CHINA CONCERNED OVER FUTURE TEXTILE PROTECTIONISM,

UNCLAS SECTION 01 OF 02 BEIJING 004304 SENSITIVE SIPDIS STATE PASS USTR FOR STRATFORD DEPT OF COMMERCE PASS TO DAVID SPOONER, RONALD LORENTZEN AND MATTHEW PRIEST E.O. 12958: N/A TAGS: ETRD KTEX EIND CH SUBJECT: CHINA CONCERNED OVER FUTURE TEXTILE PROTECTIONISM, EXPIRATION OF TEXTILE AGREEMENT 1.(SBU) SUMMARY: MOFCOM Director General for Foreign Trade Wang Shouwen met with U.S. Embassy officials to express concern over possible U.S. actions when the current Memorandum of Understanding (MOU) on Textile and Apparel Products expires at year's end. He expressed concern that comments by President-elect Obama could be interpreted as protectionist, particularly in relation to textiles. DG Wang stated that China's textile and clothing industry had fundamentally changed: diversifying export markets, decreasing fixed investment, and laying off workers. He argued that China posed no threat to the U.S. textiles industry, and actions such as a 421 safeguard request for textiles would only harm U.S. interests and the broader economic relationship. DG Wang suggested renewed dialogue through the JCCT Textiles Working Group was the best way to resolve differences. END SUMMARY. ¶2. (SBU) On November 18, 2008, responding to a request from the Chinese side, Minister Counselor for Trade Affairs Christopher Adams and Senior Import Administration Officer Sarah Ellerman, met with Director General Wang Shouwen of the Department of Foreign Trade at the Chinese Ministry of Commerce (MOFCOM). Concerns about New Administration -------------- ¶3. (SBU) DG Wang explained that the Chinese government and Chinese industry was very satisfied with the administration of the MOU on Textile and Apparel Products. The Chinese textile industry is looking forward to the Dec. 31, 2008, expiration of the MOU and an era of free and open trade, ending the past "discriminatory" treatment of Chinese textiles via multifiber agreement quotas and later EU and U.S. restraints. ¶4. (SBU) However, DG Wang said the Chinese government and industry are very concerned over the possible future policies of incoming President-elect Obama. DG Wang referenced a letter written by Senator Obama to the National Council of Textile Organizations on October 24, 2008, in which the Senator stated that he would make decisions regarding 421 cases and other trade remedy matters on their merits and not in accordance with any sort of trade ideology. DG Wang said the Chinese were also concerned about the recent instruction by House of Representatives Ways and Means Committee Chairman Rangel to the International Trade Commission to monitor imports of textiles categories covered by the current MOU. Chinese Textiles Not a Threat -------------- ¶5. (SBU) DG Wang argued that exports from China do not pose a threat to the United States. He claimed that, according to statistics from both sides, for the 21 textile categories subject to the quota, imports from China make up only 20 percent of the total imports into the United States. He also pointed out that thus far in 2008, the average utilization rate for all quota categories is 52.9 percent. Although we still have 1.5 months to go, this year's utilization rate is lower than last year. ¶6. (SBU) DG Wang asserted that the textile and clothing industry in China is in a different position than it was a few years ago. He claimed that the industry has improved IPR awareness and increased attention to corporate social responsibility. The large exporters are mindful of potential problems if imports into the United States surge, so they are trying to diversify their sales. Responding to MC Adams' observation that in 2005 when multi-fiber agreement quotas were lifted, imports had surged 600 percent, DG Wang said that in 2004 the quota fill rate was very high. Now he said it is about 53 percent. Neither importers nor exporters want a "rollercoaster" market, so the Chinese exporters no longer focus only on the U.S. market. He also noted that factories had unrealistic expectations in 2004. Now they are decreasing their investments in fixed assets and are more realistic. He claimed that since the MOU with the European Union (EU) expired at the end of 2007, the EU has not experienced import surges. China Might "Take Action" -------------- ¶7. (SBU) DG Wang asserted imports from China would not flood the U.S. market. He said that companies' investment in fixed assets has decreased; that of the 23 million employees in the textile industry, the Chinese industry has laid off 400,000 workers; and that some factories have closed. (Note: DG Wang acknowledged that the layoff statistic was based on incomplete data.) He expressed concern that if the new U.S. administration employs protectionist trade measures, it could produce difficulties for China, and the Chinese side might have to "take action." Layoffs of rural migrant workers threatened BEIJING 00004304 002 OF 002 to undermine stability in urban/rural areas, he said. ¶8. (SBU) DG Wang said imposing 421 safeguards would not help the U.S. textile industry. He claimed U.S. importers need to source textile products internationally, so imports from other countries would likely fill any decrease in Chinese exports. DG Wang noted that Chinese companies were the largest purchasers of U.S. cotton and that last year one-half of China's cotton imports were from the United States. With the U.S. economy in a downturn, American families would likely want cheaper textiles from China. He also pointed out that China buys large quantities of U.S. soybeans and is increasing its purchases of U.S. pork. Request for Dialogue -------------- ¶9. (SBU) DG Wang noted that China and the United States both have a much broader economic situation to manage. He read the excerpt from President Bush's G20 Summit speech pledging to refrain from raising new barriers to investment and trade. DG Wang said the Chinese side would like to resume meetings of the JCCT Textiles Working Group as a means to resolve differences, and recommended using the Steel Dialogue as a model for future meetings. ¶10. (SBU) COMMENT: While there are substantiated reports of textile and apparel sector layoffs, we are unable to confirm DG Wang's informal estimate of over 400,000 laid off workers. Given China conscious effort to transition away from lower-end manufacturing, this number seems plausible, although there is no indication yet that these laid-off workers were unable to find alternative employment in other encouraged sectors. Beijing's concern is that, with China's domestic demand now slowing and the drop off in foreign demand expected to accelerate, it will lead to a decline in employment opportunities for low-skilled laborers across the economy. The government has stated that it fears such large-scale unemployment could lead to social instability. In this environment, the Chinese side is closely watching the new Administration for any indications that it might be more protectionist than its predecessors. END COMMENT. RANDT