Cablegate: China-Asean Fta Start-Up: Impact On Yunnan Province Modest

VZCZCXRO3796
PP RUEHCHI RUEHDT RUEHGH RUEHHM RUEHNH
DE RUEHCN #0044/01 0570557
ZNR UUUUU ZZH
P R 260557Z FEB 10
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3763
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 4489

UNCLAS SECTION 01 OF 05 CHENGDU 000044

SENSITIVE
SIPDIS

STATE FOR EAP DASES DAVID SHEAR, SCOT MARCIEL

E.O. 12958: N/A
TAGS: ECON ECIN ETRD EINV ELTN CH VM LA BM TH
SUBJECT: CHINA-ASEAN FTA START-UP: IMPACT ON YUNNAN PROVINCE MODEST
NOW BUT BIG LATER

REF: A) 07 CHENGDU 124, B) 09 CHENGDU 069, C) 09 CHIANG MAI 057, D) 09 VIENTIANE 088

CHENGDU 00000044 001.2 OF 005

1. (U) This cable contains sensitive but unclassified
information - not for distribution on the Internet.

2. (SBU) Summary: Although Yunnan's overall foreign trade
numbers declined by about 16 percent in 2009 because of the
global financial crisis, its trade with the 10 member-nations of
ASEAN managed to grow by nearly 14 percent over 2008 -- in part
due to improved road infrastructure linking Yunnan to Vietnam,
and to Thailand via Laos. Yunnan's trade with ASEAN has seen a
consistent annual double digit increase since 2003, with the
exception of 2008, which saw a seven percent contraction. While
Burma has been the province's biggest trading partner,
Yunnan-Burma trade increased by only 3 percent in 2009, with
Yunnan-Vietnam trade growth of 22.4 percent.

3. (SBU) Yunnan officials downplayed, in the short term, the
importance of the January 1, 2010 launch of China-ASEAN Free
Trade Area (CAFTA) because much of Yunnan's trade is with Burma,
Vietnam, and Laos, which will not become fully liberalized under
CAFTA until 2015. At the same time, they expressed confidence
in CAFTA's long-term potential, and stressed further
improvements in infrastructure -- particularly by China's
southern neighbors -- as key to allowing Yunnan to develop as a
transportation and logistics hub between southeast Asia and the
rest of the PRC. The limits of the physical infrastructure are
further compounded by only limited implementation of an existing
cross-border transportation agreement; at present, for example,
most Chinese trucks must offload onto Vietnamese trucks in
Hekou, and Chinese trucks are banned altogether in Thailand,
necessitating offload-onload onto a Thai truck. End Summary.

4. (SBU) Consul General and PolEconoffs made a week-long road
trip January 17-23 to Yunnan's provincial capital, Kunming, and
to Hekou and Mohan, the main ports for Yunnan's trade with
Vietnam and Laos respectively. Our interlocutors in Kunming
included the Yunnan Departments of Commerce and Transportation,
the Yunnan Academy of Social Sciences (YASS). Septel reports on
border trade at Hekou and Mohan.

Yunnan-ASEAN Trade and Investment Growing Steadily
--------------------------------------------- -----

5. (SBU) Although Yunnan's overall foreign trade numbers
declined by about 16 percent in 2009 because of the global
financial crisis, its trade with ASEAN countries managed to grow
by nearly 14 percent over 2008, a Department of Commerce
official told CG. This growth in Yunnan-ASEAN trade also went
against the tide of overall China-ASEAN trade, which was down by
two percent in 2009. In fact, Yunnan's trade with ASEAN has
seen a consistent annual double digit growth since 2003, with
the exception of 2008, which saw a seven percent contraction.
While both Commerce and YASS identified Burma as the province's
biggest trading partner, Vietnam may be catching up.
Yunnan-Vietnam trade grew by 22.4 percent in 2009, higher than
overall Yunnan-ASEAN trade, and far higher than Yunnan-Burma
trade, which increased by only 3 percent.

6. (U) According to official statistics for 2009, the total
value of Yunnan-ASEAN trade stood at about USD 3.15 billion,
39.3 percent of the province's total international trade.
Exports from Yunnan to ASEAN were USD 2.1 billion; imports were
USD 1.05 billion. Yunnan ran trade deficits only with Indonesia
and Laos. Yunnan's top exports to ASEAN were agricultural
products, phosphorus chemicals, and electrical machinery; its
top imports from ASEAN were minerals, electrical machinery and
agricultural products. Additional details on Yunnan-ASEAN trade
are in appendix.

Yunnan- ASEAN Investment Ties: A Two-Way Street
--------------------------------------------- --

7. (U) Yunnan-ASEAN investment relations have also risen
steadily, if modestly, according to Department of Commerce
officials. Several hundred companies in Yunnan are currently
authorized to invest internationally, and an increasing number
of companies are seeking to expand their international business
operations because they face domestic overcapacity.

8. (U) Most such investments are going to Laos, Burma, and
Vietnam in the fields of mining (chiefly iron, lead and zinc),
hydropower (i.e. dam building) and agriculture (produce and wood
products). According to Department of Commerce statistics, the
total contracted Yunnan outward investment as of the end of 2009
to the three countries was USD 419 million -- of which 230
million went to Laos, 180 million to Burma, and only 9 million
to Vietnam. About half of these investments were made by

CHENGDU 00000044 002.2 OF 005

state-owned enterprises (SOEs) under the central government; the
rest were by provincial SOEs or private companies.

9. (SBU) By contrast, ASEAN investment in Yunnan stood at USD
348 million as of the end of 2009, with nearly half of that (USD
160 million) being from Singapore. Department of Commerce
officials expressed hope that Singaporean investments could help
develop the province's service and logistics capacities.
Thailand, with USD 70 million invested in the province, is the
second largest source; Burma is third with USD 40 million
invested.

That Said, Yunnan Still Accounts For
Less Than 2 Percent of China-ASEAN Trade
----------------------------------------

10. (SBU) Despite growing links, Yunnan Province's trade with
ASEAN countries remains a small proportion of China's overall
trade with the region. As a YASS researcher pointed out,
although trade with ASEAN is significant for the province, it
still accounts for less than two percent of all trade between
China and ASEAN. A Department of Commerce official confided
that he expected that Yunnan's relative importance in
China-ASEAN trade would not increase significantly in the near
future. Instead, he predicted faster growth in overall
China-ASEAN trade volumes as CAFTA comes on line.

11. (SBU) Despite its geographic position, the potential for
Yunnan to benefit from expanded trade under CAFTA remains
limited in the near term for several reasons, noted both YASS
and Department of Commerce officials. The three nations with
which Yunnan shares a border -- Myanmar, Vietnam and Laos -- are
all new ASEAN members and thus will not be required to implement
CAFTA's tariff-free rules until 2015. Trade in most
agricultural products -- primarily with Thailand and Vietnam --
has already been tariff-free since 2004. This leaves only a
small proportion of trade between Yunnan and ASEAN that is
seeing an elimination of tariffs as a result of CAFTA going into
effect. Moreover, emphasized the Department of Commerce,
expanding Yunnan's proportion of overall China-ASEAN trade will
be difficult in the face of long-established commercial
relationships structured around trade via the eastern ocean
ports that bypass Yunnan altogether.

12. (SBU) Comment: One notable exception in terms of transit
trade may be Vietnam, because of the growing importance for
Yunnan of the port of Haiphong. Some Yunnan trade is already
brought in through Haiphong; our interlocutors indicated that
third-country trade to Yunnan (and perhaps other provinces in
southwestern China such as Sichuan) via Vietnam may increase
significantly in the future due to improvements in rail and road
infrastructure between Hekou and Haiphong. It is likely that
some U.S. beef, for example, which is technically banned for
sale in China, is already being imported illegally into China
via this route. End Comment.

Transportation Infrastructure Challenges
----------------------------------------

13. (SBU) Yunnan officials nonetheless emphasized the long-term
potential of CAFTA. While provincial officials have long
identified development of transport links as the key to ending
the province's relative isolation and stimulating economic
growth, the province has faced considerable challenges on this
front. Officials at both the Transportation Department and YASS
noted the province's mountainous terrain considerably increases
the cost of road construction and has thus slowed development.
For example, the new highways to Southeast Asia required the
building of a large number of tunnels and bridges. (Note:
During many days of travel to border points with Vietnam and
Laos, we noted dozens of fairly long tunnels, a large number of
raised highways -- in part to reduce negative impacts on the
environment -- and several elaborate bridges. End Note.)

Dramatic Progress on Major Roads Projects
-----------------------------------------

14. (SBU) Despite the cost and engineering challenges, progress
on highways linking the provincial capital of Kunming to its
main border ports and onto Southeast Asian capitals has been
dramatic over the last few years. According to the
Transportation Department, virtually all of the Kunming-Bangkok
Highway within Yunnan -- 668 kilometers from Kunming to Mohan --
is now high-grade expressway; the 400-kilometer stretch from
Kunming to Hekou of the Kunming-Hanoi-Haiphong Highway is also
now mostly high-grade expressway; and, of the nine highways
connecting Yunnan to Burma, three now have significant portions

CHENGDU 00000044 003.2 OF 005

within Yunnan that are expressways.

15. (SBU) During the last extended Consulate travel along these
same roads in early 2007 (Ref A), the Chinese portions of the
Kunming-Hanoi-Haiphong and Kunming-Bangkok highways were still
under construction. At that time, travel between Kunming and
Hekou on the border with Vietnam took 12 hours, mostly on
mountainous secondary roads. In contrast, the same drive in
January 2010 took approximately six hours, mostly on expressway.
Likewise, in 2007 travel between Yuanjiang and Mohan involved a
ten-hour "bone-jarring ride over badly decayed secondary roads."
The more recent trip, on this now completed stretch of the
Kunming-Bangkok Highway, took about four hours.

Improved River Ports; Plans for More Rail Connections
--------------------------------------------- --------

16. (SBU) While roads have clearly been given top priority,
officials also noted emphasis on other trade and transportation
infrastructure development. Large new port facilities have been
built at Hekou and Mohan (discussed septel). A YASS official
also noted plans to increase the capacity of Mekong River
transport from the current 300 ton per ship limit to 500 tons.

17. (SBU) Construction of a new railroad linking Kunming and
Hanoi is well underway and was in evidence all along our route
from Kunming to the border town of Hekou. (Yunnan's first rail
line, a French-built narrow gauge line to Hanoi and Haiphong,
remains operational, but only for freight.) YASS officials also
confirmed that a line linking Dali and Bashan within Yunnan will
commence soon, with the possibility of later extending into
Burma.

18. (SBU) However, discussions of linking Kunming with Singapore
by connecting various national rail networks remain largely
"theoretical," according to officials at the Department of
Commerce, while YASS officials assessed its completion as
unlikely within the next 7-8 years. Plans to link Yunnan with
its neighboring provinces within China via high speed rail are
likely to come on line much sooner, according to YASS.

Yunnan Officials:
Biggest Trade Obstacles Still Lie Across the Border
--------------------------------------------- ------

19. (SBU) Fast-paced infrastructure development in Yunnan is not
always matched across the border, officials said. Once it
crosses into Laos (at Mohan) the Kunming-Bangkok Highway (Route
R3A) is all second-grade road, Transportation Department
officials noted. (Refs C and D describe extensive problems
along the Lao portion of R3A, including stretches observed to be
collapsing within the last year.)

20. (SBU) Transportation Department officials also emphasized
the physical bottleneck at the Lao-Thai border where the road
meets the Mekong and vehicles must currently cross via ferry.
They reported that construction of the new bridge meant to link
the two sections of the R3A -- a joint Chinese-Thai project --
is to start within this month and will be completed in 2012.
(Note: This is one year later than the initial planned
completion date for this project. Some press reports on the
bridge have identified it as the key obstacle to expanding trade
along this route, and note a long history of delays in getting
the project off the ground. See for example:
http://tinyurl.com/R3Abridge. Yunnan transportation officials,
however, did not discuss these delays or express any skepticism
regarding the new timeframe. End Note.)

Poor Coordination Among Transportation Officials;
Need Implementation of Cross-Border Transport Agreement
--------------------------------------------- ----------

21. (SBU) The limits of the physical infrastructure are further
compounded by continued poor coordination of transportation
regimes in the region, noted Commerce officials. For example, a
large cargo truck travelling from China toward Thailand hits
multiple checkpoints along the road in Laos, adding both time
and expense to the trip. Once it arrives at the Thai border,
the goods on the truck must be transferred to a new truck to
drive into Thailand, as Chinese trucks remain barred from entry.
At the Vietnamese border, only trucks bearing plates from the
Chinese border town of Hekou can cross, necessitating reloading
of most trucks on the Chinese side of the border. Cargo trucks
face similar obstacles to uninhibited and efficient transport in
various forms throughout the region.

22. (SBU) Officials at both the Commerce and Transportation

CHENGDU 00000044 004.2 OF 005

Departments cited the importance of the GMS Cross-Border
Transport Agreement (CBTA) for facilitating smoother transport
processes within CAFTA. However, they noted that the CBTA,
despite being agreed to by all GMS governments, is not yet being
fully implemented, blaming foot dragging on the part of some
signatories. (A Transportation Department official described
the Government of Thailand as the largest obstacle, but also
mentioned Burma.)

23. (SBU) Overall, officials assessed the successful integration
of the various transport and border regimes to be a ways off.
There have been "many promises and deadlines, but they can't be
put into practice." (Note: The CBTA was initiated in 1996 as
part of the Asian Development Bank's technical assistance to the
six countries of the GMS in order to identify and address
non-physical and non-tariff barriers to cross border cargo
transport along key routes. All six countries have signed and
ratified the agreement. See
adb.org/GMS/Cross-Border/default.asp for additional information.
End note.)

Comment: Further Substantial Integration Coming,
But Will Taken Take, Need Unified Transportation Regimes
--------------------------------------------- -----------

24. (SBU) Comment: Although providing the necessary foundation,
neither the official launching of CAFTA on January 1, nor rapid
road and rail development, will necessarily produce a quick,
substantial upsurge in Yunnan's trade with its southern
neighbors. It will take time to redirect long-established trade
patterns, and to overcome bureaucratic hurdles to unified,
cross-border transportation regimes. Nonetheless, the trade and
investment relations of Yunnan are already undergoing profound
changes that will continue to reshape landscapes and
livelihoods, and bring an increased level of economic
integration between China and its much poorer southern
neighbors.

APPENDIX: Official Yunnan-ASEAN trade statistics for 2009,
compiled from information published by the Yunnan Department of
Commerce and China-ASEAN Expo (see http://tinyurl.com/YunnanDOC
and http://www.caexpo.org). Amounts are in US Dollars.

I. Yunnan's ASEAN Trade Partners:

COUNTRY: BURMA
Trade Value/% of Total Trade: 1.2 billion / 15.3%
Trade Balance: 323 million surplus
Trade Growth Rate: 3%
Main exports to: chemicals, machinery, household appliances,
and building materials
Main imports from: rubber, minerals, jade, rice and wood
products

COUNTRY: VIETNAM
Trade Value/% of Total Trade: 790 million / 9.9%
Trade Growth Rate: 22.4%
Trade Balance: 53 million surplus
Main exports to: phosphorous, cigarettes, fertilizer,
building materials, textiles, electric appliances
Main imports from: minerals, agricultural products

COUNTRY: INDONESIA
Trade Value/% of Total Trade: 345 million / 4.3%
Trade Growth Rate: 53.9%
Trade Balance: 56 million deficit
Main exports to: cigarettes, phosphorus, machinery, textiles
Main imports from: nonferrous metals, fertilizer

COUNTRY: THAILAND
Trade Value/% of Total Trade: 236 million / 2.9%
Trade Growth Rate: declined by 6.2%
Trade Balance: 169 million surplus
Main exports to: agricultural products
Main imports from: agricultural products, aquatic/sea products

COUNTRY: MALAYSIA
Trade Value/% of Total Trade: 221 million / 2.8%
Trade Growth Rate: 92.2%
Trade Balance: 9.5 million surplus
Main exports to: cigarettes, metals, chemical raw materials
Main imports from: palm oil, forestry products

COUNTRY: LAOS
Trade Value/% of Total Trade: 155 million / 1.9%
Trade Growth Rate: 40.5%
Trade Balance: 6.3 million deficit

CHENGDU 00000044 005.2 OF 005

Main exports to: machinery, textiles, chemicals
Main imports from: agricultural products, wood

COUNTRY: SINGAPORE
Trade Value/% of Total Trade: 115 million / 1.4%
Trade Growth Rate: declined by 31.4%
Trade Balance: 44 million surplus
Main exports to: cigarettes, lead, aluminum
Main imports from: chemical products, electrical machinery,
precision instruments, telecommunication equipment

COUNTRY: PHILIPPINES
Trade Value/% of Total Trade: 59 million / 0.7%
Trade Growth Rate: 27%
Trade Balance: 28 million surplus

COUNTRY: CAMBODIA
Trade Value: 3.7 million
Trade Growth Rate: declined by 78.2%
Trade Balance: 2 million surplus

COUNTRY: BRUNEI
Trade Value: 0.25 million
Trade Growth Rate: 97.6%
Trade Balance: 0.25 million surplus

II. Yunnan's Main Exports to ASEAN:

Category: Agricultural products
Trade Value/% of Total: 883 million / 23.6%
YOY Growth Rate: 25.5%

Category: Phosphorus chemicals
Trade Value/% of Total: 720 million / 19.2%
YOY Growth Rate: declined by 52.6%

Category: Electrical machinery
Trade Value/% of Total: 703 million / 18.8%
YOY Growth Rate: declined by 20.5%

Category: Cigarettes
Trade Value/% of Total: 280 million / 7.5%
YOY Growth Rate: 31.9%

Category: Nonferrous metals
Trade Value/% of Total: 281 million / 7.5%
YOY Growth Rate: declined by 28.9%

Category: Textiles
Trade Value/% of Total: 243 million / 6.5%
YOY Growth Rate: 40.3%

Category: Electric Power
Trade Value/% of Total: 186 million / 5%
YOY Growth Rate: 34%

Category: Other
Trade Value/% of Total: 734 million / 19.6%
YOY Growth Rate: declined by 9.6%

III. Yunnan's Main Imports from ASEAN:

Category: Minerals
Trade Value/% of Total: 1.3 billion / 42.6%
YOY Growth Rate: declined by 35.8%

Category: Electric Machinery
Trade Value/% of Total: 701 million / 23.4%
YOY Growth Rate: 17.4%

Category: Agricultural Products
Trade Value/% of Total: 339 million / 11.3%
YOY Growth Rate: 34.4%

Category: Wood
Trade Value/% of Total: 151 million / 5.1%
YOY Growth Rate: 0.4%

Category: Non-metallic Raw Materials
Trade Value/% of Total: 131 million / 4.4%
YOY Growth Rate: declined by 87.5

Category: Other
Trade Value/% of Total: 396 million / 13.2%
YOY Growth Rate: 8.6%
BROWN

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