MINDANAO TUNA INDUSTRY AT RISK

UNCLAS SECTION 01 OF 04 MANILA 005344

SIPDIS

STATE FOR EAP/EP, EB/TPP/ABT, EB/TPP/BTA/ANA, OES/OMC
STATE PASS USTR FOR BWEISEL, DKATZ, RVARGO
STATE PASS USAID
USDA FOR MANIS, AUTRY, SHEIKH
TREASURY FOR OASIA FOR AJEWELL
USDOC FOR 4430/ITA/MAC/DBISBEE

E.O. 12958: N/A
TAGS: EAGR EAID PREL PGOV ECON RP WTRO
SUBJECT: MINDANAO TUNA INDUSTRY AT RISK

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SUMMARY
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1. The tuna industry, which generates $400 million in
annual revenues in Mindanao, faces a potential reduction in
access to the EU market and restrictions in traditional
fishing grounds. Indonesia is reluctant to extend a crucial
bilateral fishing agreement beyond December 3. Tuna
producers are also concerned the EU will decertify fishing
vessels and canneries because of heightened health criteria.
Tuna exporters fear efforts by Ecuador, Thailand and other
producers to gain preferential access to the US market. To
ensure continued growth, the industry must adapt new
mechanisms to improve international management of fish
resources in the Pacific Basin. Limited access to
Indonesian waters or restricted access to EU and US markets
could severely damage the Philippine tuna industry and
undermine an economic sector critical to the development of
southern and western Mindanao. The U.S. has an interest in
supporting the Philippine tuna industry to promote economic
development and political stability in Mindanao. If GRP
negotiations with Indonesia become deadlocked, the USG could
consider encouraging Indonesia to renew its bilateral
fishing agreement, emphasizing the importance of Mindanao to
our common anti-terrorism efforts.

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TUNA: PRODUCTION AND TRADE
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2. The tuna business, with total annual revenues of $400
million, is vital to southern Mindanao, home to eight
canneries - two in Zamboanga City and six in General Santos
City. The USAID-funded Growth with Equity in Mindanao (GEM)
project estimates that the tuna industry provides 100,000
jobs and ancillary employment for an additional 50,000.
According to the U.N. Food and Agricultural Organization,
Philippine tuna production has grown from 300,000 metric
tons in 1996 to exceed 500,000 metric tons annually in 2003
and 2004. In anticipation of further growth, canning firms
General Tuna and Celebes Canning recently announced new
investments of P347 million ($6 million) to expand
production facilities and create 547 new jobs. Celebes will
nearly double its annual production capacity from 8,386
metric tons to 15,600 metric tons.


3. Industry groups estimate the Philippines' annual
commercial tuna production at 400,000 MT (excluding non-
commercial coastal species). Roughly half is canned for
export, with 44% of canned exports sent to the US and 42% to
the EU. The industry exports approximately 50,000 MT of
fresh or frozen fish. The value of processed tuna exports
rose from $123 million in 2000 to $183 million in 2004,
though tuna canners report that exports have long been
underreported. The industry is trying to correct production
figures to ensure equitable access to international fish
stocks, since an international commission will allocate
annual fishing quotas based on past statistics. Philippine
exporters joined the Thai tuna industry in lobbying to
retain equal access to the US canned tuna market during 2002
when the US limited preferential duties to pouched tuna
under the Andean Trade Preference and Drug Eradication Act
(ATPDEA).

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ACCESS TO INDONESIAN WATERS UNDER THREAT
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4. The bilateral RP-Indonesia fishing agreement, which
governs access to Indonesian waters, will expire on December

3. In renewal negotiations, Indonesia has proposed to
sharply reduce Philippine access to Indonesian fishing
grounds where 60-70% of Philippine tuna originates.
According to the Bureau of Fisheries and Aquatic Resources
(BFAR),Indonesia has proposed reflagging most Philippine
fishing vessels that use Indonesian waters and requiring
each vessel to employ 60% Indonesian crews. Reflagged
vessels would need to process their catch in Indonesia or
export it, through Indonesian firms, to Philippine
processors. Dr. Stanley Swerdloff, GEM's Senior Fisheries
Advisor, noted that Indonesia lacks the capacity to store
and process this volume of tuna, so the proposal does not
appear to serve Indonesian interests either. If the
agreement expires, Philippine vessels would be subject to
surveillance by a new vessel monitoring system and subject
to seizures by Indonesian authorities. GEM estimates that
General Santos City could suffer a 40-100% decline in the
tuna industry, and a 25-60% overall economic decline if the
two countries fail to renew the agreement.


5. The GRP counteroffer would avoid reflagging RP vessels
but promises to land 60% of the catch in Indonesia, provided
that sufficient cold storage and processing capacity is
available. Philippine companies have established two
canneries in Indonesia in recent years, but the Tuna Canners
Association of the Philippines (TCAP) reports that
Indonesia's production costs are not competitive. GRP
negotiators are willing to encourage further investment in
return for renewed access to Indonesian waters. The GRP can
also cite Article 62 of the United Nations Convention on the
Law of the Sea (UNCLOS) requiring signatories to allow
access to unused aquatic resources taking into account "the
need to minimize economic dislocation in states whose
nationals have habitually fished in the zone".


6. According to Swerdloff, the Philippine Department of
Foreign Affairs has appeared reluctant to push for renewal
of the bilateral agreement possibly due to an outstanding
maritime boundary dispute involving a disputed island off
Mindanao. He said DFA is unwilling to cite UNCLOS
provisions and may prefer to delay resolution of the
maritime boundary in hopes of encouraging joint ventures for
oil exploration in disputed areas. BFAR bypassed DFA to
negotiate the current bilateral agreement and is leading the
renewal negotiations, which will resume on November 24-25 in
Jakarta.

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EU INSPECTORS MAY RESTRICT MARKET ACCESS
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7. TCAP expects a team of 20 EU Inspectors to visit the
Philippines in late 2005 to verify that canneries and
fishing boats meet EU sanitary and phytosanitary (SPS)
rules. The requirements are intended to prevent bacterial
contamination during storage and processing of fish. If
compliance falls short, EU inspectors could cut off access
to EU markets for some or all canneries. TCAP noted that
BFAR has required 34 fish processing companies to apply for
recertification due to health issues, but tuna exporters
have not been affected. Swerdloff said that EU consultants
highlighted some legitimate issues but also made some
unreasonable demands, and it is unlikely that EU inspectors
will impose the same requirements.


8. Philippine exporters believe these SPS issues are a
spurious attempt to restrict trade in retaliation for a
successful WTO complaint filed by GRP and other Asian
producers against preferential EU market access offered to
African Caribbean and Pacific (ACP) countries. ACP market
access preferences favor Spanish companies that expanded
canning operations in eligible countries. TCAP claims to
have compiled documentary evidence, including videos of
Spanish canneries, showing that EU and Philippine producers
face different inspection standards.


9. TCAP Executive Director Francisco Buencamino reported
that EU consultants have also questioned the competence of
the Philippine Bureau of Fisheries and Aquatic Resources
(BFAR). Swerdloff said that these doubts arose after
security issues prevented EU consultants from conducting a
pre-inspection visit to Mindanao, so BFAR instead brought
them to visit a Manila fishing port with dismal sanitary
standards.


10. The EU also wants to reduce by 2006 the maximum lead
content in fish to 0.02 parts per million (PPM) from the
present 0.05 PPM by 2006. TCAP reports that the new
standard is extremely difficult to maintain, inconsistent
with the Codex Alimentarius, and of negligible impact on
consumer health. TCAP is concerned that these lead content
standards may also be a discriminatory non-tariff barrier
that could favor EU and ACP producers.

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COMPETITORS SEEK ADVANTAGES IN US MARKET
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11. Philippine tuna exporters are also concerned that major
competitors such as Thailand and Ecuador may obtain
preferential access to the US canned tuna market through
current trade negotiations. After Ecuador obtained lower US
tariff rates for pouched tuna, TCAP fears it may push to
extend duty-free access to canned tuna under the Andean Free
Trade Agreement. Exporters here expect Thailand to seek
preferential market access for tuna under a US-Thailand Free
Trade Agreement. Philippine canners also fear that the
Central American Free Trade Agreement will expand trade
preferences already granted for Caribbean tuna. TCAP
believes that Philippine tuna exports to the US could be
reduced to zero if significant preferences are offered to
other major producers.

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GSP APPLICATION OR US LEGISLATION
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12. TCAP is considering either submitting an application to
include canned tuna under the Generalized System of
Preferences (GSP) or lobbying for US legislation to counter
preferential US market access to competing producers. Ted
Po, Vice President of Century Canning Corporation, surmised
that a US-RP Free Trade Agreement (FTA) might ensure
competitive US market access for Philippine tuna exporters,
but he expressed doubt about the near-term feasibility of
such an FTA in view of the political sensitivities over
Philippine agriculture. TCAP has engaged a US law firm to
explore the feasibility of filing a GSP petition in the
event that competing producers gain preferential market
access. TCAP also suggested that the U.S. congress could
intervene to ensure equal market access for Philippine tuna
producers as it has proposed to do for pouched tuna through
the Fair Trade In Pouch Tuna Act of 2005.

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NEW PACIFIC FISHING REGIME
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13. The tuna industry is adapting to new multilateral
mechanisms to regulate fish stocks in the western Pacific
Basin. In May 2005, the GRP ratified the Multilateral High
Level Convention (MHLC) on the Conservation and Management
of Highly Migratory Fish Stocks in the Western and Central
Pacific Ocean. Originally signed in 2000, the MHLC led to
the establishment in 2004 of the Western and Central Pacific
Fisheries Commission (WCPFC),to monitor fish stocks, and
allocate fishing quotas for international waters. The WCPFC
will try to limit the annual catch of yellowfin and bigeye
tuna based on evidence of overfishing, while allowing
further growth in the skipjack tuna catch.


14. Under the new regime, fishing vessels will be required
to install tracking devices, increase their minimum net size
to reduce the collection of smaller fish and submit daily
and monthly logs of their catch. In July 2005, the GRP
adopted a National Tuna Management Plan that incorporates
MHLC requirements for managing fishing stocks in Philippine
waters. USAID Manila programs support this initiative and
help the GRP improve its resource management capacity and
adapt to international standards.

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COMMENT
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15. Philippine exporters appear most concerned over
upcoming EU inspections and potential loss of EU market
access. Exporters and USAID advisors doubt that health
issues would justify decertification of Philippine
canneries, but TCAP is worried that EU inspectors may impose
unreasonable standards as a non-tariff barrier to support EU
and ACP competitors. The expiration of the bilateral
agreement with Indonesia, however, may be a more serious
threat to the Philippine tuna industry. Since Indonesia
receives limited economic benefits from its bilateral
fishing agreement with the Philippines, the GRP is concerned
that Indonesia may allow the agreement to expire and use new
surveillance tools to enhance enforcement. The U.S. has an
interest in supporting the Philippine tuna industry to
promote economic development and political stability in
Mindanao. If negotiations fail to overcome the impasse, the
USG could encourage Indonesia to renew its bilateral fishing
agreement with the Philippines, emphasizing the importance
of Mindanao to our common anti-terrorism efforts.
JONES