PRC/DPRK: IMPACT OF PRC EXPORT RESTRICTIONS;

C O N F I D E N T I A L SHENYANG 000030

SIPDIS

SIPDIS

DEPARTMENT FOR EAP/CM, EAP/K, PRM

E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION
TAGS: PREL PINR PGOV ECON ETRD KN KS CH
SUBJECT: PRC/DPRK: IMPACT OF PRC EXPORT RESTRICTIONS;
DEADLOCK OVER NEW TRADE BRIDGE; INTER-KOREAN TRADE NEAR
DANDONG

REF: SHENYANG 14

CLASSIFIED BY: CONSUL GENERAL STEPHEN B. WICKMAN.
REASONS: 1.4(B)/(D).


1. (C) SUMMARY: NEW PRC EXPORT RESTRICTIONS ARE DELAYING,
IN SOME CASES BY MANY WEEKS, SHIPMENTS OF KEY CHINESE
COMMODITIES TO NORTH KOREA VIA DANDONG. IN LIMITED CASES,
BEIJING IS GRANTING TEMPORARY WAIVERS FOR PRC FIRMS WITH
LARGE, PREEXISTING CONTRACTS IN THE DPRK. PYONGYANG IS
DISPLEASED, AND DANDONG OFFICIALS EXPECT A MORE ACUTE NORTH
KOREAN REACTION IN LATE SPRING. UNEASY LIAONING OFFICIALS
ARE CURRENTLY LOBBYING BEIJING TO WAIVE THE NEW
RESTRICTIONS FOR NON-AID, DPRK-BOUND SHIPMENTS IN THE
INTEREST OF BORDER STABILITY. A FUNDING DISPUTE DEADLOCKS
BILATERAL TALKS OVER A NEW PRC-DPRK TRADE BRIDGE NEAR
DANDONG. NORTH KOREAN CARGO SHIPS WEEKLY HAUL COPPER, IRON
ORE AND OTHER RAW MATERIALS TO DANDONG'S DADONG PORT, WHERE
SOUTH KOREAN FIRMS NEARBY CREATIVELY TRADE WITH NORTH
KOREAN ENTERPRISES THROUGH CHINESE INTERMEDIARIES. END
SUMMARY.


2. (C) POLOFF TRAVELED FEBRUARY 25-27 TO THE SOUTHERN END
OF THE PRC-DPRK BORDER. SITES VISITED INCLUDE DANDONG, THE
STRATEGIC THOROUGHFARE OPPOSITE SINUIJU THROUGH WHICH THE
MAJORITY OF PRC-DPRK TRADE FLOWS; DONGGANG, SITUATED
ROUGHLY 60 KILOMETERS SOUTH OF DANDONG NEAR THE YELLOW SEA;
AND QIANYANG, A SHORT DRIVE FROM DONGGANG.

PRC, DPRK RESPONSES TO SLOWDOWNS IN CROSS-BORDER TRADE
-------------- --------------

3. (C) NEW PRC RESTRICTIONS ON CERTAIN AGRICULTURAL EXPORTS
LIKE GRAIN (REF A),ACCOMPLISHED VARIOUSLY THROUGH
INCREASES IN EXPORT TARIFFS, THE CANCELLATION OF EXPORT
REBATES AND/OR THE "CAPTURE" OF CERTAIN COMMODITIES BY A
NATIONAL EXPORT-QUOTA REGIME, ARE GENERATING PRC-DPRK TRADE
FRICTIONS AND CONCERN IN THE DANDONG-SINUIJU AREA,
ACCORDING TO YANG WENJIA (STRICTLY PROTECT),CHIEF OF THE
FOREIGN TRADE ADMINISTRATION SECTION OF DANDONG'S FOREIGN
TRADE AND ECONOMIC COOPERATION BUREAU. YANG PRIVATELY TOLD
POLOFF ON FEBRUARY 26 THAT AS A RESULT OF THE NEW EXPORT
RESTRICTIONS, THE MINISTRY OF COMMERCE (MOFCOM) HAS BEEN
INUNDATED WITH EXPORT-PERMISSION APPLICATIONS LEADING TO
DELAYS--IN SOME CASES OF MANY WEEKS--BEFORE CHINESE FIRMS
RECEIVE APPROVAL FOR THEIR INTENDED SHIPMENTS FROM DANDONG
TO NORTH KOREA.


4. (C) IN CERTAIN CASES INVOLVING DPRK-BOUND SHIPMENTS,
MOFCOM IS TEMPORARILY WAIVING RESTRICTIONS FOR PRC FIRMS
HAVING LARGE, LONGSTANDING CONTRACTS WITH NORTH KOREAN
COUNTERPARTS. THE AIM, YANG SAID, IS TO MITIGATE, AS MUCH
AS POSSIBLE, POTENTIAL DAMAGE TO EXISTING PARTNERSHIPS AND
THE "IMAGE OF CHINESE FIRMS ABROAD." ONCE THE CONTRACTS
EXPIRE, HOWEVER, CONTINUED EXEMPTIONS ARE NOT GUARANTEED.
ASKED HOW PRC FIRMS IN THE DANDONG AREA ARE RESPONDING TO
THE RESTRICTIONS, YANG REPLIED THAT MOST ARE FOCUSING ON
OTHER, COMPARATIVELY MORE HASSLE-FREE COMMODITIES. YANG
CLAIMED NORTH KOREAN FIRMS IN JANUARY INITIALLY REFUSED TO
BUY CHINESE COMMODITIES AT THE HIGHER PRICES WROUGHT BY PRC
DOMESTIC INFLATION AND THE NEW EXPORT RESTRICTIONS. BUT
MOST HAVE SINCE RELENTED, IN PART BECAUSE THEY NOW
UNDERSTAND THE ECONOMIC LOGIC, AND IN PART BECAUSE THEY
RECOGNIZE THEY HAVE NO CHOICE BUT TO "EAT A LOSS" (CHI KUI)
TO PROCURE CRITICAL COMMODITIES. YANG SAID HE EXPECTS A
FULLER NORTH KOREAN REACTION IN THE APRIL-MAY TIMEFRAME, BY
WHICH TIME MORE CONTRACTS WILL EXPIRE AND POTENTIAL PRC
GOVERNMENT-SANCTIONED PRICE HIKES IN CHINA MIGHT LEAD TO A
MORE ACUTE CRUNCH FOR THE DPRK.

DANDONG CONCERNED, LOBBYING BEIJING FOR PRC-DPRK WAIVER
-------------- --------------

5. (C) LOCAL DANDONG AND PROVINCIAL LIAONING OFFICIALS
EXPRESS PRIVATE CONCERN ABOUT THE SITUATION AND ARE
INTERNALLY LOBBYING BEIJING TO WAIVE THE EXPORT
RESTRICTIONS FOR RELEVANT COMMODITIES IN PRC-DPRK TRADE,
YANG SAID. THEIR ARGUMENT: GRAIN AND OTHER AGRICULTURAL
EXPORTS TRANSITING DANDONG, WHETHER IN DOLLAR TERMS OR BY
VOLUME, ACCOUNT FOR A RELATIVELY MINOR PORTION OF


LIAONING'S AND THE PRC'S OVERALL EXPORTS. BECAUSE OF THIS-
-AND THE VIEW THAT NON-AID CHINESE AGRICULTURAL EXPORTS ARE
CRITICAL TO SUSTAINING THE DPRK, THEREBY SHORING UP
LIAONING'S BORDER STABILITY--LIAONING OFFICIALS BELIEVE
PRC-DPRK TRADE NEEDS TO BE GRANTED SPECIAL CONSIDERATION.


PRC-DPRK DEADLOCKED ON NEW BRIDGE ACROSS THE YALU
-------------- --------------

6. (C) ON ANOTHER TOPIC IN PRC-DPRK RELATIONS, YANG
DOWNPLAYED A RECENT PRESS REPORT CLAIMING THE PRC IS
"ACCELERATING" PLANS FOR A NEW BRIDGE CONNECTING DANDONG
WITH SINUIJU ACROSS THE YALU RIVER. AT PRESENT, A SINGLE,
TWO-LANE BRIDGE DATING BACK TO THE JAPANESE OCCUPATION
LINKS THE TWO CITIES. A RAILROAD OCCUPIES ONE LANE, WHILE
THE OTHER, INITIALLY INTENDED AS A LANE FOR TRAIN-TRACK
REPAIR VEHICLES, IS USED FOR CROSS-BORDER TRAFFIC.
CAPACITY IS FAR FROM OPTIMAL, AND SINCE PRC-DPRK CARGO
TRAFFIC CAN TRANSIT ONLY ONE WAY AT A TIME, SHIPPING IS
SLOW AND BOTH THE DANDONG AND SINUIJU LAND PORTS REGULARLY
SUFFER FROM UNNECESSARY BOTTLENECKS. BOTH BEIJING AND
PYONGYANG HAVE BEEN TALKING AT THE STATE-TO-STATE LEVEL
"FOR A WHILE NOW" ABOUT A NEW BRIDGE, BUT TALKS ARE HUNG-UP
OVER FUNDING. YANG SAID THE DPRK IS DEMANDING PRC FUNDING
FOR THE BRIDGE AND ITS FUTURE MAINTENANCE IN THE FORM OF
IRREGULAR AID, SOMETHING TO WHICH BEIJING HAS NOT WARMED.
YANG, WHO CONTINUES TO RAISE THE ISSUE WITH VISITING NORTH
KOREAN COUNTERPARTS, BELIEVES A RESOLUTION IS UNLIKELY IN
THE NEAR TERM, THOUGH A NEW, MODERN BRIDGE WITH SUFFICIENT
CAPACITY FOR CROSS-BORDER CARGO TRAFFIC WOULD YIELD
CONCRETE BENEFITS FOR BOTH SIDES. (WHILE DANDONG
FORMULATED A DETAILED PLAN FOR THE BRIDGE, BOTH THE
LOCATION AND FORMAL APPROVAL REMAIN ELUSIVE, YANG SAID.)

DANDONG LAND PORT: A SITREP
--------------

7. (C) DURING A VERY BRIEF OBSERVATION AT THE DANDONG LAND
PORT ON FEBRUARY 25, CROSS-BORDER CARGO TRAFFIC MIRRORED
LEVELS OBSERVED DURING RECENT VISITS AT THE SAME TIME
INTERVAL. BETWEEN 1030 AND 1100, APPROXIMATELY 60-70
MOSTLY LARGE, SEALED CHINESE CONTAINER TRUCKS HAVING PRE-
CLEARANCE TAGS PASSED WITHOUT ADDITIONAL INSPECTION INTO
SINUIJU. FLATBED CHINESE TRUCKS HAULED A NUMBER OF DIESEL
GENERATORS, PIECES OF INDUSTRIAL FARMING EQUIPMENT AND
TRACTORS. BOXES OF BANANAS, MEAT AND CLOTHING CHOKED MANY
CHINESE DRIVERS' CABS. A NUMBER OF NORTH KOREANS LOITERED
IN THE PORT COMPLEX, MOSTLY STANDING BESIDE SHINY, LATE-
MODEL JAPANESE SUVS AND PASSENGER BUSES WITH NORTH KOREAN
PLATES.

DADONG SEAPORT: INCOMING NK CARGO, INTER-KOREAN TRADE
-------------- --------------

8. (C) NORTH KOREAN CARGO SHIPS, MANY ORIGINATING IN NAMPO,
TRAVEL SEVERAL TIMES EACH WEEK TO DANDONG'S DADONG PORT IN
DONGGANG, WHICH HUGS THE YELLOW SEA AND YALU RIVER. ONCE
UNLOADED, CARGO--MOSTLY RAW MATERIALS, INCLUDING COPPER AND
IRON ORE--IS TYPICALLY PROCESSED AT FACTORIES WITHIN THE
ADJACENT DONGGANG DEVELOPMENT ZONE AND THEN EXPORTED ABROAD
OR ELSEWHERE IN CHINA, ACCORDING TO YU ZHENDONG (STRICTLY
PROTECT),A VICE DIRECTOR OF THE DONGGANG ECONOMIC
DEVELOPMENT ZONE'S ADMINISTRATIVE COMMITTEE. YU AND JIANG
HAIJUN (STRICTLY PROTECT),ANOTHER VICE DIRECTOR OF THE
ZONE'S ADMINISTRATIVE COMMITTEE, NOTED THAT SOUTH KOREAN
FIRMS INVESTED IN THE ZONE CONDUCT BUSINESS WITH THE DPRK
THROUGH CHINESE INTERMEDIARIES. TWO METHODS PREDOMINATE.
THE FIRST INVOLVES CHINESE PARTNERS IMPORTING NORTH KOREAN
RAW MATERIALS VIA DADONG HARBOR, WHEREUPON ROK FIRMS
PROCESS THE INPUTS WITHIN THEIR NEARBY FACTORIES AND
ULTIMATELY EXPORT THE GOODS ABROAD. THE SECOND, PRIMARILY
CENTERED ON GARMENTS/TEXTILES, INVOLVES SENDING INPUTS TO A
NORTH KOREAN FIRM FOR LOW-COST PROCESSING; THE GOODS ARE
THEN SUBSEQUENTLY SHIPPED THROUGH DADONG HARBOR AND
ULTIMATELY EXPORTED BY THE SOUTH KOREAN FIRMS. OVER TWENTY
ROK FIRMS ARE CURRENTLY INVESTED IN THE DONGGANG ECONOMIC
ZONE, THOUGH IT IS UNCLEAR HOW MANY ARE INVOLVED IN
INDIRECT INTER-KOREAN TRADE.
WICKMAN