SMUGGLING OF FOOD PRODUCTS INCREASES ON CHINA'S SOUTHERN

UNCLAS SECTION 01 OF 03 BEIJING 003401 SENSITIVE SIPDIS STATE PASS USDA/ERS STATE PASS USDA/FAS/OSTA CHINA DESK STATE PASS USDA/OGA STATE PASS USTR FOR STRATFORD TREASURY FOR OASIA E.O. 12958: N/A TAGS: SNAR SENV EAGR ETRD ECON CH VN SUBJECT: SMUGGLING OF FOOD PRODUCTS INCREASES ON CHINA'S SOUTHERN BORDER Refs: A) HANOI 164, B) 08 GUANGZHOU 366, C) 08 HANOI 409 (U) This cable is Sensitive But Unclassified. Please protect accordingly. ¶1. (SBU) U.S. exports of agricultural products smuggled into China have surged due to an increase in politically motivated trade restrictions. China's border with Vietnam has become a prime transit point for trade in beef, pork, and poultry. A smuggler involved in this trade recently described how this trade flourishes along China's southern border. END SUMMARY. EXPORTS SKYROCKET TO VIETNAM, BUT WHERE'S THE BEEF? -------------- -------------- ¶2. (SBU) U.S. beef exports to Vietnam spiked at $171,000 in 2003 only to drop back to $9,000 in 2004 due to an outbreak of BSE in the United States. When Vietnam joined the WTO, U.S. beef exports to Vietnam shot to over $5 million in 2005 and then skyrocketed to $27 million in 2007. In 2008, the increase in U.S. beef export trade to Vietnam was meteoric, increasing over 362% to $124.8 million. According to USDA's Office of Agricultural Affairs in Vietnam, this fantastic rise in exports shows no sign of slowing down, and even with the current global economic downturn and tight credit market, indicators point to another record year. For the first five months of 2009, U.S. beef exports to Vietnam are $81.3 million, already 65 percent of the total for 2008. ¶3. (SBU) What is driving this growth and where is the beef going? Although U.S. beef is now available from select outlets and very high end restaurants in major cities of Vietnam, this accounts for only a tiny fraction of the export trade. Reportedly up to 95% of U.S. beef exports to Vietnam are bound for China, where U.S. beef is banned due to BSE. POROUS BORDER WITH VIETNAM -------------- ¶4. (SBU) From October 19-21, Agricultural Attach Mark Petry and Agricultural Specialist Jiang Junyang visited the southern part of Guangxi Province on a sugar reporting trip. Guangxi produces about 60 percent of China's sugar and this industry is the largest agricultural sector, employer, and land use in the province. We decided to stay the night in Pingxiang City after visiting sugar mills in that area. Our driver contacted a friend in that city and arranged at dinner at which the friend revealed that he was an entrepreneur engaged in smuggling. The account of his job correlates very closely to previous accounts provided to FAS China second-hand and to the account provided by the FAS Office of Agricultural Affairs and Agricultural Trade Office Hanoi in FAS Internal News Report titled "Mong Cai" from July 2009. ¶5. (SBU) The "entrepreneur" was surprisingly open about his activities and described the process in detail. He said that he was very active in sourcing agricultural products from Vietnam, though recently focused on non-agricultural goods and only provides "logistics" for the food trade. Last year, he said that he specialized in imports of U.S., Canadian and Brazilian beef, pork and poultry and exports of Chinese rice. He noted that his friends in the business have recently added significant amounts of pork to their shipments north. He showed a picture on his cell phone of U.S. commercial classifications of chicken feet to demonstrate his knowledge. [Note. U.S. beef has been barred from China due to BSE restrictions since 2004, while pork has only recently been banned due to H1/N1 restrictions. While not banned for the most part, various restrictions increase commercial risk for exporting U.S. poultry to China. Chinese rice is less expensive than Vietnamese due to subsidies and tight export restrictions. End Note.] ¶6. (SBU) The entrepreneur said that the majority of the smuggling operations in the Pingxiang area occur at night at a small clearing on the river that separates China and Vietnam. While the operation is large scale and well-known locally, he said that conducting the operations in the day light was non-negotiable with the local authorities. Basically, it is just a clearing in the forest on each side of the river that has access to a road. In the case of frozen BEIJING 00003401 002 OF 003 meat products, semi-trucks with refrigerated containers first pull up to the Vietnamese side. The containers are unloaded by hand and the boxes of meat are carried down to small boats for the river crossing. The small boats carry about 5-8 tons each trip and, on average, it takes about 5 trips to ferry one container-load of meat to the Chinese side. The boxes were then restacked in a waiting truck, generally bound for the wholesale markets in Guangdong. At this location, the man said that the transfer of 18 containers (760 metric tons) was the record in one night. ¶7. (SBU) The contact noted that the value of high-end meat cargo could be as much as 2 million RMB ($293,000). For some cuts of U.S. beef, the MFN tariff rate is 20 percent, the VAT rate is 13-17 percent, and there are additional customs and quarantine clearance fees. Thus, direct fees alone can easily reach 40 percent of the value of the shipment. Avoiding the customs fees alone could gross a smuggler 800,000 RMB ($118,000) per container. On that record night, the smuggling organization could have made 11.2 million RMB ($1.6 million) on high-end U.S. beef. Additionally, the wholesale mark-up could be 50 percent and the retail/food service mark-up over 100 percent. If the smugglers had direct contacts in the food service industry, their profit would have been much greater. ¶8. (SBU) As noted above, the contact said that he stopped his active involvement in most of the smuggling activity related to foreign food products. He noted that there are other opportunities that are not so labor intensive. He said that he is now involved in the export of Chinese fertilizer to Vietnam through an exclusive supply agreement with Vietnam's Ministry of Agriculture. He claimed that he receives a free trade arrangement from both sides. [Note: China had 100 percent plus export tariffs on fertilizers for much of 2008.] When we visited the Pingxiang Border Economic Cooperation Area/Youyi Guan border point, the man pointed out one of the lanes is dedicated to smuggled electronics, but that the "facilitation" costs of this trade are too high for him. ¶9. (SBU) While at the checkpoint, one could see why it could be relatively easy to conduct an operation even within sight of the customs house. First, many local people are granted special access passes to work and conduct trade in special border areas where goods are stored and housed. They drive vehicles and walk among these areas on each side of the border, but within a designated area. Additionally, there was also a clearly visible footpath on the side of the mountain going around the border control point where people could be seen walking back and forth over the formal border with various goods. Lastly, all the customs documents for goods transiting the border are processed in these special trade areas. With all the people and customs officials milling around, it does not seem hard to slip in forged documents or pay for the right stamp in the confusion. BIG BUSINESS FOR BORDER AREA -------------- -- ¶10. (SBU) FAS Vietnam contacts report that when the border is fully open at all points, the number of refrigerated containers that pass daily is estimated from 50 to 300. They believe that Mong Cai, in Vietnam's Quang Ninh province, is the main border post for such containers going to China, but thought is being given to using border gates in Lang Son province, where the roads are much better and thus transportation cost would be less. FAS Vietnam reports that its contacts believe that Vietnam has no plans to curtail this lucrative transhipment trade which provides an important income stream for Vietnam from port charges, as well as a significant source of employment for local labor. With a 1,200 KM border between relatively poor provinces on each side, it is hardly surprising that the trade flourishes. COMMENT -------------- ¶11. (SBU) Most in the agriculture trade community believe that China's policies encourage and sustain this trade. China's openness to trade in agriculture and food trade grew rapidly after their 2001 WTO accession and the number and types of products imported soared. However, following the lead of many countries, China has BEIJING 00003401 003 OF 003 increasingly used sanitary and phytosanitary barriers to limit and direct trade. The trend toward more non-tariff trade barriers against key third countries is particularly pronounced in the large trade of meat and poultry products. While the trade in semi-legal or smuggled products has generally been replaced with direct imports in recent years, politically motivated trade barriers have caused a different trend in China's imports of meat products. ¶12. (SBU) Generally speaking, importers in South China prefer to import directly into China. However, smuggling routes through Hong Kong and Vietnam remain and, in some cases, are growing as a "cost effective" option. While not a preference, the Chinese suppliers will meet demand through the grey channel when necessary. If China continues to expand non-scientific trade barriers, big profits in the food trade are going to continue to encourage criminality along China's southern border. GOLDBERG