Oct. 4 (Bloomberg) -- The European Union imposed duties on 9.7 billion euros ($12.3 billion) of Chinese and Vietnamese shoes and sneakers, escalating a trade conflict as Europe's deficit soars.

The EU's 25 governments applied two-year tariffs of 16.5 percent on some leather shoes from China and 10 percent on shipments from Vietnam. The bloc accuses China and Vietnam of selling footwear in Europe at unfairly low prices that harm its shoemakers and justify EU retaliation.

``It's a huge disappointment for all proponents of free trade,'' said Alisdair Gray, director of the British Retail Consortium in Brussels, which represents companies including C&J Clark Ltd. and Timberland Co. ``This won't save a single job in Europe, nor will it stop manufacturing jobs shifting to China.''

China supplied half of the 2.5 billion pairs of shoes sold in Europe last year, helping drive the EU's trade deficit with the Asian nation to a record 57.6 billion euros in the first half of the year. Last month, the EU joined the U.S. and Canada in what would be the first World Trade Organization case litigated against China, asking the WTO to outlaw Chinese regulations that raise import duties on automobile parts.

China's sales of 86.9 billion euros in the first six months made it the No. 2 exporter to Europe, just under the U.S.'s 89.8 billion euros.

`Clear Line of Thinking'

Today's decision to impose duties for two years rather than the standard five ``would indicate a clear line of thinking among our member states and not a protectionist line,'' EU Trade Commissioner Peter Mandelson told reporters in Brussels. ``If we are going to stand up for free trade, it's important we keep in place proper defenses against unfair trade.''

The EU and the U.S. have also complained that the Chinese government is failing to clamp down on the counterfeiting of brand-name products and limiting foreign companies' access. Mandelson today pledged new steps to open China's market to European exporters, fight low-cost competition and crack down on counterfeiters of European products.

While the EU has frequently used anti-dumping duties to limit Chinese exporters' ability to undercut higher-cost European manufacturers, the Bush administration has relied on diplomacy. Treasury Secretary Henry Paulson has visited China to urge the government to allow the yuan to strengthen and was instrumental in persuading U.S. Senators Charles Schumer of New York and Lindsey Graham of South Carolina to drop legislation last week to apply tariffs on Chinese imports.

Yuan

The U.S., whose trade deficit surged to an unprecedented $68 billion in July, is pressuring China to raise the value of its currency, saying the weak yuan makes Chinese products cheaper on world markets. Lawmakers and some U.S. economists say the yuan is as much as 40 percent undervalued.

EU imports of Chinese leather shoes climbed more than fourfold between 2001 and the 12 months through March 2005, raising China's share of the European market to 9 percent from 2.2 percent, according to the European Commission, the EU's executive arm. Vietnam's shipments doubled over the same period, bringing the country's share of the EU market to 14 percent.

The customs duties, which replace temporary levies imposed in April, will be applied to about 174 million pairs of shoes from China and 103 million pairs from Vietnam. Those shoes have an average retail price of 35 euros a pair, the commission calculated in August.

Switching Sides

Calls for protection against Chinese footwear exports came from the EU's 8,000 leather-shoe manufacturers, mainly small businesses concentrated in southern Europe. While four-fifths of the bloc's leather shoes come from Italy, Portugal and Spain, some of those shoemakers employ fewer than 10 people.

Today's 13-12 vote came after months of haggling between EU governments that favor a free market and those seeking to shield domestic industry from foreign rivals. Cyprus and Austria switched sides, giving proponents of the two-year levies enough votes to lock in the duties.

Vietnam is ``not going to accept this decision,'' said Tran Anh Son, deputy director general of the Ministry of Trade's Competition Administration Department. ``We shouldn't have to pay any anti-dumping duties at all because we are not dumping into the EU market,'' he said by telephone from Hanoi.

Vietnam will await the EU's official announcement about the duties and then may send a letter objecting to the decision, Son said. The Vietnamese government has no recourse at the WTO as it's not yet a member of the organization.

Credibility to Suffer

Chong Quan, a spokesman for China's Ministry of Commerce, and Fu Yan, head of the news department at the Beijing-based ministry, couldn't be reached for comment. China's companies are closed from Oct. 1-7 for the National Day holidays.

``Today's decision will damage the credibility of the EU worldwide, as it's unilaterally protecting certain sectors that are no longer competitive and making it more difficult for more competitive suppliers to gain market access,'' Anton Boerner, the president of Germany's BGA exporters' and wholesalers' association, said in a faxed statement.

The EU's existing six-month tariffs end Oct. 7. The bloc began in April to phase in duties up to a maximum 19.4 percent over five months on Chinese leather shoes and 16.8 percent on shipments from Vietnam. Both countries already face 7.5 percent customs duties.

The EU usually approves duties to prevent dumping, the practice of selling in Europe below domestic prices or below the cost of production, for five years.

Separately, in an overhaul of EU trade strategy, Mandelson said he'll push to win Chinese government contracts for European companies and will consider scaling back the use of customs duties to protect European manufacturers.

``We cannot argue for openness from others while sheltering behind barriers of our own,'' he said. ``Our prosperity is directly linked to the openness of markets we try to sell into. China will be the single greatest test of Europe's capacity to make globalization an opportunity for growth and jobs in the years ahead.''

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net

Last Updated: October 4, 2006 10:55 EDT