WSJA(10/23) China Worries Downturn May Spur Protectionism

BEIJING -- With the world's major economies headed toward recession, China is starting to worry that its flashy trade surplus will elicit a protectionist backlash.

The topic will be raised at the Asia-Europe Meeting opening Friday, an annual summit of top leaders from the two regions. According to diplomats preparing the two-day meeting, protectionism and ways of alleviating the current financial crisis will be two key topics discussed.

European leaders have said they will use the meeting to promote a global system of financial regulation. French President Nicolas Sarkozy has expressed confidence he could win China's support for the effort, which could serve as a possible counterweight to U.S. resistance.

A Chinese government spokesman said Wednesday the meeting will be a "perfect platform" to discuss the crisis. Chinese leaders have also taken a keen interest in U.S. efforts to manage the crisis. On Tuesday evening, Chinese President Hu Jintao told U.S. President George W. Bush he hoped U.S. moves to stabilize its financial markets will restore investor confidence and prevent the financial crisis from spreading to the wider economy, according to the government-run Xinhua news agency.

China's financial institutions -- most of which are state-owned -- are relatively insulated from outside shocks, thanks to heavier regulation and government controls. That makes protectionism the greater worry for China.

In recent talks with senior Chinese officials, World Trade Organization Director-General Pascal Lamy said Chinese officials raised concerns about protectionism. "In their view there's a risk of it reviving," Mr. Lamy said in an interview in Beijing.

That has been reflected by pronouncements of senior officials and discussions in the state-run media. The Chinese official in charge of economic crisis management, Wang Qishan, said China wants a new round of trade talks to succeed and "firmly" opposes protectionism.

Part of China's concerns lie in its trade imbalance. Growth in exports has remained stable, but growth in imports has been slowing. That has helped give China a record $29.4 billion trade surplus in September, helping to drive foreign-exchange reserves toward $2 trillion.

The global slowdown could accelerate this pace. China's products are primarily low-cost, so tend to sell well during hard times. In past recessions, Chinese-made products have gained market share in the U.S. and could do so elsewhere as well, economists say.

"Made in China is the favored brand of worried Western consumers," said Ben Simpfendorfer, an economist with Royal Bank of Scotland. "We think they will gain significant market share in the euro area. They gained significant market share in the U.S. during the last global slowdown."

Although a pickup in demand would be good news for China's exporters, that dynamic helped to spur previous calls for protection against Chinese imports. This time, Chinese officials are worried that those calls could yield action damaging to China, particularly from the U.S.

Mei Xinyu, a trade researcher at China's Ministry of Commerce, said protectionist calls are likely to come from the U.S. if manufacturing there continues to erode. "We need to sound the alarm bell" even before protectionist calls start, Mr. Mei said.

Protectionist sentiment could also manifest itself in calls for China to stimulate domestic demand in order to boost imports.

In Europe, with manufacturing already depleted, low-cost Chinese goods are seen to help retailers and consumers more than they trigger job losses. The EU recently extended antidumping tariffs on Chinese shoe imports but declined to set new tariffs on Chinese steel.

China's concern about protectionism helps to explain its eagerness to complete the current round of global trade negotiations.

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John W. Miller, Ellen Zhu and Andrew Batson contributed to this article.