Regional Free Trade and U.S. Agriculture Exports

UNCLAS SECTION 01 OF 03 MANILA 001737

C O R R E C T E D C O P Y/ ADD SENSITIVE CAPTION

SIPDIS
SENSITIVE

STATE FOR EAP/MTS, EAP/EP, AND EEB/TPP
STATE PASS USTR FOR BWEISEL AND KEHLERS
STATE ALSO PASS USAID, OPIC
USDA FOR ONA, OTP
TREASURY FOR OASIA
USDOC FOR 4430/ITA/MAC

E.O. 12958: N/A
TAGS: EAGR ETRD EINV ECON PGOV PREL RP
SUBJECT: Regional Free Trade and U.S. Agriculture Exports

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1. (U) Summary: Scheduled January 2010 tariff reductions under
ASEAN-centered free trade agreements may reduce the $1.7 billion of
U.S. food and agricultural exports to the Philippines. Secretary
Clinton's July 22 speech on the U.S. intent to participate fully in
the region was welcomed by AmCham members, who noted that the free
trade area centered on ASEAN will soon encompass much of the world's
people and production capacity. End Summary.

ASEAN Free Trade Agreement Impact on U.S. Ag Exports
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2. (U) Under the Association of Southeast Asia Nations (ASEAN,
composed of Brunei Darussalam, Burma, Cambodia, Indonesia, Laos,
Malaysia, the Philippines, Singapore, Thailand and Vietnam) Free
Trade Agreement (AFTA),all tariff rates on all products (with
special protocol exemptions for a very few hyper-sensitive products
such as rice) in the ASEAN region will fall to between zero and five
percent by 2010. Several types of U.S. agricultural exports to the
Philippines will face higher tariffs than competing products
imported under the lower Common Effective Preferential Tariffs
(CEPT) of AFTA:

(a) Poultry/Pork products: Beginning January 2010, ASEAN-origin
processed and fresh or frozen pork and poultry products may enter
the Philippines at a 5 percent tariff while U.S. products will still
face most favored nation (MFN) tariff rates of between 30 and 40
percent in addition to tariff-rate-quota restrictions. U.S. exports
to the Philippines of poultry meat were about $20 million and of
pork about $54 million in 2008.

(b) Corn: Under AFTA, corn tariffs will go down to 5 percent by
2010 versus an MFN rate of 35-50 percent applied to U.S. corn.

(c) Packaged Food Items (soups, peanut butter, biscuits, fruit
juices): The majority of U.S. packaged food items have duties
between 3-15 percent compared with products entering under the AFTA
at 0-5 percent duty.

(d) Frozen french fried potatoes: Starting in 2012, French fries
will be levied a 5 percent duty under AFTA, while U.S. french fries
will face an MFN rate of 10 percent.

ASEAN-Australia-New Zealand Free Trade Agreement
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3. (U) The ASEAN-Australia-New Zealand Free Trade Agreement
(AANZFTA) signed in February this year provides products from
Australia and New Zealand with the same lower tariffs as
ASEAN-origin products. U.S. wheat, beef, and dairy exports to the
Philippines face direct competition from Australian and New Zealand
products and will be disadvantaged as a result of the new tariff
regime:

(a) Wheat and Wheat Flour: Beginning January 2010 under the
AANZFTA, foodgrade wheat may enter the Philippines duty free,
compared with a 3 percent MFN tariff rate for U.S. wheat. Wheat
flour duties will drop to zero in 2011 under AANZFTA.

(b) Dairy Products: Starting in 2010, milk powder, cheese and
buttermilk from Australia and New Zealand can enter the Philippines
duty free. On the other hand, U.S. milk powder will have a MFN duty
of 1 percent; cheese and buttermilk face a 7 percent MFN duty.

(c) Fresh Fruits: Under AANZFTA, fresh fruits such as apples,
grapes, kiwifruit, and cherries will be duty-free starting 2011
while U.S. apples, grapes, and cherries will continue to face an MFN
duty of 7 percent.

(d) Beef: By 2012, beef and live cattle under AANZFTA will be able
to enter duty-free while those coming from the U.S. are subject to
10 percent and 3 percent MFN tariff rates, respectively.

(e) Packaged Food Items (soups, peanut butter, biscuits, fruit
juices): The majority of U.S. packaged food items face a Philippine
duty of between 3-15 percent compared with products entering under
the AANZFTA which will face only 0-5 percent duty.

(f) Frozen french fried potatoes: As was noted for ASEAN-origin
products, Australian and New Zealand-origin french fries can also
enter the Philippines duty-free starting in 2012 while U.S. french
fries will continue to face an MFN rate of 10 percent.


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)g) Wine: By 2015, wine from AANZFTA-member countries will be able
to enter the Philippines duty-free, compared to the 7 percent MFN
tariff for wines from the U.S.

(h) Liquid milk, butter and beef offal: Under the AANZFTA, liquid
milk, butter & beef offal will be duty-free by 2019, while
U.S.-origin products will still have 3 percent, 7 percent and 7
percent MFN tariffs, respectively.

ASEAN-China Free Trade Agreement
--------------


4. (U) Meanwhile, the Philippines and China eliminated tariffs on
more than 210 agricultural commodities in January 2006 under the
memorandum of understanding covering the Early Harvest Program
(EHP). The EHP is a free trade agreement under the framework of the
ASEAN-China Free Trade Agreement (ACFTA) and covers unprocessed
agricultural products, in particular, livestock, meat, fish, dairy
products, live plants, vegetables, fruits and nuts:

(a) Vegetables: Under EHP, duties have been reduced to zero since
2006 for dried vegetables, leguminous vegetables, as well as
artichokes and brussels sprouts. On the other hand, dried peas from
the U.S. face a MFN rate of 3 percent.

(b) Fresh Fruits: Apples have been singled-out for duty-free
treatment under the Philippine-China EHP since 2006. On the other
hand, a 7 percent MFN tariff applies to U.S. apple imports into the
Philippines.


5. (U) Duties for some vegetables have already been reduced under
the ASEAN-China Free Trade Agreement. The Benguet Farmers'
Federation Inc. (BFFI),which produces and supplies the majority of
Philippine highland vegetables, has admitted difficulty in competing
with imported vegetables from China. Increasing farm input and
marketing costs have been compounded by the entry of smuggled
Chinese vegetables. The BFFI has concerns over how to compete with
more entry of additional (i.e., beyond the EHP) duty-free vegetables
from China next year.


6. (U) In spite of domestic opposition from some local agricultural
interests, in June 2009 Philippine President Gloria Macapagal-Arroyo
announced that the Philippines would implement its AFTA tariff
commitments as scheduled in January 2010.

Wheat is the Single Most Important U.S. Ag Export
-------------- --------------


7. (U) Wheat accounts for much of the $1.7 billion of U.S.
agricultural exports to the Philippines, with over $700 million in
U.S. bulk wheat shipped to the Philippines in 2008. The Philippine
government temporarily scrapped the duty on all wheat imports from
December 2008 through June 2009 to temper the impact of rising
prices of imported wheat on local bread/bakery products. The
tariff on imported feedgrade wheat has since reverted to 7 percent
while duty free importation of foodgrade wheat has been extended for
another six months or through December 2009. However, Australian
wheat and wheat flour exports to the Philippines will have an
advantage when tariffs on these products are eliminated in 2010 and
2011, respectively. Philippine flour milling and bakery industries
have been lobbying with the Philippine government for an extension
of the duty-free privilege for all wheat imports.

U.S. Companies Applaud Greater U.S. Interest in Region
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8. (SBU) Some members of the American Chamber of Commerce in Manila
have expressed appreciation for Secretary Clinton's July 22 remarks
on the U.S. intent to be more fully involved in ASEAN affairs.
However, one AmCham member then asked how this intent would be
translated into concrete actions comparable to the $10 billion
"China-ASEAN Fund on Investment Cooperation" announced by China
earlier this year.

Comment
--------------


9. (U) Several U.S. agricultural and food exports will be
disadvantaged as regional free trade agreements take effect in
January 2010, and our markets share here for those products may
decline as a direct result. Post will continue to monitor this
issue.

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Kenney