US embassy cable - 03ROME4236

UNCLAS  ROME 004236 
 
SIPDIS 
 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREASURY FOR OASIA HARLOW, STUART, 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
STATE ALSO PASS USTR 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, IT, CH, EXPORT CONTROLS 
SUBJECT: FINANCE MINISTER TREMONTI AND THE "CHINA THREAT" 
 
REF: ROME 2853 
 
1. Summary: The weakness of export markets and a perceived 
loss of Italian competitiveness have fueled a summer-long 
debate in Italy on the "trade threat" posed by China.  The 
debate, led by Finance Minister Giulio Tremonti and his close 
ally, Northern League leader Umberto Bossi, has highlighted 
allegedly "unfair" Chinese trade policies.  Promptly 
disavowed by the PM and the other parties of the GOI 
majority, the debate did not affect Italian positions at the 
Cancun Ministerial. Tremonti did, however, raise it again at 
the informal EcoFin meeting in Stresa, and intends to raise 
the issue at the September 20th G7 finance ministers, 
meeting in Dubai.  In the interest of business trade and 
investment relations with China, other elements in the GOI 
are working to calm the polemics.  End Summary. 
 
Poor performance of Italian exports 
----------------------------------- 
 
2. Italian exports have done poorly during 2003.  According 
to the latest ISTAT CIF/FOB statistics, exports decreased by 
2.8 percent in the period January-June 2003 over the 
corresponding period in 2002, while imports increased by 2.3 
percent over the corresponding period in 2002.  These trends 
produced a E4.3 billion trade deficit in the first half of 
2003, compared to a E2.3 billion surplus in the comparable 
period in 2002.  The worsening of the trade balance also 
negatively affected the current account deficit, which 
reached E14.5 billion at the end of the period January-June 
2003, more than twice the deficit of E6.3 billion registered 
at the end of June 2002.  The weakness of Italian exports and 
the loss of competitiveness are serious problems for an 
export-led country where exports account for 25 percent of 
GDP.  According to both government and industry economists, 
the lack of investment in technology has reduced the 
competitiveness of Italian exports and aggravated their 
sensitivity to exchange rate fluctuations. In addition, 
Italian exports were hit by the euro,s appreciation against 
the dollar in the first eight months of this year. 
 
Summer debate on the "Chinese threat" 
--------------------------------------- 
 
3. Italy's exports to China dropped by 39.9 percent from 
July 2003 to July 2002, and Italy,s imports from China 
increased by 12.7 percent during this period.  For the seven 
months through July 2003, Italian exports to China decreased 
6.3 percent, while imports from China increased by 18.2 
percent, producing a E3.6 billion trade deficit. Italy's 
trade deficit with China has worsened each year from 1998 to 
2002, rising from E2.5 billion to E4.3 billion.  During the 
same period, however, two-way trade more than doubled from 
E6.1 billion to E12.3 billion. 
 
4. In mid-August, Northern League leader Umberto Bossi, a 
junior member of the GOI coalition and Minister of 
Institutional Reforms, called for "appropriate measures" to 
be taken against Chinese products to defend Italian exports. 
He spoke of implementing customs duties on behalf of small 
northern Italian entrepreneurs, the core of his political 
electorate, who are potentially threatened by the allegedly 
aggressive Chinese trade policy.  The following day, PM 
Berlusconi and Deputy Minister Urso disavowed Bossi, 
maintaining that WTO agreements do not permit the EU to 
impose additional customs duties against China.  Note: There 
are 61 antidumping customs duties currently imposed on non-EU 
production, 32 of which apply to Chinese products. End Note. 
 
5. Subsequently, Finance Minister Tremonti stated several 
times that the EU should implement appropriate measures 
to defend not only Italian and EU production, but the 
industries of all developed western countries, against the 
Chinese threat and to ensure "rules based trade."  In an 
 
interview with popular magazine Panorama, (and promptly 
echoed by the Italian dailies) Tremonti recommended that 
"Europe should do what America, the home of free-trade, has 
long done successfully.  In other words, protect the domestic 
market and national production, not only with customs duties, 
but also through indirect measures, such as food safety, 
health, environmental and labor standards, to control the 
entry of products from the Far East." 
 
6. In the Panorama interview Tremonti also raised Chinese 
intellectual property rights violations, such as the "CE" 
(China Exports) seal put on Chinese exports, which appears 
identical to the European Union "CE" seal put on products 
manufactured according to EU labor, health and environmental 
regulations.  Tremonti charged that the similarity of the two 
seals creates intentional confusion for consumers.  He also 
expressed serious concern that aggressive (and unfair) 
Chinese competition would not stop at mature and low 
technology products, but soon would hit high technology goods 
and services that are now the monopoly of advanced western 
economies. Comment: In the interview Tremonti ignored the 
role that Italy's lack of investment in research and 
development has played in the decline in competitiveness of 
Italian exports, preferring instead to focus on foreign ) 
and particularly Chinese ) competitive practices.  End 
Comment. 
 
Italy's official position 
------------------------- 
 
7. On August 26 Carlo Monticelli, Senior Director in the 
Finance Ministry's international department in charge of the 
EU presidency, told Emboffs that Tremonti would not 
officially include in the agenda of the September 12-13 
EcoFin meeting in Stresa any specific issue regarding China. 
Nonetheless, we understand that China's currency value was, 
in fact, debated at the informal ECOFIN, reported SEPTEL. 
Tremonti has asked various experts to analyze the "Chinese 
problem" and its effects, and Monticelli said that Tremonti 
would likely raise this issue when G7 Finance Ministers 
assemble prior to the annual IMF/World Bank meetings in Dubai 
on September 23-24.  He said that China's unfair trade 
practices had already been discussed in a G7 forum 
(specifically citing a G7 meeting in France in February). 
Moreover, Monticelli argued that other G7 member countries 
are interested in this issue. 
 
8. Monticelli's statements, however, stand in contrast to 
the negative reactions to the Tremonti proposal elsewhere 
within the Italian Government and with some other EU 
governments and the Commission.  EU Trade Commissioner 
Lamy,s spokesperson has denied that, at the EU level, there 
exists a case against China for "unfair competition."  At 
the GOI level, PM Berlusconi is expected to visit China at 
the end of October, during Italy's EU presidency, and he is 
expected to sign an agreement on tourism.  Approximately 100 
million Chinese are estimated to have the financial resources 
to visit Europe, and Italy is considered a popular 
destination.  In November, a bilateral EU-China trade summit 
is scheduled in Taormina, Italy -- foreign direct investment 
flows will be a theme, with the aim of increasing both 
European investment in China and Chinese investment in 
Europe. 
 
9. Comment: Despite the negative trends in bilateral trade 
flows and the Italian media hype, the "Chinese threat" 
raised by Tremonti has not captured the support of the 
governing coalition as a whole.  At the moment it appears to 
be merely a personal view, albeit one held by Italy,s most 
important economic official, and by Northern League head 
Bossi (reported Milan SEPTEL).  Given the complexity and the 
scope of the Chinese-Italian relationship, the official GOI 
position leans toward a positive approach to China in order 
to avoid retaliation.  Several Italian companies invest and 
produce directly in China, and a protectionist crusade with 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREASURY FOR OASIA HARLOW, STUART, 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
STATE ALSO PASS USTR 
GENEVA FOR USTR 
 
E 
 
the imposition of customs duties on Chinese products would 
adversely affect Italian companies operating in China. 
Nevertheless, it is likely that at the Dubai G7 meeting 
Tremonti will raise his personal views.  He might call for 
adoption by China and other developing countries of 
environmental and social standards generally accepted by 
western countries.  End Comment. 
 
Sembler 
SEMBLER 
 
 
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 2003ROME04236 - Classification: UNCLASSIFIED