US embassy cable - 05TAIPEI2243

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 002243 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 05/18/2015 
TAGS: ECON, ETRD, EAGR, PREL, CH, TW, Cross Strait Economics, Cross Strait Politics 
SUBJECT: PRC'S CROSS-STRAIT AGRICULTURAL INITIATIVE - 
CHEN'S SOUR GRAPES 
 
REF: A. TAIPEI 1781 
 
     B. TAIPEI 2164 
     C. TAIPEI 2202 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 d 
 
Summary 
------- 
 
1. (C) The PRC has offered to eliminate tariffs on ten of 
the twelve categories of fruit that can be legally imported 
from Taiwan to the PRC.  In addition, Beijing announced it 
will expand the number of permitted import categories to 
18.  The Taiwan government is insisting that government-to- 
government negotiations must precede implementation of 
these measures.  The DPP government in Taipei fears that 
Taiwan's agricultural industry will become too dependent on 
the PRC market and that the PRC might request reciprocal 
market opening measures.  Despite these concerns, Taiwan's 
agricultural industry has generally responded positively to 
the Beijing overtures.  The KMT-controlled Taiwan 
Provincial Farmers Association (TPFA) indicated it would 
send a delegation to negotiate implementation of the 
measures.  Taiwan's Council of Agriculture said that such a 
move could be illegal.  Many estimates of the potential 
impact of these measures have been wildly exaggerated, but 
AIT/T believes they have the potential to triple Taiwan's 
fruit exports to the PRC.  The current proposed measures 
would have little impact on U.S. trade, unless Taiwan 
grants reciprocal measures to the PRC.  If Taiwan were to 
open its markets to PRC imports of corn, soybeans or apples 
as it has previously for corn, the consequences for U.S. 
trade interests would be severe.  Some critics claim that 
these measures are part of a PRC "united front" strategy 
aimed at isolating Chen Shui-bian and putting him on the 
defensive again.  End summary. 
 
 
The PRC's Offer - Previously Forbidden Fruit 
-------------------------------------------- 
 
2. (U) During Kuomintang (KMT) Party Chairman Lien Chan's 
April 26-May 3 visit to the Mainland, PRC officials 
announced measures to expand Taiwan fruit exports to the 
PRC, one of three PRC goodwill "gifts" to enhance cross- 
Strait exchanges.  The PRC indicated that it will eliminate 
tariffs on ten of the twelve categories of fruit it has 
already approved for import and that it will approve 
another 6 categories for import.  Currently, tariffs on the 
twelve import categories range from 10 to 25 percent. 
These initiatives may have already been implemented. 
Taiwan media reported that the first duty-free Taiwan fruit 
has been exhibited at a trade show in Fuzhou that opened 
May 18.  The reports indicate that up to 47 tons of fruit 
were shipped from Kaohsiung and received expedited customs 
clearance at Fuzhou's Mawei port. 
 
3. (U) The announcement was not unexpected.  During the 
March 28-April 1 visit of KMT Vice Chairman P.K. Chiang to 
the PRC, Chiang and the PRC's Taiwan Affairs Office (TAO) 
released a joint statement that included a commitment to 
promote Taiwan's agricultural exports to the PRC.  It 
builds on the expansion from five to twelve authorized 
fruit import categories that followed the November 2004 PRC 
visit of former Democratic Progressive Party (DPP) Chairman 
Hsu Hsin-liang, who led a delegation of farmers 
associations.  Other agricultural trade exchanges involving 
farmers associations and the Taiwan External Trade 
Development Council (TaiTRA) have been ongoing since at 
least 2000. 
 
Taiwan Government Response - Thumping a Free Melon 
--------------------------------------------- ----- 
 
4. (SBU) The Taiwan government has not responded positively 
to the PRC's offer to eliminate tariffs unilaterally and 
expand the number of authorized categories of imports. 
This is due in part to lack of information about the 
proposals.  Council of Agriculture (COA) Department of 
International Affairs Director General Huang Tsu-bin told 
AIT/T that to date the Taiwan government has not received 
any details on the PRC offer other than what has appeared 
in the press.  The PRC proposal did not spell out which 10 
fruits would receive duty free status or which six new 
categories would be approved. 
5. (C) The bottom line for the Taiwan government, officials 
say, is that government-to-government negotiations should 
precede implementation of the PRC's offer.  Huang indicated 
that Taiwan's first preference would be to discuss this 
proposal under the framework of the WTO.  However, Huang 
also noted that the PRC proposals might violate WTO most- 
favored nation practices if offered only to Taiwan outside 
of a free trade agreement or CEPA-type agreement.  He 
pointed out that Taiwan would not qualify for special 
tariff treatment as a less developed economy under WTO 
agreements.  Alternatively, Taiwan would be willing to 
discuss the issue bilaterally in direct negotiations 
between government officials.  As reported ref B, National 
Security Council Secretary General Chiou I-jen told AIT/T 
that COA would soon announce its willingness to deal with 
agriculture trade issues in discussions linked to cross- 
Strait cargo flights.  Chiou explained that the two would 
be linked because of the need to transport highly 
perishable fruits quickly. 
 
6. (U) Because the Taiwan government believes these are 
international trade concerns that should be negotiated 
under the WTO framework, it is not willing at this time to 
authorize a private organization to discuss implementation 
of these measures with the PRC using a model similar to 
that used to discuss Lunar New Year charter flights. 
However, they have not categorically ruled out taking this 
step in the future.  On May 13, the Taiwan Provincial 
Farmers Association (TPFA), whose leadership is dominated 
by KMT members, announced that it would send a delegation 
to the PRC to discuss the proposal with the PRC's Taiwan 
Affairs Office.  In response, COA Vice Chairman Lee Jen- 
chyuan pointed out that the group did not have Taiwan 
government authorization to negotiate with the TAO and 
would be breaking Taiwan law if it engaged in such talks. 
He underscored that the TPFA is not the Taiwan counterpart 
of the TAO and that the Taiwan government is ready to 
engage in negotiations on a government-to-government basis. 
 
7. (SBU) Taiwan government officials have identified 
several concerns related to the proposal that they believe 
justify the need for bilateral negotiations.  From the 
Taiwan government's perspective, the most important problem 
is perhaps the potential for these proposed measures to 
increase the dependency of the Taiwan fruit producers on 
the PRC market.  The PRC and Hong Kong together are already 
Taiwan's second most important destination for fruit 
exports after Japan.  COA fears that with further expansion 
of exports to the PRC, Taiwan's fruit industry will become 
too vulnerable to manipulation.  Huang believes that 
without a negotiated agreement the PRC could withdraw the 
tariff-free status without warning in order to manipulate 
Taiwan farmers for political ends. 
 
8. (SBU) Huang also commented that the Taiwan government 
fears that the PRC might seek reciprocal market 
liberalization for its agricultural exports.  The effects 
of such measures could be devastating to Taiwan 
agricultural producers.  They would be unable to compete 
with Mainland farmers in the production of certain 
commodities, such as soybean oil or rice.  (Note: 
Reciprocal market opening measures could also have severe 
implications for U.S. exports described in paragraph 14 
below.  End note.) 
 
9. (U) In addition, Taiwan officials have noted that the 
PRC must take additional steps in order for the proposed 
measures to produce any practical benefits for Taiwan 
farmers.  These steps include improved customs clearance 
procedures and distribution channels in the PRC for Taiwan 
products.  Huang explained that currently PRC customs 
clearance for Taiwan agricultural products could take a 
week to ten days.  According to Huang, some products would 
require a much faster clearance period of only a few days 
to export effectively. 
 
Industry Response - Wanting a Bite of the Apple 
--------------------------------------------- -- 
 
10. (SBU) The response among farmers associations has 
ranged from interested to enthusiastic.  As noted above, 
the Taiwan Provincial Farmers Association has already 
announced plans for a 10-member delegation led by Penghu 
County Farmers Association Secretary General Chen Yi-zheng 
to visit the PRC in early June to meet with TAO officials 
and discuss implementation with a PRC organization to be 
designated by TAO.  However, Taiwan Vegetable and Fruits 
Exporters Association Secretary General Lin Rong-hua told 
AIT/T that his organization would need more information 
about the proposals before he could comment on them and 
their potential benefits for Taiwan farmers.  As reported 
ref C, the Taiwan stock market has responded favorably. 
Food industry stocks have risen almost six percent since 
the start of the Lien visit, significantly outperforming 
the overall market during the period. 
 
Estimated Impact - Visions of Sugar Plums 
----------------------------------------- 
 
11. (U) Taiwan agricultural exports to the Mainland are 
small compared to the trade in manufactured goods. 
According to a report prepared by COA and the Ministry of 
Economic Affairs (MOEA) for the Legislative Yuan (LY), 
Taiwan exported USD 83.8 million worth of agricultural 
goods to Hong Kong and the PRC in 2004, less than one 
percent of its USD 63.8 billion in total exports to the 
Mainland (including Hong Kong).  Agricultural exports to 
the Mainland constitute less than five percent of Taiwan's 
total agricultural exports.  Although small, Taiwan 
agricultural exports to the Mainland are growing.  They 
have risen by almost a third since Taiwan joined the WTO in 
2002.  Fruit makes up a significant portion of Taiwan's 
agricultural exports to the Mainland with USD 7.6 million 
in exports in 2004.  Of this, approximately USD 1.6 million 
went to the PRC market.  The PRC and Hong Kong together 
accounted for 21.2 percent of Taiwan's fruit exports. 
Media reports in Taiwan indicate that Taiwan fruits have 
become very popular in the PRC, and markets there are ready 
to receive more. 
 
12. (SBU) Estimates of the potential benefits of the PRC's 
proposals for Taiwan farmers have varied widely.  Some have 
been unrealistically high and politically motivated.  Lien 
Chan told the press that the proposals could increase the 
value of Taiwan's fruit exports by NT$ 10 billion (USD 317 
million) per year -- an increase of nearly 200 times 
current levels.  The KMT-dominated Taiwan Provincial 
Farmers Association offered an even more unrealistic 
estimate, claiming a potential increase of nearly NT$ 30 
billion (USD 950 million). 
 
13. (SBU) AIT's Agricultural Section believes that the 
potential growth is much lower than these estimates. 
However, it is substantial; these measures could triple 
Taiwan's fruit exports to the PRC.  The impact would depend 
on which ten of the current twelve authorized categories 
would receive tariff-free treatment.  Some categories such 
as papaya, which is subject to a relatively high tariff, 
have significant potential for growth.  Taiwan is 
competitive in papaya production but currently takes only a 
small share of the Mainland's large import market for that 
commodity.  In other categories where Taiwan already 
dominates the PRC's import market, such as star fruit, 
guava, and sugar apple, tariff free treatment might not 
substantially increase Taiwan exports. 
 
Implications for U.S. trade - Small Potatoes for Now 
--------------------------------------------- ------- 
 
14. (U) The PRC's proposed tariff elimination and expansion 
of authorized import categories would have little effect on 
U.S. exports.  The U.S. is not a major source of PRC 
imports for any of the current twelve authorized categories 
except tangerines.  The real threat to U.S. exports would 
come from any reciprocal measures implemented in Taiwan. 
Imports from the PRC of any of several agricultural 
commodities would flood the Taiwan market if liberalized, 
forcing out higher priced U.S. imports.  Most at risk would 
be U.S. corn, soybean and apple exports.  AIT/T 
Agricultural Section estimates that if fully implemented, a 
Taiwan opening of these three markets to PRC products could 
cut U.S. exports, which currently total about USD 1 billion 
annually, by USD 300 million. 
 
15. (SBU) Although the current state of cross-Strait 
relations make reciprocal measures by Taiwan highly 
unlikely at this time, unilateral PRC liberalization could 
increase existing pressure to liberalize PRC imports of 
some products such as corn, which are not produced in 
significant amounts in Taiwan.  In 2003, Taiwan pork 
producers secured a limited opening for PRC corn.  They 
continue to push for full liberalization.  The Taiwan 
government has been resistant to liberalization measures 
implemented without cross-Strait government-to-government 
negotiations.  The current PRC proposals appear to be 
designed specifically to avoid such contact. 
 
Comment - Making Lemons out of Lemonade 
--------------------------------------- 
 
16. (C) The PRC's agricultural liberalization proposals fit 
neatly into the Chinese Communist Party's traditional 
"united front" strategy, in the present case aimed at 
isolating the DPP and keeping Chen Shui-bian on the 
defensive.  First, the measures can be implemented 
unilaterally, obviating the need for government-to- 
government negotiations.  After COA's Huang explained in 
thorough detail to AIT/T the need for cross-Strait 
consultation before implementation, he predicted that in 
the end the PRC would proceed without any official 
consultation with the Taiwan government.  In addition, The 
KMT with its lock on the leadership of the Taiwan 
Provincial Farmers Association can use that organization as 
a substitute for the Council of Agriculture and continue 
playing the role of the party able to make progress on 
cross-Strait relations.  The agriculture proposals may have 
the added benefit for the PRC of eroding DPP support in the 
Taiwan's agricultural south, the DPP's traditional 
stronghold. 
 
17. (C) The reaction of Chen Shui-bian's government has 
been uncooperative, but Chen's own reaction has bordered on 
shrill.  In a nationally broadcast television interview on 
May 8, Chen called on Taiwan's farmers not to become the 
"agricultural slaves" (nong nu) of the PRC.  He cited the 
example of Chi-mei founder Hsu Wen-lung's about face 
(reported ref A) to make the point that the PRC would use 
increased dependency on Mainland markets to manipulate 
Taiwan farmers.  Despite Taiwan government concerns, the 
liberalization measures will benefit Taiwan farmers at 
least in the short run, and it appears they are being 
implemented in the face of Taiwan government resistance. 
The Chen administration has thus far been unable, or 
unwilling, to find a way to take ownership of the 
initiative as it managed to do with some success in 
implementing the Lunar New Year charter flights earlier 
this year.  Since passage of the Anti-Secession Law, it has 
been on the defensive, claiming efforts to improve contacts 
across the Strait are coming "too soon."  Now Chen is 
clearly playing defense again as the clock ticks on the 
current window of opportunity for improved cross-Strait 
relations.  End comment. 
PAAL