Set Chinese bras free: Mandelson to EU
By David M Lenard
Truly, these last few days have been a feeding frenzy for business headline
writers: "Bra wars", "tempest in a D-cup", "the wrong support", and so on. Or,
as the talk show hosts say, "make up your own joke".
What these stories all refer to is the latest textile trade squabble between
China and the European Union (EU), which has resulted in as many as 80 million
items of Chinese-made clothing imports sitting in European ports and warehouses
undelivered. Many of those items are ladies' underwear, hence the leering
headlines. Although the "bra wars" episode has undeniably taken on a quality of
high farce, the long-term consequences for the players involved may be quite
serious. And Americans who may be
inclined to snicker at this European fiasco should realize that the US may be
on the verge of falling into the same trap.
The latest developments
On August 29, EU Trade Commissioner Peter Mandelson urged EU countries to
voluntarily release 80 million items of Chinese-made clothing to their European
buyers, even without a new textile quota deal with China to supplement, or
replace, the deal concluded in early June. Although Mandelson's recommendation
was non-binding, it was generally regarded as a sign that he had sided with
Europe's clothing retailers in an internal EU dispute between them and the EU's
clothing manufacturers, who have argued against the Chinese goods being
released on the grounds that this would exceed agreed-upon quota limits. Said
Mandelson: "I cannot accept that EU retail businesses should be penalized
unfairly by the introduction of the agreement we made in China" (referring to
the June 10 quota agreement).
How did it happen?
On January 1, 2005 the Multi-Fiber Agreement, a fantastically complex web of
restrictions and special arrangements accumulated over several decades whose
net effect was to prevent global free trade in textiles, was abandoned. Ten
years before, World Trade Organization negotiatiors had finally decided to put
the MFA out of its misery and allow the global rag trade to develop according
to the principle of comparative advantage. But they allowed a 10-year
"adjustment period" for enterprises in the developed world to prepare. Some
did. Many others did not, instead exploiting the "adjustment period" to
continue to plumb traditional markets, in the full knowledge that the arrival
of a free trade regime would instantly make their businesses nonviable.
When January 1 finally arrived, the biggest winners were large developing
nations like China and India - but especially China - which had the space, the
skills, the low-cost labor and the critical mass to sustain competitive textile
industries in the new free trade environment. Textile exports from China to the
EU and US soared, with unit quantities in some categories increasing by 1,000%
or more. Sadly but predictably, this triggered a protectionist reaction in both
the US and EU, 10 years apparently not having been enough time to "adjust". The
result was, in both cases, not free trade but a completely new set of quota
agreements; on the EU side, it was the June 10 agreement, which restricted 10
categories of Chinese clothing imports to a small percentage increase per
annum.
Unfortunately, the Brussels bureaucracy being what it is, there was a
month-long time lag between the June 10 agreement and July 12, when the new
rules actually came into effect at European ports of entry. Many retailers,
instead of meekly acceding to the restrictions, realized that they had one last
chance to snap up cheap Chinese clothes before the implementation began, and
put in a colossal surge of orders. Many of these orders could not be delivered
in time before the quotas came into effect. Hence, we now see mountains of
bras, pants and sweaters languishing at European ports, which cannot be
delivered because they would exceed the June 10 quotas.
Mandelson has certainly tried to defend himself and his agency, saying, "the
sheer volume of goods already in transit prior to the [June 10] agreement and
the large amounts subsequently licensed immediately after the agreement,
overwhelmed the arrangements made to implement it. By definition these
circumstances will not arise again." He also pointed out that not only the
European Commission but individual EU members and China should take a share of
the blame, noting Chinese delays in implementing an export license regime
required by the new agreement.
But many European retailers were desperate as the fall shopping season loomed.
The Financial Times interviewed Henrik Holbech, the owner of a lingerie company
in Skanderborg, Denmark, who flew to Asia immediately in an emergency hunt for
new suppliers when the bra quotas ran out last week. "We have moved production
to Hong Kong and Macao," said Holbech. "It wasn't easy to find an alternative
manufacturer because we weren't the only ones looking ... It cost us about 1
million Danish krone (US$165,000) but we couldn't wait for the EU to react or
not react."
The politics: North vs South, buyers vs makers
The political battle lines within the EU have been clear. Countries with little
or no low-end textile industry, such as Germany and the Netherlands, have come
down on the retailers' side, favoring higher quotas or no quotas at all.
France, Italy and some eastern European states, which actually have domestic
industries to protect, have taken a hard line on quotas. Having said that, the
French position is more nuanced than one might think: France's domestic
industry actually competes mostly in high value-added clothing (haute couture);
it abandoned long ago the basic products like socks and underwear where China
tends to dominate. Why, then, the French support for restrictions? Because
French firms own textile operations in Muslim states like Morocco, Tunisia and
Turkey, and the French (they say) are not only concerned about their profits
but about political stability in these states, if their clothing industries are
wiped out by Chinese competition.
China's motivations are more straightforward: China simply wants to sell as
much to the EU as it can - the PRC's textile industry, like almost every other
industry in the country, is characterized by overcapacity, perilously narrow
profit margins and a structural overdependence on exports. At the same time,
China wants to show it is a responsible country that will accept compromise
arrangements when the situation merits it, and does not want to alienate the
EU, which is a major trading partner. A yearly increase in quotas appeals to
both the Chinese regime's pragmatism and its visceral loathing of "disorder",
because a modest year-on-year export rise would at least be predictable.
Did Mandelson cave in to the retailers?
The commissioner could have taken the position that the retailers knew the
quotas were coming, and if they failed to receive last-minute orders, then that
was their own fault. But the former UK Labour parliamentarian (he represented
Hartlepool from 1992 to 1997) was far too skilled a politician to go that
route. When asked whether retailers had caused the crisis by ordering too many
goods before the quotas could come into effect, he would only say: "It's not
cheating the system, it's arguably beating the system." Still, the appearance
of a British EU trade commissioner siding with countries like Denmark and
Germany, who tend to agree with the so-called "Anglo-Saxon economic model",
against France and Italy, was not likely to go down well with French officials,
and raised the specter of previous Anglo-French disputes.
The near-term options
The question of what to do with the trapped bras remains. One idea is for the
blocked goods to be counted against next year's quota. This went down like a
lead balloon with Beijing officials, one of whom memorably told the Financial
Times, "[this would be like] eating the Year of the Tiger's food in the Year of
the Rabbit". Another option is to allow the textiles to be delivered, but
reduce shipments of non-textile goods (one can well imagine how this suggestion
would be received by, for example, Chinese steel or electronics vendors).
The Times Online suggested two other options, both of which would essentially
place the trapped clothing outside the quota rules. One would call for goods
ordered before July 12, when the quotas came into effect, to not be counted
against the quota. The other would call for any goods actually in transit
before that date to be outside the quota; this would appeal to textile
producers since it would solve the immediate problem, but exclude clothing
still in Chinese factories or on their order books.
Bra Wars 2: US vs China?
On Tuesday morning, at the Ministry of Commerce in Beijing, a delegation from
Washington led by textile negotiator David Spooner resumed negotations with
Chinese officials regarding the US version of the EU's Chinese textile problem.
The Beijing talks were a continuation of meetings held a few weeks ago in
San Francisco.
Earlier in the year, the US had also placed "temporary" quotas on various
categories of Chinese textiles, limiting growth to 7.5% per year. US producers
sought to broaden those restrictions to additional categories, while retailers
and consumer groups have argued that 20% annual growth should be permitted.
Ironically, one of those restricted categories was underwear; and a petition by
US manufacturers calling for quotas on several additional clothing categories
earlier this summer specifically mentioned brassieres.
Seemingly, then, the groundwork has already been laid for a second front in the
"bra wars". In Brussels, observers warned the US to learn from Europe's
mistakes. The New York Times quoted Laurent Ruessmann, an international trade
lawyer in Brussels, as saying that the European troubles in implementing quotas
were giving pause to the US negotiators now in Beijing. According to Ruessmann,
retailers and importers have warned Washington not to act hastily: "They are
saying, 'Hey, be careful; don't do the same stupid thing the EU did ... make
sure you have some sort of transition period'."
The larger significance
The end of the multi-fiber agreement was a watershed in the history of the
textile industry. If nothing else, the bra wars were a reminder that the
industry has some way to go before reaching a stable equilibrium in the new
WTO-governed era. One way or another, China will be a dominant player in
textiles. Even if Chinese goods are shut out by quotas, experience has shown
that these goods will still find their markets by using evasions such as
transshipments through third countries, or simply by Chinese enterprises
shifting their production to other countries not subject to the quotas.
Ironically, quota restrictions may have the effect of simply accelerating
Chinese dominance of developing countries in Asia. A recent magazine article
told of a Cambodian official who was startled when a representative from the
Chinese province of Anhui appeared and asked to meet with him about improving
operating conditions for Anhui businessmen in Cambodia; his surprise was
because he hadn't even realized that there were any Anhui businessmen in
Cambodia. Anhui is one of the poorer provinces in China, and the fact that even
a poor Chinese province had a major commercial presence in Cambodia spoke
volumes about the extent to which overseas Chinese already dominate commerce in
southeast Asia.
The real losers of the post-MFA world are countries whose textile industries
were not viable without it, like Lesotho, the Maldives, many Caribbean states,
Turkey, some north African countries, and even Bangladesh. To be sure, China is
developing so quickly that these countries will, even if they do nothing,
eventually regain their competitive advantage. But this could be small
consolation if it involves waiting an entire generation whilst China and India
become superpowers. Furthermore, in a rational world, the French concerns about
unemployment in Arab states would be a more pressing concern for Washington
than for Paris. If there is any plan in the US to prevent Arab textile workers
from walking out of their factories, pink slips in hand, straight into the arms
of Al-Qaeda, now would be a good time to suggest it.
Still, one effect of the bra mountains should be to highlight, however
embarrassingly, the futility of protectionist measures. Quotas on one sector
will inevitably create pressure for more quotas in others; if textiles, why not
shoes, or polythene bags (China-EU spats are ongoing in both categories), or
farm products, or steel, or computers? If this logic is pursued to its natural
end point, the effect will be to resuscitate the Frankenstein's monster of the
MFA. As Vincent Cable, a Liberal Democrat member of the UK Parliament, said in
a memorable editorial, "The corpse of textile protectionism ... has been
stirring in its coffin and Mandelson has obligingly lifted the lid." Cable
points out another embarrassing aspect of the situation for the EU: what is the
logic of arguing that Europe should be allowed to sell weapons systems to China
on free trade grounds, while refusing to import humble products like bras where
anyone can see China has a competitive advantage? Furthermore, why penalize,
with higher clothing prices, countries like Denmark which successfully adapted
to the new trade regime, and reward countries like Italy which failed to
prepare?
As silly as the bra wars may appear, they have raised, yet again, the issue of
how to respond to China's inevitable rise. Since China's trade advantage is
heading rapidly up the chain from textiles to technology products and services,
the Guardian newspaper suggested that "braining up" was the only rational
response - ie, educating Europeans and Americans to the point where they can
compete on knowledge, not on price. But given that China's upcoming generations
are only children, given every possible advantage by two parents and four
grandparents and expected to excel in every conceivable way, pulling such a
strategy off will be anything but easy. The bras are just the beginning.
David M Lenard is a correspondent for Asia Times Online in Thailand.
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