PRC REACTS TO U.S. TIRE SAFEGUARDS

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 002630

SIPDIS

STATE FOR E, EAP, EAP/CM
STATE FOR EEB/TPP WCRAFT, CLAYTON HAYS, HHELM
STATE FOR H/BETSY FITZGERALD, EAP/CM SHAWN FLATT,SCA/RA
JOHN SIPLSBURY
STATE PASS USTR FOR DMARANTIS, TREIF, TIM STRATFORD, ANN
MAIN, JEAN GRIER
DOC FOR IRA KASOFF, NICOLE MELCHER (5130),MAC (4420)
TREASURY FOR OASIA/DOHNER/WINSHIP
GENEVA PASS USTR
NSC FOR JLOI,DBELL

E.O. 12958: DECL: 09/14/2019
TAGS: ETRD EFIN ECON PREL WTRO CH
SUBJECT: PRC REACTS TO U.S. TIRE SAFEGUARDS

REF: A. BEIJING 2626

B. BEIJING 2525

C. BEIJING 02441

D. BEIJING 2299

E. STATE 85673

F. BEIJING 2439

Classified By: A/DCM WWEINSTEIN FOR REASONS 1.4 (b),(d) and (e).


1. (C) SUMMARY: Official Chinese reaction to the U.S.
decision announced September 11 to impose Section 421 tariffs
against Chinese tire imports has thus far been contained to
the trade sector, in line with PRC indications to the
high-level interagency delegation in Beijing last week.
MOFCOM announced on September 13 the initiation of
anti-dumping and countervailing duty (AD/CVD) investigations
against imports of U.S. auto products and poultry, though the
scope is unclear. MOFCOM also informed Embassy that China
will file a formal request in Geneva this week for WTO
consultations on the U.S. action. MOFCOM has confirmed that
the Joint Commission on Commerce and Trade (JCCT) will
continue and has yet to demarche the embassy on this issue.
Press outcry against the U.S. decision has been widespread
and negative, often calling for retaliation, and the
blogosphere has been deluged by a storm of passionate
anti-U.S. commentary on the decision. While it is possible
that media/netizen outcry, if it intensifies, could prompt
top policymakers to ratchet up China,s reaction/retaliation,
for now they seem inclined to contain fallout and protect
positive atmospherics in the run up to Presidential
bilateral. END SUMMARY.


2. (C) In the wake of the White House September 11 announcement
of the imposition of tariffs on Chinese tire imports under
Section 421, public official reaction has been centered at
MOFCOM, with apparently only one exception: a statement
issued today by the MFA spokesperson. MOFCOM Minister Chen
Deming roundly criticized the U.S. decision to Xinhua
reporters on September 12, and MOFCOM issued a statement the
same day. Unsurprisingly, such commentary criticized U.S.
action as unjustified and protectionist, and the U.S.
negotiating stance as unreasonable and inappropriately
extending beyond the tire sector. The MFA statement said the
U.S. failed to honor its G20 Summit commitments and "abused"
trade remedy measures. The lack of rhetorical extremes, and
the fact that other senior officials have not weighed in
suggests a degree of restraint.


3. (C) More direct bilateral interaction thus far suggests the
PRC is trying to compartmentalize a reaction that is
commensurate with U.S. remedies, in line with what MOFCOM VM
Zhong Shan told Deputy USTR Marantis last week. MOFCOM
Minister Chen Deming accepted Ambassador Kirk,s call on
Saturday, evincing readiness to discuss bad news directly
rather than hash out the issue in the press. And, while
decrying the U.S. decision, he notably stated that he looked
forward to meeting USTR Kirk at the upcoming JCCT meetings in
late October. Also, the PRC has yet to call the Ambassador
in to complain about the decision, as has been their practice
during other critical events. Embassy working level contacts
with the PRC continued apace September 14, with no attempt by
Chinese interlocutors to suspend extensive work underway to
prepare several JCCT working groups. Combined, these
official interactions and statements offer reason to believe
that the Chinese planned response to the U.S. tariff on tires
is a measured one.


4. (C) That plan seems thus far to target WTO-consistent and
financially commensurate retaliation. The PRC told USTR
Washington September 14 it will file for WTO consultation on
our decision. On September 12, MOFCOM announced the
initiation of anti-dumping and countervailing duty
investigations of imports of U.S. auto products and poultry.
(Note: those two sectors, as well as cotton and soybeans,
were on a list of possible responses previewed to the
Marantis delegation. End Note.) MOFCOM has not yet shared a
copy of the petitions in question, so it is impossible to
estimate the scope, but U.S. chicken imports in 2008 totaled

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over USD 523 billion; motor cars over USD $1 billion.
Considering that the key Chinese industry association
estimates tariff-induced lost sales at USD $1.1 billion,
retaliation in these two sectors alone could be seen as a
neat symmetry.

THE WEIGHT OF PUBLIC OPINION


5. (C) While Chinese official reaction to the U.S.
announcement was restrained, China,s media and netizens were
less so. Press commentary has been strikingly widespread.
All of the Chinese leading newspapers carried stories about
the U.S. tariff on tires today, though many were not front
page news. Sources for press reports were mostly MOFCOM,
academicians and the Chinese Rubber Association. The bulk of
reports called the tariffs a violation of WTO rules, but
provided no explanation of how, and a betrayal of the U.S.
promise at the last G20 not to implement protectionist
measures. Several blamed domestic U.S. politics as the
underlying reason for the tariff, saying Obama needs the
support of "certain interest groups" for his health reform
agenda. Another repeated message was that the tariff sends
the "wrong signal" at a time when world economies need to
cooperate to overcome the economic downturn. The
International Herald Leader predicted that the consequence
will be "explosive trade friction between the two countries,"
while the Global Times English edition said "a trade war
would be regrettable, but may be required to create a
long-term deterrent to U.S. protectionism."


6. (C) China,s netizens were even more vocal, with tens of
thousands commenting in emotional opposition to the U.S.
decision, and thousands more commenting every half an hour.
Several of the most popular web sites have opened special
portals dedicated to this issue. As one local employee
described it to us today, "it would be hard NOT to hear about
this issue since Friday." In recent domestic and
international controversies, such as reneging on the
requirement that all computers sold in China must have Green
Dam software preinstalled or the decision not to allow
Coca-Cola to purchase fruit juice maker Huiyuan, the opinion
of bloggers on the internet has apparently put pressure on
Chinese officials at times to at least appear to take tougher
actions in support of popular sentiment. It remains to be
seen, however, in this instance whether the popular netizen
protests will maintain or gain momentum and intensity.

IMPACT ON CHINA, OTHER BILATERAL ISSUES


7. (C) The China Rubber Association estimated the remedies
could result in the loss of USD1.1 billion in Chinese exports
in tire-making and related industries, down from the USD2.2
billion estimated as recently as this August. Even if true,
the macroeconomic impact on China would be fairly
insignificant, amounting to 0.4 percent of China,s exports
to the U.S., and 0.07 percent of China,s total exports in

2008. Job losses, because they would likely occur in the
large, economically-recovering regions of the Shanghai,
Qingdao, Guangzhou, and Hangzhou (where the major affected
factories are based),are unlikely to raise concerns of
large-scale social instability.


8. (C) Many bloggers and a few commentators have suggested
that China sell U.S. treasury bonds to protest the 421 tire
decision. At least one large private investment banker based
in Beijing indicated to Econoff that she was getting numerous
questions from local and international investors about this
possibility. We have absolutely no indication that either
the Chinese government or large investors are considering
this option; not only would it be extremely difficult for
reserve managers to find alternative investments, but a large
sell-off of treasuries would cause a dramatic drop in the
value of the Chinese government,s holdings. At most, this
incident has again highlighted China,s continued
uncomfortable (an unavoidable) reliance on U.S. Treasuries to
absorb its massive foreign exchange reserves; it remains to
be seen whether this will help spur real rebalancing with a
goal of reducing reserve accumulation, or just additional

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inadequate schemes to try to "diversify" China,s investments.


9. (C) COMMENT: China,s reaction thus far appears
restrained and contained to the trade sector, pressing the
issue in the WTO while at the same time pursuing AD/CVD cases
that provide an opportunity from China,s point of view to
inflict as much economic damage on the U.S. as it assesses
the U.S. move inflicted on China. Given next week,s planned
summit meeting on the margins of UNGA and the Pittsburgh
Summit, indications are that China will not seek to further
escalate its reaction in the coming days. That said, public
outcry -- especially by netizens -- could potentially
pressure China,s leadership to speak out at a higher level
to criticize the U.S. move. END COMMENT
HUNTSMAN