US embassy cable - 05MANILA5344

UNCLAS SECTION 01 OF 04 MANILA 005344 
 
SIPDIS 
 
STATE FOR EAP/EP, EB/TPP/ABT, EB/TPP/BTA/ANA, OES/OMC 
STATE PASS USTR FOR BWEISEL, DKATZ, RVARGO 
STATE PASS USAID 
USDA FOR MANIS, AUTRY, SHEIKH 
TREASURY FOR OASIA FOR AJEWELL 
USDOC FOR 4430/ITA/MAC/DBISBEE 
 
E.O. 12958: N/A 
TAGS: EAGR, EAID, PREL, PGOV, ECON, RP, WTRO 
SUBJECT: MINDANAO TUNA INDUSTRY AT RISK 
 
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SUMMARY 
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1.  The tuna industry, which generates $400 million in 
annual revenues in Mindanao, faces a potential reduction in 
access to the EU market and restrictions in traditional 
fishing grounds.  Indonesia is reluctant to extend a crucial 
bilateral fishing agreement beyond December 3.  Tuna 
producers are also concerned the EU will decertify fishing 
vessels and canneries because of heightened health criteria. 
Tuna exporters fear efforts by Ecuador, Thailand and other 
producers to gain preferential access to the US market.  To 
ensure continued growth, the industry must adapt new 
mechanisms to improve international management of fish 
resources in the Pacific Basin.  Limited access to 
Indonesian waters or restricted access to EU and US markets 
could severely damage the Philippine tuna industry and 
undermine an economic sector critical to the development of 
southern and western Mindanao.  The U.S. has an interest in 
supporting the Philippine tuna industry to promote economic 
development and political stability in Mindanao.  If GRP 
negotiations with Indonesia become deadlocked, the USG could 
consider encouraging Indonesia to renew its bilateral 
fishing agreement, emphasizing the importance of Mindanao to 
our common anti-terrorism efforts. 
 
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TUNA: PRODUCTION AND TRADE 
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2.  The tuna business, with total annual revenues of $400 
million, is vital to southern Mindanao, home to eight 
canneries - two in Zamboanga City and six in General Santos 
City.  The USAID-funded Growth with Equity in Mindanao (GEM) 
project estimates that the tuna industry provides 100,000 
jobs and ancillary employment for an additional 50,000. 
According to the U.N. Food and Agricultural Organization, 
Philippine tuna production has grown from 300,000 metric 
tons in 1996 to exceed 500,000 metric tons annually in 2003 
and 2004.  In anticipation of further growth, canning firms 
General Tuna and Celebes Canning recently announced new 
investments of P347 million ($6 million) to expand 
production facilities and create 547 new jobs.  Celebes will 
nearly double its annual production capacity from 8,386 
metric tons to 15,600 metric tons. 
 
3.  Industry groups estimate the Philippines' annual 
commercial tuna production at 400,000 MT (excluding non- 
commercial coastal species).  Roughly half is canned for 
export, with 44% of canned exports sent to the US and 42% to 
the EU.  The industry exports approximately 50,000 MT of 
fresh or frozen fish.  The value of processed tuna exports 
rose from $123 million in 2000 to $183 million in 2004, 
though tuna canners report that exports have long been 
underreported.  The industry is trying to correct production 
figures to ensure equitable access to international fish 
stocks, since an international commission will allocate 
annual fishing quotas based on past statistics.  Philippine 
exporters joined the Thai tuna industry in lobbying to 
retain equal access to the US canned tuna market during 2002 
when the US limited preferential duties to pouched tuna 
under the Andean Trade Preference and Drug Eradication Act 
(ATPDEA). 
 
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ACCESS TO INDONESIAN WATERS UNDER THREAT 
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4.  The bilateral RP-Indonesia fishing agreement, which 
governs access to Indonesian waters, will expire on December 
3.  In renewal negotiations, Indonesia has proposed to 
sharply reduce Philippine access to Indonesian fishing 
grounds where 60-70% of Philippine tuna originates. 
According to the Bureau of Fisheries and Aquatic Resources 
(BFAR), Indonesia has proposed reflagging most Philippine 
fishing vessels that use Indonesian waters and requiring 
each vessel to employ 60% Indonesian crews.  Reflagged 
vessels would need to process their catch in Indonesia or 
export it, through Indonesian firms, to Philippine 
processors. Dr. Stanley Swerdloff, GEM's Senior Fisheries 
Advisor, noted that Indonesia lacks the capacity to store 
and process this volume of tuna, so the proposal does not 
appear to serve Indonesian interests either.  If the 
agreement expires, Philippine vessels would be subject to 
surveillance by a new vessel monitoring system and subject 
to seizures by Indonesian authorities.  GEM estimates that 
General Santos City could suffer a 40-100% decline in the 
tuna industry, and a 25-60% overall economic decline if the 
two countries fail to renew the agreement. 
 
5.  The GRP counteroffer would avoid reflagging RP vessels 
but promises to land 60% of the catch in Indonesia, provided 
that sufficient cold storage and processing capacity is 
available.  Philippine companies have established two 
canneries in Indonesia in recent years, but the Tuna Canners 
Association of the Philippines (TCAP) reports that 
Indonesia's production costs are not competitive.  GRP 
negotiators are willing to encourage further investment in 
return for renewed access to Indonesian waters.  The GRP can 
also cite Article 62 of the United Nations Convention on the 
Law of the Sea (UNCLOS) requiring signatories to allow 
access to unused aquatic resources taking into account "the 
need to minimize economic dislocation in states whose 
nationals have habitually fished in the zone". 
 
6.  According to Swerdloff, the Philippine Department of 
Foreign Affairs has appeared reluctant to push for renewal 
of the bilateral agreement possibly due to an outstanding 
maritime boundary dispute involving a disputed island off 
Mindanao.  He said DFA is unwilling to cite UNCLOS 
provisions and may prefer to delay resolution of the 
maritime boundary in hopes of encouraging joint ventures for 
oil exploration in disputed areas.  BFAR bypassed DFA to 
negotiate the current bilateral agreement and is leading the 
renewal negotiations, which will resume on November 24-25 in 
Jakarta. 
 
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EU INSPECTORS MAY RESTRICT MARKET ACCESS 
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7.  TCAP expects a team of 20 EU Inspectors to visit the 
Philippines in late 2005 to verify that canneries and 
fishing boats meet EU sanitary and phytosanitary (SPS) 
rules.  The requirements are intended to prevent bacterial 
contamination during storage and processing of fish.  If 
compliance falls short, EU inspectors could cut off access 
to EU markets for some or all canneries.  TCAP noted that 
BFAR has required 34 fish processing companies to apply for 
recertification due to health issues, but tuna exporters 
have not been affected.  Swerdloff said that EU consultants 
highlighted some legitimate issues but also made some 
unreasonable demands, and it is unlikely that EU inspectors 
will impose the same requirements. 
 
8.  Philippine exporters believe these SPS issues are a 
spurious attempt to restrict trade in retaliation for a 
successful WTO complaint filed by GRP and other Asian 
producers against preferential EU market access offered to 
African Caribbean and Pacific (ACP) countries.  ACP market 
access preferences favor Spanish companies that expanded 
canning operations in eligible countries.  TCAP claims to 
have compiled documentary evidence, including videos of 
Spanish canneries, showing that EU and Philippine producers 
face different inspection standards. 
 
9.  TCAP Executive Director Francisco Buencamino reported 
that EU consultants have also questioned the competence of 
the Philippine Bureau of Fisheries and Aquatic Resources 
(BFAR).  Swerdloff said that these doubts arose after 
security issues prevented EU consultants from conducting a 
pre-inspection visit to Mindanao, so BFAR instead brought 
them to visit a Manila fishing port with dismal sanitary 
standards. 
 
10.  The EU also wants to reduce by 2006 the maximum lead 
content in fish to 0.02 parts per million (PPM) from the 
present 0.05 PPM by 2006.  TCAP reports that the new 
standard is extremely difficult to maintain, inconsistent 
with the Codex Alimentarius, and of negligible impact on 
consumer health.  TCAP is concerned that these lead content 
standards may also be a discriminatory non-tariff barrier 
that could favor EU and ACP producers. 
 
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COMPETITORS SEEK ADVANTAGES IN US MARKET 
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11.  Philippine tuna exporters are also concerned that major 
competitors such as Thailand and Ecuador may obtain 
preferential access to the US canned tuna market through 
current trade negotiations.  After Ecuador obtained lower US 
tariff rates for pouched tuna, TCAP fears it may push to 
extend duty-free access to canned tuna under the Andean Free 
Trade Agreement.  Exporters here expect Thailand to seek 
preferential market access for tuna under a US-Thailand Free 
Trade Agreement.  Philippine canners also fear that the 
Central American Free Trade Agreement will expand trade 
preferences already granted for Caribbean tuna.  TCAP 
believes that Philippine tuna exports to the US could be 
reduced to zero if significant preferences are offered to 
other major producers. 
 
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GSP APPLICATION OR US LEGISLATION 
--------------------------------- 
 
12.  TCAP is considering either submitting an application to 
include canned tuna under the Generalized System of 
Preferences (GSP) or lobbying for US legislation to counter 
preferential US market access to competing producers. Ted 
Po, Vice President of Century Canning Corporation, surmised 
that a US-RP Free Trade Agreement (FTA) might ensure 
competitive US market access for Philippine tuna exporters, 
but he expressed doubt about the near-term feasibility of 
such an FTA in view of the political sensitivities over 
Philippine agriculture.  TCAP has engaged a US law firm to 
explore the feasibility of filing a GSP petition in the 
event that competing producers gain preferential market 
access.  TCAP also suggested that the U.S. congress could 
intervene to ensure equal market access for Philippine tuna 
producers as it has proposed to do for pouched tuna through 
the Fair Trade In Pouch Tuna Act of 2005. 
 
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NEW PACIFIC FISHING REGIME 
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13.  The tuna industry is adapting to new multilateral 
mechanisms to regulate fish stocks in the western Pacific 
Basin.  In May 2005, the GRP ratified the Multilateral High 
Level Convention (MHLC) on the Conservation and Management 
of Highly Migratory Fish Stocks in the Western and Central 
Pacific Ocean.  Originally signed in 2000, the MHLC led to 
the establishment in 2004 of the Western and Central Pacific 
Fisheries Commission (WCPFC), to monitor fish stocks, and 
allocate fishing quotas for international waters.  The WCPFC 
will try to limit the annual catch of yellowfin and bigeye 
tuna based on evidence of overfishing, while allowing 
further growth in the skipjack tuna catch. 
 
14.  Under the new regime, fishing vessels will be required 
to install tracking devices, increase their minimum net size 
to reduce the collection of smaller fish and submit daily 
and monthly logs of their catch.  In July 2005, the GRP 
adopted a National Tuna Management Plan that incorporates 
MHLC requirements for managing fishing stocks in Philippine 
waters.  USAID Manila programs support this initiative and 
help the GRP improve its resource management capacity and 
adapt to international standards. 
 
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COMMENT 
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15.  Philippine exporters appear most concerned over 
upcoming EU inspections and potential loss of EU market 
access.  Exporters and USAID advisors doubt that health 
issues would justify decertification of Philippine 
canneries, but TCAP is worried that EU inspectors may impose 
unreasonable standards as a non-tariff barrier to support EU 
and ACP competitors.  The expiration of the bilateral 
agreement with Indonesia, however, may be a more serious 
threat to the Philippine tuna industry.  Since Indonesia 
receives limited economic benefits from its bilateral 
fishing agreement with the Philippines, the GRP is concerned 
that Indonesia may allow the agreement to expire and use new 
surveillance tools to enhance enforcement.  The U.S. has an 
interest in supporting the Philippine tuna industry to 
promote economic development and political stability in 
Mindanao.  If negotiations fail to overcome the impasse, the 
USG could encourage Indonesia to renew its bilateral fishing 
agreement with the Philippines, emphasizing the importance 
of Mindanao to our common anti-terrorism efforts. 
JONES