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