The textile tangle

It is business as usual as foreign buyers and local manufacturers get together at the apparel-sourcing fair at Hangzhou in Zhejiang province in eastern China. - AP

China imposes export tariffs on 74 textile and apparel lines after the E.U. threatens curbs on imports and the U.S. reimposes quotas on four types of Chinese textiles.

TRADE frictions generated heat in mid-May between the European Union and China. The E.U. asked China to start formal talks on ways to restrict Chinese exports of two types of textiles - T-shirts and flax yarn - to its member-states or face limits on them if corrective action is not taken. "In view of the seriousness of market disruption in these categories, formal consultations need to begin immediately," said E.U. Trade Commissioner Peter Mandelson. An E.U. inquiry has been under way since April 29 into nine categories of textiles made in China, including T-shirts and flax yarn.

China responded on May 20. The Ministry of Finance said that as of June 1 tariffs would be substantially higher, up by 400 per cent on average, for 74 textile and apparel products. The products range from trousers and shirts and suits to blouses and underwear.

Chinese exports to the E.U. and the United States rose by more than 50 per cent in the first quarter of this year. The U.S. government reimposed quotas in May on four types of textiles, which means that imports from China for the current year have a limit of 7.5 per cent over last year's levels. The surge in Chinese exports has cost 16,000 jobs in the U.S., according to the U.S. textile industry.

The Chinese government described the U.S. trade restrictions as unfair. Commerce Minister Bo Xilai said China was abiding by the World Trade Organisation (WTO) rules and accused the U.S. and the E.U. of "double standards". He earlier told an international business delegation visiting Beijing that "the integration of the textile trade is a right we have gained since China joined the WTO and China will not impose curbs on its textile products". He said the E.U. and the U.S., by not lifting their quotas in stages, were unprepared for the end of the quota system and as a result found their markets flooded once it ended.

The Multi Fibre Agreement (MFA), which ended on December 31, 2004, under the WTO accord, was a system of quotas on the textiles and garment trade installed in the 1970s, whereby tariffs ensured that no single country dominated the market. The WTO has been phasing out quotas since 1995 to bring trade agreements in textiles in line with global free-trade regulations.

Exports of certain made-in-China textiles to Europe have risen by over 500 per cent since the expiry of the MFA. The increase in the first quarter of this year over that of 2004 has seen nine categories of textiles going over the alarm levels set out in the E.U. guidelines. For instance, sales of pullovers rose by 534 per cent, T-shirts by 164 per cent and flax yarn by 56 per cent.

China, on its part, took measures at the start of 2005 to attenuate the effects of the anticipated boom in textile exports after the MFA ended. It abolished export incentives and introduced export duties of between 2 and 4 per cent on 148 types of textile exports as part of a series of moves designed to reassure major trading partners and help its own industry adjust to freer trade. The hike in duties puts a relatively heavy burden on Chinese exporters, particularly those in the low-value sector of the garments industry. Duties on cotton pants, for instance, went up 16 times. Said Yong Dong Hui, vice-president of the China National Textile and Apparel Council: "The duties will have a significant impact on China's textile industry, and exports will decrease significantly. In order to fulfil this international responsibility, China's textile industry will suffer. Right now the profit margins are between 2 and 3 per cent."

China accounted for 17 per cent of the world's textiles in 2003, and the WTO estimates its market share to reach 50 per cent in the next three years. The E.U. inquiry found that textile producers in Greece, Portugal and Slovenia were particularly hit hard by Chinese competition. T-shirt production in Greece was down by 12 per cent from a year ago, and in Portugal the drop ranged between 30 and 50 per cent. In Italy, apparel sales for March were nearly 13 per cent lower, while orders fell by 20 per cent. At the same time, E.U. imports of T-shirts from South Asia (mostly Bangladesh, Pakistan and Sri Lanka) have also fallen. The E.U. voiced its concern at this fallout of the trade dispute. Said Mandelson: "This sudden surge of imports is damaging the textiles sector in several vulnerable developing countries."

The E.U. spokesperson in Brussels declined to comment on the Chinese move, saying the E.U. would await further details. The guarded reaction is attributed to a U.S. demand, which has implications for the massive U.S. trade deficit with China. Washington has been particularly insistent in calling upon Beijing to reform its currency, the yuan. The yuan, which has a fixed rate of exchange with the dollar, is considered to be undervalued by at least 30 per cent, conferring unfair advantage to Chinese exports.

China's $32-billion global trade surplus last year is estimated to rise to $100 billion in 2005. U.S. Treasury Secretary John Snow has said that he expects China to end the dollar peg and allow free-float of the yuan. The U.S. Congress will vote on a bill that seeks to impose a 27.5 per cent duty on all Chinese imports unless China removes the currency peg in six months. Although the policy has the support of the local industry and all the political parties, a considerable body of opinion is against precipitate action in view of the risks involved.

From China's perspective, letting the yuan appreciate could affect the competitiveness of the country's exports and is hence politically sensitive. Moreover, it could expose the currency to fluctuations that undermine the stability of the financial system and hurt growth prospects - an unpleasant scenario even for the U.S., which would like China to be the driving force for other Asian economies.

During his recent tour of Europe, Japan's Deputy Finance Minister Hiroshi Watanabe warned against any sharp adjustments to the yuan. He said it would have a negative impact not only on the economies linked closely to China - such as those of Thailand and South Korea - but also indirectly on the Japanese economy.

Chinese Prime Minister Wan Jiabao clarified that China would not surrender to external pressure on questions that are in the exclusive domain of a "sovereign nation". During his recent visit to Beijing, French Industries Minister Patrick Devedjian complimented the Chinese government for having understood France's problems and for the "very important" gesture on export taxes.

"It is absurd to think of anti-dumping taxes," said Umberto Triulzi, Professor of Economics at Rome's La Sapienza University, on the issue of the E.U. considering quotas on Chinese exports. "This important gesture from China shows its willingness to keep the doors open for a negotiated settlement. A prolonged confrontation over the trade dispute would have major negative effects for the world economy." He added that "China, however, cannot back down so blatantly to the U.S. on a sovereign issue such as the currency."

Triulzi argued that the way to a long-term solution lay elsewhere, while the problem itself was rooted in the faults of the European system. "We had enough time and advance knowledge of the January 1, 2005 deadline of the Multi Fibre Agreement, but did nothing to prepare for it. Instead of short-term measures, we need to adopt a long-term approach that would produce solutions such as increasing manifold the number of E.U. producers in China producing for the Chinese market."

With its major economies in a fragile state, the E.U. finds itself with limited room to manoeuvre on problems such as Chinese competition. Its effects, including the downturn in sales and jobs lost, have been highlighted widely in euro-zone countries, leading to questions being asked on the E.U. integration process. The French economy, earlier among the euro area's best performers, has slowed down this year, growing at only 0.2 per cent in the first quarter. Italy has gone into recession, while Germany expanded by 1 per cent in the first quarter of 2005.

In a bid to improve growth and employment, European heads of government had agreed in March to relax the 3 per cent limit on member-country budget deficits as required by the Growth and Stability Pact. The measure, which effectively killed the Stability Pact, was taken after persistent demands by Germany and France to ease controls on spending. The European Central Bank (ECB) had earlier cautioned against higher budget deficits as a factor in stoking inflationary pressures. Germany and Italy blamed their economic problems on the ECB's drive for price stability.

Italy's recession is its second in two years. Its low growth is a drag on the recovery of the euro zone, while its borrowings put pressure on interest rates. E.U. policymakers are worried about Italy's rising deficit, high debt ratio of above 100 per cent of gross domestic product (GDP), and rapidly declining competitiveness. Italian exports are weighted towards sectors such as textiles, leather, furniture and machinery, which face competition from Asian economies like China, with their low labour costs.

In France, opinion polls done closer to the referendum on the E.U. Constitution gave a slight advantage of 53 per cent to the `No' camp, which unites extreme Right groups with substantial sections of the Left. Economic analysts offer three main reasons for this situation in the larger context of globalisation: French growth being hampered by the rise in oil prices, the effects of the euro's appreciation, and the surge in imports from China. The Opposition Socialist Party is divided, with the anti-Constitution group being led by former Premier Laurent Fabius.

Opposition to the E.U. Treaty is centred on the defence of the French `social model', with its state-oriented conception of public services, against the neoliberal, free market orientation of the Constitution - a struggle of positions described in the media as that between "Anglo Saxon free marketism and continental industrial and social policy".

Many in France have grown disillusioned with the E.U.'s deregulatory, free market policies. There are specific focal points of discord, such as the E.U.'s Bolkenstein directive on liberalising the market in the services sector, which accounts for 70 per cent of the E.U.'s GDP. The fear in France is that it would be flooded with firms, particularly from the East European member-countries, which have lower wages and welfare standards. Fear of Muslim immigration is another issue, which is in evidence in the case of the Dutch, who were once the most keen integrationists.

Noted French economist Jean Paul Fitoussi, in an article reproduced in the Italian daily La Repubblica, described the effects of prolonged unemployment and underemployment in France, which has affected nearly a quarter of the population for over two decades, defeating every hope and aggravating social disintegration. For the citizens of Europe, he wrote, "the essential promise associated with the European project is no longer that of peace, but of prosperity".