CHINA CIVAIR: UPS REQUESTS USG ADVOCACY

UNCLAS SECTION 01 OF 02 STATE 098684 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: CH EAIR KTIA SUBJECT: CHINA CIVAIR: UPS REQUESTS USG ADVOCACY REF: A. REFS: STATE 35772 ¶B. BEIJING 1508 ¶C. LATHAM/LEVINE--LIMAYE-DAVIS EMAILS ¶D. AUGUST-SEPTEMBER 2008 ¶1. This is an action request. Please see para 6. ¶2. (SBU) Summary: As Post is aware, U.S. cargo carriers continue to experience difficulties getting their operating schedules approved by the General Administration of Civil Aviation in China (CAAC). Recently, the CAAC informed UPS that its 2008 winter schedule may not be approved. The CAAC cited concerns over UPS,s planned schedule and questioned whether Shanghai qualifies as a hub. Washington agencies believe that CAAC's position is inconsistent with our air services agreement. Hub rights for U.S. carriers were a key component of our 2004 Protocol to the 1980 agreement, and the CAAC's &buyer's remorse8 is extremely troubling. Washington requests Post demarche CAAC officials at the highest levels to urge Chinese approval of UPS's schedule and recognition of its right to operate a cargo hub, under the agreement, at Shanghai. Washington agencies will then consider how best to supplement this demarche to CAAC with senior-level discussions in other fora, including the SED. End summary. ¶3. (SBU) In April, after Embassy Beijing intervened, the CAAC approved UPS's summer schedule for one season, after weeks of delay (Refs A and B). Last month, the CAAC raised objections to UPS' and FedEx's winter 2008 schedules, citing concerns about multiple beyond points on a single change-of-gauge routing and questioning the ability of both companies to co-terminalize in China. The companies, working closely with the CAAC to make the necessary revisions to their schedules, had received some positive feedback over the last few weeks. However, the latest report from UPS indicates the Chinese are now questioning a much broader right -) whether UPS's Shanghai operations meet the criteria for a cargo hub (Ref C). ¶4. (SBU) Article 9 of the 2004 Protocol to the Agreement between the Government of the United States of America and the Government of the People's Republic of China Relating to Civil Air Transport (which added Article 11bis to the Agreement) clearly defines the four criteria necessary to achieve hub status. The USG has already articulated our view that the UPS facility in Shanghai clearly meets the hub requirements. In April 2007, DOT Secretary Peters traveled to China and formally announced UPS's qualification as having an air cargo hub in Shanghai. It appears the CAAC is now reinterpreting the bilateral to set a new standard, one that would require a cargo hub to operate as a "transit hub." ¶5. (SBU) The Chinese appear to be reinterpreting and misinterpreting our bilateral in order to forestall U.S. competition in the cargo market. As Embassy is aware, State and DOT are sending a team to China for meetings and technical consultations September 26-28. ¶6. (SBU) Action requested: Prior to the upcoming technical talks, we request Embassy engage with the CAAC at the highest levels at the earliest opportunity to express concern with the incorrect interpretation of the bilateral, and urge the CAAC to approve UPS's planned operations at the earliest possible date. Embassy may also wish to use some version of the talking points with other high-level Chinese officials who may appreciate the potential wider repercussions of the aviation issue. EAP/CM also plans to engage with Chinese Embassy officials in Washington this week. Post may draw from talking points below. Begin talking points. -- In 2004 and 2007, U.S. and Chinese civil aviation negotiators agreed on two landmark amendments to our bilateral Air Transport Agreement that significantly liberalized our aviation relationship to reflect the two countries' strong trade ties, as well as the important roles of China and the United States in the global economy. Rights were expanded for passenger traffic as well as for the establishment of cargo hubs to benefit both countries. The two sides also agreed to pursue discussions beginning in 2010 to fully liberalize our aviation relationship. -- Our cargo carriers have committed to hub operations with millions of dollars of investment in China and employment of STATE 00098684 002 OF 002 thousands of Chinese workers. UPS has invested $600 million in China, employs 4,500 workers, and expects to employ 1,200 just at its Shanghai hub by 2010. Chinese communities and companies have also made investments and commitments. -- We are very concerned to hear that questions have been raised with respect to our carriers' ability to exercise their rights under the Agreement, in particular with respect to hub status. -- The 2004 Protocol clearly defined the four criteria necessary to achieve hub status. The USG has already articulated its view that the UPS facility in Shanghai meets these requirements. In April 2007, DOT Secretary Peters traveled to Shanghai and formally announced UPS's qualification as having an air cargo hub in China. It appears that the CAAC is now trying to set a new standard, one that would require a cargo hub to operate as a "transit hub," a concept neither defined nor included in the 2004 Protocol definition. -- Unilateral limits on hub operations would be inconsistent with our bilateral agreement. -- Moreover, a failure to recognize UPS's hub rights would not be consistent with our excellent cooperation and relationship with China in so many other areas. -- China gains huge benefit from efficient and flexible cargo connections to move Chinese products around the world. -- The fact that China and the U.S. agreed in 2007 that we will work toward fully liberalizing our bilateral civil aviation relationship in 2010 reflects that China is ready to move its economy into an even higher gear. -- The possibility that CAAC might seek to reverse what was agreed upon risks putting the brakes on China's own economic boom. -- We urge that you not permit such backtracking to jeopardize our two countries' excellent relations. End Talking Points. ¶7. Washington agencies appreciate Post's assistance. RICE