The restrictions on cross-Strait shipping are neither
absolute nor static. Over the past 10 years, several
openings have been made to ease cross-Strait transportation
while maintaining the basic prohibition against direct
shipping. Two significant openings stand out: in 1995 Taiwan
approved cross-Strait offshore transshipment through
Kaohsiung Harbor, which was further expanded in 2004 to
Keelung and Taichung Harbors. The second big opening
occurred in 2000 when the mini-links from Kinmen and Matsu,
controlled by Taiwan, to the Mainland ports of Xiamen and
Fuzhou were opened. These and other gradual changes have
substantially liberalized cross-Strait transportation and
paved the way for direct shipping links. However, the
current situation still imposes some small costs and
inconveniences.

Various Routes Across the Strait
--------------


3. (C) Several options currently exist for moving goods by
sea across the Taiwan Strait. All are subject to
restrictions, but shipping companies and their customers have
found means to minimize the cost imposed by these
restrictions. According to industry experts, it is difficult
to gauge and compare the volume of cargo shipped through the
various routes because they are measured by different
organizations using different standards )- if measured at
all. These methods can be grouped into three main categories.

--International Shipping Link - Any ship can travel between
the PRC and Taiwan with an intermediate stop in a third
location. This method of shipping makes up the bulk of
cross-Strait shipping and virtually all Taiwan-PRC trade that
is shipped by sea. Dai Heui-huang, professor at National
Kaohsiung Marine University, told AIT that the volume of
cargo that is shipped across the Strait is very difficult to
estimate. However, he indicated that at least 1 million TEU
of cargo is shipped this way. The most common stopping
points are Hong Kong and Ishigaki Island, Japan. Ships are
required to show documentation from the stopover port upon
arrival. Some contacts report that many ships, possibly
most, do not physically stop in a third port, but instead
obtain their paperwork through other channels. For example,
Japanese customs officials will reportedly meet ships at sea
without requiring the vessel to actually dock at a Japanese
port. One contact indicated that the necessary Hong Kong
documentation could be obtained for as little as USD 200
without a physical stop in the port.

--Offshore Transshipment Link ) Ships flying flags other
than ROC or the PRC, including ships owned by Taiwan and PRC
shipping firms, travel directly to and from PRC ports on
routes that include a third destination. However, they
cannot ship cargo directly. No PRC-origin cargo can clear
customs in Taiwan and no Taiwan-origin cargo can clear
customs in the PRC, unless the ship has passed through
another port in between. For example, a ship in Taiwan could
take on cargo bound for the U.S., travel to the PRC, take on
more cargo, and then return to the U.S. This route cannot be
used for cross-Strait trade, so the main beneficiaries in
Taiwan are shipping companies. Keelung and Taichung were
only approved as offshore transshipment centers this year.
In 2003, a total of 630,336 twenty-foot equivalent units (TEU
) a unit of cargo volume equal to one twenty-foot container)
was loaded or unloaded at Kaohsiung Harbor. However,
Professor Dai estimates that 70 to 80 percent of the total
volume is comprised of empty containers enroute to the PRC to
be filled with exports.

--Mini Three Links ) Taiwan and Mainland Chinese vessels
flying ROC and PRC flags are able to travel directly between
Taiwan-controlled Kinmen and Matsu and the Mainland ports of
Xiamen and Fuzhou. They carry both passengers and cargo.
However, cargo is limited to goods produced locally or for
local consumption on the small Taiwan-controlled islands just
off the Mainland coast. As a result, mini-three-links cargo
makes up only a tiny fraction of goods shipped across the
Strait.

Cheap for Now
--------------


4. (U) Despite regulations and the complications of
cross-Strait shipping, industry experts estimate that current
costs are not substantially higher than direct shipping costs
would be; delays are generally short as well. For example,
Bob Hsu, Secretary General of the National Association of
Chinese Ship Owners (NACS),estimates that the fare for
shipping one TEU from Kaohsiung to Tienjin via Japan,s
Ishigaki Island is approximately USD 480. Direct sea cargo
links would reduce the price only to USD 475. The Japan stop
(or sail-by) only adds about one day to the total shipping
time. Hsu estimates that there would be no cost savings
whatsoever on the shorter Kaohsiung-Shanghai route. A stop
in Hong Kong en route to Guangzhou only adds about two
dollars to the cost of shipping each TEU and increases
shipping time by less than one day. Greater savings would be
found on Kaohsiung-Fuzhou and Kaohsiung-Xiamen routes where
direct shipping would cut costs by approximately 7 percent.
The time saved on these routes would be more substantial,
cutting a three to four day trip down to one day.

Impact of Direct Shipping ) Stronger in the Long Run
-------------- --------------


5. (C) Direct marine cargo links would leave their strongest
impact on the shipping industry itself. However, much of the
impact would come from increased access to the Chinese market
for Taiwan shipping firms rather than the reduced costs.
NACS Secretary General Hsu tells AIT/T that Taiwan shipping
firms expect that negotiations on direct shipping links would
also result in an agreement that would permit greater access
to the Mainland market, particularly the authority to set up
branch offices in China. Currently, the PRC will only
approve representative offices, which are permitted to engage
in promotional activities. Branch offices would also be
allowed to engage in sales and issuance of bills of lading.
Taiwan,s major shipping companies generate about 50 to 60
percent of their revenue from the greater China market.
Evergreen and Yangming shipping companies report that 1.5
percent of their revenue from business in the China market
goes to commissions paid to Mainland brokers. Branch offices
in China would cut their expenses significantly and help them
increase opportunities in China.


7. (C) In the short term, the real economic impact of direct
cross-Strait shipping on Taiwan,s overall economy would be
much smaller. The cost savings from direct shipping would be
an almost negligible fraction of an already inexpensive
transportation option. Saved shipping time would also be
small for most routes. Chinese National Federation of
Industries Deputy Secretary-General Tsai Horng-ming told us
that in shipping Taiwan and the PRC already have virtual
direct links; they,re only indirect on paper. (In contrast,
the savings offered by direct air cargo links would be much
more substantial and immediate. We will report on the
potential impact of direct air links via septel.)


8. (U) However, over time, these small cost and time savings
will grow in relative importance. As PRC ports expand and
improve their services, Taiwan ports will be less competitive
without direct links. With the continued expansion of
cross-Strait trade, the total cost imposed by indirect links
will grow. As Mainland industrial technology advances,
Taiwan,s manufacturing industries will need to work harder
and further cut costs to maintain competitiveness. Small
variations in shipping expenses will grow in significance.

Comment ) An Opening for the Cross-Strait Relationship
-------------- --------------


9. (U) Although the economic benefits of cross-Strait direct
shipping are relatively small in the short run, direct
shipping should still be a priority for the Chen
administration. In addition, to growing importance in the
long run, cross-Strait direct shipping could provide a
valuable opportunity to improve cross-Strait relations.
Because of Taiwan,s experience with the mini links and
offshore transshipment, establishing direct marine cargo
links may present fewer problems than direct air links.
Establishing direct shipping links would send a very positive
message about the state of cross-Strait relations. The
implications for future regional stability and further
normalization of economic relations would increase confidence
and improve the investment environment in Taiwan.
PAAL