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Cablegate: China Continues Fta Expansion in 2007

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PP RUEHCN RUEHGH RUEHVC
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ZNR UUUUU ZZH
P 100754Z AUG 07
FM AMEMBASSY BEIJING
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UNCLAS SECTION 01 OF 06 BEIJING 005254

SIPDIS

SENSITIVE

SIPDIS

USDOC FOR DAS KASOFF AND ITA/MAC/AP/MCQUEEN
STATE PASS USTR STRATFORD, WINTER, ALTBACH
GENEVA PASS USTR

E.O. 12958: N/A
TAGS: ETRD WTRO ECON CH

SUBJECT: CHINA CONTINUES FTA EXPANSION IN 2007

REFS: A) BEIJING 0609 B) BEIJING 09501(06)

BEIJING 00005254 001.2 OF 006


1. (SBU) Summary: While consistently professing support
for the Doha Round of WTO negotiations China is moving
forward on an ever increasing number of Free Trade
Agreements (FTAs) in 2007, according to MOFCOM Director Zhu
Guangyao. Previously concluded Trade in Goods Agreements
are being followed by Services and Investment negotiations
with ASEAN, Chile and Pakistan. In order to gain
experience with Europe, China is exploring FTAs with Norway,
Iceland, and Switzerland. Difficulties in negotiating
trade agreements remain and the larger and more complicated
FTA with Australia, combining goods and services, appears
stalled with estimates for completion now ranging from 2-3
years. China has launched a FTA feasibility study with
Costa Rica and has accelerated the FTA process with South
Korea. It has made approaches to Egypt and the South
Africa Customs Union (SACU), but the response has been
tepid. Talks with India and the Gulf Cooperation Council
are proceeding slowly. Paragraphs 6-17 summarize the
individual status of China's FTAs. End Summary.

Foreign Interest in FTAs with China Is Strong
---------------------------------------------

2. (SBU) When Prime Minister Wen Jiabao and other senior
leaders travel abroad, the possibility of concluding an FTA
is often the first topic their foreign interlocutors raise,
Zhu said. Leadership understands how important the issue
is to other countries. After the 17th Party Congress,
there will be "some adjustment of the economic ministries."
Zhu indicated that some had advocated creation of a
specialized trade organization along the lines of the
United States Trade Representative, but said such a major
initiative would have to come from the State Council.

Assessing the Economic Impact of FTAs on China
--------------------------------------------- -

3. (SBU) Due to staffing shortages, MOFCOM has not
completed any comprehensive studies on the
economic/commercial impact of FTAs. China's trade with

BEIJING 00005254 002.2 OF 006


Chile, however, increased 80 percent in the three months
since their FTA was completed, according to Zhu. Chinese
small- and medium- enterprises do not feel particularly
threatened by FTAs, Zhu stated. ASEAN businesses are
benefiting more than Chinese companies as the inland
provinces of Yunnan and Guangxi are not applying for trade
certificates. Zhu said MOFCOM will seek to publicize the
value of the FTAs in China. Meanwhile MOFCOM Division Five
is conducting a study on the potential impact of a China-
Korea FTA.

The Two Red Lines: Market Economy Status and One China
--------------------------------------------- ---------

4. (SBU) Zhu was clear that the two non-negotiable
preconditions for an FTA are diplomatic relations with the
PRC and recognition of China's status as a Market Economy.
Zhu noted the Swaziland is still "under the hand" of Taiwan
and "diplomatic difficulties" exist with Paraguay. Zhu
said Costa Rica insisted on China's agreeing to begin FTA
negotiations in return for switching recognition from
Taiwan to the PRC. At the time of the switch, Taiwan was
already trying to negotiate an FTA with Costa Rica, Zhu
noted.

Other Criteria - Larger the better, but all welcome
--------------------------------------------- ------

5. (SBU) China prefers FTA partners that are large with
economic and trade structures that complement China's, Zhu
said. China prefers to negotiate with smaller economies as
a group (e.g., ASEAN). While some countries prefer Partial
Trade Agreements (PTAs) they are not a good option for
China since they have limited tariff line reductions and
focus only on goods. (Embassy Comment: In practice,
however, China has been flexible. We are unaware of an
example of China's refusing to negotiate an FTA with a
country because its economy is too small. End Comment.)

East and Southeast Asia
-----------------------


BEIJING 00005254 003.2 OF 006


6. (SBU) ASEAN - The FTA in Services will enter into force
in July 2007. China will open up new markets to ASEAN
countries in 26 branches of 5 service areas which include
construction, environmental protection, transportation,
sports and commerce. ASEAN agreed to open their markets to
China in finance, telecommunication, education, tourism,
construction and medical treatment, according to a MOFCOM
press release. The Trade in Services Agreement marks the
second phase of China-ASEAN trade negotiations. In 2004 a
Trade in Goods Agreement was completed covering 7,000
products which was implemented in 2005. Full FTA
implementation is expected by 2010 (Reftel B).

7. (SBU) South Korea - MOFCOM Deputy Director Ms. Wang
confirmed to Econoffs that China and South Korea have
agreed to "speed up" the research phase of FTA talks. Ms.
Wang said that this decision was spurred by news of the
conclusion of United States - South Korea FTA negotiations.
Wang pointed out that China's FTA negotiations with South
Korea are being handled by a DG, which indicates the
importance MOFCOM attaches to this economic relationship.

8. (SBU) Australia - Zhu characterized this FTA as the
hardest to negotiate. Big differences still exist
regarding agriculture, textiles and electrical machinery.
Both sides keep in touch but no new recent concessions have
been made, Zhu commented. The last round was held in May
while they are supposed to have one round every two months.
China is facing a great challenge from the Ministry of
Agriculture which is trying to protect Chinese farmers (e.g.
rice in the east and central regions, dairy, wheat, beef
and mutton in the north.) Australia's competitive
advantage is in agriculture, he emphasized.

9. (SBU) New Zealand - According to the New Zealand
Embassy in Beijing, talks are ongoing but agricultural
issues have been hard to resolve. (Note: New Zealand is
also seeking a comprehensive FTA which includes both goods
and services. End note.) New Zealand lacks the negotiating
leverage of larger economies and will conclude a deal at
some point, the Embassy contact said.


BEIJING 00005254 004.2 OF 006


Latin America
-------------

10. (SBU) Costa Rica and China will conduct a feasibility
study this year. Mexico has proposed a Preferred Trading
Agreement (PTA) but China is only interested in an FTA. No
consensus between the two has been reached. Paraguay still
has diplomatic relations with Taiwan so there are
"diplomatic difficulties", Zhu noted. China and Peru have
initiated a joint feasibility study.

11. (SBU) The first round of services talks with Chile
were held in January, 2007 and began only four months after
the goods agreement was implemented. It included
discussion on banking, overseas labor, education,
construction, tourism, water transportation, health,
telecommunication, Chinese medicine and energy resources.
Both parties also discussed current laws and regulations on
investment. MOFCOM Director Zhu noted that there have been
many complaints from Chile regarding tropical fruits. He
did not elaborate.

South Asia - Pakistan On, India Stalled?
----------------------------------------

12. (SBU) Pakistan - Discussions on Trade in Services and
Investment is ongoing according to Zhu. A Free Trade
Agreement on Goods was signed in November, 2006. All
tariff reductions from the early harvest agreement remain
in place. The Phase I agreement, which remains in force
for five years, eliminates customs duties on 35.5 percent
of Chinese goods and 35.6 percent of Pakistani goods at the
eight digit tariff code level over three years. Both
countries made no concessions on 15 percent of goods for
Phase I. Phase II of the agreement seeks to "eliminate the
tariffs of no less than 90% of products, both in terms of
tariff lines and trade volume within a reasonable period of
time on the basis of friendly consultation and
accommodation of the concerns of both Parties."

13. (SBU) India - MOFCOM indicated that a joint study is
ongoing. The Indian Embassy in Beijing indicated at one

BEIJING 00005254 005.2 OF 006


point that an FTA was highly unlikely due to the overlap in
competitive industries in both countries.

Gulf Cooperation Council (GCC) - Slow Going
-------------------------------------------

14. (SBU) Director Zhu said that four rounds have been
completed but are proving difficult. The main GCC
interlocutor is the Director General from the GCC
Secretariat which is usually a Saudi. The Saudis, Zhu

SIPDIS
lamented, have many holidays and only work four hours per
day. Each round of negotiations is one to two days.

Europe - Small Steps First
--------------------------

15. (SBU) By negotiating with smaller European countries
such as Iceland, China hopes to gain experience and
insights that will help with larger European economies, Zhu
said. The China-Iceland joint feasibility study has been
completed, and FTA negotiations have formally begun with
Norway, Switzerland and Iceland which seem to be competing
with each other, he noted. Iceland is expected to finish
negotiations by the end of 2007 according to the Norwegian
Minister Counselor for Economic Affairs.

16. (SBU) A China-Norway feasibility study is expected to
be finished by the end of 2007, with the conclusion of FTA
negotiations one year later. The Norwegian Minister
Counselor observed that China wants to start with a
bilateral agreement. He said China seems uncomfortable
with the process and would rather take a step by step
approach while Norway wants a comprehensive agreement.
Norway's main interest is in fishery products with their
main competition being Chile which, due to the China/Chile
FTA, now has a 10 percent price advantage. The volume of
Norwegian fish products is not large at the moment and
mainly consists of salmon exports to China. Of the
approximately USD 2 billion in total exports, 25 percent
are fishery products. Energy is not a main interest
because Norway sells its oil and gas on the spot market and
has no need for long-term contracts, he added. Services

BEIJING 00005254 006.2 OF 006


interests include shipping, insurance and telecom. China's
main interests are access to the Norwegian market for
agricultural products, building China's trade reputation,
and financial access, the Norwegian Minister Counselor said.

Africa - SACU, Egypt, Nigeria
-----------------------------

17. (SBU) Zhu said China had proposed an FTA with the
Southern African Customs Union (SACU -- South Africa,
Botswana, Lesotho, Namibia and Swaziland), but SACU has not
replied yet and seems hesitant. Zhu noted that Swaziland
is still "under the hand" of Taiwan. At one time, Egypt
had proposed FTA talks, but then backed down when domestic
businesses expressed reservations. Nigeria prefers a PTA,
Zhu added.

Comment
-------

18. (SBU) In practice, China seems willing to consider FTA
negotiations with any country that recognizes its WTO
status as a Market Economy and does not recognize Taiwan.
On that basis, it has made progress over the past year in
enlisting FTA partners among the world's small and medium-
sized economies. To expand the FTAs to encompass larger
economies like Australia and South Korea it will have to
revamp staffing at MOFCOM and confront concerted opposition
from domestic economic interests. End Comment.

RANDT

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