June 24 (Bloomberg) -- The European Union may this weekend step up pressure on China to let the yuan appreciate and curb export growth, as the 25-nation bloc confronts a widening trade deficit and calls for protectionism at home.

EU and Asian finance ministers will hold talks at the Asia- Europe Meeting (ASEM) in the coastal city of Tianjin, east of Beijing, on June 25 and 26. The EU's trade deficit with China last year surged to a record, partly because a strengthening of the euro made European goods more expensive abroad.

The growing flood of cheaper products from Asian nations has sparked calls from some EU industry groups and politicians for the bloc to raise import barriers and push for China to drop its decade-old peg to the U.S. dollar. Some economists say the EU needs to focus on boosting its own competitiveness rather than seeking to sway policy in faster-growing Asian economies.

``The deficit has continued to get worse and there's no sign of it turning,'' said Robert Subbaraman, Tokyo-based senior economist at Lehman Brothers Japan Inc. ``One route is to jump up and down and have trade wars, and that's in no one's interest. The other is to try to adapt to the rise of China and India and other emerging economies.''

Europe's trade deficit with China soared by a fifth to 78.7 billion euros ($95.2 billion) last year, according to the European Commission. The Chinese yuan's value is fixed at 8.3 to the dollar, meaning its value declined as the dollar slid 9 percent last year against the euro.

Rising Protectionism

European Union Trade Commissioner Peter Mandelson on June 16 warned there were signs of a ``rising tide of protectionism'' in the EU as the region struggles to compete with Asian economies.

Such concerns didn't stop him from threatening to impose restrictions on Chinese textile exports earlier this year. China on June 11 agreed to limit annual export growth of 10 textile products to the EU to between 8 percent and 12.5 percent through 2007. Mandelson has also said he may impose tariffs on shoe imports, and battles loom over products ranging from bicycles and lamps to strawberries and tinned mandarin oranges.

For some European politicians, such moves go nowhere near far enough. In regional elections in April, Italy's Northern League party ran with slogans saying ``Made in China? No thanks!''

``No one has any interest in opening a trade war with China,'' said Paolo Zegna, co-chief executive of suit maker Ermenegildo Zegna SpA and president of Italy's textile association. ``But there is no denying the abnormality of the influx of Chinese goods, and the EU's unwillingness to impose safeguards is at the base of this.''

Competitiveness

Andy Scott, director of international competitiveness at the London-based Confederation of British Industry, said imposing limits on Asian exports can't form part of any long-term solutions to the EU's economic woes. European nations should focus instead of loosening up domestic labor laws, while putting pressure on China to protect intellectual property rights and dismantle its own regulatory barriers, he said.

``The way not to go is taking an overtly protectionist route,'' Scott said. ``Europe has to be competitive and internationally focused. It doesn't support your long-run ability to be competitive by in the short run putting up barriers.''

A trade war would do little to help European companies such as retailer Carrefour SA and Dutch corporation Royal Philips Electronics NV, which are expanding in Asia.

Carrefour, Europe's biggest retailer, said in March that half the new stores it plans to open this year and next will be in Asia. As of March 31, the French company had 59 so-called hypermarkets in China alone.

Chinese Factories

Philips, which sells products ranging from semiconductors and televisions to shavers, said on April 20 sales derived from China jumped 20 percent to $9 billion last year. Exports of goods made in China accounted for 60 percent of the total and domestic sales 40 percent, the company said.

The Organization for Economic Cooperation and Development forecasts China's economy will expand 9 percent this year after 9.5 percent growth in each of the past two years. The European Union's $12 trillion economy grew at a quarter of that pace last year, expanding 2.3 percent. Japan reported 2.7 percent growth and the U.S. a 4.4 percent expansion.

Cost-cutting efforts at companies such as Fiamm SpA, the world's largest maker of car horns, highlight the extent of the pressures confronting European manufacturers. Last year the Italian business shut down two plants in Evreux, France, moving production to India, and it plans to cut several hundred jobs in Italy this year as it grapples with higher labor costs.

`Dramatic Situation'

``There's no doubt Italy's industry is in a dramatic situation never seen before,'' said Giulio Dolcetta, the company's president. ``Italy has lost competitiveness not just towards Eastern Europe and Asia but towards Western Europe as well. We are the least efficient in an already inefficient continent.''

The U.S.'s trade gap with the world's most populous nation far exceeds Europe's at $162 billion. That has prompted U.S. congressmen to call for a clampdown on Chinese imports and complain that the yuan's peg to the dollar has contributed to the loss of 1.1 million factory jobs in the past three years.

China has said it will move to a flexible exchange rate in its own time. While such a move might help some European producers ``at the margin,'' it won't obviate the need for more profound reforms on the continent, said Lehman's Subbaraman.

And while gains in Asian currencies against the euro might help exporters, increased prices of imports from China and other nations would do little to boost European consumer demand and might add to inflationary pressures at home.

Divided Europe

Meanwhile, the prospects for domestic reforms in European economies seem remote. EU ministers will walk into meetings with their Asian counterparts divided over issues ranging from the bloc's budget to its constitution, which was rejected by French and Dutch voters in referendums.

The U.K., backed by the Netherlands, last week blocked the EU's seven-year financing package worth 105 billion euros, fueling fresh doubts about the management of the EU. Such divisions also place a question mark over the ability of the bloc's finance ministers to present a united front to the Chinese in meetings this weekend.

``Chinese competition will turn up the heat on Europe to reform its economies,'' said Katinka Barysch, chief economist at the Centre for European Reform in Brussels. ``China will sooner or later move into the kinds of goods we are trying to be competitive in. We need to have a strategic debate in Europe about how we deal with a rising China.''

To contact the reporter on this story: Sam Fleming in London at sfleming5@bloomberg.net

Last Updated: June 23, 2005 12:01 EDT