After the quota

As Chinese textile manufacturers near their caps on certain garment exports to Europe, many of them are wondering how it has come to this. After all, they argue, Europe and the US have had 10 years to prepare for the new era of quota-free textile trade that began this year, as had been agreed upon at the close of the Uruguay Round talks that created the WTO back in 1994.

Effective July 20, China's textile manufacturers began exporting to the EU under provisional quota allocation measures to ensure its textile shipments stay within an annual 8-12.5% growth rate until 2008 (at this writing, China has yet to reach a similar textile deal with the US). The quota left for allocation are not large, because they had been used up earlier this year when it was a free-for-all, before the restrictions set in.

There's a lot at stake here. China is the world's biggest textile manufacturer and exporter, employing 19m workers to make 17% of the clothing worn in the world. Textiles and garments command 16%-the largest share-of China's total exports. The industry, which earned US$193bn last year, half of it from exports, plays an important role in the earning of foreign exchange.

Action and reaction
Shen Bin, general manager of the Shanghai-based Three Gun, which bills itself as the biggest textile and underwear maker in China, told the CHINA ECONOMIC REVIEW with a resigned bitterness that the course of events has been unfair to China and will prove counterproductive to everyone. "Unilateral anti-dumping measures will not only damage the Chinese textile industry but also disrupt the US and EU's supply chain," he said.

Indeed, some European retailers are already seeing disruption of supplies. Held-up orders at ports or airports and panicked retailers wondering where they will fill their fall or winter requirements have been widely reported. According to The Wall Street Journal, buyers for Germany's Metro AG have been told to stop doing new deals in China as the retail giant seek new suppliers. The German Textile Retailing Federation and the German Fashion Manufacturers. Association said in August that this year's quota for pullovers has already been exhausted and other products appear to be close to the limit. The trade groups said retailers had signed deals anticipating the full opening of the EU market to Chinese textiles and placed orders based on that assumption. They now estimate losses to retailers could exceed US$120m as consumers face higher prices amid shortages and lower sales levels.

For Shen, the bitterness he harbors arises from a sense of unfairness. "The foreign importers want the prices to be as low as possible; the foreign consumers love the low-cost, high-quality Chinese goods, but the foreign governments, like the US, blame China for dumping," he said.

Shen also points out that China's textile trade with the US is not strictly one way, as China's textile makers like himself import capital equipment and raw materials from the States. Shen says Three Gun imported US$1m in nylon, yarn and other fibers from US-based Dupont last year. Cotton is another staple which China's textile makers source from the US, and that trade could grow as demand from China's burgeoning textile sector outstrips the country's cotton supplies. Last year, China imported over US$1.4bn in US cotton, nearly double that of 2003.

Many industry insiders, including Shen, say western pressure on China's textile industry is politically motivated and the negotiations are merely a cover for securing other concessions from China, such as a yuan revaluation and increased access to still-restricted domestic markets. Felix Ung, chair of the Hong Kong Apparel Society, remarked that in the US, textile workers now number only a few hundred thousand, yet Washington appeared ready to risk a trade war with China "as though millions of jobs were at stake".

CAFTA, the Central America Free Trade Agreement, is the other factor. The US doesn't want China to steal away the garment-making business from Honduras and El Salvador, because its southern neighbors, which specialize in labor-intensive sewing, are big customers of US textile makers, having spent US$2.4bn on US textiles last year. Thus a "Made in Honduras" shirt might contain 60% US thread, while a "Made in China" shirt would likely contain none.

China's advantages
Industry observers and insiders say China's textile industry has succeeded on the back of the country's dedicated workforce. "The Chinese are very hard-working," Shen said. "You look at the Europeans who saunter into work only after they five had several cups of coffee and you wonder why we're ahead."

Linda Lim, a business professor at the University of Michigan, would agree with that assessment. Lim argued in a paper published earlier this year by the Yale Center for the Study of Globalization that one reason China's textile industry is winning is its highly productive and motivated workforce, and not-as widely believed-because of its abundant low-cost labor. Chinese factories also enjoy economies of scale, a byproduct of a large production base that continues to scale up to meet rising domestic and over-seas demand. Another factor, according to Lim, is China's increasingly integrated industrial base, which allows local sourcing of many of the materials, thereby reducing risks, costs and lead-times.

And, as pointed out by many, China's well-developed infrastructure, including its world-class ports gives it another edge by cutting the delivery times of imports and exports. According to Ung of the Hong Kong Apparel Society, the number of days it takes to ship from Shanghai to the US is 12-14 days, compared to 45 days for goods from India and Pakistan to reach the US. Finally, China has another advantage not available to western competitors: direct state subsidies such as bank loans and export tax rebates that some trade experts have characterized as questionable or illegal under WTO rules.

Looking forward; industry realigns
The answer for Western countries, says Shen, is to exit the textile sector and develop those industries in which they own distinct advantages. As for China's textile industry, garment makers are now eyeing other markets for production, including the Middle East and Africa, while strong domestic demand continues to boost industry sales.

Still, the recent challenges present opportunities for an industry-wide realignment. "Because of the quota, the mainland textile industry will begin to restructure assets and adjust itself," says Zhang Hanlin, director of the Research Institute on the World Trade Organization with China's University of International Business and Economics. "It may cause some job losses, but it won't be too serious and might be good for the health of the industry."

China's Chamber of Commerce for Import and Export of Textiles estimates about 30% of the 19m textile workers will lose their jobs this year. Seen from another perspective, every US$100m drop in the industry's exports will cost 7,000 jobs, according to the China National Textile and Apparel Council. Given the recent yuan revaluation, and thin profit margins in the 3-4% range, layoffs could be imminent, say experts. The mandated EU growth cap will also drive Chinese producers up-market, as the cap is on low-value, mass-market products, including briefs and cotton shirts. Indeed, China's government is aiming to encourage the industry to produce branded apparel through design, innovation and quality.

But, in the end, Zhang argues that multi-lateral engagement is the path to success. "It's not important whether the EU market fully opens to the Mainland in 2008 or not," he said. "The key is for mainland textile and garment makers to form JVs with EU or US makers, to move the R&D base to the EU or US, and put the production base in China. Only then is there cooperation to allow us to achieve a win-win situation."