Identifier
Created
Classification
Origin
05ROME1150
2005-04-05 12:29:00
UNCLASSIFIED
Embassy Rome
Cable title:  

ITALY'S TRADE AND INVESTMENT RELATIONS WITH CHINA:

Tags:  ETRD ECON ELAB IT CH EXPORT CONTROLS 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS ROME 001150 

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/TPP
DEPT FOR EAP/CM (GOLDBERG)
STATE PASS USTR
GENEVA FOR USTR
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ETRD ECON ELAB IT CH EXPORT CONTROLS
SUBJECT: ITALY'S TRADE AND INVESTMENT RELATIONS WITH CHINA:
THREAT OR OPPORTUNITY?

Refs: A) Florence 13; B) 2004 Beijing 19943

Summary
-------

UNCLAS ROME 001150

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/TPP
DEPT FOR EAP/CM (GOLDBERG)
STATE PASS USTR
GENEVA FOR USTR
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ETRD ECON ELAB IT CH EXPORT CONTROLS
SUBJECT: ITALY'S TRADE AND INVESTMENT RELATIONS WITH CHINA:
THREAT OR OPPORTUNITY?

Refs: A) Florence 13; B) 2004 Beijing 19943

Summary
--------------


1. There are divided views in Italy on trade and investment
in China and whether China is a threat or an opportunity.
Although Italian exports to China have increased recently,
they pale compared to the sharp increase of Chinese imports
into Italy. Italy's direct investment in China remains
quite small. Those GOI officials and Italian manufacturers
that view China as a threat point primarily to China's
unmatchably low labor costs, the strength of the Euro,
Italy's weak economy, and the lack of strong Italian
investment in China as root causes of their anxiety. This
fear of China has caused some Italian manufacturers to push
for protectionist actions against Chinese products,
especially after the recent expiration of the WTO Agreement
on Textiles and Clothing. Alongside such concerns, other
Italian companies believe China's growing economy represents
an important opportunity to expand trade and investment.
Chinese competition may not pose a significant threat to
most Italian companies, but in several/regions (for example,
textiles in Tuscany),the effects of Chinese competition are
significant and it has fostered a sense of crisis within the
business community. More broadly, certain Italian SMEs will
suffer from Chinese competition if they do not adapt to an
increasingly competitive international market. Because of
Italy's electoral timetable over the next year, politicians
will continue to generate a lot of noise and smoke about the
"China threat," but this will translate into little action,
given the constraints of Italy's EU obligations. End
summary.

Italy-China Trade -- The GOI's Dueling Views
--------------


2. In recent months, the Italian Government has ratcheted up
its attention to Italy's trade relationship with China as
never before, most publicly with the visit of President
Ciampi to China in December 2004. Accompanied by Foreign
Minister Fini, Finance Minister Siniscalco, and Productive
Activities Minister Marzano, Ciampi emphasized commercial
opportunities for Italian firms during the visit, as

strongly evidenced by some 200 Italian business
representatives that accompanied him. During his visit,
Ciampi signed eight commercial accords with Chinese
President Hu Jintao, including agreements on restriction-
free exports of Italian processed meats to China; the
proclamation of 2006 as the "Year of Italy in China;" and
joint cooperation in preparation for the 2006 Winter Olympic
Games in Turin (Ref B). China reportedly had never before
recognized a foreign Olympic committee as a viable partner
for cooperation in preparation for the Olympic games.
Ciampi's visit came towards the end of the yearlong "Marco
Polo Project," a calendar of events organized by Italian
trade officials to promote greater Italian investment in
China in 2004.


3. China was also the focus of the Second National Foreign
Trade Conference, on February 26, 2005, which featured Prime
Minister Berlusconi, along with Fini, Marzano, Foreign Trade
Vice Minister Urso, and other leading government and
business figures. In contrast to Ciampi's emphasis on China
as an opportunity for Italian business seeking trade and
investment abroad (and thus a means to help bolster Italy's
lackluster economy),the February trade conference focused
more on the potential threat China poses to Italy's export-
dependent economy, especially in the textile sector. Several
speakers noted that China's reputation as a golden
opportunity for foreign investors was overstated; and the
prevailing view among the many Italian manufacturers present
was that, in the near to medium term, China represented more
of a threat to them than an opportunity. Just one week after
the conference, Marzano and Urso announced that the GOI
would ask the European Commission to impose safeguard
measures, including antidumping duties, to counter the
"predatory invasion" of Chinese textiles into Italy in
recent months.


4. Italian industry views of China vary as much as those


within the GOI. Some Italian SMEs express concern that
Chinese goods flooding both domestic and foreign markets
will displace Italian goods. At the same time, many Italian
firms, including some that worry about Chinese exports, wish
to reap the benefits of the ever-growing Chinese economy.
Italy's export finance company (SACE, akin to the QS.
Export-Import Bank) lies firmly in the pro-opportunity-in-
China camp.

Italy-China Trade and Investment Figures
--------------


5. Italy's exports to China in 2004 were valued at Euro 4.4
billion, placing Italy third within the EU, after Germany
and France. More than half of Italian exports to China are
machinery-based, and the remainder includes high technology
medical equipment, iron, and steel. In terms of imports,
Italy is China's fourth largest market in the EU (Euro 11.8
billion in 2004). Italy's principal imports from China
include textiles, household equipment, and machinery parts.
Italy's 2004 trade deficit with China equaled 7.4 billion
Euro. Although Italian exports have increased in all but
one of the last six years, Chinese imports have risen by
much higher percentages during this same period.

Italy's Foreign Trade with China (billions of Euro)

Imports Exports Balance
1999 5.0 1.8 -3.2
2000 7.0 2.4 -4.6
2001 7.5 3.3 -4.2
2002 8.3 4.0 -4.3
2003 9.6 3.9 -5.7
2004 11.8 4.4 -7.4



6. Recent statistics on Italian exports to China could be
viewed positively, especially given the rise of the euro
against the Chinese yuan. However, many companies,
especially the small-to-medium-sized manufacturers that
constitute roughly 90 percent of all Italian enterprises,
are blaming China for their loss of market share in both
Italy and abroad in recent years. In 2003, Italy's export-
dependent economy weathered a 3.9 percent decline in all
exports, though exports rebounded in 2004 with a 5.7 percent
increase. Despite this positive 2004 data, the sectors of
textiles and clothing, furniture, leather and footwear
registered significant decreases in exports during the year.


7. In terms of foreign direct investment, Italy is currently
ranked fifth among European countries and 19th among all
foreign investors. According to the latest statistics,
Italy's cumulative investment in China was about USD 230
million as of September 2003, amounting to only 0.3% of
worldwide investment in China. Most investment during 2003
was in the automobile, textile, mechanical equipment, and
pharmaceutical sectors.

Euro's Strength Versus the Dollar and the Yuan
-------------- -


8. The strong euro gives Chinese companies a key advantage
over Italian firms when exporting to foreign markets,
especially the United States. Italian government
representatives believe Italy's unfavorable exchange rate
vis--vis the yuan (which is pegged to the dollar) has led
to growing Chinese competition in the foreign export sector
(Ref A). Some experts calculate that certain Italian export
sectors suffered as much as 20 percent from 2003-2004, due
solely to the euro's strength against the yuan.


Promoting Labels of Origin/"Made in Italy" Brand
-------------- ---


9. In response to anxiety over Chinese exports flooding
global markets, more Italian SMEs are working together to
strengthen the competitiveness of Italian goods. One idea
advocated by some Italian SMEs, and backed by Italian trade
officials, would require all nations to label the origin on
the textiles they produce. This information would


theoretically encourage consumers to buy Italian products
due to their high quality reputation, compared to those of
other nations, including China. In addition, there is a
campaign within Italy to promote the "Made in Italy" brand
by placing it on more Italian products, again relying on the
reputation of high-quality Italian goods to increase Italian
exports. This emphasis on labeling is also a reflection of
widespread Italian views that Chinese exports are pirated,
and thus unfair competition.

WTO Agreement's Demise Raises Strong Concerns
--------------


10. No single recent event has preoccupied Italian exporters
and trade officials more than the termination of the
multilateral WTO Agreement on Textiles and Clothing (which
replaced the earlier Multifiber Arrangement ending in 1994).
This termination is widely believed to pose a serious threat
to Italian manufacturers. Rossano Soldini, president of the
Italian footwear manufacturers' association, recently
claimed that footwear imports from China rose 45 percent in
the past three years and reached 150 million pairs in 2004.
He predicts a further increase to 300 million pairs this
year.


11. Textile manufacturers are equally worried, particularly
in Tuscany, where the province of Prato is Italy's largest
producer of fabrics. In the last ten years, the district
has lost 30 percent of its manufacturing companies, while
imports of fabrics and apparel from China increased six
times, increasing in value from euro 23 million in 1994 to
122 million in 2003. According to the Prato manufacturers'
association and Chamber of Commerce, large illegal imports
of counterfeited textile products from China also add to the
industry's problems. As a consequence, Prato's per capita
income, in real terms, declined 0.4 percent each year
between 1996 and 2003 (though there was some increase in the
city's population at the same time, mostly due to
immigration). A recent study of the University of Florence
predicts a further 25 percent decline in the number of local
textile manufacturers in the next two/three years.


12. The Italian textile and footwear industries believe that
the only way to compete with Chinese manufacturers is to
continue to rely on the reputation and quality of Italian
brand-name products. SACE's chief economist, Alessandra
Lanza, believes Italian SMEs can maintain superior quality
through consolidation, allowing several SMEs to use their
combined resources to make joint investments in product
research. Similarly, Francesco Pensabene, economic expert
at the Asia-Oceania desk of the "Istituto Nazionale per il
Commercio Estero" (ICE: Italy's foreign trade promotion
agency, roughly equivalent to the U.S. Foreign Commercial
Service),told us that simply maintaining current quality
standards is not sufficient for Italy's exports to maintain
or increase their current levels. Rather, Italian companies
need to invest in more research and development to create
higher quality products.

.But Not All Italian Companies Fear China.
--------------


13. Despite strong concerns about Chinese competition and
the lack of Italian investment in China, many Italian
companies are trying to take advantage of China's growing
economy by promoting their products in China. As discussed
above, some hope promoting the "Made in Italy" brand could
increase Italian market share in China beyond textiles and
machinery into other sectors, such as high technology
equipment. ICE's Pensabene notes that Italian firms could
benefit very much by taking advantage of the growing
consumer awareness of the Chinese middle class. This group,
he maintains, views Italy as a nation of cultural and
manufacturing excellence, and desires many Italian products,
including furniture, kitchenware, fashion, food, and
products featuring Italian design. Pensabene also believes
the Italian tourist sector is poised to attract much larger
numbers of Chinese tourists in the near future. According to
some polls, 70 percent of Chinese who want to come to Europe
would choose Italy as their destination. Chinese tourism
should bring a significant increase in direct revenue to the


Italian economy, while further stimulating the Chinese
desire for Italian exports.

Italian Investment in China - A Weak Relationship
-------------- --------------


14. Pensabene believes Italians have so far been unwilling
to take the risk of large investments and that Italy's
relative lack of investment in China could have lasting
repercussions on Italy's economy. Pensabene identified two
obstacles to Italian investment in China:(a) lack of
financial resources, and (b) an "export-only" mentality that
keeps Italian firms from creating sales and service networks
abroad.

Lack of Financial Resources
--------------


15. Pensabene told us that Italian SMEs find it difficult to
acquire capital to invest in China for two reasons. First,
Italian SMEs, many of which are family-owned, tend to be
reluctant to seek outside financing for fear of giving up
control of their companies. Second, many Italian banks are
overly risk-averse, thus unwilling to extend credit for
investment in China where success appears uncertain.
(According to SACE's Lanza, Italian SMEs prefer to invest in
small markets close to home, such as Eastern Europe, an area
also considered less risky than China. These SMEs do not
have to consolidate to invest in Eastern Europe and do not
need as much initial capital to start a business there.)


16. Despite this difficulty, SIMEST (the Italian government
agency that lends to Italian companies wishing to invest
abroad, similar to the U.S. OPIC) helps Italian companies in
every step of setting up business in China, from making
equity investments to developing industrial relations with
foreign partners. SIMEST Director of Area Participation and
Finance, Gerardo Stigliani, told us that the agency
currently ranks China as its number one priority in terms of
investment aid to companies. SIMEST gives out more than 40
million euro yearly for projects in China, mostly for
engineering, construction, and clothing projects.

"Export-only" Mentality
--------------


17. Pensabene argues that Italian companies should make long-
term investments abroad and not rely merely on quality and
brand recognition to increase market share. He noted
Italian firms do not always appreciate the need for
investment to support exports. For example, a Chinese Fiat
owner, Pensabene maintained, often must wait weeks for parts
to arrive from Turin because the Italian car maker has not
built a sufficient parts and service network in China. Fiat
and other Italian firms are also hampered in international
markets, including China, by a reluctance to transform
research and development into new technologies, he said.
Note: we understand Fiat's truck division is doing well in
China, but its auto sector is in trouble (not unlike the
company's situation in Europe). End Note.

Two Success Stories
--------------


18. There are close to 500 Italian companies in China,
excluding those in Hong Kong. Many are Italian/Chinese
joint ventures, mostly in the areas of telecommunications
(nineteen percent),automotive products (sixteen percent),
and chemicals and petrochemicals (nine percent). Two
examples of Italian companies that have been quite
successful in opening manufacturing facilities in China are
Geox (footwear manufacturer) and De Longhi (manufacturer of
small appliances and heating systems). Both have opened
factories in China, with De Longhi also closing down several
factories in Italy to relocate production in China - but at
the cost of more than 650 Italian jobs and several labor
protests in 2004.

Comment
--------------



19. China's rise as a global economic power, based on low-
cost manufacturing capabilities, has provoked considerable
hand-wringing in Italy. Much of this concern, however, can
be attributed to a widespread anxiety here that Italy is in
economic decline. The World Economic Forum's 2004
Competitiveness Report, for example, ranks Italy a dismal
47th globally, the lowest by far of the G7 economies. Under
the Berlusconi government, in office since mid-2001, Italy's
annual GDP growth rate has been only 0.9 percent.
Contrasted with China's booming economy, Italy's economic
malaise appears all the more pronounced.


20. Looked at dispassionately, however, there is little
evidence to suggest that China poses a direct threat to the
vast majority of Italian businesses, especially those whose
success has been built upon the high-quality and high-brand
recognition products for which Italy is famous. However,
those businesses that compete more upon price than quality -
such as the lower ends of the textile, apparel and shoe
industries -- will likely continue to suffer. Moreover,
Italian family-owned SMEs in such sectors may have a
particularly difficult time adapting to new market
realities.


21. The GOI's ability to react against the "China threat,"
even in those limited areas where it actually exists, is of
course severely constrained by Italy's obligations within
the European Union. This, however, will not prevent Italian
politicians from continuing to make a great deal of noise on
this issue, given the country's electoral calendar:
regional election take place in early April; national
elections loom in the first half of 2006. The Northern
League party, a junior partner in the governing coalition,
for example has seized upon the Chinese threat to Italy's
textile sector as a prime vote-attracting issue (the League
is strongest in the commercial heartland of northern Italy).
In the end, however, we anticipate such polemics will amount
to just that: much smoke and noise, but little action. End
comment.


22. This message was drafted by Embassy Rome Intern Jessica
Alvarez.


NNNN
2005ROME01150 - Classification: UNCLASSIFIED