China Repeals Textile Tax, Threatens WTO Grievance

By Peter S. Goodman
Washington Post Foreign Service
Tuesday, May 31, 2005

SHANGHAI, May 30 -- China on Monday threatened to take the United States to a dispute proceeding at the World Trade Organization if the Bush administration persists in restricting imports of Chinese-made textiles.

China also rescinded tariffs on its own textile exports, asserting that it will do nothing to limit its shipments as it offered to do last week so long as the United States and Europe impose their own restrictions.

At a news conference in Beijing, China's commerce minister, Bo Xilai, unleashed the latest rhetorical volley in an intensifying trade conflict, warning that his government might formally accuse the United States of foul play if the Bush administration does not lift quotas on its textiles.

"This is a legitimate right that China is entitled to, and we will resort to this mechanism when it is time to do so," Bo told reporters, according to Bloomberg News.

That threat came only days before Bo was scheduled to receive his American counterpart, Commerce Secretary Carlos M. Gutierrez, who is due in Beijing on Thursday for meetings on the textile conflict and the larger issue of how to lessen China's $160 billion trade surplus with the United States.

The growing intensity of the dispute underscores the degree to which domestic pressures appear to be leading both sides to push hard, lest they face accusations of appeasement. Analysts emphasized that Beijing and Washington both appear to be engaged in a show of toughness aimed at assuaging their domestic industries and not at a genuine escalation.

'This is entirely about domestic politics in both countries," said Andrew Rothman, China strategist at CLSA Asia-Pacific Markets in Shanghai. "They're doing the dance that they always do. I don't see this turning into a trade war."

The textile dispute stems from the expiration of an old system of global quotas that for four decades limited how much clothing any single country could ship to the United States and Europe. Since the lifting of those limits at the beginning of the year, shipments of Chinese-made clothes into the United States have grown by more than half, according to the U.S. Commerce Department. Volumes of some goods, such as cotton pants and shirts, have soared by more than 1,000 percent.

That surge has increased pressure on the Bush administration to choke the flow. Domestic textile manufacturers and a vocal contingent in Congress have accused the administration of being soft on China, allowing a renegade trade power to inundate the market with cheap goods at the expense of American workers.

The Bush administration earlier this month slapped new quotas on several categories of Chinese clothes and textiles, limiting their growth to 7.5 percent this year. The administration has the right to impose such "safeguard" quotas under the agreement that brought China into the World Trade Organization three years ago.

China reacted by accusing the United States of violating the spirit of free trade. Officials in Beijing maintain that China is simply using its advantages -- an abundance of cheap labor and natural resources -- to produce high-quality goods at a lower price. China asserts that it is being made a scapegoat for the inevitable decline of American manufacturing.

In a bid to persuade the Bush administration to drop the safeguard quotas, China last week said it would quadruple the tariffs it imposes on its textile exports. But on Monday, China said it would withdraw those tariffs altogether so long as the safeguard limits remain.

The conflict comes as little surprise. In interviews last year, Bush administration officials signaled clearly that they were almost certain to impose safeguard limits once the old quota system expired. Chinese officials and major textile producers here said they expected such a move. So did major buyers of Chinese clothing, such as Wal-Mart Stores Inc. and J.C. Penney Co. Many held off on shifting purchase orders from other countries to China until they saw how the situation would be resolved.

"If the administration didn't invoke safeguards when some of these goods are up over 1,000 [percent], when would they ever?" asked Pietra Rivoli, a trade expert at Georgetown University.

But China's response highlights how some factories here -- particularly smaller operations -- may have miscalculated the likelihood of safeguard quotas and are now crying foul as they forgo shipments to the United States and Europe.

"The Chinese government has received a lot direct and indirect pressure" from the domestic textile industry, said Sun Huaibin, deputy editor-in-chief of China Textile, an official trade magazine.

As the countries' top two commerce officials prepare to meet later this week, both appear unable to offer concessions lest they suffer the wrath of pressure groups at home.

But even as Commerce Minister Bo raised the prospect of a full-blown case at the WTO -- a process that takes years to unfold and usually results in a settlement -- he was careful to wall off the textile dispute. He pledged that his government would not link it to other trade issues, such as the ongoing Doha round of negotiations aimed at widening the scope of the global trade body.

"China does not want to link the textile issue," Bo said. "China is a country of principle. We do not want to couple all things under one single subject to bargain with others."

Among the other issues the U.S. commerce secretary is likely to raise in his visit this week is the prevalence of pirated goods on the streets of China and in markets worldwide, churned out by Chinese factories.

U.S. officials blame piracy in China for costing companies tens of billions of dollars a year.

"The intellectual property issue is so large and important that it would be a very productive meeting if we were to get progress for that alone," Gutierrez said in an interview with Bloomberg News. "Protecting intellectual property is a way of opening up the market for our products."

Special correspondent Eva Woo contributed to this report.

© 2005 The Washington Post Company