U.S. Curb on China Imports Raises Retaliation Concern (Update4)
Nov. 20 (Bloomberg) -- The Bush administration's decision to limit textile imports from China is sparking concern among investors about growing protectionism and possible retaliation by the Chinese, including a sale of U.S. Treasuries that might cause the dollar to continue sliding.
China, the third-biggest international investor in Treasuries, may sell some of its holdings following the U.S. move yesterday to restrict imports of brassieres, robes and knit fabric, the Royal Bank of Canada said in a report. The dollar dropped to a record low against the euro Tuesday.
The Commerce Ministry in Beijing said the U.S. was violating free-trade principles. China has postponed a soybean-buying trip to the U.S. because of ``technical problems,'' Foreign Ministry spokesman Liu Jianchao told a press briefing today.
News that the Chinese backed out of the trip triggered a plunge in soybean prices and the biggest decline in wheat futures in eight years.
The U.S. actions ``will be negative for the dollar,'' said Thomas Gallagher, managing director of International Strategy & Investment Group Inc., an economic research firm in Washington. ``Capital usually flows away from countries that engage in bad economic policy like protectionism.''
Steel Tariffs
The move against Chinese textiles came a week after the World Trade Organization ruled that steel tariffs put in place by the Bush administration in 2002 to protect U.S. companies were illegal. The WTO has also ruled against tax credits the U.S. provides to exporters.
China is considering raising tariffs on some U.S. goods, state-run Xinhua news service reported today, citing Ma Xiuhong, vice minister at the Commerce Ministry. A study was underway, the agency said, without identify which goods may be involved.
U.S. Ambassador Clark Randt was summoned to China's foreign ministry yesterday to express Beijing's ``shock and displeasure'' at the U.S. decision, said ministry spokesman Liu.
``U.S. trade barriers could trigger retaliatory dumping of Treasuries by Chinese officials,'' said Monica Fan, a currency strategist in London at RBC Capital Markets, a unit of Canada's largest bank by assets.
A Treasury report this week showed net foreign purchases of U.S. securities fell to the lowest level in five years, raising concern about the U.S.'s ability to finance the deficit in its current account, the broadest measure of trade and investment.
Decision criticized
The U.S. decision drew criticism from Wall Street economists and Robert Rubin, a former Treasury secretary and now vice chairman of Citigroup Inc., the world's biggest financial services company by market value.
``We are going to see an escalation of rhetoric about trade,'' Rubin said after a speech to the Council on Foreign Relations in New York. ``There's more of a threat about this than I thought three months ago. Protectionism would be very damaging to us.''
In a speech in which he didn't specifically mention the textiles decision, St. Louis Federal Reserve President William Poole yesterday also expressed concern about protectionist measures. ``Trade restriction imposes net costs on society'' that outweigh any benefits, Poole told the Louisville Society of Financial Analysts in Kentucky.
U.S. companies such as Boeing Co. and General Electric Co. risk losing contracts worth billions of dollars if Washington's decision to curb Chinese textiles cause relations between the two countries -- already strained in recent months -- to deteriorate.
``Where we place orders for our next planes would rely not just on commercial considerations -- it would also be contingent on relations between our government and the U.S.,'' said Song Chaoyi, a Beijing-based deputy director at State Development and Reform Commission, the country's top planning ministry. ``If the U.S. persists with unfair trade policies, we also might take similar measures to counter them.''
Plane Purchases
China this month agreed to buy 30 planes from Boeing Co. worth ``more than $1 billion,'' Song said. The purchase is part of Beijing's effort to narrow the country's trade gap with the U.S.
U.S. Commerce Secretary Don Evans this month denounced China as a closed market and predicted his country's trade deficit with China would reach a record $130 billion this year. U.S. Treasury Secretary John Snow earlier said he wants China to end its peg of 8.3 yuan to the dollar and let the currency float to make U.S. exports more competitive.
Strategists such as Daniel Katzive at UBS AG in Stamford, Connecticut, said the U.S. currency will continue its decline following the move against China. The U.S. currency has dropped 12 percent against the euro and 8.2 percent against the yen this year.
As of 8:36 a.m. in New York, the dollar had weakened to $1.1924 per euro from $1.1878 late yesterday. It fell to 108.88 yen from 109.32.
The benchmark 4.25 percent note maturing in November 2013 rose 5/32, or $1.56 per $1,000 face amount, to 100 9/32 at 8:33 a.m., according to Lehman Brothers. The yield fell 1 basis point to 4.22 percent.
Soybeans for January delivery fell 28.25 cents, or 3.6 percent, to $7.4875 a bushel on the Chicago Board of Trade. Wheat for March delivery fell 23 cents, or 5.8 percent, to $3.77 a bushel, the biggest one-day percentage decline since February 1996.
`Pandora's Box'
Carl Weinberg, chief economist at High Frequency Economics, an economic-research firm in Valhalla, New York, said the Bush administration had set ``a bad and dangerous precedent'' that would trigger more restrictions.
``Pandora's box has now been opened, and there is no latch on the lid to keep these pernicious restrictions from being extended,'' Weinberg said.
Evans tried to soothe concerns, saying during a trade conference in Miami that the 7.5 percent year-on-year growth limit for imports of the Chinese goods was temporary and that he's open to negotiations.
``We're more than happy to sit down with them and see if there are other ways to work this out,'' he said. ``When you have trade growing as rapidly as we do with China, you're always going to have issues.''
The administration's decision shows that trade will play an increasingly important role as the 2004 presidential election approaches, said Citigroup's Rubin, who was Treasury secretary under President Bill Clinton.
Record Deficit
The U.S. trade deficit with China reached a record $12.7 billion in September. More than 2.6 million manufacturing jobs have been lost since Bush took office, and groups such as the National Association of Manufacturers have placed some blame on unfair trade practices by China.
Evans, Snow and other officials have urged China to open its markets more to U.S. exports and investment.
James Leonard, deputy assistant secretary of Commerce for textiles and apparel, said the textile quotas were not protectionist. ``We didn't pull this out of the woodwork,'' he said.
Leonard said the limits came in response to petitions from the textile industry. The petitions went through a 30-day comment period that included information from the Chinese government and a 60-day review period before a decision was made.
The products affected by the quotas account for only about $600 million of the $11 billion worth of textiles the U.S. imports from China, Leonard said.
`Countries Concerned'
J. Michael Finger, a former World Bank economist now with the American Enterprise Institute, said other nations are likely to follow the U.S. lead and take action against China.
``Countries are concerned about China's export potential,'' he said.
Lloyd Wood, a spokesman for the American Manufacturing Trade Action Coalition, a Washington-based trade group, said his organization is planning to file another petition against China over the import of socks.
Ken Landon, senior currency strategist at Deutsche Bank, said the quotas were a sign the administration was moving away from its strong-dollar policy.
``Because the ultimate protectionist measure is currency depreciation, we believe that yesterday's announcement of new quotas is an important indicator of the true intent of the Bush administration when it comes to dollar policy,'' Landon wrote in his morning research report.
Last Updated: November 20, 2003 08:48 EST |
