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Cablegate: East China Views On Trade Facilitation Versus Tighter

VZCZCXRO3092
RR RUEHCN RUEHVC
DE RUEHGH #0573/01 3580636
ZNR UUUUU ZZH
R 230636Z DEC 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7470
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 0201
RUEHKL/AMEMBASSY KUALA LUMPUR 0046
RHEHAAA/NSC WASHINGTON DC
RUEAUSA/DEPT OF HHS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8084

UNCLAS SECTION 01 OF 04 SHANGHAI 000573

SENSITIVE
SIPDIS

USTR FOR CHINA OFFICE - TSTRATFORD, AWINTER, TWINELAND, DKATZ;
IPR OFFICE - RBAE; AND OCG - TPOSNER
NSC FOR LOI, SHRIER

E.O. 12958: N/A
TAGS: ETRD ELTN EWWT ASEC PREL KIPR CH
SUBJECT: EAST CHINA VIEWS ON TRADE FACILITATION VERSUS TIGHTER
SECURITY

SHANGHAI 00000573 001.2 OF 004


1. (SBU) Summary: During a December 4-7 visit to Shanghai, U.S.
Senate Finance Committee Trade Analyst Hun Quach met with
Shanghai Customs and Entry-Exit Inspection and Quarantine Bureau
(CIQ) officials, as well as held discussions with U.S. business
representatives on a wide-range of customs-related issues.
Shanghai Customs emphasized it attaches great importance to
trade facilitation and welcomes working with the United States
on such programs as the Container Security Initiative. However,
it "resolutely" opposes the hundred percent screening mandated
by The Security and Accountability For Every Port Act of 2006
(aka, the SAFE Port Act). CIQ officials said that better
cooperation between countries is essential for better food and
product safety. Although U.S. business representatives
favorably viewed Shanghai Customs, they said inconsistency of
enforcement and non-transparency of customs rules remain major
problems for many U.S. businesses throughout China. They also
oppose the hundred percent screening requirements required by
the U.S. legislation, saying that it will likely be viewed as
U.S. trade protectionism by the Chinese if implemented. End
Summary.

Shanghai Customs Balancing Security and Trade Facilitation
--------------------------------------------- -------------

2. (SBU) As part of a visit to Shanghai's Yangshan Deepwater
Port, Quach met with Yangshan Customs Director Xu Zupei,
Shanghai Customs Divisions of Legal Affairs Director Wu Huading,
and Shanghai Customs Foreign Affairs Director Ding Ye. Xu
outlined the work of Yangshan Customs, noting that the average
clearance time for both imports and exports is 24 to 72 hours.
Clearance on goods originating in the Yangshan Special Economic
Zone is between 2.5 and 4 hours. Shanghai Customs uses a system
of risk management in which both companies and commodities are
classified according to a number of risk factors. Companies are
divided into three categories according to their "credibility".
Those that are deemed to have the highest degree of credibility
are given faster clearance. These companies must operate under
certain standards and sign agreements that they will uphold all
Shanghai Customs regulations. For companies with bad records,
the highest degree of scrutiny is given. The same system
applies to goods as well, which are divided into five
categories. The most "risky" shipments all require manual
inspection. Xu emphasized that CIQ plays the leading role in
food and product safety, while Customs focuses on smuggling, IP
infringement, and other such issues. Certain products, both for
exports and imports, require CIQ certification. Customs
releases the goods only after CIQ gives the green light.

Customs Pleased with Shanghai CSI Program
-----------------------------------------

3. (SBU) On the U.S. Container Security Initiative (CSI), Xu
said Shanghai Customs is very pleased with the program. Since
the CSI program officially began in Shanghai in April 2005,
Shanghai Customs has investigated 240 cases involving 550
containers. Shanghai Customs welcomes further work on the CSI
program.

Shanghai Customs Active on IP
-----------------------------

4. (SBU) Wu said Shanghai Customs is very active on IPR
protection, noting that in 2007 Shanghai Customs was top in the
nation for seizures of infringing goods (by value). Counterfeit
consumer products are the main type of infringement detected by
Shanghai Customs. Of the products that are investigated or
seized, 90 percent of the cases are ex-officio. In response to
a question on ways the United States could help Shanghai
Customs, Wu responded that more training for Customs' staff
would be very helpful.

Shanghai Customs "Resolutely" Opposes 100 Percent Scanning
--------------------------------------------- -------------

5. In response to a question regarding Shanghai Customs' view
on the hundred percent screening requirement mandated by the
U.S. SAFE Port Act, Xu said it is impossible to comply and that
Shanghai Customs "resolutely" opposes this requirement. First,
full implementation would require a huge Chinese investment in

SHANGHAI 00000573 002.2 OF 004


equipment and human resources to maintain the program. The
inspection would also significantly slow processing time and
negatively impact trade facilitation. Such delays and costs
would ultimately be passed on to the consumers. The requirement
would also be viewed by the Chinese as a "significant trade
barrier," and could ultimately hurt trade between China and the
United States. (Note: Xu read from a prepared script when
making his point on the hundred percent screening requirement.
When asked by Congenoff about the origin of his script, he said
his points reflected a consensus among Chinese Customs
Districts. Shanghai Customs FAO Director Ding later confirmed
Xu's text came from General Administration of Customs
headquarters in Beijing. End note.)

Shanghai CIQ Welcomes Further Cooperation with the U.S.
--------------------------------------------- ----------

6. (SBU) In a separate meeting, Shanghai CIQ Division Director
for Supervision on Food Safety Chen Jianliang, explained CIQ's
role in food and product safety and its relationship with
Shanghai Customs. Imports and exports must first be declared to
Customs; if the product falls into a certain category,
stipulated by regulation, that requires quality inspection, it
is then referred to CIQ. Shanghai CIQ's main responsibility is
to inspect products based on safety, health and environmental
regulations. It uses a sampling methodology based on the risk
of each product. Shanghai CIQ has agreements in place with
other CIQ units in East China to share testing services on
products in which they specialize. According to Chen, non-CIQ
"third parties" are also contracted by CIQ, but they only
provide land and equipment for inspection. Shanghai CIQ uses
its own licensed inspection staff to do the work. Certain
standards are set for each product, but these standards can
change from time to time. After CIQ issues a certificate of
approval, it notifies Customs for clearance purposes.

7. (SBU) For quality and safety of exported goods, Chen said
that Shanghai CIQ uses the importing country's standards for
clearance. For example, if a product is being exported to the
United States and requires inspection by the United States,
Shanghai CIQ bases its inspection on U.S. safety standards. On
the question of transparency, Chen said that Shanghai CIQ
publishes all its standards through a variety of sources, such
as the internet. However, Chen acknowledged that different
ports in China may have different procedures, which could cause
variation in the interpretation of regulations by different CIQ
units. However, CIQs do not report to municipal authorities;
they report to the General Administration of Quality
Supervision, Inspection and Quarantine (AQSIQ) in Beijing, so
technically all CIQs should have the same requirements. Chen
concluded by saying more collaboration between governments on
food and safety issues is important. It is also important to
ensure manufactures are educated on product safety requirements.

AmCham: China Customs Lacks Transparency and Consistency
--------------------------------------------- ------------

8. (SBU) In a meeting with a group of AmCham Shanghai business
representatives, AmCham President Brenda Foster noted that
AmCham Shanghai started an initiative two years ago with
Shanghai Customs to help improve communication between the two
sides. Foster reported that Shanghai Customs has been extremely
responsive, and each year AmCham undertakes two or three
programs where it can "make a difference" with Shanghai Customs.
Business Development Director from Scandic Sourcing Warren Bock
praised Shanghai Customs saying it is very direct and has set
the stage for a smooth flow of imports and exports. Foster said
that while AmCham member companies are generally pleased with
Shanghai Customs, member companies dealing with many customs
units throughout China are often frustrated by the general lack
of transparency and consistency. Foster also said that a China
Customs pre-clearance system for U.S. companies with a good
reputation would be very helpful. However, these companies face
a catch 22 - they would like a pre-clearance system, but are
wary of providing information that may be compromised and given
to their Chinese competitors. Companies have "no confidence"
that their information will be kept confidential.

9. (SBU) Tyco Electronics Global Supply Chain Vice President

SHANGHAI 00000573 003.2 OF 004


Kevin Harris said one of the U.S. business community's biggest
headaches is getting an official translation of changes in
Customs rules and procedures. Often an official translation can
take up to two years, which puts foreign companies at a
disadvantage when trying to navigate Customs clearances. As a
result, companies are left to do their informal translations and
then check with Customs if they are in the ballpark. Harris
also noted that Customs likes to "make examples" out of foreign
companies, cracking down on them while going soft on domestic
firms. According to Scandic Sourcing's Bock, Customs regulatory
changes often take a long time to "trickle down" to the local
level, and then there is often uneven enforcement. To get a
favorable ruling on a customs issue, building "guanxi," or
connections, with Customs officials is the most important thing.
Foster also confirmed that, in general, China Customs is very
good at promulgating rules but bad at enforcement. In addition,
most customs rules are "made in a vacuum," and people can only
comment on the rules after they are made. "Flexibility comes
later through interpretation," said Foster.

U.S. Companies' Views on U.S. Import Security Measures
--------------------------------------------- ---------

10. (SBU) All the AmCham representatives at the meeting with
Quach voiced concern over the hundred percent scanning
requirement in the U.S. SAFE Port act. Foster said it would add
tremendous costs to the bottom line for many U.S. companies in
China and would add significantly to the customs processing
time. Bock also noted that the policy would be perceived by the
Chinese as a trade barrier and could precipitate some form of
retaliation. On the U.S. Importer Security Filing and
Additional Carrier Requirements (also known as the "10 Plus 2"
requirements), which require additional data from U.S. importers
and carriers, AmCham representatives were more positive. Werner
Global Logistics General Manager for China Juan Bautista said
that his company is advising shippers, and they are "in the
process of understanding" the requirements. Matson Navigation
Asia Director Christa Stauffer said that there are concerns
among some shippers on how to handle the data once they receive
it. She also advised that it is important to have strict
enforcement of the rule to get the full attention of shippers.
Harris said that his company will have no problem in compliance,
but foreign companies will have more of a struggle.

U.S. Logistics Reps on the Competitiveness of U.S. Ports
--------------------------------------------- -----------

11. (SBU) In a separate meeting, two representatives from
Intermarine and a representative of BNSF Railway echoed AmCham
representatives' sentiments on beefed up security requirements.
BNSF Railway International Services Chief Representative and
Director Michelle Liu said she worried that the additional U.S.
security requirements will hurt the competitiveness of U.S.
ports. She noted that many shippers are already using Canadian
and Mexican ports as a result of bottlenecks encountered at West
Coast ports. However, if compliance with new U.S. regulations
actually speeds up the clearance process, it could help the
competitiveness of ports. On disparate treatment at Chinese
ports, Intermarine Asia Managing Director Richard Seeg said the
speed of clearance and valuation depends almost entirely on the
relationship a company has developed with the port. As a
result, companies tend to "shop" for the most favorable port and
stick with those with which they have a good relationship. He
added that this adds a great deal of unnecessary shipping around
China. For example, a company will spend a great deal of money
to send a shipment from northern to southern China just to get
"more favorable customs treatment."

Ernst & Young: Customs Inconsistencies Hurts U.S. Business
--------------------------------------------- --------------

12. (SBU) Ernst Young Partner Robert Smith, who in Shanghai
specializes on customs and indirect tax issues, said he does a
substantial amount of training on customs issues, and there is a
significant misunderstanding by China Customs officials about
WTO valuation rules. He concurred that inconsistent
implementation of rules and valuation procedures is the top
customs-related problem faced by importers and exporters.
According to Smith, this problem is especially acute in second

SHANGHAI 00000573 004.2 OF 004


and third tier Chinese cities. He added that there are also
insufficient resources devoted to valuation throughout China.
Citing Shanghai Customs as an example, he said there are only 20
people who work on valuation, yet Shanghai Customs handles 25
percent of China's total trade volume. Significant differences
in interpretation of customs rules largely occur because customs
rules are often ambiguous and vague. And, more senior customs
officials are unwilling to take responsibility for issuing
clarifications. In addition, a ruling by one customs unit has
no binding effect on other customs units, or even the same
customs unit at a later period. He cited one example of a case
that took over one and a half years and 50 meetings to get a
ruling. Even then, an administrative interpretation had to be
issued to understand the ruling.

13. (SBU) This report has been cleared by Senate Finance
Committee Trade Analyst Hun Quach.
CAMP

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