China Cancels Tariffs On Textile Exports

By FEDERICA BIANCHI DOW JONES NEWSWIRES

May 30, 2005 2:33 a.m.

BEIJING – China signaled Monday that it's willing to play hardball in trade disputes with the West by canceling self-imposed tariffs on its textile exports.

In a terse statement, the Ministry of Finance announced it was rescinding export tariffs on 78 textile products that had been imposed on Jan. 1, as well as another set of tariffs announced less than two weeks ago.

The first set was designed to limit a surge of Chinese exports after the lifting of a global quota system for textile trade at the start of this year, while the second set was a response to complaints by the U.S. and the European Union, which have experienced a leap in Chinese shipments. So canceling the tariffs is certain to fan protectionist sentiment in China's major trading partners.

"I don't think they have reached a trade war situation yet," said Paul McKenzie, head of consumer research at CLSA Asia Pacific Markets in Hong Kong.

But he added that if the textile dispute wasn't quickly resolved, China might conceivably take steps against products from the U.S. or EU that weren't textile-related, or might show bias against American or European companies. "These would signal the start of a trade war," he said.

China's finance and commerce ministries didn't immediately explain the decision, but said Commerce Minister Bo Xilai would discuss it later Monday at a news conference.

The decision was almost certainly made in retaliation against the EU, which three days earlier took the dispute over Chinese textile exports to the World Trade Organization, forcing an immediate curb in shipments of T-shirts and flax yarn. China has also been angered by the fact that the U.S. has continued to pursue legal action against Chinese textiles since Beijing raised export tariffs earlier this month.

Some analysts said in addition to warning the U.S. and the EU that it wouldn't tolerate more protectionist measures, China might be trying to reduce international pressure on it to revalue the yuan.

"This is clearly part of Beijing's negotiating tactics," said J.P. Morgan economist Ben Simpfendorfer. "Beijing is trying to break the attention of the EU and the U.S. down to specific issues."

Many analysts said Monday that following the tariff decision, a yuan revaluation in coming months had become less likely. China has always insisted it won't give into foreign pressure on its currency policy, and is particularly unlikely to do so while it also feels aggrieved over textile trade.

Standard Chartered Bank economist Tai Hui said China's textile decision probably made reform of its exchange rate system more distant.

"What bit of progress which has been made will now be stalled as the three sides enter negotiations, not only over textiles but also trade policy," he said.

In the Shanghai stock market on Monday, most textile shares rose moderately on relief that their profit margins wouldn't be hit by the export tariffs. Shenzhen Textile Holdings Co. rose 1.7% in a soft overall market, while Luthai Textile Joint Stock Co. gained 2.3%.

However, analysts said investors' relief could prove short-lived if the EU and the U.S. responded to China's decision by imposing fresh restrictions on Chinese textiles.

According to EU figures, Europe's imports of Chinese T-shirts soared 187% from a year earlier in the first four months of 2005, while flax yarn imports jumped 56%.

There was no immediate comment from the Beijing office of the EU, while the U.S. embassy was closed for a U.S. holiday.