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Cablegate: China Responds to U.S. Trade Concerns Over Steel and Yellow

VZCZCXRO8635
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4307 3300121
ZNR UUUUU ZZH
O 250121Z NOV 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1022
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE

UNCLAS BEIJING 004307

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD AND KEMP
DEPT OF COMMERCE FOR DAVID SPOONER, RONALD LORENTZEN AND MATTHEW
PRIEST

E.O. 12958: N/A
TAGS: EMIN ETRD EIND CH
SUBJECT: CHINA RESPONDS TO U.S. TRADE CONCERNS OVER STEEL AND YELLOW
PHOSPOROUS

REF: BEIJING 4304

1.(SBU) SUMMARY: Chinese Ministry of Commerce Director General of
Foreign Trade Wang Shouwen responded to U.S. concerns regarding
steel and yellow phosphorous. DG Wang's response suggested that
China would review the high export tariff for yellow phosphorous,
but he firmly reiterated China's policy stance on steel product
export duties and VAT rebates. END SUMMARY.

2. (SBU) At a November 18, 2008, meeting requested by Director
General Wang Shouwen of the Department of Foreign Trade at the
Chinese Ministry of Commerce (MOFCOM) to discuss the U.S.-China
Memorandum of Understanding on Textile and Apparel Products
(reftel), Minister Counselor for Trade Affairs Christopher Adams
raised two issues of concern to the U.S. side regarding trade in
steel products and yellow phosphorus.

Change Unlikely in Steel Policy
-------------------------------

3. (SBU) MC Adams addressed China's recent decision to remove export
duties and increase VAT export rebates on steel products. He
reiterated the U.S. side's concern that the Chinese government seems
to implement such policies in a selective manner, resulting in
increased exports of downstream steel products. MC Adams cited the
U.S. industry presentation during the U.S.-China Steel Dialogue in
October, as well as follow-up information, which explained the
imbalance created by the Chinese government's policy of taxing
exports of wire rod but giving a VAT export rebate for downstream
wire rod products. MC Adams emphasized that U.S. wire producers may
pursue litigation if the matter is not resolved.

4. (SBU) DG Wang responded that following the Steel Dialogue, the
Chinese government considered they had two options: to either
retain the VAT export rebate for all wire/wire products, although
the U.S. side would not approve of such action, or to take the
recent actions of lowering/removing export tariffs and increasing
the VAT export rebates. However, DG Wang said he would further
discuss the matter with other ministries that comprise the State
Council's Tariff Committee.

Possible Action on Yellow Phosphorus
------------------------------------

5. (SBU) Regarding yellow phosphorus, MC Adams acknowledged China's
decrease of the recent "special" export duty from 100 percent to 75
percent, but pointed out that the total duty on this product remains
at 95 percent, which is extremely high, hurting American users. He
pointed out that yellow phosphorus is not used in the production of
phosphate fertilizers, an explanation the Chinese had earlier tried
to use to justify the sudden duty imposition. Therefore the Chinese
government's tax will not be effective in ensuring China's supply of
fertilizer, particularly because there is no tax on downstream
products.

6. (SBU) DG Wang explained that although yellow phosphorus is not
used to produce fertilizer, phosphorus rock is used for production
of both phosphate fertilizer and yellow phosphorus. He said the
portion used for production of yellow phosphorous is very small
compared to that used in fertilizer production. MC Adams noted that
this suggested there was no need to restrict exports of yellow
phosphorous in order to ensure fertilizer supply. DG Wang
acknowledged that other countries have also raised concerns
regarding this policy and said the Chinese government would consider
whether further action was warranted.

7. (SBU) COMMENT: DG Wang's remarks suggested that the Chinese side
would stand firm regarding current export tariff/VAT export rebate
policy on steel products, including for wire products. However, DG
Wang appeared to suggest that a change in policy on yellow
phosphorus was possible. END COMMENT.

RANDT

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