Peking set to defy US ultimatum over trade

Hong Kong and Taiwan, the biggest investors in China, yesterday voiced fears that their economies would be caught in a trade war between Washington and Peking after President Bill Clinton's administration gave China a three-week ultimatum to stop unfair trading practices or face retaliation.

Peking said it would impose similar sanctions on US goods to defend its "sovereignty and national dignity". Yesterday's People's Daily, China's official mouthpiece, warned that "pressure and reprisals are worthless".

The stage was set for an eleventh-hour round of bargaining to avert a trade war after the failure of nearly 20 months of negotiations between American and Chinese officials.But, if talks fail on 26 February, China will face a doubling of tariffs on more than $1bn (£.650m) of Chinese goods exported annually to the US, the toughest retaliatory trade sanctions that Washington has ever imposed.

"We are drawing the line right here today," said Mickey Kantor, the US Trade Representative. "We cannot stand by while the interests of our fastest growing, most competitive industries are sacrificed in China." Referring to demands for Peking to shut to down factories producing pirated goods, Mr Kantor added: "The Chinese know what they have to do."

One hour later, China carried out its threat to "counter-retaliate". The Ministry of Foreign Trade and Economic Co-operation (Moftec) issued a list of US imports to China that would carry 100 per cent tariffs, also from 26 February. The statement said the country felt both "great regre...and strong resentment" over the US move.

The US wants enforcement of existing Chinese laws protecting copyrights, patents and trademarks. US exporters are losing hundreds of millions of dollars of business because Chinese manufacturers pirate US video films, pharmaceutical products and compact discs and, according to US officials, sell them in China and in the Far East. The US wants China to clamp down on 29 factories that produce 75 million counterfeit compact discs and laser discs a year.

The key question is whether the two sides re-open a dialogue. "At the moment, it is more a war of nerves than a trade war," said one observer in Peking. Mr Kantor stressed that the invitation remained open for further talks over the next three weeks.

Chinese negotiators have a history of waiting until the eleventh hour before reaching an agreement. The difficulty for Peking is that many of the factories that Washington wants closed are owned by or linked to local governments in the south, which increasingly ignore edicts from Peking.

Chinese leaders have presented the copyright row as an issue of sovereignty. Nationalism is a powerful unifying force and the leadership may feel that a foreign adversary will shift the focus from domestic economic problems. As Chinese leaders jockey forposition ahead of the death of Deng Xiaoping, no one wants to appear to give in to US threats.

A fully-fledged trade war would have a serious impact on Chinese-US relations and both sides would bear the economic consquences. The Chinese exports that would be affected are a small fraction of China's estimated $30bn trade surplus with the US. Products under threat include picture frames, baseball card-holders, answering machines, cellular phones and sports goods. Mr Kantor said he chose products which were not used to make goods in the US.

He said Chinese toys had been excluded from the list. An unnamed Clinton administration official told the New York Times that domestic political considerations had come into play, saying: "It didn't take a political genius to see that we would be blamed for taking toys out of the hands of little kids."

Increased tariffs on the listed goods could affect US consumers as well as Chinese exporters. But, the Clinton administration's initiative won immediate support from US business circles and congressional Republicans. Newt Gingrich, Republican Speaker of the House of Representatives, said he backed the administration "in being very direct and very tough with the Chinese because there seems to be a massive level of pirating of US rights".

Trade "cannot be a one-way street", Mr Gingrich said. "They can't cheat us and expect us to have our markets open".

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