Free trade, sort of

Or does galloping development so compress the calendar that a China-year represents three or four anywhere else? It is difficult to know, but what seems clear is that China is forcing the world to move faster.

It took years to draw up the Rube Goldberg construct known as the Multi-Fiber Agreement (MFA) and the assorted add-ons that gave rise to textile quotas, and years to draw up a 10-year schedule for removing them and only months to reinstitute them.

Textile flood
In the first three months of the quota-free era, China's exports of sweaters and trousers to the European Union shot up 400% year on year. The United States market was so overwhelmed by bras, socks and other products that it almost immediately imposed a 7.5% growth restriction on seven different items; cresting imports also reenergized calls for Beijing to do something about its cheap currency, or face further sanctions. The import restrictions came, despite repeated promises by US officials to refrain from invoking "safeguards" that would effectively reintroduce quotas.

Hardly surprising, relations with Europe had soured over export surges. But last month – at writing, details were few and unofficial – the European Union and China agreed to limit export growth by different percentages depending on the article through to 2008, when quotas are supposed to come off for real.

This breathing space conceivably leaves enough time for the EU to figure out what to do with its surviving producers and their doomed employees; a distant hope, perhaps, is that European manufacturers consolidate around Turkey, the big serious player in that part of the world, should the Turks be admitted to the EU by then.

China's commerce minister, Bo Xilai, obviously a man with a robust sense of humor, slid one last garment through just as June's deal was being signed – saluting the compromise struck in Shanghai by giving EU Trade Commissioner Peter Mandelson a made-in-China polo shirt.

Mandelson called the accord a win-win-win agreement. Trade lobbyist Margery Kraus, CEO of Washington-based APCO, might dispute the contention. She has argued in the pages of this magazine that if one adds up all the people who benefit from imports freely moving into a market – shippers, transporters, retailers in this case, and not least consumers – and compare that number to all the people in the protected industry, the result is more likely to be lose-lose: a loss for all Europeans except those specifically in the industry, and a loss for all those Chinese who benefit from rising textile and apparel exports.

But to look at June's Sino-European accord from the narrow window of the rag trade – which, in fact, employs one Australian in China – is to risk missing the bigger picture. While the deal may make a joke of free trade, compromise brings its benefits, and one of them is this: considering the potential it has to flatten the competition, China demonstrated an impressive capacity to surrender rights it had been promised for 10 years. The example should give Europeans pause when they next accuse China of coming up short on meeting its WTO commitments delaying the opening up of this or that industry.

Compared to its first-world trade partners, China has been taking the big hits in its shift to a market economy. Chinese, in their many tens of millions, have lost their jobs in the undoing of state-owned enterprises. Double-digit unemployment, alarming though it may be in some parts of Europe, is nothing compared to China's army of unemployed and underemployed. The situations simply do not compare. So when China lets go of the abundant opportunities the market-driven world promised, it is an especially significant sacrifice.

Shanghai, Beijing and a few other big cities may glitter, but many are rather still coping with the wrecks of the old economy. Since foreign media are for the most part mesmerized by the glitter, their readers are given a skewed version of China's reality.

In a fast world, everyone must stay gripped to the learning curve. "In the past 10 years," Mr. Bo was quoted as saying in one report, "not only have China and EU economic and trade relations taken a big leap and the EU has become the largest economic partner of China, but we have learned to find ways to solve our differences."

Auto sector shock
Problem-solving skills will be needed in a host of areas; textiles and garments represent only one of several sectors that are in for a shock. Restructuring is well underway in the US auto sector, where General Motors last month announced plans to lay off another 25,000 auto workers over the next three years – this on top of 30,000 laid off since 2000. While GM, Ford and others lay off more workers and shut down more plants, they will continue efforts to expand manufacturing capacity in China, where automakers are not weighed down by the unsustainable insurance, health and retirement costs they have to cover in its home market.

Even the US government has warned Detroit that Chinese auto imports will be arriving in volume before the decade is out. But if anyone needed any warning of what the future holds, the Ford Motor Co provided it. In a study it commissioned in 2003, Ford said Asia's annual auto-making capacity (excluding Japan, and meaning essentially South Korea and China) would rise to 6.8m vehicles, by which time North American capacity would be less than 1m.

Emerging markets
The Ford study also pointed out that emerging markets would represent 90% of vehicle sales growth over the next decade, making big health insurance and other benefit payouts all the less sustainable. As the big automakers continue efforts to drive down costs in their home markets, they will whittle away at worker benefits through renegotiation, of course, but they will also force their suppliers to produce cheaper components.

Increasingly their suppliers will source these in China, from their own plants that are shifting over to China now, or subcontracted suppliers, who will keep building up their Mainland manufacturing bases to accommodate ever more orders. The more components made to world-class standard in China, the more viable and competitive China becomes as an exporter. In short, saving the North American auto industry by sourcing cheaper parts in China will ultimately lead to its undoing.

These processes have been under way for some time. But judging by the shock and consternation with which mainline US media greeted textile trade figures after 10 years' warning, it is a good bet they and the American public won't know what hit them when the first Chinese cars start rolling into Long Beach, Seattle and New York.

The Associated Press last month reported on an Ipsos-Reid poll suggesting that two-thirds of Americans are now of the opinion that China is a serious economic threat, especially where jobs are concerned. Half the Canadians polled in the North American sample felt the same way, and about half those polled in both countries expressed concern over China's rising investment in their countries.

For the Canadians, the news wasn't all bad; for many, growing trade with China opens up new export possibilities and lessens the country's huge dependence on US trade, which always weighs heavily on foreign policy questions – as it did when then Prime Minister Jean Chretien declined Washington's invitation to join in the Iraq war.

Let's hope the world draws some lessons from sorting out textiles so that the machinery of free trade is in better repair for the next onslaught, be that cars, turbo-powered butter knives or Chairman Mao dolls.