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Cablegate: Getting Trade Flowing: A Phased Approach to Beef

VZCZCXRO0176
RR RUEHGH RUEHVC
DE RUEHCN #0198/01 2640728
ZNR UUUUU ZZH
R 210728Z SEP 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC 3408
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 4099

UNCLAS SECTION 01 OF 04 CHENGDU 000198

SENSITIVE
SIPDIS

STATE FOR EAP/CM
COMMERCE FOR USTR CHINA DESK, WINELANDT, O'CONNORL
USDA FOR FAS/OSTA/ANIMAL DIVISION, BERMAND, BEANC
USDA FOR FAS/OCRA/CHINA DESK, SHEPPARDW, RADLERC

E.O. 12958: N/A
TAGS: ETRD EAGR EINV ECON PREL CH
SUBJECT: GETTING TRADE FLOWING: A PHASED APPROACH TO BEEF

CHENGDU 00000198 001.2 OF 004


1. (U) Sensitive But Unclassified. Not for Internet
Distribution.

What's at "Steak": A Billion Dollars in U.S. Exports in Short
Order
--------------------------------------------- --------------
--------

2. (U) At a recent meeting with Ambassador in Chengdu, AmCit
Steven Allemang pleaded for USDA to issue export certificates so
that he could comply with Chinese import requirements for his
U.S. beef. The expert certificate is "all that is stopping me
from leading a USD one billion U.S. export bonanza."

"Where's the Beef?" - Recommend Legal Imports Now, Greater
Market Access Later
--------------------------------------------- --------------
-------------------

3. (U) Allemang proposed a phased approach for gaining Chinese
compliance with international import standards for beef. Small
and medium sized business could comply with current Chinese
import requirements for U.S. beef, and the U.S. government could
continue to negotiate for market access for a broader category
of products, he said.

Ambassador Roundtable, JCCT: Ban on U.S. Beef Exports to China
Needs Review
--------------------------------------------- --------------
----------------

4. (U) At an August 28, 2009 round table discussion with
Ambassador Huntsman in Chengdu, U.S. businessman Steven Allemang
of SMA Holdings highlighted the billion dollar business impact
on U.S. beef exports as a result of the current U.S.-China
stalemate in beef market access negotiations. As follow-up, and
in light of the upcoming, October 27-29, 2009 meeting of the
Joint Commission on Commerce and Trade (JCCT) in Hangzhou,
Consul General, Foreign Agricultural Service (FAS)
representative, and Econoff met with Allemang September 9 to
review the issue in detail.

I Can Export: Give Me a USDA Export Certificate
--------------------------------------------- --

5. (U) Allemang explained that, but for the U.S. government's
rejection of China's July 31, 2006 veterinary requirements, the
United States would have over a billion dollar in beef exports
to China. Further, the U.S. rejection of China's veterinary
requirements, and unwillingness to issue USDA export
certificates consistent with these requirements, threatens
long-term U.S. trade interests by allowing an on-going degrading
of U.S. beef's reputation in the China market. Allemang
estimates U.S. exports would be over $200 million the first year
USDA provides these certificates.

SMEs: Let Me Sell My Beef NOW
-----------------------------

6. (U) The current U.S. all-or-nothing negotiating position is
bad for business, Allemang contended. This position responds to
large industry producers in the United States, and assumes that
China will eventually capitulate. "In the meantime, businessmen
like myself are losing market opportunities," he said.

7. (U) Allemang acknowledged that China's position on U.S. beef
imports is inconsistent with international standards and not
compliant with rules of the World Organization for Animal Health
(aka International Office of Epizootics (OIE) ). However, he
argued that our priority should be to "start the flow" of U.S.
beef into the China market and then work on expanding market
access. He proposed that the U.S. begin by "accepting the rules
as written" to allow U.S. producers willing and able to meet
China's current import requirements to begin exporting.

BSE Found: China Bans U.S. Beef
-------------------------------

8. (U) Background: In December 2003, a cow infected with bovine
spongiform encephalopathy (BSE) was identified in the state of
Washington. Shortly thereafter, China and most U.S. trade
partners, banned imports of live cattle and bovine products from
the United States. The ban extended even to low-risk products,
including cosmetics and other products that used non-protein
beef tallow, plus bovine semen and embryos. The U.S. industry

CHENGDU 00000198 002.2 OF 004


and U.S. negotiators looked for a short-lived ban. USDA
negotiations led to the resumption of trade in cosmetics, bovine
semen and other low-risk materials in 2004.

China Issues Veterinary Requirements: U.S. Says "No Deal"
--------------------------------------------- ------------

9. (U) After protracted negotiations with the United States, on
July 31, 2006, China agreed to resume imports. The import
requirements were outlined in an announcement of the "Inspection
and Quarantine Requirements on the Conditional Resumption of
U.S. Boneless Beef Imports," known in the industry as China's
Veterinary Requirements. The Veterinary Requirements permitted
the import of boneless beef from the U.S. as long as it met 22
import requirements and came with an USDA export certificate.

10. (U) USG concerns about the onerous import certification
requirements included that only muscle meat was permitted entry,
animals had to be under 30-months of age, U.S. beef imports into
China had to be "fully traceable," and beef that was not
compliant with the Veterinary Requirements could not be
comingled with beef exported to China. As a result, the U.S.
rejected the Chinese Veterinary Requirements as not being based
on science, as required under China's World Trade Organization
accession agreement, and also impossible for U.S. industry to
meet.

The U.S. Position: All or Nothing: China Says No
--------------------------------------------- ---

11. (U) The U.S. did not accept the 2006 terms. To date, legal
beef trade has still not resumed, and the U.S. Department of
Agriculture (USDA) still will not provide an export certificate
for U.S. beef products for China. The U.S. position remains
that China's Veterinary Requirements are inconsistent with the
OIE guidelines under which the U.S. has been eligible to export
all beef and beef products from cattle of any age since May
2007, when the OIE issued its BSE "controlled risk" country
status for the United States.

12. (U) High level talks continued between the U.S. and China
after the July 2006 Veterinary Requirements were issued. These
discussions, including those following the December 2007 JCCT,
failed to make any progress. Some further information sharing
took place at the September 2008 JCCT, and again during working
level meetings held in November 2008, but there has been no
significant engagement on this issue in the interim. The GOC
claimed that it was being held to a higher standard than other
markets, such as Japan and Korea, where, prior to its May 2007
OIE eligibility certification, the U.S. had previously agreed to
less than complete market openings.

Phased Approach: A Good Negotiating Position
--------------------------------------------

13. (U) If the market is opened under the current Chinese rules,
Allemang asserted, Chinese industry interest in expanding access
to high-quality U.S. beef would gradually influence the Chinese
government to grant more complete market access. Additionally,
he contends, a flexible U.S. stance would help create an overall
more cooperative negotiation environment. Allowing U.S. beef
exports to resume under current rules, he said, need not
preclude continued, hard bargaining toward the ultimate goal of
an OIE-compliant beef regime.

U.S. Beef Industry Organizations Urge United States to Negotiate
Phased-in Market Access for Beef
--------------------------------------------- --------------
--------------------------------------

14. (U) In a April 15, 2009 letter to Agriculture Secretary
Vilsack and U.S. Trade Representative Kirk, U.S. beef industry
representatives acknowledged China and several other trading
partners are "not in a position politically" to restore full
access immediately. The groups propose negotiating market
opening agreements in stages that eventually lead to full OIE
compliance. The letter was co-signed by the following
organizations representing U.S. beef producers: American Meat
Institute, National Cattlemen's Beef Organization, National Meat
Association, and the U.S. Meat Export Federation.

Elimination of DeLauro Amendment Necessary to Resume Beef
Negotiations
--------------------------------------------- --------------
-----------

CHENGDU 00000198 003.2 OF 004

15. (SBU) U.S. efforts to reopen the Chinese beef market have
been hampered by legislation prohibiting USDA from rulemaking to
allow imports of cooked chicken from China (aka the DeLauro
Amendment). Beef negotiations were suspended in November 2007,
when the amendment was first signed into law. China continues
to emphasize unofficially it cannot proceed on key U.S.
agriculture market access concerns, including beef, as long as
the DeLauro amendment remains in place. The amendment was
extended through September 2009. Legislation to eliminate
DeLauro under the fiscal year 2010 Agriculture Appropriations
Bill is currently being debated. Elimination of DeLauro would
allow beef negotiations to resume.

No Formal Market Access But Illegal Imports Are Booming
--------------------------------------------- ----------

16. (SBU) Post understands that current estimates are the market
for U.S. beef in China is approximately $200 million. China
imports U.S. beef through gray market channels brought in
through Hong Kong and Vietnam. In the restaurants and hotels of
the "first tier" cities of Beijing, Guangzhou and Shanghai, U.S.
beef is not on the menu, even if it is on the plate. In "second
tier" cities, like Chengdu, U.S. beef is not only on the plate
but on the menu in most top-end restaurants and five-star
hotels. In addition, because of the high demand of specialty
means, including stomach, intestines, throat and tongue, these
products from the U.S. are also available. FAS Chengdu market
surveys confirmed the availability of U.S. beef at wholesale
markets and in hotels and restaurants. At $200 million, China
would be the fifth largest export market for U.S. beef.

Contraband is Not Good for Quality or Reputation
--------------------------------------------- ---

17. (U) While lamenting that he cannot legally bring in
America's best, Allemang railed against the argument that
illegal access is better than no access. Traditionally, the
reputation in China of U.S. beef is that it is second to none -
the highest quality available on the world market. Now, low
quality U.S. beef or mislabeled domestic or third-country beef
is compromising the U.S. reputation for quality among millions
of emerging, middle-income consumers.

18. (U) Allemang explained that in the absence of legal imports,
low quality U.S. beef is entering the China market. Instead of
USDA Premium or Choice as would normally be imported for top-end
food service facilities, U.S. beef smugglers typically bring in
commercial USDA Select beef, an inferior product that
compromises future premium marketing efforts. In addition,
domestic or third-country (especially Australian) beef is
sometimes labeled as "U.S. beef" to deceive the consumer and
thus obtain larger profit margins. The result is to provide
smugglers and unscrupulous handlers of a price-premium for a
less-than-premium product; the result is a long-term hit to U.S.
beef's high-quality reputation and market prospects.

Small Producers and Processors Ready to Meet the Market Meat
Demand
--------------------------------------------- --------------
--------

19. (U) Allemang asserted that for small and medium-sized
producers and processors (SME) like himself, only the lack of
USDA export certificate bars U.S. beef export viability to
China. His company alone, he said, would be able to import a
container a week almost immediately. The total market for U.S.
beef could easily reach USD one billion within a short period,
and would only grow from there, he emphasized.

20. (U) Allemang explained that his company has business
relationships with producers and processors in Florida, Texas
and New Mexico that are already compliant with the current
Chinese veterinary requirements, including the requirements for
"full traceability," and that he is ready to market premium beef
to the Chinese food service industry. Once this obstruction is
removed, he said, he would be able to have his product in China
within 2-3 months.

21. (U) Allemang notes that many SME involved in beef
production, which comprise about 20 percent of U.S. beef
production capacity, are also either ready to export under
current Chinese requirements or could adjust to meet them within
12 to 18 months. In the short- to medium-term, the greater
problem would be for the large producers.

CHENGDU 00000198 004.2 OF 004

Traceability: What it is and What it Means
------------------------------------------

22. (U) The second issue that has been problematic for the large
U.S. beef industry players, says Allemang, is the full
traceability requirement. Traceability requires that each cut
of beef be traced back to an individual animal throughout the
food distribution chain, from birth to slaughter to
in-store/restaurant sales. Further, there can be no comingling.


23. (U) In response to the identification of a dairy cow with
BSE in Washington, USDA implemented in 2004 the National Animal
Identification System (NAIS). NAIS is a voluntary
identification system. According to Allemang, only an estimated
30 percent of ranchers have adopted NAIS as a result of a
reluctance to share such information among industry players,
including ranchers, feedlots, processers, and government
agencies, and over concern for the costs involved. As a result
of this low adoption rate, most large-volume slaughtering plants
cannot procure an adequate supply of traceable beef without
running into comingling problems.

24. (U) In fact, while large players would face a longer
adjustment period to meet China's veterinary requirements,
Allemang believes they would quickly begin to adjust once the
flow of legal, high-quality U.S. beef resumed. In the meantime,
he emphasized the benefit of giving U.S. SMEs the opportunity to
establish a competitive presence in the Chinese beef market.

Comment and Recommendation: Phased Approach is the Right
Approach
--------------------------------------------- --------------
-------

25. (SBU) The absence of legal imports of high-quality U.S. beef
from the Chinese market, now in its sixth year, is resulting in
the erosion of U.S. beef's reputation and long-term
competitiveness, as black/grey market or counterfeit products
current being sold under the "U.S. Beef" label are causing
Chinese consumers to increasingly associate the U.S. beef label
with a low quality product. Our current policy of blocking all
beef exports to China pending China's full compliance with OIE
guidelines has proven ineffective and deserves reconsideration.

26. (SBU) The U.S. should adopt a more incremental approach. A
negotiating posture that allows U.S. beef exporters able to meet
current Chinese Veterinary Requirements to immediately begin
selling into the Chinese market would make it possible to start
reestablishing a market presence for high quality U.S. beef,
while continuing to pursue long-term, full market access
objectives.

27. (U) This cable was coordinated with Embassy Beijing.
BROWN

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