EU ON TIRES CASE; CHINESE REACTIONS DAY TWO

UNCLAS SECTION 01 OF 02 BEIJING 002656 C O R R E C T E D C O P Y//PARA MARKING// 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: N/A TAGS: ETRD EFIN ECON PREL WTRO CH SUBJECT: EU ON TIRES CASE; CHINESE REACTIONS DAY TWO REF: A. BEIJING 2630 ¶B. BEIJING 2626 ¶C. BEIJING 2525 ¶D. BEIJING 02441 ¶E. BEIJING 2299 ¶F. STATE 85673 ¶G. BEIJING 2439 BEIJING 00002656 001.2 OF 002 THIS MESSAGE SENSITIVE BUT UNCLASSIFIED. ¶1. (SBU) SUMMARY: EU Commission officials told Econ M/C September 16 their Chinese interlocutors on trade had not raised the tires issue in meetings earlier this week, though PRC Commerce Minister Chen Deming had been very tough on the subject when he met EU Commissioner Ashton in New Delhi two weeks prior. The EU representatives saw a new pattern emerging in China,s two-pronged approach to trade-related retaliation: simultaneous pursuit of a) WTO consultations, and b) anti-dumping and countervailing duty investigations. They forecast that President Hu would "launch a new offensive at the Pittsburgh Summit" taking the high road on trade and protectionism. While they jokingly welcomed the U.S. decision for making the EU "good guys" again, they acknowledged that consultations with European industry had already began over concerns Chinese tire exports might be diverted to European markets. Press coverage of the case remained heavy today, with several commentators noting positively the restrained reaction of the PRC to date. To date, MOFCOM has declined to provide Embassy with petitions for either the auto parts or the chicken cases it announced on September 13. END SUMMARY. PRC,S DUAL-PRONGED AD/CVD AND WTO STRATEGY EMERGES ¶2. (SBU) EU Minister-Counselor for Trade Miguel Ceballos and two EU Commission trade remedy officials (Dr. Wolfgang Muller and Carlo Pinto) visiting China called on the Econ M/C today to talk tires and other trade issues. Our interlocutors observed that in the tires case, and in the EU,s own experience, the PRC,s overriding concern has been the mechanism i.e. use of the WTO-agreed transitional product-specific safeguard mechanism, rather than the remedy itself. They noted that "some time ago" the EU had considered implementing a product-specific safeguard measure against Chinese imported mandarin oranges, but after the PRC "went ballistic", the EU applied a general safeguard instead of the WTO-linked bilateral one. (Note: Despite MOFCOM,s repeated assertion that the WTO,s TPSSM has never been used, Turkey, India and Colombia have all instituted tariffs against Chinese products under the TPSSM. End Note.) ¶3. (SBU) The EU team said their interlocutors on trade had not raised the U.S. decision in pre-scheduled meetings on September 14. However, at the WTO Ministerial in New Delhi two weeks ago, MOFCOM Minister Chen Deming had told EU Commissioner for Trade Ashton "quite firmly" that the Chinese would take all necessary measures to prevent the U.S. from implementing a special safeguard measure on tires. Ceballos admitted with some relief that the U.S. remedies had in fact made the U.S. "bad guys" and the EU "good guys" on China trade again -- a position the EU feared it was losing after the "very good discussions" at the first S&ED last July. ¶4. (SBU) The EU team did not anticipate they would rapidly follow suit with their own special safeguard measure on China. In fact, although they initially expressed concern that newly-excess Chinese tire supplies might be diverted to the European market, consultations with European industry set those fears at bay for the time being. European industry told them that EU security standards for passenger tires were higher than those in the U.S. or China, keeping Chinese tire exports to Europe low. Caballos said that overall tire imports account for 20 percent of the EU market, with China accounting for just under half of that, or just less than 10 percent of the European tire market. He said European industry predicted that the Chinese tires would continue to flow into the U.S. and that any diversion of Chinese tires would go to Asia or other emerging markets. Our interlocutors did note that the EU,s implementing mechanism of the WTO transitional product-specific safeguard mechanism (TPSSM) was harder to deploy than the U.S. Section 421. BEIJING 00002656 002.3 OF 002 First, labor unions do not have the legal right to file complaints under the European TPSSM mechanism. Second, to impose the TPSSM, a difficult-to-achieve "qualified majority" of EU Council members must agree. They noted the EU steel industry had been the most vocal sector over Chinese product flows, and estimated that current Chinese steel production overcapacity has reached 150 million tons/year (50 million of which is due to the PRC,s stimulus plan). ¶5. (SBU) Muller observed that the PRC seems to be implementing a consistent two-pronged "retaliation" strategy in trade disputes. First, they initiate anti-dumping and/or countervailing duty investigations (often not well-founded, in the EU experience). Second, they request WTO consultations. The U.S. was now facing such a Chinese strategy, as had the EU in the two 2009 instances it experienced Chinese retaliation over EU trade remedies: steel fasteners (winter 2009),and security scanners (Nuctech this August/September). Noting that "nothing happens by accident" in China, the EU team related with some amusement that only one hour after Commissioner Ashton finished a meeting with PRC Vice Premier Wang Qishan, China announced its own investigation into European-manufactured scanners. Wang had not said a word to Ashton on the issue. ANTI-DUMPING AND COUNTERVAILING DUTIES TIMELINE ¶6. (SBU) Based on China,s past practice, the cases likely will not proceed until the USG is notified of the petitions. Although MOFCOM,s AD/CVD practices are less than transparent, they have roughly followed a pattern similar that of the U.S. system, with three general phases: 1) the petition: the PRC, either MOFCOM or industry, would initiate a petition; 2) consultations: MOFCOM then affords the potential responding government (in this case, the USG) a consultation opportunity, during which the USG could submit to MOFCOM evidence for the record arguing against moving forward on the petition; 3) the investigation: if MOFCOM chooses to proceed, it will initiate a formal CVD investigation. The CVD investigation would start with MOFCOM presenting a questionnaire to the USG, local governments and to U.S. industry, with the goal of exposing financial, policy, practice and other details that could prove a subsidy to U.S. industry. After a few rounds of questionnaires and responses, MOFCOM would issue a preliminary determination. Anti-dumping cases, on the other hand, would be based on two criteria: that dumping occurred (in this case, U.S. producers were selling for less on the export market than on the domestic market) and then show injury to the Chinese market. OFFICIAL AND PRESS REACTIONS CONTINUED ¶7. (SBU) On the local scene Tuesday, the only official comment on the tire issue came from MOFCOM spokesperson Yan Jian, who announced publicly China,s request for WTO consultations on this case. Commentary on Chinese retaliatory measures against imports of U.S. auto parts and chicken dominated Chinese press September 15, but, unlike yesterday, left room for other headlines. Several outlets predicted that the Chinese retaliatory measures would roughly equal the value of the Chinese losses due to U.S. tariffs. Otherwise, opinion swung from calls for China to "stand strong in the face of protectionism" in order to prevent its spread, to recognition that both the U.S. and PRC were measured in their responses to this trade dispute and a trade war would only hurt both countries. Of note, one outlet underscored that the PRC did not target soybeans, the "ultimate weapon to safeguard its trade interests, which shows that the Ministry of Commerce is still focused on ... a balanced and controllable situation." Another story observed that China and the U.S., as well as China and the EU, are inseparable trading partners. HUNTSMAN