CLOSING THE FINAL LINK - SHIPPING (PART 1 OF 2)

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 000152 SIPDIS SIPDIS STATE PASS USTR STATE FOR EAP/TC COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER USTR FOR STRATFORD, ALTBACH E.O. 12958: DECL: 01/11/2017 TAGS: EWWT ECON PREL CH TW SUBJECT: CLOSING THE FINAL LINK - SHIPPING (PART 1 OF 2) REF: 06 TAIPEI 82 Classified By: AIT Deputy Director Robert S. Wang, Reason 1.4 d ¶1. (SBU) Summary: Measures to liberalize cross-Strait shipping have fallen well short of direct maritime links between Taiwan and Mainland China. Offshore transshipment at Taiwan's major harbors and traffic through the "mini-links," which connect Taiwan-controlled islands off the Fujian coast directly with PRC ports, account for only a small fraction of total cross-Strait shipping traffic. Shipping companies have been successful at minimizing the costs imposed by indirect shipping, but the lack of direct links still imposes a small but significant burden on the Taiwan economy. The negative effects on Taiwan's shipping industry are more substantial. Taiwan has longstanding plans to make the island a regional operations or logistics center. Direct shipping could be an important step toward realizing that goal. End summary. ¶2. (U) Of the original three links first proposed by the PRC in 1979, two have been effectively realized. "Tong you," or direct postal and telecommunications, and "tong shang," or direct commerce, are subject to few barriers. In 2005, 9.4 million letters were delivered from Taiwan to China, making up 32 percent of all international mail posted from Taiwan. The same year, 319 million telephone calls were placed from Taiwan to the PRC, also accounting for 32 percent of Taiwan's outgoing calls. The PRC is now Taiwan's most important trading partner. In 2005, it accounted for 28 percent of Taiwan's total exports and 11 percent of imports. ¶3. (U) "Tong hang" or direct transportation is, however, still far from complete. Ships are not allowed to carry cargo directly between Taiwan and PRC ports and there are no direct flights. This report will examine efforts to move toward direct cross-Strait shipping and the effect on the Taiwan economy. Septel will look at progress toward direct air links. Liberalization Efforts Fall Short -------------- ¶4. (U) To date, there has been little progress toward the establishment of direct shipping links between Taiwan and the PRC. Only two initiatives have had a substantial ;impact in removing the barriers to cross-Strait direct maritime transportation. Since 1997, Taiwan has permitted offshore transshipment of cargo from and to the PRC through the Port of Kaohsiung. In 2004, the establishment of offshore transshipment centers in Keelung and Taichung Harbors were announced. Ships can travel directly from the transshipment centers to Chinese harbors. However, they cannot take on freight in Taiwan bound for the PRC, only freight bound for onward destinations. Similarly, ships traveling directly from the PRC can stop in the transshipment centers, but they cannot unload freight from China. In addition, PRC and Taiwan-flagged vessels are not permitted to use the transshipment centers. Kaohsiung's offshore transshipment center berthed 955 ships in 2005. They loaded and unloaded 661,826 twenty-foot equivalent units (TEU),equal to 7 percent of total container traffic in the Port of Kaohsiung that year. ¶5. (U) In 2001, Taiwan opened the "mini-links," which connect the Chinese ports of Xiamen and Fuzhou in Fujian province directly with Kinmen and Matsu, Taiwan- controlled islands just off the Chinese coast. Shipping traffic using the mini-links has grown rapidly. In 2002, the first full year of operations, ships made 934 round trips using the mini-links. By 2005, the total number of round trips had reached 4,276. Both passenger ferries and cargo ships use the mini-links, but the people and cargo they are permitted to carry are limited. Cargo is limited to goods produced locally in Kinmen and Matsu, Taiwan products for use by Taiwan investors in Fujian TAIPEI 00000152 002 OF 003 Province, or Chinese goods for local consumption on the Kinmen and Matsu. Passengers are limited primarily to Kinmen and Matsu residents, Taiwan investors in the PRC, and Fujian residents traveling to Kinmen and Matsu but not onward to the main island of Taiwan. However, there have been numerous exceptions to these general categories, and it appears that enforcement is not strict. Industry Finds Other Ways -------------- ¶6. (SBU) Despite the lack of direct links, ship owners have found effective means to minimize the impact on cost and transportation time for cross-Strait cargo. Foreign flagged vessels are permitted to carry cargo between Taiwan and the PRC, but only with a stop in the port of third territory. Hong Kong and Ishigaki Island, Japan, are frequent stops. Many ships do not physically berth at the port, but instead obtain the paperwork through other channels. For example, Japanese customs officials reportedly will meet the ship at sea with the necessary paperwork. ¶7. (C) John Yang, Secretary General of the Chinese Maritime Research Institute told us that these kinds of arrangements eliminate any additional costs for routes between Taiwan and China's southern ports, but he believes that interim stops can add substantially to the costs of shipping between Taiwan and China's northern ports. Bob Hsu, Secretary General of the ROC National Association of Shipping Agents (ROC-NASA),however, dismissed these additional costs for northern routes as well. He speculated that direct shipping would not significantly lower the cost of transporting goods across the Strait on any routes. Impact is Small but Significant -------------- ¶8. (U) Although shipping companies have been effective at minimizing the costs imposed by the lack of direct links on cross-Strait shipping, the impact on Taiwan's overall economy of the remaining restrictions is not negligible. Over time, even small additional costs could grow in importance. Global competition by continually improving the speed and efficiency of supply chains will increase the relative disadvantage for Taiwan. As noted above, the PRC accounts for 28 percent of Taiwan's exports. As other countries compete for the PRC market, Taiwan's manufacturing industries will have to work harder to keep customers in the Mainland, its most important market. ¶9. (C) The barriers to cross-Strait shipping have a more substantial effect on Taiwan's maritime transportation industry. Liu Chao-san, Chairman of ROC-NASA and President of Strong Maritime Corporation, told AIT/T that membership in ROC-NASA has declined from about 300 a few years ago to just 168 currently. He explained that many shipping agents, which mainly represent foreign shipping companies in Taiwan, have shut their doors. This is due in large part to the migration of manufacturing industries to the Mainland. However, Liu argued that foreign shipping companies increasingly exclude Taiwan ports from their routes because of the lack of direct maritime links with China, leaving fewer opportunities for Taiwan's shipping agents. ¶10. (C) Large Taiwan shipping companies are also hurt by the restrictions. Arnold Wang, who was recently promoted from President to Chairman of Evergreen Marine Corporation, told us that his firm could cut costs significantly if it was able to use its Taiwan facilities as a hub for more China trade. Instead, Evergreen has invested heavily in port facilities in Ningbo Harbor in China's Zhejiang Province. In 2005, it announced it would invest USD 250 million through its Italian subsidiary Lloyd Triestino. TAIPEI 00000152 003 OF 003 ¶11. (U) Meanwhile, the Port of Kaohsiung's competitiveness has suffered. For many years, Kaohsiung ranked as the third busiest container port in the world after Hong Kong and Singapore, but Busan, South Korea, overtook it in 2001. Since then it has fallen further behind and ranked just sixth in 2006. It could fall further if Rotterdam, the seventh busiest, manages to overtake it. Rotterdam moved 9.6 million TEUs last year compared to Kaohsiung's 9.7 million. Kaohsiung's fall in the rankings is due in large part to the migration of Taiwan's manufacturing industries to the Mainland. However, the lack of direct shipping links has only served to accelerate the decline. ¶12. (C) For years, the Taiwan authorities have promoted proposals to make the island a regional operations and logistics center for East Asia. In 1995, the KMT government of Lee Teng-hui first promulgated its Asia-Pacific Regional Operations Center project (APROC). In 2000, the new Democratic Progressive Party administration repackaged many of the APROC proposals into the Global Logistics Development Plan. As recently as a January 12 in a meeting with the Director, Vice Premier Tsai Ing-wen reiterated these goals and expressed Taiwan's SIPDIS interest in improving the competitiveness of the Port of Kaohsiung. In promoting these plans, Taiwan officials emphasize the island's close proximity to Japan, China and Southeast Asia as its main advantage. Without direct transportation links to China, this advantage is considerably diminished. One element of the Global Logistics Development Plan has been the establishment of free-trade zones in Taiwan's major ports of Kaohsiung, Keelung and Taichung. However, without direct maritime links, the zones have been slow to attract tenants. Comment - Going the Last Mile -------------- ¶13. (SBU) Because shipping companies have been so effective in minimizing the extra cost of shipping goods across the Strait, calls for the government to establish direct maritime links have been relatively quiet compared to lobbying for direct flights. Despite the lack of direct shipping, Taiwan's trade with the Mainland has continued to grow dramatically. The potential benefit to the Taiwan economy of direct air links is much greater, but Taiwan would also benefit from moving toward direct maritime links. With experience from offshore transshipment centers and the mini-links, there should be few technical obstacles to implementing direct shipping. If Taiwan is serious about becoming a regional operations or logistics center and preserving the competitiveness of its ports, direct maritime links could be an important step. YOUNG