Identifier
Created
Classification
Origin
09BEIJING1115
2009-04-25 10:35:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Beijing
Cable title:  

AUSTR STRATFORD AND DOC DAS KASOFF REVIEW

Tags:  ETRD ECON KIPR EIND WTRO CH 
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VZCZCXRO9000
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #1115/01 1151035
ZNR UUUUU ZZH
O 251035Z APR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3658
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 06 BEIJING 001115 

SENSITIVE
SIPDIS

STATE PASS USTR
USTR FOR STRATFORD; WINTER; MCCARTIN; ALVAREZ; GRIER;
KEMP AND LEE
COMMERCE FOR KASOFF; MELCHER; SAUNDERS; CASSEL;
LORENTZEN AND SHOWERS (5130); HEIZNEN (6510) AND
SZYMANSKI (4310)
TREASURY FOR MOGHTADER

STATE FOR D PAM PARK; E HUGO YON; EAP/CM SHAWN FLATT;
EEB/BTA ERIK MAGDANZ; EEB/MTA WILLIAM CRAFT

E.O. 12958: N/A
TAGS: ETRD ECON KIPR EIND WTRO CH
SUBJECT: AUSTR STRATFORD AND DOC DAS KASOFF REVIEW
U.S.-CHINA TRADE AND INTELLECTUAL PROPERTY AGENDA

Ref A) Guangzhou 00218

(U) This cable is Sensitive But Unclassified.
Please protect accordingly. Not for internet
distribution.

UNCLAS SECTION 01 OF 06 BEIJING 001115

SENSITIVE
SIPDIS

STATE PASS USTR
USTR FOR STRATFORD; WINTER; MCCARTIN; ALVAREZ; GRIER;
KEMP AND LEE
COMMERCE FOR KASOFF; MELCHER; SAUNDERS; CASSEL;
LORENTZEN AND SHOWERS (5130); HEIZNEN (6510) AND
SZYMANSKI (4310)
TREASURY FOR MOGHTADER

STATE FOR D PAM PARK; E HUGO YON; EAP/CM SHAWN FLATT;
EEB/BTA ERIK MAGDANZ; EEB/MTA WILLIAM CRAFT

E.O. 12958: N/A
TAGS: ETRD ECON KIPR EIND WTRO CH
SUBJECT: AUSTR STRATFORD AND DOC DAS KASOFF REVIEW
U.S.-CHINA TRADE AND INTELLECTUAL PROPERTY AGENDA

Ref A) Guangzhou 00218

(U) This cable is Sensitive But Unclassified.
Please protect accordingly. Not for internet
distribution.


1. (SBU) Summary: During a March 31-April 1 visit to
Beijing that marked the first USTR/Commerce senior
visit under the new Administration, Assistant U.S.
Trade Representative (AUSTR) for China Affairs
Timothy Stratford and Department of Commerce Deputy
Assistant Secretary for Asia Ira Kasoff outlined
latest developments and priorities in the U.S. trade
agenda for a range of senior officials, all of whom
expressed eagerness to engage the new administration
in a positive way. AUSTR Stratford pressed the
National Reform and Development Commission (NDRC)
and the Ministry of Commerce (MOFCOM) on China's
failure to adjust its steel output during the past
year, even as other producing countries were cutting
back sharply on production. Chinese officials
stressed central government efforts to restructure
and stimulate China's domestic economy to counteract
the effects of the global economic downturn and
maintain economic growth. The officials also
repeatedly raised their opposition to U.S. actions
on Chinese poultry imports. Ref A covered
Stratford's April 1-3 meetings in Guangzhou and
Shenzhen. End Summary.

NDRC DG Chen: Focus on Stimulus, Industry Plans


2. (SBU) NDRC DG Chen Bin told AUSTR Stratford and
DAS Kasoff April 1 that China's RMB four trillion
stimulus package is aimed at stimulating domestic
demand, revitalizing key industries, and
"safeguarding the livelihood of the people". Chen
said 90 percent of the stimulus package funds were
focused on China's domestic markets. Regarding
foreign investment in China, he said "only a small
percentage of foreign investment projects are
subject to central government approval", as roughly

90 percent of investment projects are not subject to
national approval. With respect to China's industry
support/revitalization plans for ten key industries,
the NDRC's primary focus is on restructuring. The
global financial crisis and reduced demand for
exports has forced China's industries to reduce
production, creating a difficult situation. However,
even without the global financial crisis, China
would still need to restructure its industries, Chen
added.

Chinese Steel Exports Drop, But Not Domestic Demand


3. (SBU) Citing the steel industry revitalization
plan as an example, Chen said the plans would
"stabilize production." Since July 1, 2007, China
has had a policy to discourage steel exports and
steel exports have decreased as a result of measures
such as increased taxes, he stated. Chen attributed
the global destabilization of steel production to
"other countries'" failure to stimulate domestic
demand, noting that China would stimulate domestic
demand in order to compensate for reduced external
demand. The steel industry plan would also promote
environmental protection by moving more than 30
polluting steel factories out of big cities.

AUSTR Stratford: Increased Bilateral Dialogue
Needed...


4. (SBU) In the meeting with Chen and other
officials, AUSTR Stratford highlighted the need for
increased dialogue between the United States and
China. He said the U.S. would be pleased to share
its experiences on restructuring of industry.

BEIJING 00001115 002 OF 006


Noting Premier Wen Jiabao's criticism of countries
with high consumption and low savings, Stratford
said the United States, like China, needs to find a
balance between consumption and savings. The
current crisis highlights the fact that no country
can afford to rely on an unsustainable strategy of
maintaining high savings and high production while
basing their economic growth on exports to the
United States. Both China and the United States
need to make structural adjustments, and dialogue
will help ensure that our actions do not harm each
other. While recognizing that China has the
authority to make its own economic decisions, the
United States will offer suggestions for cooperation
and share ideas with China.

...Accompanied by Greater Transparency


5. (SBU) Regarding China's industry revitalization
plans, AUSTR Stratford advocated for attaining a
higher degree of transparency to build trust and
improve bilateral cooperation. He reiterated the
need for China to make public the details of its ten
industry support plans, which would help the United
States resist domestic pressure for protectionist
measures. In response, DG Chen stated that details
of the steel and auto industry plans had already
been announced and posted to NDRC's website and
promised other plans would also be released publicly.
Given the large number of ministries involved and
the more than 120 measures included in the plans,
NDRC would publicize them in a "gradual, step-by-
step" manner, he said.

DAS Kasoff Raises GE/Harbin, Pharma Pricing, Baxter


6. (SBU) DAS Kasoff raised several commercial issues.
First, on the GE/Harbin Power Equipment
Corporation's proposal for the Shanghai Lingang
Power Plant, Kasoff urged the NDRC to give the
proposal every appropriate consideration. DG Chen
responded that both GE and Harbin Power Equipment
Corporation were "very capable" firms whose joint
project had "a good chance" of being approved.
Second, Kasoff suggested that the topic of domestic
pharmaceutical pricing should be viewed in the
context of overall health care financing and
decisions should be made in an open and transparent
manner. Chen did not have any information on
pharmaceutical pricing but promised to convey the
matter to the appropriate NDRC department. Finally,
Kasoff also urged China to give Baxter China
adequate time to phase out the use of polyvinyl
chloride (PVC) in intravenous infusion bags or face
possible job losses. Chen promised to "seriously
study" the request regarding Baxter China.


7. (SBU) Kasoff closed with an invitation to the
NDRC to send a representative to participate in the
April 29th Institute of Scrap Recycling Industries
(ISRI) convention in Las Vegas; Chen indicated that
a Deputy Director General from NDRC would likely
attend.

MIIT Luncheon: MIIT DG Chen Yin Floats Expanded IIWG


8. (SBU) DAS Kasoff hosted on April 1 a luncheon
for Ministry of Industry and Information Technology
(MIIT) International Cooperation Department DG Chen
Yin and colleagues. Kasoff began by asking Chen to
explain MIIT's desire (expressed earlier to Emboff)
to expand the Information Industries Working Group
(IIWG) and explain MIIT's issues of interest. Chen
said that MIIT wanted to use the Joint Commission on
Commerce and Trade (JCCT) as a platform to expand
cooperation beyond telecommunications to other
sectors such as autos, raw materials, and consumer

BEIJING 00001115 003 OF 006


goods. The expanded WG could discuss how to save
energy and reduce emissions, for example. Kasoff
explained that the range of issues involved very
different people on the U.S. side. Chen explained
that the WG could be subdivided into subgroups or
dialogues to discuss specific issues/sectors. Level
of the subgroups would not be important - they could
still be lead by Director Generals, Deputy Director
Generals, or Division Directors. He pointed out the
IIWG had been at the DG level for many years and the
overarching WG and subgroups or dialogues could be
at the same level. Kasoff said that this was an
interesting concept that the US could consider as
the US wanted to explore how to strengthen the WGs
to make them more effective.

DAS Kasoff: Baxter, Remanufacturing, MIIT
Reorganization and Telecom


9. (SBU) DAS Kasoff raised four other specific
issues, including the Industrial Restructuring
Catalogue and the implementation of new requirements
that would impose a ban on PVC IV bags produced by
Baxter in China. Kasoff asked whether MIIT or NDRC
was responsible for issuing the catalogue, and
requested that MIIT ensure that Baxter be permitted
at least three years to comply so that Baxter's
Shanghai employees would not lose their jobs. He
also indicated that Baxter would like to meet with
Vice Minister Ou to discuss the matter, and asked DG
Chen to help facilitate. Chen acknowledged Kasoff's
request and said that MIIT was now responsible for
issuing the catalogue and leading the effort to
solicit input from other entities. Kasoff inquired
about China's policy on remanufacturing and pilot
program on heavy equipment. Chen explained that
NDRC is still in charge of remanufacturing, and that
it had already completed a pilot program on auto
parts. Chen said that China wanted the original
manufacturers to do remanufacturing to guarantee
quality. Kasoff also asked how MIIT's information
security office related to other Chinese ministries
with responsibility for information security. Chen
indicated that while this used to be the purview of
the State Council Information Office, it had been
folded into MIIT, which raised it to the Ministry
level, and its functions expanded. Lastly, Kasoff
asked whether China was considering further
reductions in its telecom capitalization
requirements. Chen did not directly respond,
instead recounting the history of discussions in the
JCCT on this issue, noting that everyone was now
waiting for the NPC to approve the draft Telecom Law.

AUSTR Stratford: U.S. Awaiting Details on Industry
Support Plans


10. (SBU) AUSTR Stratford inquired about China's
recently released industry support plans, stressing
U.S. companies' keen interest in obtaining specific
details of the plans. Chen said that NDRC and MIIT
had worked jointly on the plans, and that the
detailed plans were currently being published. He
explained that the financial crisis was having a big
impact on Chinese companies, but that MIIT was
beginning to get positive results from
implementation of the plans. Declining production
trends had been reversed and idled capacity had been
reinvigorated, with auto output up in
February. China had encouraged auto purchases
domestically by reducing the tax on auto purchases
by half, to five percent. Low emission cars were
now being produced. Chen promised that details of
all plans would be out soon and the U.S. would see
that the plans were, in fact, not just a response to
the current economic crisis but a long-term
restructuring plan based on mergers and acquisitions,

BEIJING 00001115 004 OF 006


and scientific research.

AUSTR Stratford: U.S. Concerns On Government
Procurement


11. (SBU) Stratford raised U.S. concerns about
certain practices favoring domestic/local products,
and explained the benefits of China's accession to
the WTO Agreement on Government Procurement (GPA),
including access to other members' government
procurement markets. Chen countered that he had
visited a Toyota factory in China and this Japanese
factory's products were being procured by the
Chinese government, so clearly China was open to
"foreign" products. Beijing USTR Attache Chris
Adams explained that for the purposes of government
procurement in the U.S., where a product is produced,
not factory ownership, determined whether a product
was considered a U.S. product. Products produced in
the U.S. by a wholly-owned foreign entity were
considered US products for the purposes of
government procurement.

DG Chen: China Has "Fewer Industrial Policies" than
U.S.


12. (SBU) Stratford closed the luncheon by asking
how many industrial policies China now has, to which
Chen's colleagues quickly responded that the U.S.
has more. According to recently completed research
his department had done, China has only one tenth of
the industrial policies that the U.S. and EU
have. Kasoff pointed out that both sides must be
using a different definition of "industrial
policies," but more discussion on the topic was
merited.

MOFCOM DDG Wen: U.S., Chinese Economies Intertwined


13. (SBU) AUSTR Stratford and DAS Kasoff discussed
trade issues with MOFCOM DDG Wen Zhongliang on March

31. DDG Wen opened the meeting by noting that,
generally, China's exports are in steep decline and
that the U.S. and Chinese economies are intertwined,
so both are suffering under the current global
economic crisis. China is under great pressure from
its industries and companies because of the lack of
demand from international consumers for Chinese
products. Wen encouraged the United States to
implement another stimulus package to provide
momentum for the U.S. economy that might result in
increased demand for Chinese products.

DDG Wen: China's Steel Exports to U.S. Down 37.5
Percent Year on Year


14. (SBU) Presenting several statistics on the state
of China's steel industry, DDG Wen said that exports
have dropped dramatically, especially in the first
two months of this year. In 2008, overall exports
dropped 5.5% to 59.2 million tons and 2008 imports
also dropped 8.7% to 15.4 million tons. In the
first two months of 2009, total steel exports fell
52% while steel exports to the U.S. fell 37.5%. Wen
linked the downturn in the steel industry to more
than 3 million lost jobs for China. While the
global financial crisis is a financial crisis in
America, in China it is having a negative effect on
China's "real economy", inferring that the U.S. had
particular responsibility for the current crisis.
One element of China's response is a steel industry
revitalization plan that will be in place until 2011,
which promises greater efficiency and
rationalization of current capacity.

AUSTR Stratford: China's 2009 Steel Output Same as
2008

BEIJING 00001115 005 OF 006




15. (SBU) Responding on steel, Stratford noted the
current economic situation was difficult for both
Chinese and U.S. steel industries. He produced a
chart showing that in 2008 China accounted for one-
third of world total steel production (January and
February, 2008),whereas in the same timeframe in
2009 (January and February, 2009),China's share of
world steel production had increased to almost fifty
percent -- meaning that, in a year in which
worldwide total production decreased in line with a
drop in world demand, China's steel production had
remained practically constant. The practical result
was that other producers had to even more
drastically curtail their own production. Regarding
Wen's suggestion for another U.S. stimulus, AUSTR
Stratford reiterated points made earlier to the NDRC
regarding Premier Wen Jiabao's criticism of "certain
countries" [Read: the United States] with high
consumption and low savings. Stratford concluded by
noting that the current situation presented an
opportunity to work together towards necessary long-
term systemic adjustment in a cooperative spirit.

U.S. Concerns About Policy Measures to Favor
Exporters


16. (SBU) AUSTR Stratford also addressed China's
recent increase in value-added tax rebates for many
steel products, along with China's use of
administrative measures to increase exports and
continue production at prior levels even as steel
companies cut production. The message that other
steel producing countries are receiving is that
China will strengthen itself at the expense of other
economies, he said. China's policy of placing
differential export duties on certain product
categories like wire rod and aluminum gives China's
downstream producers the benefit of lower cost
inputs for higher value-added products -- a benefit
that U.S. wire rod downstream producers do not have.
Stratford said these policies greatly concern U.S.
steel producers as well as the U.S. government.

DDG Wen: China Banking on Stronger Domestic Steel
Demand


17. (SBU) DDG Wen countered that China's steel
production level has not changed much but repeated
that China's exports have drastically decreased,
with the bulk of production going instead to
domestic projects. He explained that China's
continued steel production was intended for domestic
consumption which would be boosted by China's
economic stimulus package, which focuses heavily on
infrastructure. Given the high cost to shut down
and then restart steel mills, recent increases in
value added tax rebates for certain steel products
are justified, he asserted. Moreover, WTO rules
allow China to provide VAT export rebates as long as
such rebates are not excessive, and China showed
restraint in the recent changes, as the highest
level of any rebate is only 13 percent, not the full
rebate of 17 percent.


18. (SBU) AUSTR Stratford responded that U.S. mills
have the same cost difficulties in terms of mill
shut downs, and the U.S. is aware of the WTO
provision allowing VAT export rebates. However, the
actions of the Chinese government as well as Chinese
steel companies thus far do not seem to reflect
economic reality. While other countries idle their
mills and lay off workers while awaiting renewed
demand, Chinese changes in VAT rebates makes it
appear that China wishes foreign producers to bear a
greater share of the burden associated with the
decline in global demand. Stratford regretted that

BEIJING 00001115 006 OF 006


he did not have time to go into details, but he said
the U.S. had similar concerns about China's trade
policies and industrial policies for other metals
including, particularly, aluminum.

China Upset Over Section 727 of Appropriations Bill...


19. (SBU) DDG Wen raised Section 727 in the 2009 U.S.
Omnibus Appropriations bill, which effectively bans
imports of poultry from China. He noted that the
Chinese complained about this issue in 2008 and
understood that the Bush administration was working
to ensure that such a provision was not included in
subsequent legislation. The Chinese government was
disappointed to see the provision included in the
2009 Omnibus Appropriations Act and hoped the Obama
Administration would seek to rectify the situation.
AUSTR Stratford said he is familiar with the issue
and has already told Obama Administration officials
of China's concerns. Pending WTO litigation
precluded more extensive statements on the issue at
this time.

...and Interested in USITC Textile Monitoring


20. (SBU) As a final point, DDG Wen raised U.S.
International Trade Commission (ITC) monitoring of
textile imports from China. He explained that the
Chinese and U.S. textile industries are
complementary and benefit from good trade relations.
He noted that the Chinese side does not want a
return of the special safeguard or quota
arrangements. AUSTR Stratford ended the meeting by
responding that while the ITC is certainly
monitoring the inflow of textiles, to his knowledge
it is not applying any restrictions to imports of
textiles, merely monitoring the flow.


21. (U) This cable was cleared by U.S. Embassy
Beijing USTR Senior Representative Christopher Adams
and U.S. Embassy Beijing DOC/MAC Director Teresa
Howes for USTR/Commerce. Also representing USTR/DOC
on the delegation: Deputy Assistant U.S. Trade
Representative for Intellectual Property Enforcement
Kira Alvarez and DOC China Officers Ellen Szymanski
and Tom Dycus.

PICCUTA