A Setback or an Opportunity?

China’s textile trade in the post-quota era

By ZHAO YUMIN

BIG SUPPLIER: China-made textile products are now available throughout the world

The American Manufacturing Trade Action Coalition (AMTAC) announced on May 13 safeguards against three categories of textile products made in China covering cotton trousers, cotton shirts and cotton and man-made fiber underwear. On May 18, the AMTAC once again announced safeguards against another four categories of textile products from China including cotton and man-made fiber men shirts, man-made fiber trousers, man-made fiber and knit shirts and combed cotton yarn.

Such restrictions mean that the export growth rate of the seven categories of Chinese textile products to the United States will be limited to below 7.5 percent this year. Besides, the EU is now carrying out an inquiry into nine categories of Chinese textile exports to its market, including T-shirts, and is deciding whether to impose similar safeguards against textile imports from China.

According to the Agreement on Textile and Clothing becoming effective 10 years ago, the 40-year-old global quotas on clothing and apparel products were to be phased out by January 1, 2005, so as to liberate the trade of textiles worldwide. But just several months after the lifting of the quota system, the United States and the EU rushed to launch restrictions on textiles made in China, leaving China’s textile industry with a hazy future.

An opportunity for China?

Compared with other countries and regions of the world, China has some advantages in textile and clothing production and trade. The country owns the largest number of cheap and skilled labor forces. It is also rich in materials, cotton, fur, linen and man-made fibers to develop the textile industry. China’s textile industry is complete and solid-large in scale and sound in structure. China also has good processing capabilities and is leading the world in developing and producing materials and fabrics. The country also owns advanced and highly efficient textile and clothing industrial groups. All these elements keep China’s textile industry at a very competitive place. Apart from these matters, after years of institutional innovation and reform and large-scale investment and construction of roads, railways and ports, China’s trade facility has greatly increased, which has in turn significantly increased the efficiency of transactions and reduced the costs. All these things give China’s textile products a low-cost advantage in world trade, and have made the country into the largest producer and exporter of textile products in the world. China has dominated the world’s middle- and low-end textile and clothing market for a long time.

FASHON MONGER: For most customers, who know little about the quota system, patterns matter

As the cornerstone of the world textile market, Chinese enterprises have undoubtedly hoped to explore more trade opportunities in the post-quota world market. With China’s entry into the WTO in 2001 and the 2005 deadline for lifting the quota system, the textile industry of the country has experienced a new round of expansion. In 2003, China’s fixed assets investment in the textile industry hit 59.8 billion yuan (close to $7.5 billion), a rise of 66.7 percent year on year and 38 percentage points higher than the growth of the country’s total fixed assets investment for that year. The fixed assets investment in the textile industry continued to increase in the first quarter of 2004 and the growth rate of the whole year reached 144 percent, 96 percentage points higher than the national average rate

during the same period. In 2004, the number of Chinese enterprises dealing with textile exports exceeded 30,000, up by more than 6,000 from 2002, and the total population directly engaged in textile production reached 19 million. Anticipating the prominent advantages for China’s textile industry in post-quota period, more and more foreign enterprises have invested in China. From 2002 to 2004, the foreign direct investment (FDI) in China’s textile industry came to $6.82 billion, 46.5 percent higher than the total FDI from the preceding three-year period.

Before China entered the WTO, its textile exports fluctuated a lot. Its annual growth rate from 1995 to 2001 averaged 5.6 percent, and the annual growth rate of exports to the U.S. and European quotaed markets averaged 6.3 percent and 6.7 percent, respectively. After its entry into the WTO, China’s exports of textile and clothing products increased rapidly, especially to markets that had already lifted quotas and particularly products without the quota limits.

From 2002 to 2004, the average annual growth rate of China’s exports of textile products to the United States was 29.2 percent, and was 38.4 percent to the European market.

Trade Frictions

With the gradual lifting of the world quota system on textiles, global trade frictions have been intensifying, especially the frictions between China and some major textile products importers.

According to the protocol on China’s accession to the WTO, if other members believe that China’s textile and clothing products disturb the market and impede the orderly development of the trade, they have the right to impose quantity limits on textile products from China. On May 21, 2003 and April 6, 2005, the United States and the EU worked out and issued the procedures and guidelines for special safeguards on textiles. Thus, China’s textile and apparel exports have faced some of the most discriminative safeguard measures in the history of world trade.

According to rough statistics, since May 2003, when the U.S. Government announced its safeguards, U.S. textile and labor circles have raised 24 appeals for safeguard on textile imports from China. The AMTAC has approved eight cases and the U.S. Government has launched three safeguards.

FORGING PARTNERSHIP: Chinese and U.S. businesswomen negotiate a deal at a fair of Chinese textiles in New York

Concerning the EU, apart from the current investigation into nine categories of Chinese textiles, it carried out anti-dumping inquiries to 35 categories of textile imports in July 2004.

Since January 1, 2005, Turkey has imposed safeguard measures on 42 categories of Chinese textiles, which will limit the growth rate of these Chinese imports to roughly 7.5 percent this year.

Such actions will not only affect China but also its trade partners. It is very hard for one party to obtain ideal results through trade sanctions. Accompanying the growth of China’s textile exports to the EU and the United States, the amount of the textile machinery and dyestuffs that China imports from the EU and the cotton from the United States have also increased. The train-effect of the trade restrictions will also hurt relevant U.S. and European enterprises, importers, retailers and consumers. According to statistics, among the textile and apparel exports of China in 2004, the products of foreign funded enterprises accounted for 34.4 percent.

The 70 percent of export growth rate this year after the lifting of the quota system has largely been realized by foreign-funded firms. In fact, within the EU, there are different voices in terms of imposing restrictions toward textile products from China. Countries including Britain and Germany actually hold a suspicious attitude. People need to maintain a rational understanding of the rapid growth of China’s textile exports and ensuing trade frictions with other countries. Although the comparative advantage of China’s current labor-intensive industries, like textiles, is obvious and solid, such sharp growth will not last long. The former quota system has restricted China’s textile exports and distorted the world textile trade structure. The quota pattern was formed at the cost of the efficiency and effectiveness of the world material resources allocation. A correction of the imbalance was the natural reaction of the market after the lifting of the quota system. In fact, the trade of certain products that were once strictly limited in the quota period has shown rapid growth after the quota lifting, which was not a phenomenon for China alone. To some extent, this is because developed countries deliberately retained quotas for 70% of the sensitive textile products until January 1, 2005. It is unreasonable to impose safeguard measures based on the data just one quarter after the end of quota system.

In fact, a mere expansion of low value-added products does not serve the basic interest of China. It is not helpful politically speaking, nor sustainable economically. From the political perspective, textile products have long been sensitive in world trade and this sensitivity has been gradually strengthened since the lifting of the quota system and the rise of China’s status in the world market. In the past, the frictions in the textile trade usually happened between developed importers and developing exporters. But today, the barrier that China is facing does not just come from the industry groups of importing countries, but also from developing countries that compete with similar textile exports.

The textile industry is one of the sectors with a high degree of globalization, and many developing countries have established closer connections to the world economy by developing domestic textile industries. But the foundation to establish such connection is largely attributed to the quota system of the past 40 years. Once the quota system is abolished, trade alliances lose their guarantees and the established connections may be interrupted. So, the lifting of the quota system has affected not only the textile industries of developed countries, but also those of developing countries that depended on the protections of the quota system. In this sense, the growth of China’s textile exports will not only be obstructed by developed countries, but also arouse the uneasiness of many developing countries.

From the economic perspective, after the lifting of the quota system, China’s low- and mid-end textile exports have expanded greatly, but this is not the best result for China. It will encourage enterprises to place more of an emphasis on low- and mid-end products, which is unhelpful to the development and export of high value-added products. In an open market, if too many small and medium-sized enterprises deal with exports, it will impact the raw material and products markets. Trade protectionism will be manifested in various ways, and the traditional development mode, such as price war or winning by quantity, will be difficult to guarantee in the future.

To ensure a smooth transition from the quota system to a free trade era, the Chinese Government has adopted a range of forceful measures since the beginning of the year. The government began to levy export taxes on part of its textile and clothing products, carry out the export registration system and launch an industrial pre-warning system. The government has also adjusted the investment policy in the textile sector, listing 28 categories of products where investment is prohibited. The quality and environmental standards of textile enterprises have also been raised in order to improve the quality of Chinese products. On the other hand, the country has taken a series of measures, like granting zero-tariffs and preferential treatment to 25 undeveloped African countries, encouraging Chinese enterprises to invest in other countries, especially the less developed nations, and lowering its tariffs on textile and clothing imports, so as to share the benefits of textile trade liberalization. These measures, along with others that are coming out, will further curb the low-level expansion of China’s textile industry and will lead it into a high-growth direction.

The country has entered a critical period featured with huge adjustment and development. Faced with economic globalization and increasing trade frictions, Chinese textile enterprises have begun to explore new paths of development and have been engaged in resolving trade frictions and finding a win-win strategy under the new market condition. Many Chinese entrepreneurs have realized that China’s textile industry will not face a brighter future in the post-quota era if only relying on the advantages of large scale and low labor cost. For a long time, Chinese textile enterprises have lacked technological creativity and management expertise to forge their own brand names, which has resulted in a big difference between China’s growing textile exports and its actual trade benefits, as well as more and more trade disputes.

On May 10, Chinese textile companies in the Yangtze River delta region gathered in east Jiangsu Province for a forum on the textile industry development in the post-quota era. All the entrepreneurs attending the forum agreed that speeding up the technological advancement and industrial upgrades should be the focus of the development of the Chinese textile industry in the days ahead.