China-Philippines Trade Discrepancy

UNCLAS SECTION 01 OF 02 MANILA 000668 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA STATE PASS EXIM, OPIC, AND USTR STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE TREASURY FOR OASIA USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN E.O. 12958: N/A TAGS: KTFN KCRM ETRD ECCT PGOV RP SUBJECT: China-Philippines Trade Discrepancy Ref: Manila 603 MANILA 00000668 001.2 OF 002 ¶1. (SBU) Summary: There is a difference in excess of USD20 billion between Philippine and Chinese estimates of 2007 bilateral trade between the two countries. Even after various adjustments, a large discrepancy remains compared with China's trade statistics with other ASEAN countries. The discrepancy is worth exploring because of possible policy implications and possible illicit activities. End Summary. Trade numbers discrepancy -------------- ¶2. (SBU) At a mid-February economic briefing, Philippine President Arroyo cited China as the Philippines's largest trade partner. The statement appears to have been based on PRC Customs statistics that show its trade with the Philippines at USD30.6 billion in 2007. However, according to the Philippine National Statistics Office, bilateral trade with mainland China was only USD9.76 billion (ranking third among the Philippines' trading partners),while bilateral trade with the United States was USD16.5 billion (ranking first). Why the huge discrepancy? -------------- ¶3. (SBU) One can be reasonably sure that the Philippines-U.S. trade numbers are correct, as they roughly correspond to U.S. customs numbers, adjusted for shipping costs. The largest discrepancy involves statistics on Philippine exports to the PRC. According to PRC Customs data, China imported USD23.1 billion of goods from the Philippines in 2007, while the Philippines recorded only USD5.7 billion in exports to the PRC. Transshipment and Shipping Costs Explain Little -------------- -- ¶4. (U) The most significant adjustment that can be made to the statistics is for transshipment of goods through Hong Kong. Goods that are exported from the Philippines to Hong Kong are often ultimately destined for China, yet are recorded in the Philippine trade statistics as an export to Hong Kong. The PRC Customs authorities, however, record the goods as Philippine exports to China. In 2007, Philippine exports to Hong Kong totaled USD5.8 billion. Extrapolating from Hong Kong Customs numbers in 2005, perhaps USD4.4 billion of Philippine exports actually ended up in China. This still leaves an unexplained discrepancy of around USD13 billion in 2007. ¶5. (U) The next adjustment to be made is for shipping charges. The Philippine estimates of Philippine exports to China do not include shipping and insurance costs, while the Chinese estimates of imports from the Philippines do. A typical estimate is that insurance and freight adds about 5-8 percent to the cost of exported goods. This amount is clearly not enough to account for the large difference in the Philippines, but by including the Hong Kong re-exports, it could bring down the discrepancy by another USD1 billion, leaving around USD12 billion unexplained. Statistical Issues -------------- ¶6. (SBU) An International Monetary Fund task force found that in 2002 that imports into the Philippines were being routinely underestimated, resulting in a downwards revision of the 2001 trade balance from a surplus of 3.8 percent of GDP to a deficit of 8.8 percent of GDP. However, the type of problem the task force found affected Philippine imports, but not its exports. Thus far, none of the financial organizations that we spoke with in Manila have been able to explain the discrepancy in PRC and Philippine trade statistics. ¶7. (SBU) Chinese estimates of their global trade surplus are often far below that reported by their trading partners, even after adjusting for shipping costs and transshipment. But although other ASEAN countries also experience some amount of trade discrepancy, MANILA 00000668 002.2 OF 002 they are dwarfed by the relative size of the discrepancy in the Philippines. PRC Embassy officials also had no explanation for the huge statistical discrepancy in its bilateral trade with the Philippines. Illicit Activities? -------------- ¶8. (SBU) Smuggling into the Philippines is a serious problem that has received a lot of publicity (reftel). The Philippines records large differences in the value of imports from China, with official imports about USD2.8 billion less than what PRC statistics claim in ¶2007. Apart from Indonesia, which reputedly also has serious smuggling problems, other countries in ASEAN record modest discrepancies in imports from China. ¶9. There are a few areas where there are incentives for smuggling exports out of the Philippines. A local mining industry association reports that there are significant gaps in Philippine data on its mineral exports. However, both PRC and Philippines Customs data indicate the statistical discrepancy probably lies in electronics exports, which account for over 80% of Philippine exports to China and which are primarily semiconductors. Discrepancy in Semiconductor Valuation -------------- ¶10. (SBU) Our conversations with the semiconductor industry association in Manila lend support to the Philippine Customs statistics of a lower figure for Philippines exports of electronics to China. The data indicate that semiconductors valued at around USD3.5 billion when exported from the Philippines were assigned a much higher value (as much as USD14 billion) when they arrived in China. The head of the semiconductor industry association said the valuation discrepancy of Philippine semiconductor exports to China was far larger than the valuation discrepancies of similar semiconductors exported by other ASEAN countries to China. ¶11. (SBU) Comment: Although PRC statistics indicate that China has become the Philippines largest trade partner, both U.S. and Philippine trade statistics show that Philippine trade with the United States in 2007 was still larger than its trade with China, even after including transshipments through Hong Kong. However, if current trade trends continue, it is highly likely that China will overtake the United States as the largest Philippine trading partner in the near future by all measures. The discrepancy in statistics may be deliberate over/under-invoicing goods in order to move money into China, which has a closed capital account, or to move money out of China into foreign bank accounts. Kenney