Outsourcing production to Chinese textile manufacturers has become increasingly common during this period, but it was in 2005 – the deadline for lifting worldwide textile quotas looming – that foreign producers began arriving in droves. Inevitably, when the quotas were removed, textile exports surged more than 40% in 2005 to US$135 billion, despite protectionist measures imposed by US and European nations in the second half of the year.
Chinese-made clothing was initially allowed nearly unfettered access to the markets of Europe and America, with US imports of underwear more than trebling in the first six months of the year. Cotton shirt imports increased 1350% and cotton pant imports rose by a factor of 15.
The protectionist backlash, initiated as a result of fierce lobbying by US and European producers who feared for their livelihoods, came in legal form. The rich countries raised the stakes in this long-running textiles war by using a loophole in WTO rules to place new maximums on imports from China. In the EU, these limits were reached by mid-year, and suddenly thousands of bras and cotton trousers lay in limbo at the ports. Urgent diplomatic talks were held, resulting in a compromise whereby China agreed to voluntarily limit annual textile increases to 10% until 2008.
The dispute clearly showed that protectionism remains the only defense for the US and European textile industries against the might of their Chinese competitors. But it also awakened Beijing to the importance of shifting its focus to quality over quantity if it hopes to remain in top spot. Research and development at major textile companies accounted for only 0.25% of total sales in 2004, meaning products were less profitable and largely focused on the cheaper end of the market.
As part of an attempt to encourage textile companies to adjust their product mix and turn out more value-added, high-end products, the government raised export tariffs on 74 textile products up to 400% from June 1, 2005. It also plans to help domestic textile firms establish trade cooperation zones overseas, particularly in developing countries, as well as foreign-based R&D, production and sales centers.
China's textile production tends to be concentrated on the coastal areas. Guangdong has long been a locus of factories (some may be more properly called "sweatshops"), with large textile trade volumes passing in and out of Hong Kong. The Yangtze River Delta region is also a strong textile center; the city of Ningbo alone produces about 1.4 billion pieces of apparel annually, roughly 12% of the country's textiles output.
Opportunities for foreign investment exist throughout the industry, from manufacturing and retail to machinery, design and research. High production capacity together with the ability to meet strict quality control standards makes China's unique, large and inexpensive labor force the world's preferred means of textile manufacturing. Since domestic sourcing cannot meet cotton demand, China has also become the top buyer of US cotton. Some experts estimate that 2005-2006 imports will exceed 3 million tons.
Chinese consumers have shown a growing appetite for textiles, as fashion trends have shifted over the past quarter-century from Mao jackets to Moschino knockoffs and on, tentatively, toward the real thing. The huge market for fake brands in the country, both for domestic consumption and export, remains a major irritant in China's trading relations with the West, although there are signs that the authorities are now serious about cracking down on it.
However, the real impact of fakes on the major brand producers such as Ralph Lauren, Gucci and North Face is hotly debated. Industry advocates naturally say that every sale of a fake Calvin Klein T-shirt represents lost revenue for the company. But it is equally plausible to say that people who buy the fakes wouldn't – or couldn't – pay for the real thing anyway. Furthermore, it can be argued that the spread of fakes actually helps the big labels by providing a free source of advertising. Either way, the warning signs abound for foreign firms looking to manufacture goods in China: IP laws are not up to international standards.
Another worry is that China's domestic market has become saturated with clothing and related goods, resulting in a period of deflation stretching from the late 1990s through to 2005. The government determined that 87% of textile goods were in oversupply and imposed strict limits on the growth of the industry, meaning up to 400,000 textile workers faced salary cuts or possible redundancy. Expansion in capacity is now being actively discouraged in favor of the modernization of existing facilities and quality improvements. Imports of machinery involved in textile production are now in steep decline following several years of steady growth.
As living standards have risen, increasingly affluent Chinese consumers have also started to move upmarket, rejecting the shoddy quality of the fakes for the prestige of real Gucci, Armani and Ferragamo. The top international brands are now a common sight in the classy malls of all major Chinese cities – those who can afford to shop there are still relatively few in number but the consensus is that China's moneyed-up middle class is only going to grow.