South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Trade Disputes

Trade wars in T&C sector

Trade disputes have surfaced since the abolition of the Agreement on Textiles and Clothing (ATC) on 31 December 2004. The stakes in the US$ 400 billion global textiles and clothing (T&C) industry are high due to vested interests of China, the European Union (EU) and the United States (US) – representing the major suppliers and buyers. As far as many developing countries and least developed countries (LDCs) are concerned, it is evident that country competitiveness matters in a liberalised trade regime, as much as a level playing field.

The Multi-Fiber Arrangement (MFA) – constituted in 1974 – enabled developing country exporters to acquire a foothold in the European and US markets. The T&C sector comprises a major share in the manufacturing sectors in many low-income nations, where it emerged as a vital source of export led-growth. When the World Trade Organisation (WTO) was formed in 1995, the ATC sought to free the T&C sector from quotas beginning 1 January 2005.

In the wake of the ATC expiry, competition has intensified with ramifications for international trade. While upgrading is vital for producers to remain competitive, trade policies have also put increasing competitive pressures on producers everywhere. Some developing countries from the Caribbean Basin and Sub- Saharan Africa have been able to maintain their competitiveness due to preferential (duty-free) access to the US market while least developed country (LDC) producers in Asia and the Pacific region have been unable to do so.

The Chinese onslaught

With a total share of 25 percent of T&C exports in 2004, China’s strong performance in the months after the ATC elapsed has caused frictions with the EU and the US. Verbal exchanges spanned for several weeks before the US imposed ‘safeguard’ quotas on seven categories of Chinese textiles. An eleventh hour agreement on 11 June imposed voluntary export restraints on Chinese T&C products to the EU before the latter erected its own trade barriers.

US Commerce Department statistics released on 1 April showed that Chinese T&C imports into the country were 63 percent higher in the first quarter of 2005 compared to 2004. As a response, the US Committee for the Implementation of Textile Agreements – an interagency US government group chaired by the Department of Commerce – announced on 13 May the initiation of ‘safeguard proceedings’ to determine whether certain Chinese T&C imports were disrupting the domestic market; as they increased by approximately 1,240 percent, 1,500 percent and 300 percent for three categories, viz., cotton Tshirts and blouses, cotton trousers and cotton underwear, respectively. In the EU, imports of Chinese pullovers and men’s trousers rose by more than five times whereas imports of Tshirts and blouses nearly doubled although prices fell by as much as a quarter. The EU reacted sharply to rising Chinese T&C import levels, constituting 20 percent of its market by announcing ‘an early warning system’. This provision allows Chinese imports of particular products to increase by 10 – 100 percent before triggering investigations to determine their impact in terms of trade flows and possible injury to the EU industry. China vehemently opposed these moves by the US and the EU, terming them unfounded and a protectionist garb to deter Chinese export performance that would undermine its own belief in free trade.

The EU and US repulse

The EU and the US have the discretion to impose quotas to offset further rise of China’s T&C imports, according to ‘Textile Safeguards Provision’ included in China’s Protocol of Accession to the WTO. As a conciliatory move, China announced on 20 May that it would raise export tariffs by as much as 400 percent on 74 types of textile products (but covering only one-fifth of Chinese apparel exports) beginning 1 June but later revoked the step when the EU and the US decided to proceed with restrictions. The EU gave China until 11 June to check its export surge, failing which it would follow the US in imposing quotas. However, an eleventh hour agreement in Beijing between EU Trade Commissioner Peter Mandelson and Chinese Commerce Minister Bo Xilai on 10 June, resulted in a settement. The deal limits 10 categories of Chinese T&C exports to the EU to between 8 - 12.5 percent growth above a specified base period until 2008. The EU eventually dropped its intention to impose import restrictions against Chinese textiles.

Meanwhile, the target of US criticism is not only against Chinese T&C exports per se but also at China’s exchange controls, which it accuses of being used soley to the benefit of Chinese exporters. China’s currency – the yuan – has been pegged to the US dollar at an exchange rate of 8.28 to one since 1995. The Chinese economy has witnessed rapid economic growth, accumulation of huge foreign exchange reserves, large foreign direct investment inflows and balance of payments surplus. At the same time, the US dollar has depreciated in world markets, which has also led to depreciation of the yuan. An upward revision of China’s exchange regime had thus been long overdue. A manifestation of its undervalued exchange rate is that it distorts prices and gives an artificial advantage to national exporters at the cost of exporters in the rest of the world. The US further estimated that the yuan has been undervalued by 27.5 percent; a bill was introduced in the US Congress on 27 May, threatening to impose a 27.5 percent tariff on all Chinese imports to the US should China fail to change its monetary policy by November 2005. China acknowledged the need for exchange rate reform but has categorially stated that any decision to intervene in its foreign exchange markets would not be made under external pressure. In the first week of July, China revauled its currency by 2.1 percent and also pegged it to a basket of currencies instead of the US dollar. Nevertheless, US quotas on Chinese imports remain effective.

Casualty: Free trade

The transition to the quota free regime in the T&C sector has been far from smooth. Instead, events proved that protectionism in various guises exists.

China’s failure to restrain its export surge runs countrary to its binding commitments when joining the WTO. Both the EU and the US can impose ‘safeguard measures’ to restrict the growth of Chinese T&C exports to 7.5 percent, renewable annually until 2008. The safeguard provision was primarily invoked to smooth the transition in the post ATC era for producers facing the ‘new competition’. This is understandable as China is a rapidly growing economy and already accounts for around a quarter of US T&C imports and one-fifth of EU T&C imports. Domestic textile lobbies, strong in both the EU and the US, would repel any Chinese action to dominate their markets. However, the proposed US legislation to tax all Chinese imports unless China revalues the yuan, is utterly meaningless since the product/s under dispute are only T&C and not other goods. The yuan’s under-valuation by 27.5 percent is subject to debate and its revaluation is best left for the Chinese authorities to decide. In the near future, both quotas and tariffs on Chinese T&C products would lead to a rise in their prices, making them expensive to consumers in the EU and the US. With Chinese products becoming expensive, buyers have the option of sourcing from other emerging lowcost and efficient suppliers. Meanwhile, the new deal between China and the EU requires monitoring to avoid trade disputes from resurfacing.

Although the expiry of ATC liberalises trade in the T&C sector, the current trade regime is characterised by preferential trade agreements such as the African Growth and Opportunity Act (AGOA) and Caribbean Basin Partnership Treaty Act (CBPTA). The US has yet to provide similar treatment to textile-dependent LDCs in Asia and the Pacific, which are facing the brunt of stiff competition through factory closures and lay-offs of workers. These countries could be well placed for growth if provided with duty free market access. Granting of similar preferences by the US to LDC T&C producers in Asia and the Pacific region has become urgent required to save millions from being the victims of unbridled liberalisation.

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