Thursday, September 08, 2005

Economic Brief: Textile Quotas

Drafted By: Erich Marquardt,Dr. Michael A. Weinstein

On January 1, 2005, international quotas on the exports of developing countries ended. The termination of the quotas, which had been in place for 40 years and was long-awaited by retailers, gave China the opportunity to greatly increase its exports of textiles to the United States, the European Union, and other countries. Indeed, in the first six months of 2005, U.S. imports on Chinese-made clothing increased 97 percent from the previous year, totaling US$7.4 billion. The E.U., too, witnessed a sharp increase in Chinese textile imports. For instance, the E.U.'s trade deficit with China in 2004 was €78.9 billion; in the first six months of 2005, that number already stood at €46.3 billion.

The imports, which are in response to a strong demand for Chinese-made apparel by U.S. and European retailers, have triggered protectionist measures in the United States and the European Union, as the two developed powers react to complaints by their domestic textile producers and labor unions who are unable to handle the increased competition from China.

The Effects of China's Textile Imports

The increase in Chinese textile imports has a negative effect on U.S. and European textile producers. These producers cannot compete with the production capability of China due to that country's low employee wages and weak labor laws. The termination of the quotas has hurt their businesses since retailers increasingly turn to China for cheaper products, thus increasing their potential for profit.

U.S. and European labor unions are also against the termination of the quotas since textile workers in these developed countries are losing their jobs to the Chinese. The lack of labor regulations and the low wages in China make it impossible for U.S. and European textile workers to produce the same quantity at such reduced rates. For instance, U.S. textile companies and clothing manufacturers have argued that due to the termination of the quotas, 19 U.S. textile factories have closed down, and some 26,000 American workers have already lost their jobs.

On the other hand, American and European retailers argue that the quotas were responsible for higher consumer prices. The retail industry looked forward to the end of the quotas at the beginning of 2005 since it would give them the opportunity to purchase cheaper goods. However, the implementation of new quotas, or "safeguards," has put them in the same boat as before. Indeed, in Europe, the situation has become desperate since millions of dollars of Chinese apparel is being held up on the E.U.'s borders.

Washington Places Safeguards on China's Textile Imports

In May, the United States responded to the increase in imports by placing "safeguards" on imports where domestic industries were threatened. It announced that it was investigating some 20 Chinese products to decide whether import restrictions should be instituted.

Then, on September 1, after the initial failure of three-day bilateral trade talks with China in Beijing, the Bush administration announced that it would reinstitute quotas on two categories of Chinese clothing and textile imports: fabric made with synthetic filament threads (such as spandex), in addition to bras and other body-supporting undergarments.

The meeting ended in disagreement, as the U.S. and China could not agree on new import rules. U.S. Commerce Deputy Assistant Secretary Jim Leonard responded to the implementation of the new quotas, saying, "Today's announcement demonstrates this administration's commitment to leveling the playing field for U.S. industries by enforcing our trade agreements." The U.S. then threatened that while it would delay further safeguards until October 1, at that date it would also place safeguards on four other textile products: sweaters, dressing gowns, knit fabric, and wool pants unless agreement is reached with the Chinese.

These actions are also premised on U.S. concern over the 2004 gigantic US$162 billion trade deficit with China. This year the deficit with China is 32 percent above the 2004 level.

While the U.S. has historically been the prime promoter of free trade and the ending of international trade quotas, the magnitude of Chinese textile imports brought such domestic pressure on the administration that it responded with protectionist measures.

Brussels Blocks China's Textile Imports

The E.U. had placed its own quota limits on Chinese textile imports in June 2005. The E.U. instituted the limits for the same protectionist reasons that the U.S. did. The quotas limited Chinese textile imports to an 8-12.5 percent growth rate per year. France, Italy and Spain were especially forthright about the quotas since they all have large domestic textile industries. In addition, France has been steadily instituting more and more protectionist measures, also seen through its shielding of strategic industries from outside buyers. And Italy wants to protect its domestic manufacturers, such as Marzotto SpA.

Once the limits were announced, European retailers excessively ordered Chinese-made apparel in an effort to fill their shelves before the quota limit was met. However, the limit was reached so quickly that it resulted in much of the retail orders getting stopped on Europe's borders by E.U. trade officials.

Now, tens of millions of Chinese-made garments are sitting on Europe's borders. Retailers, concerned that the hold-up will leave their shelves empty and cause them to lose business, reacted strongly, putting pressure on the E.U. to rethink the quota restrictions.

It created such a controversy that E.U. Trade Commissioner Peter Mandelson announced that the E.U. was preparing to unblock some 75 million garments from the borders. Beijing's official state newspaper, the China Daily, commented on the decision on August 31, saying, "This trade fiasco demonstrates that protective measures, at best, are zero-sum games for those who resort to them."

In the first few days in September, the E.U. struggled to find a compromise solution where producers and retailers could be placated. Mandelson argued, "Every day [that the products] are held costs money for European businesses and member states. It is unfair to penalize importers in this way." Mandelson also said, "I urge member states to move with utmost rapidity to approve the Commission regulation and get the goods released."

On September 5, Brussels and Beijing found a solution to the dispute. The E.U. announced that it will overlook half of the blocked imports, while the other half will go toward the 2006 quotas. If the 25-member E.U. body approves the agreement, then the some 75 million Chinese-made garments will pass through the E.U.'s borders and make their way to retailers and consumers.

The Bottom Line

The imposition of import restrictions on Chinese textiles by Washington and Brussels is one of many recent instances of a growing tendency toward protectionism in wealthier countries that find their domestic industries threatened by lower cost producers in rising economic powers. Interest groups in the countries with advanced economies that are disadvantaged by competition can be expected to continue to mobilize as they suffer further losses. As they defend their sectoral interests, they will attempt to fan sentiments of economic nationalism within the general public.

As wealthier countries move to protect their industries from outside competition, it can damage the economic growth rates of developing states. For instance, the U.S. and E.U. textile restraints placed on Chinese imports has had ramifications for the Chinese workforce since demand for Chinese-made products has gone down, thus putting people out of work and potentially putting factories out of business, hampering the country's growth toward becoming a strong economic power.

The drive for global free trade, once championed by states with advanced economies, appears to be encountering an obstacle, if not a limit. Look for increasing difficulty in promoting relaxed trade restrictions -- particularly in the W.T.O. -- as governments are pressured to protect domestic interests. If trade disputes begin to spill over into broader relations among states, globalized trade itself could suffer declines and trade disputes could exacerbate and cause political and even military conflicts.


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