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Cablegate: U.S. Travel Industry Concerns On Implementation Of

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DE RUEHGH #0446/01 2910912
ZNR UUUUU ZZH
P 170912Z OCT 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC PRIORITY 7249
INFO RUEHBJ/AMEMBASSY BEIJING 2202
RUEHHK/AMCONSUL HONG KONG 1629
RUEHGZ/AMCONSUL GUANGZHOU 1444
RUEHCN/AMCONSUL CHENGDU 1473
RUEHSH/AMCONSUL SHENYANG 1465
RUEHKO/AMEMBASSY TOKYO 0388
RUEHIN/AIT TAIPEI 1267
RUCPDOC/USDOC WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7841

UNCLAS SECTION 01 OF 07 SHANGHAI 000446

SENSITIVE
SIPDIS

STATE FOR EAP/CM, CA/VO-MEYERH, EEB/CIP
STATE PASS USTR FOR STRATFORD/WINTER/KATZ
USDOC FOR ITA - DAS KASOFF, DAS AGUEVARA, NMELCHER, HMARANO,
IHILL
TREASURY FOR OASIA-CUSHMAN, WINSHIP, HAARSAGER
NSC FOR LOI

E.O. 12958: N/A
TAGS: ECON CVIS PREL BEXP ETRD KIPR CH
SUBJECT: U.S. TRAVEL INDUSTRY CONCERNS ON IMPLEMENTATION OF
U.S.-CHINA TOURISM MOU

(U) Sensitive but unclassified. Not for dissemination outside
USG channels; not for Internet distribution.

1. (SBU) Summary: During August and September 2008 Shanghai
Commercial Officer visited with executives of several U.S.
travel and tourism firms active in the China outbound tourism
market. Each of the executives expressed concern with recent
trends in China's outbound tourism to the U.S. subsequent to the
implementation of the U.S. - China Tourism MOU signed in
December 2007. Each of the executives stated that National Tour
Association-approved inbound operators or receptives in the
United States are not realizing the benefits of a post-MOU
increase in Chinese tour groups to the U.S. The executives
attributed this to unfair actions on the part of the Chinese
outbound tourism industry and unapproved actors in the U.S.
market. Shanghai Consular Section Chief and NIV head
acknowledged problems in MOU visa implementation and offered
suggestions for solutions. End Summary.

Background
----------

2. (SBU) In December 2007 the China National Tourism
Administration (CNTA) and the U.S. Department of Commerce signed
The Memorandum of Understanding between the Government of the
People's Republic of China and the Government of the United
States of America to Facilitate Outbound Tourist Group Travel
from China to the United State. The MOU allowed Chinese leisure
travelers to travel to the United States in group tours. China
had previously not allowed its travel industry to organize or
promote group leisure tours to the U.S. U.S. destination
marketing organizations (DMOs) and travel firms had also been
prohibited from promoting their states, cities or regions in
China. The MOU removed those restrictions. The MOU was
implemented on June 17, 2008, with an inaugural tour to
Washington, D.C. led by CNTA Chairman Shao Qiwei.

3. (SBU) Since China's opening up to the outside world
beginning thirty years ago, China has had a special policy to
control and monitor outbound tourism, its Approved Destination
Status (ADS) system. China negotiated bilateral ADS agreements
with other governments to allow Chinese tour operators to
organize tours to the counterpart country while the counterpart
government allowed Chinese tourists to travel into its territory
with a special group ADS visa. As of 2008 China has ADS
agreements with over 100 nations. The ADS system allows China to
manage and monitor the flow of outbound tourism and hard
currency. China controls the flow by two means:

* Chinese tour operators are not allowed to organize or
promote group leisure tours to foreign destinations unless that
destination country has signed an ADS agreement with China
* Foreign tour operators are not allowed to promote their
services in China or open a representative office in China
unless their country has an ADS agreement with China.

4. (SBU) Nonetheless, China and the U.S. were able to negotiate
a unique tourism agreement as embodied in the 2007 MOU. While
the agreement includes some aspects of the standard ADS
agreement, it is not an ADS agreement and does not commit the
U.S. to issuing group visas to Chinese citizens. The media and
tourism industries both inside and outside of China often,
erroneously, refer to the MOU as an ADS agreement.

5. (SBU) Another aspect of the ADS system that the U.S. was
unwilling to accept was China's insistence that the counterpart
country designate certain travel firms within its territory that
would be allowed to accept ADS tours from China. Government
selection of only certain firms to benefit from the tour
business, while common practice in China, is contrary to the
free market principles of the U.S.

6. (SBU) The negotiators settled upon a unique solution to
China's desire to limit the inbound operators in the U.S. that
could accept Chinese tour groups. The U.S. Department of

SHANGHAI 00000446 002 OF 007


Commerce would accept applications from travel organizations in
the U.S. that were interested in vetting their membership for
those firms capable of servicing Chinese tour groups. The first
successful applicant, the National Tour Association (NTA),
agreed to create a list of member firms willing to meet certain
criteria such as on-staff Mandarin-speaking tour guides. The
resulting list of firms is known commonly as the "NTA's approved
list." Chinese outbound tour operators are required in the
agreement to work with U.S. inbound tour operators and firms on
this NTA list.

7. (U) On the China side the key regulator for tourism services
is the China National Tourism Administration (CNTA), the Chinese
government authority responsible for the development and
regulation of tourism in the country. CNTA does not have the
authority of a full department within the Chinese government but
in other respects acts as a ministry. Provincial CNTA offices in
each Chinese province report to the central CNTA in Beijing.
CNTA has several overseas offices called CNTO (China National
Tourism Offices) that are charged with promoting tourism to
China. CNTA is unique as a tourism promotion agency in that it
is also responsible for controlling the outflow of tourists from
China abroad.

8. (U) CNTA licenses Chinese travel agencies to operate in up
to three categories; Class 1: outbound international; Class 2:
inbound international and Class 3: domestic only. Approximately
800 travel agencies in China have a Class 1 license and are
legally able to offer outbound tours.

9. (SBU) Licenses to operate outbound travel agencies in China
are so difficult to obtain that the license is itself a
commodity. Some people obtain a license through connections and
then rent out their "regional travel departments" to others who
actually carry on the travel business. Some of the largest
players in the Chinese outbound travel industry therefore don't
show up on the CNTA's list of licensed travel agencies. In
Chinese they are known as heima or "black horses" - the real
players behind the scene.


Tourism from China to the United States
---------------------------------------

10. (U) As envisioned by the United States, the Tourism MOU was
designed to open up the Chinese outbound travel market to the
U.S. travel industry and boost the numbers of Chinese tourists
visiting the U.S. The U.S. Department of Commerce's Office of
Travel and Tourism Industries reports that January to June 2008
year-to-date arrivals from China (including Hong Kong) grew 33
percent to 305,654. According to the UN World Tourism
Organization (UNWTO), China is the fastest growing travel market
in the world. By 2020, China will become the world's fourth
largest source of tourists. The U.S. Department of Commerce
estimates that Chinese visitors to the United States will reach
579,000 by 2011. On average, Chinese citizens spend more during
their stay than visitors from most countries. In 2006, the
average per visitor spending by Chinese citizens traveling to
the United States was more than $6,000. Travel and tourism is
the top service export for the United States and has produced a
travel balance of trade surplus since 1989.

U.S. Inbound Operators Report No Increase in Tourists from China
--------------------------------------------- -------------------

11. (SBU) Commercial Officer spoke with seven U.S. inbound
operators on the new NTA-approved list. Every one of the
operators reported that they are yet to see any new business
from China in 2008. One agency head reported that the one
Chinese agency he had spoken to demanded 90-days credit -
unusual terms in an industry where consumers pay in advance for
the travel package.

12. (SBU) Three Los Angeles travel agencies with long histories
in the Chinese-language tour market reported no increase in

SHANGHAI 00000446 003 OF 007


clients from China over last year's numbers. One reported that
they are focusing on tour groups from the USA going to China
because of problems getting visas for their China clients.

NTA-Approved Receptive Services Being Cherry-picked
by Chinese Travel Agencies
--------------------------------------------- ------
13. (SBU) One large American-owned travel firm in Hong Kong
reported that since June 2008 they have been approached by a
number of Chinese outbound tour operators with requests for
quotes on only the hotel and transportation portions of
standardized tour itineraries. The Chinese indicated that they
were providing the tour guides and interpreters themselves. The
American firm has been unwilling to quote for only cherry-picked
portions of these tour packages because their understanding is
that NTA-approved inbound operators such as themselves are
responsible for the entire inbound tour package and thus for
anything that goes wrong with the tour. Without being in
control of the inbound package in its entirety the American firm
feels they run the risk of violating the terms of the MOU and of
losing their NTA-approved status. Other U.S. tour agencies
Commercial Officer spoke with confirmed that they have been
approached in the same manner. Some declined to quote because
they believed it would violate the MOU. Others quoted but
failed to get the business because their prices were too high.


Unlicensed Chinese Outbound Operators Bypassing CNTA Licensing
System
--------------------------------------------- ------------------
14. (SBU) Sources within the Chinese travel industry as well as
the Consular Section in Shanghai report that Chinese travel
agencies not licensed by the China National Tourism
Administration (CNTA) for outbound sales are going through
CNTA-licensed outbound operators to make Group Leisure Travel
(GLT) appointments at U.S. Consular Sections in China. The
licensed operators charge the unlicensed operators a fee for
providing this service. This is similar to the common practice
in China of licensed travel agencies illegally subleasing their
license out to one or more unlicensed agencies.

15. (SBU) Although the unlicensed agencies are allowed to book
their tour groups into the general group interview slots the
agencies prefer the GLT slots because there is a perception
among the Chinese agencies that the GLT slots are expedited,
prestigious and more likely to result in approvals. However,
records in Shanghai Consular indicate that approval percentages
are actually higher during the general group interview slots.

16. (SBU) According to China's regulations, U.S. and other
foreign travel agencies are not allowed to offer outbound travel
services to Chinese citizens. This outbound business is
reserved only for Chinese travel agencies licensed by CNTA.
However, foreign travel agencies have skirted these Chinese
restrictions on foreign firms by arranging partnerships with
licensed Chinese agencies.


Consular Services Facilitation of Group Tours and
MOU Implementation
--------------------------------------------- ----
17. (SBU) Contrary to perceptions among most Chinese travel
agents and citizens, U.S. Consular Service offices in China were
facilitating group travel to the United States long before the
December 2007 Tourism MOU was signed. While visa applicants
have always had to qualify on an individual basis, Consular
Services has long set aside General Group Interview slots for
groups, including tour groups.

18. (SBU) After the MOU was signed in 2007 Consular Affairs in
China created an additional category of interview slots known as
Group Leisure Travel (GLT) slots. These were set aside
exclusively for CNTA-licensed outbound travel agencies and
operators. However, the Consular Section in Shanghai reports
that fewer than 50 percent of the GLT slots have been utilized

SHANGHAI 00000446 004 OF 007


to date and plans are to cut back on the number of GLT interview
slots. The Consular Section in Beijing also reported
under-utilization of GLT slots.

19. (SBU) Consular Shanghai reports that Chinese travel
agencies not on the CNTA-approved outbound operator list can
continue to book their tour groups into the General Interview
slots. Consular Shanghai reports that in August 2008 they
processed 16,000 visa cases and issued 13,000 visas, refusing
2300 (about 16 percent). Shanghai also reports that they are
issuing about 90 percent of visa applicants once pending
documentation and/or re-interviews are taken into consideration.
Shanghai has the highest rate of visa issuance among posts in
China.

20. (SBU) Consular Shanghai reports that non-CNTA-approved
travel agencies using the General Interview slots have a higher
visa issuance success rate (90 percent) than do the
CNTA-approved agencies (80 percent) using the GLT slots. In
August there were 300 interviews in the GLT category and about
2000 in the General Group Interview category.

Large Deposits Required by Chinese Travel Agencies Impede Travel
--------------------------------------------- -------------------
21. (SBU) In practice, almost all Chinese travel agencies
require large monetary deposits from their clients before they
can begin their overseas trip. The deposit is returned to them
upon their return to China. Deposit amounts vary by
destination. Travelers must deposit around US$7,000 for
Australia, US$7,000-14,000 for Europe and US$14,000-21,000 for
travel to the USA. Clients need to deposit cash 5-15 days in
advance of their travel day or 10 days in advance for a bank
check. The tourist can collect the deposit with the receipt and
passport one week after returning to China.

22. (SBU) Commercial Officer has been told by several Chinese
travelers that they were under the impression that the deposits
were required by the visa-issuing embassies and consulates. In
reality, the large deposits are demanded by the travel agencies
both as an incentive for the traveler to return and as a large
revolving fund that travel agencies can use to earn interest at
banks or use to play the stock market. Since the travel
agencies handle the visa applications for their clients the
deposit is also used to discourage clients from canceling their
tour or switching to another agency after they get their visa.

23. (SBU) The controversial deposits are a frequent topic on
Internet chat rooms in China. Tourists are very unhappy with
the deposits but it is an invisible rule among outbound travel
agencies and there seems little that the consumers can do. One
Chinese agency that advertised that no deposit was required
found their shop windows smashed. China has no law governing
tour deposits. CNTA authorities know this is a problem but have
done nothing to change the situation.

Inbound Market in California Dominated by Brokers and Shops
--------------------------------------------- --------------
24. (SBU) According to "ABC," the American-owned travel firm in
Hong Kong, many Chinese outbound operators are bypassing the NTA
Approved List and contracting directly with new entrants into
the U.S. tourism industry - China-based tour brokers and
shopping firms in California and elsewhere. The shopping firms
in turn contract with hotels, bus companies and other suppliers.
ABC's investigation of the market found that these shopping
firms operate without indemnities, insurance, and other
safeguards that are required by U.S. law.

25. (SBU) The Chinese outbound tour operator with a tour group
in hand will go to the Chinese tour broker or inbound receptive
agency which in turn shops the tour group around to the shopping
firms (shops). The shop that will offer the cheapest price will
be awarded the business. Shops make bids based on a "per head"
basis - the average rate per head in Los Angeles is currently
$60 per-head. The shop then contracts the hotel, bus and tour
guide. This amounts to an outsourcing of the entire receptive

SHANGHAI 00000446 005 OF 007


agency function. The receptive agency has essentially become a
broker taking the spread between what the Chinese outbound
operator offers them (about $70 per head) and what the shops
offer them ($60 per head) for the tour group.

26. (SBU) ABC went to a number of the shops in Southern
California and found that they were located off of the main
streets in industrial and residential areas. Signage was absent
or low-key and in many cases it was not apparent from the
exterior that the buildings housed shops. The tour buses
typically parked some distance from the shops. Once inside, the
American travel executive discovered that the shops were stocked
almost exclusively with pirated and knockoff products. This
included famous brand shirts with a "made in USA" label sewn in,
replica basketball uniforms, luxury brand watches and cosmetics,
all obvious fakes to the trained eye according to ABC. Some
legitimate but mass-market brand cosmetics and vitamins were
being sold at highly inflated prices (up to ten times normal
price).

27. (SBU) This practice mimics a common practice among tour
agencies in China where tours are often comprised of repeated
stops at stores where the tour operator receives a kickback for
a percentage of goods purchased by their tour guests.

28. (SBU) The result of turning ultimate responsibility for the
tour group over to these shops is that the tourists spend much
of their time being herded into secluded shops where they are
encouraged, sometimes pressured, into buying overpriced
knockoffs instead of enjoying the tour of the United States they
thought they were buying. The Chinese tourists victimized by
this system are not having a quality experience and are probably
returning to China with a very sub-optimal impression of the
United States.

29. (SBU) This system bypasses much of the legitimate U.S.
tourism industry and contributes little to the industry's
prosperity. As a result, the new jobs and revenue the U.S.
industry thought it was getting with the MOU have instead flowed
back to China.

30. (SBU) According to ABC's investigation the bus providers
hired by these brokers are often unlicensed and uninsured. ABC
also claims to have found that some of the bus drivers come with
the tour group from China and serve as both (unlicensed) bus
driver and tour guide. The cost of using an unlicensed driver
from China is one-fifth the cost of using a licensed American
driver. NTA-approved operators that observe the laws cannot
compete with such illegal practices.

31. (SBU) This situation is not unique to the United States.
Australia, Hong Kong, Southeast Asia and European countries that
previously won ADS status have experienced similar problems.
Many outbound travel agencies in China and their inbound
partners offer low budget or even "zero-dollar" tour packages to
Chinese tour groups and recoup losses by leading the tours to
numerous shops from which they receive kickbacks or commissions.

32. (SBU) The abuse of the ADS system by Chinese outbound
operators led Australia to overhaul their system in 2005 to stop
Zero-Dollar practices. Only outbound and inbound tour operators
who adhere to a strict Code of Business Standards and Ethics
have access to the Australian ADS visa processing system.

NTA Approved List Not Being Disseminated by CNTA in Timely Manner
--------------------------------------------- -------------
33. (SBU) On August 22, Commercial Service (CS) Shanghai was
contacted by NTA regarding complaints from some of their
approved inbound operators that their firms had not yet been
placed on CNTA's website listing of approved U.S. inbound
operators.

34. (SBU) CS Shanghai suggested that NTA maintain a real-time
list on the NTA website and ask CNTA to place a link on their
website to the list on NTA's website - thus allowing NTA to

SHANGHAI 00000446 006 OF 007


provide a timely list to Chinese outbound operators. At NTA's
request CS Shanghai contacted CNTA about the idea but were
informed that such a simple solution would need to be formally
incorporated into the MOU agreement. CNTA pointed out that the
current agreement only called for list updates every six months.
The most recent, un-dated list of U.S. approved inbound
operators can be found on the CNTA website at:
http://zhuanti.cnta.gov.cn/cjy/index.asp

Consumer Education and the Chinese Tourist
------------------------------------------

35. (SBU) The American travel agencies interviewed agreed that
no one is forcing consumers in China to buy the low-budget or
"zero-dollar" shopping tours but they all pointed out that
Chinese consumers do not realize that they are buying tours
without insurance and licensed drivers. They do not realize
that they will be booked into hotels far from tourist
attractions or that they will be forced to spend an inordinate
amount of time in outlying shops that are not part of the
American mainstream. As one Hawaii-based U.S. inbound operator
with significant experience in China reported, "most of the
Chinese retail tour agencies do not have experience selling
tours into the U.S. market and those that do understand what's
going on are more interested in quick turnover than in
generating repeat business with satisfied customers."

36. (SBU) China is still an emerging market and Chinese travel
agencies have limited travel products to offer clients. The
agencies are further constrained by a lack of international
knowledge, experience and budget. This has also lead to an
absence of niche products and customized itineraries. This, in
conjunction with the practices discussed here, may result in
first-time Chinese tourists receiving a misleading picture of
America.

Legitimate U.S. Travel Firms Cannot Compete
-------------------------------------------
37. (SBU) ABC and others have complained that contrary to
expectations, the MOU has placed U.S. companies at a
disadvantage in their own market. They also express concern
that both governments are failing to police the agreement.

38. (SBU) On the Chinese side the CNTA is not policing the
ranks of travel agencies in China to stop unlicensed outbound
operators from organizing tours abroad. Neither is there
evidence that CNTA is cracking down on the common practice of
licensed travel agencies subleasing their licenses to unlicensed
agencies that are in turn not held accountable for their often
questionable practices.

39. (SBU) On the U.S. side there are jurisdictional gaps which
allow the illegal operations to slip through cracks in
enforcement. No federal agency is explicitly responsible for
enforcing the provisions of the MOU. Once a State Department
Consular Officer issues the visa, MOU enforcement becomes a
question of domestic U.S. enforcement of immigration, IPR and
civil laws.

40. (SBU) The Shanghai Consular Section has also pointed out
another enforcement flaw. Prior to the signing of the MOU,
travel agencies in mainland China were NOT able to advertise
about tourism to the United States, nor officially organize
groups. Government agencies were thus better able to police and
monitor infractions. However, with a growing list of approved
mainland China agencies able to now "advertise" U.S. tourism
packages, enforcement of advertising and organizing by
non-authorized travel agencies is lacking. In addition, small
unauthorized travel agencies and authorized agencies have
increased their advertising in the local media, which is
generating more and more interest among Chinese travelers.
Unauthorized GLT agencies are assisted by authorized agencies to
make appointments as "GLT Participants" OR just assisting the
traveler to make an appointment as a general B1/B2 traveler.
The Consular Section in Shanghai has seen a large increase in

SHANGHAI 00000446 007 OF 007


people going to the United States for tourism in the Non-GLT
appointment category.

Possible Solutions
------------------
41. (SBU) There are a number of possible solutions that could
be implemented to address these problems.

-- Require Chinese outbound tour operators making group
appointments at Consular Offices in China to submit a form or
statement from an NTA-approved American inbound operator that is
handling the inbound Chinese tour group in accordance with the
MOU.

-- NTA could establish a liaison with California and other
state and city commerce licensing units and a mechanism for
reporting the locations of unlicensed shops selling counterfeit
goods to tour groups. No one knows where these shops are any
better than the NTA-approved inbound operators that have to
compete with them.

-- Embassy and Consulate Commercial Sections could organize or
facilitate consumer education exhibits and events at travel and
tourism trade shows in China. The objective would be to inform
consumers of the desirability of booking legitimate tours that
provide licensed, insured transportation and quality services.

-- Development of a "single pipeline" system for making
appointments and submitting visa applications for the GLT
appointment category, allowing vetting on who is, and who is
not, authorized to use the special travel channel. According to
the Shanghai Consular Section, this would be similar to a system
they already use for local Foreign Affairs Offices, as well as
the American Chamber of Commerce. The single pipeline operator
could be CNTA-authorized or an American firm operating the
pipeline in a way that could benefit the U.S. industry as well
as level the playing field among Chinese travel agencies.
CAMP

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