GETTING TRADE FLOWING: A PHASED APPROACH TO BEEF

UNCLAS SECTION 01 OF 04 CHENGDU 000198 SENSITIVE SIPDIS STATE FOR EAP/CM COMMERCE FOR USTR CHINA DESK, WINELANDT, O'CONNORL USDA FOR FAS/OSTA/ANIMAL DIVISION, BERMAND, BEANC USDA FOR FAS/OCRA/CHINA DESK, SHEPPARDW, RADLERC E.O. 12958: N/A TAGS: ETRD EAGR EINV ECON PREL CH SUBJECT: GETTING TRADE FLOWING: A PHASED APPROACH TO BEEF CHENGDU 00000198 001.2 OF 004 ¶1. (U) Sensitive But Unclassified. Not for Internet Distribution. What's at "Steak": A Billion Dollars in U.S. Exports in Short Order -------------- -------------- -------------- ¶2. (U) At a recent meeting with Ambassador in Chengdu, AmCit Steven Allemang pleaded for USDA to issue export certificates so that he could comply with Chinese import requirements for his U.S. beef. The expert certificate is "all that is stopping me from leading a USD one billion U.S. export bonanza." "Where's the Beef?" - Recommend Legal Imports Now, Greater Market Access Later -------------- -------------- -------------- ¶3. (U) Allemang proposed a phased approach for gaining Chinese compliance with international import standards for beef. Small and medium sized business could comply with current Chinese import requirements for U.S. beef, and the U.S. government could continue to negotiate for market access for a broader category of products, he said. Ambassador Roundtable, JCCT: Ban on U.S. Beef Exports to China Needs Review -------------- -------------- -------------- ¶4. (U) At an August 28, 2009 round table discussion with Ambassador Huntsman in Chengdu, U.S. businessman Steven Allemang of SMA Holdings highlighted the billion dollar business impact on U.S. beef exports as a result of the current U.S.-China stalemate in beef market access negotiations. As follow-up, and in light of the upcoming, October 27-29, 2009 meeting of the Joint Commission on Commerce and Trade (JCCT) in Hangzhou, Consul General, Foreign Agricultural Service (FAS) representative, and Econoff met with Allemang September 9 to review the issue in detail. I Can Export: Give Me a USDA Export Certificate -------------- -- ¶5. (U) Allemang explained that, but for the U.S. government's rejection of China's July 31, 2006 veterinary requirements, the United States would have over a billion dollar in beef exports to China. Further, the U.S. rejection of China's veterinary requirements, and unwillingness to issue USDA export certificates consistent with these requirements, threatens long-term U.S. trade interests by allowing an on-going degrading of U.S. beef's reputation in the China market. Allemang estimates U.S. exports would be over $200 million the first year USDA provides these certificates. SMEs: Let Me Sell My Beef NOW -------------- ¶6. (U) The current U.S. all-or-nothing negotiating position is bad for business, Allemang contended. This position responds to large industry producers in the United States, and assumes that China will eventually capitulate. "In the meantime, businessmen like myself are losing market opportunities," he said. ¶7. (U) Allemang acknowledged that China's position on U.S. beef imports is inconsistent with international standards and not compliant with rules of the World Organization for Animal Health (aka International Office of Epizootics (OIE) ). However, he argued that our priority should be to "start the flow" of U.S. beef into the China market and then work on expanding market access. He proposed that the U.S. begin by "accepting the rules as written" to allow U.S. producers willing and able to meet China's current import requirements to begin exporting. BSE Found: China Bans U.S. Beef -------------- ¶8. (U) Background: In December 2003, a cow infected with bovine spongiform encephalopathy (BSE) was identified in the state of Washington. Shortly thereafter, China and most U.S. trade partners, banned imports of live cattle and bovine products from the United States. The ban extended even to low-risk products, including cosmetics and other products that used non-protein beef tallow, plus bovine semen and embryos. The U.S. industry CHENGDU 00000198 002.2 OF 004 and U.S. negotiators looked for a short-lived ban. USDA negotiations led to the resumption of trade in cosmetics, bovine semen and other low-risk materials in 2004. China Issues Veterinary Requirements: U.S. Says "No Deal" -------------- -------------- ¶9. (U) After protracted negotiations with the United States, on July 31, 2006, China agreed to resume imports. The import requirements were outlined in an announcement of the "Inspection and Quarantine Requirements on the Conditional Resumption of U.S. Boneless Beef Imports," known in the industry as China's Veterinary Requirements. The Veterinary Requirements permitted the import of boneless beef from the U.S. as long as it met 22 import requirements and came with an USDA export certificate. ¶10. (U) USG concerns about the onerous import certification requirements included that only muscle meat was permitted entry, animals had to be under 30-months of age, U.S. beef imports into China had to be "fully traceable," and beef that was not compliant with the Veterinary Requirements could not be comingled with beef exported to China. As a result, the U.S. rejected the Chinese Veterinary Requirements as not being based on science, as required under China's World Trade Organization accession agreement, and also impossible for U.S. industry to meet. The U.S. Position: All or Nothing: China Says No -------------- --- ¶11. (U) The U.S. did not accept the 2006 terms. To date, legal beef trade has still not resumed, and the U.S. Department of Agriculture (USDA) still will not provide an export certificate for U.S. beef products for China. The U.S. position remains that China's Veterinary Requirements are inconsistent with the OIE guidelines under which the U.S. has been eligible to export all beef and beef products from cattle of any age since May 2007, when the OIE issued its BSE "controlled risk" country status for the United States. ¶12. (U) High level talks continued between the U.S. and China after the July 2006 Veterinary Requirements were issued. These discussions, including those following the December 2007 JCCT, failed to make any progress. Some further information sharing took place at the September 2008 JCCT, and again during working level meetings held in November 2008, but there has been no significant engagement on this issue in the interim. The GOC claimed that it was being held to a higher standard than other markets, such as Japan and Korea, where, prior to its May 2007 OIE eligibility certification, the U.S. had previously agreed to less than complete market openings. Phased Approach: A Good Negotiating Position -------------- ¶13. (U) If the market is opened under the current Chinese rules, Allemang asserted, Chinese industry interest in expanding access to high-quality U.S. beef would gradually influence the Chinese government to grant more complete market access. Additionally, he contends, a flexible U.S. stance would help create an overall more cooperative negotiation environment. Allowing U.S. beef exports to resume under current rules, he said, need not preclude continued, hard bargaining toward the ultimate goal of an OIE-compliant beef regime. U.S. Beef Industry Organizations Urge United States to Negotiate Phased-in Market Access for Beef -------------- -------------- -------------- ¶14. (U) In a April 15, 2009 letter to Agriculture Secretary Vilsack and U.S. Trade Representative Kirk, U.S. beef industry representatives acknowledged China and several other trading partners are "not in a position politically" to restore full access immediately. The groups propose negotiating market opening agreements in stages that eventually lead to full OIE compliance. The letter was co-signed by the following organizations representing U.S. beef producers: American Meat Institute, National Cattlemen's Beef Organization, National Meat Association, and the U.S. Meat Export Federation. Elimination of DeLauro Amendment Necessary to Resume Beef Negotiations -------------- -------------- -------------- CHENGDU 00000198 003.2 OF 004 ¶15. (SBU) U.S. efforts to reopen the Chinese beef market have been hampered by legislation prohibiting USDA from rulemaking to allow imports of cooked chicken from China (aka the DeLauro Amendment). Beef negotiations were suspended in November 2007, when the amendment was first signed into law. China continues to emphasize unofficially it cannot proceed on key U.S. agriculture market access concerns, including beef, as long as the DeLauro amendment remains in place. The amendment was extended through September 2009. Legislation to eliminate DeLauro under the fiscal year 2010 Agriculture Appropriations Bill is currently being debated. Elimination of DeLauro would allow beef negotiations to resume. No Formal Market Access But Illegal Imports Are Booming -------------- -------------- ¶16. (SBU) Post understands that current estimates are the market for U.S. beef in China is approximately $200 million. China imports U.S. beef through gray market channels brought in through Hong Kong and Vietnam. In the restaurants and hotels of the "first tier" cities of Beijing, Guangzhou and Shanghai, U.S. beef is not on the menu, even if it is on the plate. In "second tier" cities, like Chengdu, U.S. beef is not only on the plate but on the menu in most top-end restaurants and five-star hotels. In addition, because of the high demand of specialty means, including stomach, intestines, throat and tongue, these products from the U.S. are also available. FAS Chengdu market surveys confirmed the availability of U.S. beef at wholesale markets and in hotels and restaurants. At $200 million, China would be the fifth largest export market for U.S. beef. Contraband is Not Good for Quality or Reputation -------------- --- ¶17. (U) While lamenting that he cannot legally bring in America's best, Allemang railed against the argument that illegal access is better than no access. Traditionally, the reputation in China of U.S. beef is that it is second to none - the highest quality available on the world market. Now, low quality U.S. beef or mislabeled domestic or third-country beef is compromising the U.S. reputation for quality among millions of emerging, middle-income consumers. ¶18. (U) Allemang explained that in the absence of legal imports, low quality U.S. beef is entering the China market. Instead of USDA Premium or Choice as would normally be imported for top-end food service facilities, U.S. beef smugglers typically bring in commercial USDA Select beef, an inferior product that compromises future premium marketing efforts. In addition, domestic or third-country (especially Australian) beef is sometimes labeled as "U.S. beef" to deceive the consumer and thus obtain larger profit margins. The result is to provide smugglers and unscrupulous handlers of a price-premium for a less-than-premium product; the result is a long-term hit to U.S. beef's high-quality reputation and market prospects. Small Producers and Processors Ready to Meet the Market Meat Demand -------------- -------------- -------------- ¶19. (U) Allemang asserted that for small and medium-sized producers and processors (SME) like himself, only the lack of USDA export certificate bars U.S. beef export viability to China. His company alone, he said, would be able to import a container a week almost immediately. The total market for U.S. beef could easily reach USD one billion within a short period, and would only grow from there, he emphasized. ¶20. (U) Allemang explained that his company has business relationships with producers and processors in Florida, Texas and New Mexico that are already compliant with the current Chinese veterinary requirements, including the requirements for "full traceability," and that he is ready to market premium beef to the Chinese food service industry. Once this obstruction is removed, he said, he would be able to have his product in China within 2-3 months. ¶21. (U) Allemang notes that many SME involved in beef production, which comprise about 20 percent of U.S. beef production capacity, are also either ready to export under current Chinese requirements or could adjust to meet them within 12 to 18 months. In the short- to medium-term, the greater problem would be for the large producers. CHENGDU 00000198 004.2 OF 004 Traceability: What it is and What it Means -------------- ¶22. (U) The second issue that has been problematic for the large U.S. beef industry players, says Allemang, is the full traceability requirement. Traceability requires that each cut of beef be traced back to an individual animal throughout the food distribution chain, from birth to slaughter to in-store/restaurant sales. Further, there can be no comingling. ¶23. (U) In response to the identification of a dairy cow with BSE in Washington, USDA implemented in 2004 the National Animal Identification System (NAIS). NAIS is a voluntary identification system. According to Allemang, only an estimated 30 percent of ranchers have adopted NAIS as a result of a reluctance to share such information among industry players, including ranchers, feedlots, processers, and government agencies, and over concern for the costs involved. As a result of this low adoption rate, most large-volume slaughtering plants cannot procure an adequate supply of traceable beef without running into comingling problems. ¶24. (U) In fact, while large players would face a longer adjustment period to meet China's veterinary requirements, Allemang believes they would quickly begin to adjust once the flow of legal, high-quality U.S. beef resumed. In the meantime, he emphasized the benefit of giving U.S. SMEs the opportunity to establish a competitive presence in the Chinese beef market. Comment and Recommendation: Phased Approach is the Right Approach -------------- -------------- -------------- ¶25. (SBU) The absence of legal imports of high-quality U.S. beef from the Chinese market, now in its sixth year, is resulting in the erosion of U.S. beef's reputation and long-term competitiveness, as black/grey market or counterfeit products current being sold under the "U.S. Beef" label are causing Chinese consumers to increasingly associate the U.S. beef label with a low quality product. Our current policy of blocking all beef exports to China pending China's full compliance with OIE guidelines has proven ineffective and deserves reconsideration. ¶26. (SBU) The U.S. should adopt a more incremental approach. A negotiating posture that allows U.S. beef exporters able to meet current Chinese Veterinary Requirements to immediately begin selling into the Chinese market would make it possible to start reestablishing a market presence for high quality U.S. beef, while continuing to pursue long-term, full market access objectives. ¶27. (U) This cable was coordinated with Embassy Beijing. BROWN