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