Take off Your Quotas

Restrictions on the textiles and clothing trade will be eliminated on January 1, 2005. What does this mean for Chinese companies?

By YU SHUJUN

The 96th Chinese Export Commodities Fair was held in Guangzhou, the capital of Guangdong in late October. One attendee, a manager of a small textile company from Hubei, was excited to get orders for next year from foreign companies. “In the past, how much we export depended on quotas. From next year, we will never be restricted by quotas again,” the manager chuckled.

A HUGE INDUSTRY: China is the world's largest producer and exporter of textiles and clothing

Under the Agreement on Textiles and Clothing (ATC), which World Trade Organization (WTO) members signed in 1994, their textile and clothing sectors will all be subject to the general rules of the General Agreement on Tariffs and Trade from January 1, 2005. This means the global system of quotas on textiles and clothing is set to expire at the end of 2004.

Free trade and fair competition in the global textiles and clothing market should spawn opportunities, according to an unnamed Department of Foreign Trade of the Ministry of Commerce (MOFCOM) official. The liberalization of trade in textiles and clothing might allow consumers all over the world more, better and cheaper clothes from which to choose. The elimination of quotas will help sustain the global development of the textile trade, the official said.

China, restrained by quotas on textiles and clothing, will benefit from the termination of the existing system. “Phasing out the quota restraints will bring us great opportunities, as well as challenges,” said Cao Xinyu, Deputy Director of the China Chamber of Commerce of Import and Export for Textiles (CCCT).

A Huge Industry

China, with an abundance of both materials and cheap labor, is the world’s largest producer and exporter of textiles and clothing. The sector, as a vital branch of its light industry, greatly contributes to industrialization, while playing a crucial role in creating jobs and earning foreign exchange via exportation. Foreign textiles and clothing trade has been a strong force driving China’s export growth for some time. Statistics from CCCT show that, in the past decade, exports in the sector have steadily increased, with a compound annual growth rate of 13 percent.

After China entered the WTO in November 2001, growth of exports has gained momentum. In 2003, China’s exports of textiles and clothing accounted for about 20 percent of the world’s total volume of textile trade, the most of any one country.

Japan, Hong Kong and the United States are the three major destinations for textiles and clothing leaving China. In 2003, Hong Kong surpassed Japan to become the largest importer of textiles and clothing from the mainland. According to CCCT statistics, in the first eight months of this year, textiles and clothing exports to Hong Kong reached $11.19 billion; Japan, $10 billion; and the United States, $6.99 billion. Exports to the EU’s 25 nations totaled $7.98 billion.

In terms of market share, 72 percent of Japan’s textiles and clothing imports in the first half of this year were Chinese, while 66 percent of Hong Kong’s imported textiles and clothing were made on the mainland, according to CCCT data. These numbers have not been repeated in the United States or the European Union. Statistics from U.S. customs show Chinese textiles and clothing occupied the largest share of the U.S. market in the first half of 2004, which is 16.6 percent. Statistics for the first quarter of this year show that 17.5 percent of EU textiles and apparel imports came from China.

However, the United States and the EU, both ATC signatories, must also eliminate quotas on Chinese textiles and clothing beginning with the new year. These countries are concerned with a surge of cheap Chinese products flooding their markets.

Advantages and Challenges

During this final year of quotas, intense debate on the impact of its phasing out has been centered on China’s expanding world share of this market. Some in Europe and America fear that China will dominate the sector without limitation on their nation’s imports, potentially precipitating substantial job losses.

The MOFCOM official points out that, in the past, quotas that China got in textile exports were far less than its huge output. Chinese textile exports may indeed grow considerably, at least initially, during the transition of quota restraints. Gao Yong, Vice President of the China National Textile Industry Council (CNTIC) also thinks that, after the quotas are eliminated, exported textiles and clothing which used to be subject to quotas may surge in 2005 and 2006.

But most of the exported textiles and clothing were unrestricted by quotas in 2004 and those under quotas now only account for less than 25 percent of total exports. Substantial growth can’t be kept over a long term, Gao said.

A WTO report, The Global Textile and Clothing Industry After the Agreement on Textiles and Clothing, also states, “There is no doubt that both China and India will gain market shared in the EU, the United States and Canada to a significant extent, but the expected surge in market share may be less than anticipated.”

Chinese exports to the United States won’t surge, according to CCCT Deputy Director Cao Xinyu. Under the terms of the North American Free Trade Agreement (NAFTA), the United States is obliged not to impose quotas or tariffs on the goods from Mexico, which is China’s main rival in the U.S. market. According to statistics from U.S. customs, Mexico was its second largest supplier of textiles and clothing among its northern neighbors, grabbing 10.5 percent of its market in the first half of this year, while China took up 16.6 percent. Mexico enjoys a geographic advantage. It takes at least 10 days for products to be transported across the Pacific, while it takes just hours to ship goods to the other side of the Rio Grande. Mexico’s proximity to the American market saves retailers much time and logistical costs, which mitigates the fact that clothes cost less to assemble within China.

The EU market, on the other hand, may see an influx at first due to its regional trade arrangements. Turkey is China’s main competitor for the EU market. Statistics for the first quarter of this year show that 13.8 percent of EU textiles and apparel imports came from Turkey, second overall, while 17.5 percent came from China. One edge for Turkey is that it is on Europe’s doorstep and is looking to join the EU within decade.

The EU and the United States recently took measures to stem the tide of Chinese textiles and clothing. The EU just decided to exclude Chinese fabrics from its preferential tariff scheme, while its average tax on incoming Chinese textiles will be raised from 9 percent to about 12 percent. Meanwhile, the United States has made moves to restrict the importation of socks from China.

Moreover, shortages of raw materials and electricity may very well drive up the cost of Chinese textile products in years to come, according to the same MOFCOM official. CCCT statistics indicate that China imported 1.8 million tons of cotton in the first eight months of the year, 37 percent of its total output of cotton in 2003.

Even China’s advantage of cheap labor has lost prominence in recent years, which may indicate that migrant labor pools are drying up. The WTO report also points out that other Asian countries, like India, Indonesia and Viet Nam, are catching up with China in terms of favorable worker costs.

Industrial insiders forecast that China will further reduce export tax rebates after quotas are eliminated, which, in fact, will cut into the cost advantages of buying Chinese textile products. According to CCCT data, the growth rate of Chinese textiles and clothing exports has in fact fallen from 27.7 percent in 2003 to 21.7 percent through the first eight months of this year. The drop is mainly due to a reduction of tax incentives for companies to export goods from China.

Only 30 percent of the value of all the textiles and clothing China makes is exported, according to Gao of CNTIC. The other 70 percent is consumed domestically. Li Lingmin, President of the China National Textiles Import and Export Corp. agrees that Chinese textiles and clothing producers will not export in a large scale after quota elimination because he thinks the domestic market is potentially more profitable than exporting.

Cao Xinyu points out that, although China is the largest exporter of textiles and clothing, the world forgets that it is also the third largest importer. With the development of Chinese economy, incomes are rising. Purchasing power in the mid- and high-end clothing and home textiles market is soaring. This market will provide opportunities to foreign exporters of textiles and clothing. “While the world-renowned brands have accessed the Chinese market, foreign brands are beginning to penetrate the middle-range market,” Cao said.

Sun Huaibin, Director of the Information Department of CNTIC, also disagrees that Chinese textile products will dominate the world textile market. In the post-quota era, what Chinese textiles will encounter is fiercer competition, Sun said.

Clothing makes up more than 60 percent of the textiles that China exports. However, most of this is in OEM (original equipment manufacturing) form. Few domestic brands are exported from China. Industrial structure of the textile and clothing sector and its research and development needs to improve for this to happen. The MOFCOM official believes quota elimination is an opportunity for China to adjust so that export growth of textiles and clothing can be sustained.