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New
textile rules a boon for India, China -
or not
By Alan Boyd
SYDNEY - The specter of Chinese domination looms
large over the US$350 billion global textile and garment
trades as manufacturers brace for an upheaval in export
shipments that will end decades of preferential access
to Western markets.
Driven by a huge pool of
cheap labor and a flood of foreign investment, factories
in China already supply 30% of the world clothing demand
and 22% of textiles. They could double this share once
the Agreement on Textiles and Clothing (ATC) is phased
out in January.
Some 80% of textile production
will shift to China, costing other countries $200
billion in exports and 30 million jobs in developing and
industrialized countries, according to the US-based
National Council of Textile Organizations.
Or it
may not.
Might is bite in trade negotiations,
and the stronger suppliers such as China and India
should come out on top after deregulation. But this is
not to say that other suppliers won't also do better
than before. Ultimately, it will be a question of how
the buyers decide to play the game as the one factor not
likely to change is the dominant negotiating position of
the three big importers, the US, the EU and Canada.
When the ATC was introduced in 1995 as a
transitional framework after the end of the two-decade
Multifiber Arrangement (MFA) and the establishment of
the the World Trade Organization (WTO), the leading
importers controlled 62% of the world market. By 2002,
their share had risen to 67%, and it is now estimated at
almost 70%.
WTO rules banning selective buying
agreements, which have distorted one of the most
important income sources in the developing world, will
make it more difficult for buyers to control the market
shares of individual producers. But not impossible. In
return for phasing out quotas, importers were granted a
number of concessions that were designed to maintain the
existing order as long as possible, and have made
nonsense of the WTO's claims of a level playing field.
As of August 31, only 51% of bilateral quota
agreements had been eliminated, partly because the new
rules require the integration of a designated proportion
of all imports, and not just a percentage of the
previously restricted goods. This allows buyers to
"integrate" products that were not restricted in the
first place, thus maintaining discrimination against
value-added imports and protecting their own clothing
industries.
ATC countries are also permitted to
enact "safeguard" measures, including trade barriers and
a range of indirect penalties, if they believe imports
pose a significant threat to domestic industries. China
is hamstrung by two specific commitments dating back to
its accession to the WTO in 2001 that allow other
members of the trading bloc to activate counter-measures
if Chinese producers gain a dominant market position.
One safeguard, applied generally to the textiles
industry until the end of 2008, permits any importing
country to apply restrictions if sufficient evidence is
produced that Chinese shipments are causing a market
disruption. Beijing has no right of retaliation. A
separate product-specific provision, enforced until
2013, uses the same grounds for applying
counter-measures but requires the importing nation to
undertake a public hearing.
Anti-dumping
restraints will also apply until 2016. But specific
safeguards pose a bigger threat, especially if used to
achieve political ends, because they can be used in a
non-discriminatory fashion across the entire industry.
Anti-dumping measures target only individual firms. US
and European manufacturers, faced with the probable
shutdown of their own factories if low-cost importers
are given a free hand, have already signaled that they
will use every available trade lever to prevent a deluge
of Chinese goods.
The US initiated 24
"safeguard" actions against 14 WTO members within a few
months of signing the ATC. In the most sweeping action,
a coalition of cotton growers, fiber producers, yarn
spinners and fabric makers applied in July 2003 for
temporary curbs on a range of Chinese goods. Washington
subsequently notified the WTO of its intention to place
tariffs on textiles from China in 2004, and again in
2005, providing a short-term reprieve to its own
manufacturers and other exporters.
More
restrictive rules of origin have been implemented by
various importing countries, and a spate of anti-dumping
actions is pending. European producers are lobbying for
the same sort of non-tariff treatment that the EU gives
to unwanted farm imports: quality controls, technical
and safety standards, and health rules.
Article
XX(b) of the General Agreement on Tariffs and Trade
(GATT), the predecessor to the WTO, allows an importing
country to activate measures deemed necessary to protect
human, animal or plant life or health, and there is
little recourse for shippers. Governments will try to
set parameters for the new regime by encouraging
importers to limit their import sources. The US
department of commerce forecast in a recent
congressional report that major buyers would reduce the
number of exporting countries by half in 2005-06 and
another third by 2010.
One mechanism being used
widely is bilateral free-trade agreements (FTAs), which
act as a de facto form of preferential trading.
Washington has been accused by human rights groups of
inserting local-content rules in some regional trading
pacts as a form of non-tariff barrier against the entry
of Asian textiles and garments.
An African
Growth and Opportunity Act (AGOA) signed several years
ago between the US and 48 sub-Saharan African countries
specifically promotes exports from African suppliers
that agree to use US materials, disadvantaging Asian
factories because they make very low use of costly US
yarns and fabrics. Inevitably, the lure of import
contracts is being tied to political aims, especially in
the Third World. Cambodia, a non-WTO member, was told
when it signed a five-year bilateral textiles agreement
with the US in 1999 that shipment levels would depend on
the country's labor record. An updated agreement that
comes into force in January will progressively reduce US
tariffs over a period of 10 years. In the meantime,
Cambodia has been given only two years to slash its own
duty on imports of fibers, yarns, fabrics, made-ups and
apparel.
Third World producers are hitting back,
and have won some significant victories. In one test
case filed by Brazil, the WTO's disputes mechanism
ordered that US cotton subsidies be reduced because they
offered an unfair advantage. But the market position of
the US, which bought 35% of global clothing exports in
2002 and 21% of textiles, is such that Washington has
the ability to make or break the post-ATC trading
environment, especially if it reaches an understanding
with the EU.
Chinese manufacturers accounted for
a modest 14% of textile exports to the US in 2002 and
15% of clothing, ratios that have not changed since the
start of the ATC, though shipments increased sharply
after Beijing joined the WTO in late 2001. Mexico,
China's closest rival, contributed 11% of textile goods
and 12% of garments. Like other Latin American
producers, it will gain a bigger foothold from next year
because lower shipment times will be needed as
manufacturers look for efficiency gains - it takes three
weeks for Chinese goods to reach western US markets,
against a few days for Mexican exports.
But the
Chinese will gain a windfall because of an absurdity of
the quota system that has penalized exporters who are
too successful. Currently, Chinese producers have to pay
middlemen three times as much to market shirts as their
counterparts in the Philippines, and four times as much
as Cambodian brokers simply because their quotas are
higher.
Other Asian countries such as
Bangladesh, the Philippines, Sri Lanka and Cambodia have
much the same labor-cost advantages, but either face
higher raw-material charges, have inadequate
infrastructure or cannot match Chinese productivity
levels. Production costs are 50% higher in the
Philippines and 20-40% higher elsewhere.
Another
problem is that US textiles and clothing imports have
consistently fallen since 1996, as they have in Western
Europe, Japan and most other leading markets, primarily
because of an oversupply caused by the unwieldy quota
system. Investment links established under the ATC will
have a crucial bearing on which producers keep their
shares while markets shrink, as many small and
medium-sized garment firms in effect became part of the
subcontracting chains of buying countries during the
quota era when US and European firms moved offshore -
mostly to China.
A recent WTO study predicted
that China and India would both gain bigger market
shares in the EU, the US and Canada, with the Chinese
controlling 50% of the global market. The World Bank
issued the same projection. But the WTO warned that
their edge "may be less than anticipated, as proximity
to major markets assumes increasing economic
significance and tariffs are increasingly restraining
trade due to the fact that products cross borders
several times ... Furthermore, other developing
countries are catching up with China in terms of unit
labor costs in the textile and clothing sector and China
has of yet not shown competitive strength in the design
and fashion segments of the market."
The stakes
are especially high given the economic importance of
export revenues to Asia. Bangladesh gets 76% of its
total merchandise revenues from garment shipments,
Cambodia 85%, Pakistan 72%, and Sri Lanka and Nepal
about 40%. Developing countries may still have be one
throw of the dice as they adapt to the new regime: a
total of 91 trade groups from 47 countries appealed to
the WTO in August for quotas to be retained until 2008,
arguing that much of the industry was ill-prepared for
the transition.
They are unlikely to succeed, as
Washington, making the most of its market position, has
decided to confront the challenge head-on. This month
the US Trade Representative informed the WTO that it
would oppose any delay in deregulation and was preparing
legal challenges. A fallback position outlined by the US
International Trade Commission in February has
positioned Washington for a preferential imports
strategy that is clearly designed to limit China's
domination by favoring other exporters.
"To
reduce the risk of sourcing from only one country, US
importers also plan to expand trade relationships with
other low-cost countries as alternatives to China,
particularly India," the WTO report stated. Indian
manufacturers accounted for only 5% of textile exports
to the US in 2002 and did not figure among the top 10
clothing suppliers, with many analysts rating the
industry as underperforming. However, it possesses the
same mix of advantages as China, with a low-cost
workforce, access to a large domestic supplier base, and
improving product quality. Unlike China, India also has
proven design capability.
Last month Beijing
rejected US requests to limit textile exports
voluntarily, insisting that "free-market forces" be
allowed to determine shipment volumes. The question now
is just how much freedom Washington will allow.
(Copyright 2004 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
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