PRC'S CROSS-STRAIT AGRICULTURAL INITIATIVE -

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 002243 SIPDIS DEPT FOR EAP/TC DEPT PLEASE PASS AIT/W E.O. 12958: DECL: 05/18/2015 TAGS: ECON ETRD EAGR PREL CH TW SUBJECT: PRC'S CROSS-STRAIT AGRICULTURAL INITIATIVE - CHEN'S SOUR GRAPES REF: A. TAIPEI 1781 ¶B. TAIPEI 2164 ¶C. TAIPEI 2202 Classified By: AIT Director Douglas H. Paal, Reason 1.4 d Summary -------------- ¶1. (C) The PRC has offered to eliminate tariffs on ten of the twelve categories of fruit that can be legally imported from Taiwan to the PRC. In addition, Beijing announced it will expand the number of permitted import categories to ¶18. The Taiwan government is insisting that government-to- government negotiations must precede implementation of these measures. The DPP government in Taipei fears that Taiwan's agricultural industry will become too dependent on the PRC market and that the PRC might request reciprocal market opening measures. Despite these concerns, Taiwan's agricultural industry has generally responded positively to the Beijing overtures. The KMT-controlled Taiwan Provincial Farmers Association (TPFA) indicated it would send a delegation to negotiate implementation of the measures. Taiwan's Council of Agriculture said that such a move could be illegal. Many estimates of the potential impact of these measures have been wildly exaggerated, but AIT/T believes they have the potential to triple Taiwan's fruit exports to the PRC. The current proposed measures would have little impact on U.S. trade, unless Taiwan grants reciprocal measures to the PRC. If Taiwan were to open its markets to PRC imports of corn, soybeans or apples as it has previously for corn, the consequences for U.S. trade interests would be severe. Some critics claim that these measures are part of a PRC "united front" strategy aimed at isolating Chen Shui-bian and putting him on the defensive again. End summary. The PRC's Offer - Previously Forbidden Fruit -------------- ¶2. (U) During Kuomintang (KMT) Party Chairman Lien Chan's April 26-May 3 visit to the Mainland, PRC officials announced measures to expand Taiwan fruit exports to the PRC, one of three PRC goodwill "gifts" to enhance cross- Strait exchanges. The PRC indicated that it will eliminate tariffs on ten of the twelve categories of fruit it has already approved for import and that it will approve another 6 categories for import. Currently, tariffs on the twelve import categories range from 10 to 25 percent. 
These initiatives may have already been implemented. Taiwan media reported that the first duty-free Taiwan fruit has been exhibited at a trade show in Fuzhou that opened May 18. The reports indicate that up to 47 tons of fruit were shipped from Kaohsiung and received expedited customs clearance at Fuzhou's Mawei port. ¶3. (U) The announcement was not unexpected. During the March 28-April 1 visit of KMT Vice Chairman P.K. Chiang to the PRC, Chiang and the PRC's Taiwan Affairs Office (TAO) released a joint statement that included a commitment to promote Taiwan's agricultural exports to the PRC. It builds on the expansion from five to twelve authorized fruit import categories that followed the November 2004 PRC visit of former Democratic Progressive Party (DPP) Chairman Hsu Hsin-liang, who led a delegation of farmers associations. Other agricultural trade exchanges involving farmers associations and the Taiwan External Trade Development Council (TaiTRA) have been ongoing since at least 2000. Taiwan Government Response - Thumping a Free Melon -------------- -------------- ¶4. (SBU) The Taiwan government has not responded positively to the PRC's offer to eliminate tariffs unilaterally and expand the number of authorized categories of imports. This is due in part to lack of information about the proposals. Council of Agriculture (COA) Department of International Affairs Director General Huang Tsu-bin told AIT/T that to date the Taiwan government has not received any details on the PRC offer other than what has appeared in the press. The PRC proposal did not spell out which 10 fruits would receive duty free status or which six new categories would be approved. ¶5. (C) The bottom line for the Taiwan government, officials say, is that government-to-government negotiations should precede implementation of the PRC's offer. Huang indicated that Taiwan's first preference would be to discuss this proposal under the framework of the WTO. However, Huang also noted that the PRC proposals might violate WTO most- favored nation practices if offered only to Taiwan outside of a free trade agreement or CEPA-type agreement. He pointed out that Taiwan would not qualify for special tariff treatment as a less developed economy under WTO agreements. Alternatively, Taiwan would be willing to discuss the issue bilaterally in direct negotiations between government officials. As reported ref B, National Security Council Secretary General Chiou I-jen told AIT/T that COA would soon announce its willingness to deal with agriculture trade issues in discussions linked to cross- Strait cargo flights. Chiou explained that the two would be linked because of the need to transport highly perishable fruits quickly. ¶6. (U) Because the Taiwan government believes these are international trade concerns that should be negotiated under the WTO framework, it is not willing at this time to authorize a private organization to discuss implementation of these measures with the PRC using a model similar to that used to discuss Lunar New Year charter flights. However, they have not categorically ruled out taking this step in the future. On May 13, the Taiwan Provincial Farmers Association (TPFA),whose leadership is dominated by KMT members, announced that it would send a delegation to the PRC to discuss the proposal with the PRC's Taiwan Affairs Office. In response, COA Vice Chairman Lee Jen- chyuan pointed out that the group did not have Taiwan government authorization to negotiate with the TAO and would be breaking Taiwan law if it engaged in such talks. He underscored that the TPFA is not the Taiwan counterpart of the TAO and that the Taiwan government is ready to engage in negotiations on a government-to-government basis. ¶7. (SBU) Taiwan government officials have identified several concerns related to the proposal that they believe justify the need for bilateral negotiations. From the Taiwan government's perspective, the most important problem is perhaps the potential for these proposed measures to increase the dependency of the Taiwan fruit producers on the PRC market. The PRC and Hong Kong together are already Taiwan's second most important destination for fruit exports after Japan. COA fears that with further expansion of exports to the PRC, Taiwan's fruit industry will become too vulnerable to manipulation. Huang believes that without a negotiated agreement the PRC could withdraw the tariff-free status without warning in order to manipulate Taiwan farmers for political ends. ¶8. (SBU) Huang also commented that the Taiwan government fears that the PRC might seek reciprocal market liberalization for its agricultural exports. The effects of such measures could be devastating to Taiwan agricultural producers. They would be unable to compete with Mainland farmers in the production of certain commodities, such as soybean oil or rice. (Note: Reciprocal market opening measures could also have severe implications for U.S. exports described in paragraph 14 below. End note.) ¶9. (U) In addition, Taiwan officials have noted that the PRC must take additional steps in order for the proposed measures to produce any practical benefits for Taiwan farmers. These steps include improved customs clearance procedures and distribution channels in the PRC for Taiwan products. Huang explained that currently PRC customs clearance for Taiwan agricultural products could take a week to ten days. According to Huang, some products would require a much faster clearance period of only a few days to export effectively. Industry Response - Wanting a Bite of the Apple -------------- -- ¶10. (SBU) The response among farmers associations has ranged from interested to enthusiastic. As noted above, the Taiwan Provincial Farmers Association has already announced plans for a 10-member delegation led by Penghu County Farmers Association Secretary General Chen Yi-zheng to visit the PRC in early June to meet with TAO officials and discuss implementation with a PRC organization to be designated by TAO. However, Taiwan Vegetable and Fruits Exporters Association Secretary General Lin Rong-hua told AIT/T that his organization would need more information about the proposals before he could comment on them and their potential benefits for Taiwan farmers. As reported ref C, the Taiwan stock market has responded favorably. Food industry stocks have risen almost six percent since the start of the Lien visit, significantly outperforming the overall market during the period. Estimated Impact - Visions of Sugar Plums -------------- ¶11. (U) Taiwan agricultural exports to the Mainland are small compared to the trade in manufactured goods. According to a report prepared by COA and the Ministry of Economic Affairs (MOEA) for the Legislative Yuan (LY), Taiwan exported USD 83.8 million worth of agricultural goods to Hong Kong and the PRC in 2004, less than one percent of its USD 63.8 billion in total exports to the Mainland (including Hong Kong). Agricultural exports to the Mainland constitute less than five percent of Taiwan's total agricultural exports. Although small, Taiwan agricultural exports to the Mainland are growing. They have risen by almost a third since Taiwan joined the WTO in ¶2002. Fruit makes up a significant portion of Taiwan's agricultural exports to the Mainland with USD 7.6 million in exports in 2004. Of this, approximately USD 1.6 million went to the PRC market. The PRC and Hong Kong together accounted for 21.2 percent of Taiwan's fruit exports. Media reports in Taiwan indicate that Taiwan fruits have become very popular in the PRC, and markets there are ready to receive more. ¶12. (SBU) Estimates of the potential benefits of the PRC's proposals for Taiwan farmers have varied widely. Some have been unrealistically high and politically motivated. Lien Chan told the press that the proposals could increase the value of Taiwan's fruit exports by NT$ 10 billion (USD 317 million) per year -- an increase of nearly 200 times current levels. The KMT-dominated Taiwan Provincial Farmers Association offered an even more unrealistic estimate, claiming a potential increase of nearly NT$ 30 billion (USD 950 million). ¶13. (SBU) AIT's Agricultural Section believes that the potential growth is much lower than these estimates. However, it is substantial; these measures could triple Taiwan's fruit exports to the PRC. The impact would depend on which ten of the current twelve authorized categories would receive tariff-free treatment. Some categories such as papaya, which is subject to a relatively high tariff, have significant potential for growth. Taiwan is competitive in papaya production but currently takes only a small share of the Mainland's large import market for that commodity. In other categories where Taiwan already dominates the PRC's import market, such as star fruit, guava, and sugar apple, tariff free treatment might not substantially increase Taiwan exports. Implications for U.S. trade - Small Potatoes for Now -------------- -------------- ¶14. (U) The PRC's proposed tariff elimination and expansion of authorized import categories would have little effect on U.S. exports. The U.S. is not a major source of PRC imports for any of the current twelve authorized categories except tangerines. The real threat to U.S. exports would come from any reciprocal measures implemented in Taiwan. Imports from the PRC of any of several agricultural commodities would flood the Taiwan market if liberalized, forcing out higher priced U.S. imports. Most at risk would be U.S. corn, soybean and apple exports. AIT/T Agricultural Section estimates that if fully implemented, a Taiwan opening of these three markets to PRC products could cut U.S. exports, which currently total about USD 1 billion annually, by USD 300 million. ¶15. (SBU) Although the current state of cross-Strait relations make reciprocal measures by Taiwan highly unlikely at this time, unilateral PRC liberalization could increase existing pressure to liberalize PRC imports of some products such as corn, which are not produced in significant amounts in Taiwan. In 2003, Taiwan pork producers secured a limited opening for PRC corn. They continue to push for full liberalization. The Taiwan government has been resistant to liberalization measures implemented without cross-Strait government-to-government negotiations. The current PRC proposals appear to be designed specifically to avoid such contact. Comment - Making Lemons out of Lemonade -------------- ¶16. (C) The PRC's agricultural liberalization proposals fit neatly into the Chinese Communist Party's traditional "united front" strategy, in the present case aimed at isolating the DPP and keeping Chen Shui-bian on the defensive. First, the measures can be implemented unilaterally, obviating the need for government-to- government negotiations. After COA's Huang explained in thorough detail to AIT/T the need for cross-Strait consultation before implementation, he predicted that in the end the PRC would proceed without any official consultation with the Taiwan government. In addition, The KMT with its lock on the leadership of the Taiwan Provincial Farmers Association can use that organization as a substitute for the Council of Agriculture and continue playing the role of the party able to make progress on cross-Strait relations. The agriculture proposals may have the added benefit for the PRC of eroding DPP support in the Taiwan's agricultural south, the DPP's traditional stronghold. ¶17. (C) The reaction of Chen Shui-bian's government has been uncooperative, but Chen's own reaction has bordered on shrill. In a nationally broadcast television interview on May 8, Chen called on Taiwan's farmers not to become the "agricultural slaves" (nong nu) of the PRC. He cited the example of Chi-mei founder Hsu Wen-lung's about face (reported ref A) to make the point that the PRC would use increased dependency on Mainland markets to manipulate Taiwan farmers. Despite Taiwan government concerns, the liberalization measures will benefit Taiwan farmers at least in the short run, and it appears they are being implemented in the face of Taiwan government resistance. The Chen administration has thus far been unable, or unwilling, to find a way to take ownership of the initiative as it managed to do with some success in implementing the Lunar New Year charter flights earlier this year. Since passage of the Anti-Secession Law, it has been on the defensive, claiming efforts to improve contacts across the Strait are coming "too soon." Now Chen is clearly playing defense again as the clock ticks on the current window of opportunity for improved cross-Strait relations. End comment. PAAL