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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