FINANCE MINISTER TREMONTI AND THE "CHINA THREAT"

UNCLAS ROME 004236

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREASURY FOR OASIA HARLOW, STUART,
FRANKFURT FOR WALLAR
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND
4212/ITA/MAC/OEURA/CPD/DDEFALCO
STATE ALSO PASS USTR
GENEVA FOR USTR

E.O. 12958: N/A
TAGS: ECON EFIN ETRD IT CH EXPORT CONTROLS
SUBJECT: FINANCE MINISTER TREMONTI AND THE "CHINA THREAT"

REF: ROME 2853


1. Summary: The weakness of export markets and a perceived
loss of Italian competitiveness have fueled a summer-long
debate in Italy on the "trade threat" posed by China. The
debate, led by Finance Minister Giulio Tremonti and his close
ally, Northern League leader Umberto Bossi, has highlighted
allegedly "unfair" Chinese trade policies. Promptly
disavowed by the PM and the other parties of the GOI
majority, the debate did not affect Italian positions at the
Cancun Ministerial. Tremonti did, however, raise it again at
the informal EcoFin meeting in Stresa, and intends to raise
the issue at the September 20th G7 finance ministers,
meeting in Dubai. In the interest of business trade and
investment relations with China, other elements in the GOI
are working to calm the polemics. End Summary.

Poor performance of Italian exports
--------------


2. Italian exports have done poorly during 2003. According
to the latest ISTAT CIF/FOB statistics, exports decreased by
2.8 percent in the period January-June 2003 over the
corresponding period in 2002, while imports increased by 2.3
percent over the corresponding period in 2002. These trends
produced a E4.3 billion trade deficit in the first half of
2003, compared to a E2.3 billion surplus in the comparable
period in 2002. The worsening of the trade balance also
negatively affected the current account deficit, which
reached E14.5 billion at the end of the period January-June
2003, more than twice the deficit of E6.3 billion registered
at the end of June 2002. The weakness of Italian exports and
the loss of competitiveness are serious problems for an
export-led country where exports account for 25 percent of
GDP. According to both government and industry economists,
the lack of investment in technology has reduced the
competitiveness of Italian exports and aggravated their
sensitivity to exchange rate fluctuations. In addition,
Italian exports were hit by the euro,s appreciation against
the dollar in the first eight months of this year.

Summer debate on the "Chinese threat"
--------------


3. Italy's exports to China dropped by 39.9 percent from
July 2003 to July 2002, and Italy,s imports from China
increased by 12.7 percent during this period. For the seven
months through July 2003, Italian exports to China decreased
6.3 percent, while imports from China increased by 18.2
percent, producing a E3.6 billion trade deficit. Italy's
trade deficit with China has worsened each year from 1998 to
2002, rising from E2.5 billion to E4.3 billion. During the
same period, however, two-way trade more than doubled from
E6.1 billion to E12.3 billion.


4. In mid-August, Northern League leader Umberto Bossi, a
junior member of the GOI coalition and Minister of
Institutional Reforms, called for "appropriate measures" to
be taken against Chinese products to defend Italian exports.
He spoke of implementing customs duties on behalf of small
northern Italian entrepreneurs, the core of his political
electorate, who are potentially threatened by the allegedly
aggressive Chinese trade policy. The following day, PM
Berlusconi and Deputy Minister Urso disavowed Bossi,
maintaining that WTO agreements do not permit the EU to
impose additional customs duties against China. Note: There
are 61 antidumping customs duties currently imposed on non-EU
production, 32 of which apply to Chinese products. End Note.


5. Subsequently, Finance Minister Tremonti stated several
times that the EU should implement appropriate measures
to defend not only Italian and EU production, but the
industries of all developed western countries, against the
Chinese threat and to ensure "rules based trade." In an

interview with popular magazine Panorama, (and promptly
echoed by the Italian dailies) Tremonti recommended that
"Europe should do what America, the home of free-trade, has
long done successfully. In other words, protect the domestic
market and national production, not only with customs duties,
but also through indirect measures, such as food safety,
health, environmental and labor standards, to control the
entry of products from the Far East."


6. In the Panorama interview Tremonti also raised Chinese
intellectual property rights violations, such as the "CE"
(China Exports) seal put on Chinese exports, which appears
identical to the European Union "CE" seal put on products
manufactured according to EU labor, health and environmental
regulations. Tremonti charged that the similarity of the two
seals creates intentional confusion for consumers. He also
expressed serious concern that aggressive (and unfair)
Chinese competition would not stop at mature and low
technology products, but soon would hit high technology goods
and services that are now the monopoly of advanced western
economies. Comment: In the interview Tremonti ignored the
role that Italy's lack of investment in research and
development has played in the decline in competitiveness of
Italian exports, preferring instead to focus on foreign )
and particularly Chinese ) competitive practices. End
Comment.

Italy's official position
--------------


7. On August 26 Carlo Monticelli, Senior Director in the
Finance Ministry's international department in charge of the
EU presidency, told Emboffs that Tremonti would not
officially include in the agenda of the September 12-13
EcoFin meeting in Stresa any specific issue regarding China.
Nonetheless, we understand that China's currency value was,
in fact, debated at the informal ECOFIN, reported SEPTEL.
Tremonti has asked various experts to analyze the "Chinese
problem" and its effects, and Monticelli said that Tremonti
would likely raise this issue when G7 Finance Ministers
assemble prior to the annual IMF/World Bank meetings in Dubai
on September 23-24. He said that China's unfair trade
practices had already been discussed in a G7 forum
(specifically citing a G7 meeting in France in February).
Moreover, Monticelli argued that other G7 member countries
are interested in this issue.


8. Monticelli's statements, however, stand in contrast to
the negative reactions to the Tremonti proposal elsewhere
within the Italian Government and with some other EU
governments and the Commission. EU Trade Commissioner
Lamy,s spokesperson has denied that, at the EU level, there
exists a case against China for "unfair competition." At
the GOI level, PM Berlusconi is expected to visit China at
the end of October, during Italy's EU presidency, and he is
expected to sign an agreement on tourism. Approximately 100
million Chinese are estimated to have the financial resources
to visit Europe, and Italy is considered a popular
destination. In November, a bilateral EU-China trade summit
is scheduled in Taormina, Italy -- foreign direct investment
flows will be a theme, with the aim of increasing both
European investment in China and Chinese investment in
Europe.


9. Comment: Despite the negative trends in bilateral trade
flows and the Italian media hype, the "Chinese threat"
raised by Tremonti has not captured the support of the
governing coalition as a whole. At the moment it appears to
be merely a personal view, albeit one held by Italy,s most
important economic official, and by Northern League head
Bossi (reported Milan SEPTEL). Given the complexity and the
scope of the Chinese-Italian relationship, the official GOI
position leans toward a positive approach to China in order
to avoid retaliation. Several Italian companies invest and
produce directly in China, and a protectionist crusade with
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREASURY FOR OASIA HARLOW, STUART,
FRANKFURT FOR WALLAR
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND
4212/ITA/MAC/OEURA/CPD/DDEFALCO
STATE ALSO PASS USTR
GENEVA FOR USTR

E

the imposition of customs duties on Chinese products would
adversely affect Italian companies operating in China.
Nevertheless, it is likely that at the Dubai G7 meeting
Tremonti will raise his personal views. He might call for
adoption by China and other developing countries of
environmental and social standards generally accepted by
western countries. End Comment.

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2003ROME04236 - Classification: UNCLASSIFIED