Chinese Textiles Herald Future Tensions with U.S.

The European Union has settled its dispute with China over 2005 textile imports, but the United States is still negotiating its use of safeguard measures. The EU and China agreed on June 10 to cap Chinese exports of ten categories of textiles, ranging from sweaters and bras to dresses and tablecloths. The deal followed warnings from European textile-makers that cheap Chinese goods were devastating local industry after the Multifiber Agreement expired at the end of 2004. Yet European retailers filled the new quotas within weeks. The agreement signed September 5 will allow into Europe goods ordered prior to July 12 by counting them against future limits. The further import growth of ten Chinese textile products will be limited to between 8.5 and 12.5 percent through 2007.

A second round of U.S.-China talks on limiting imports ended without success on August 31. Little change has occurred in either party’s position in advance of the third round set for September 26-27. Washington announced it was re-imposing quotas in two categories of Chinese clothing and textile imports after the second round failed. A joint press release from the American Manufacturing Trade Action Coalition, National Council of Textile Organizations, and the National Textile Association states, “The domestic U.S. textile industry is united in affirming that no agreement is better than a bad agreement.” The U.S. textile industry wants an agreement that is tighter than the EU deal, limiting Chinese imports in more than 19 categories of apparel to a 7.5 percent annual growth rate until 2008. Such a “limit” on growth would still mean that Chinese goods would displace either American goods or imports from other countries.

Year-to-date statistics from the U.S. Office of Textiles and Apparel show that American imports by volume from China are up 47 percent in 2005 compared to 2004. As of June 2005, China holds a 32 percent share of the U.S. textile and apparel import market (up from 23 percent in June 2004). The U.S. government has safeguards in place on cotton trousers, man-made fiber trousers, cotton shirts, man-made fiber shirts, men’s and boys’ cotton and man-made fiber woven shirts, cotton and man-made fiber underwear, socks, and combed cotton yarn. Safeguards cases on other items are pending.

These trade disputes reflect growing unease about the rise of China in the global economy, a development with geopolitical as well as commercial consequences. One factor that is prompting the Bush administration to take a hardline in the textile negotiations is the need to honor promises made to southern Republican House members to secure their votes for the Central America Free Trade Agreement (CAFTA) that passed by a margin of only two votes on July 28. As Majority Whip Roy Blunt (R-MO) told Congress Daily (July 29), the strongest argument for winning over GOP members was foreign policy. CAFTA would give protection to regional textile and apparel production in partnership with U.S. companies—as an economic foundation for democratic stability.

Before the vote, Deputy Secretary of State Robert Zoellick, who as U.S. Trade Representative had negotiated CAFTA, wrote in the Washington Post (May 24) that defeating CAFTA would be the same as “sending jobs in apparel production and similar industries to China.” The new USTR, Rob Portman claimed in The Wall Street Journal (May 10) that “The trade agreement will allow us to compete more effectively with China.” Yet for CAFTA to succeed, there must continue to be quotas on Chinese exports to provide room in the American market for goods from other producers whose governments are aligned with Washington.

The dispute with China has also given a boost to the EU’s long-term strategy to support its own textile industry against Asian competition. A Pan EuroMed Zone is to encompass the EU and Mediterranean countries, with Turkey, Morocco, and Tunisia as the main beneficiaries. Within such a “free trade” zone, economic operators could use intermediate products from the entire area, an even broader version of the “accumulation” concept that was included in CAFTA for the benefit of Mexico. According to a policy paper published by the European Foundation for the Improvement of Living and Working Conditions, the creation of this new integrated production bloc “would mitigate the negative effects of the abolition of import quotas in 2005.” Or, as the Director General of Euratex, William Lakin, told the 2003 Aachen Textile Conference, the objective is to create “an immense internal market, with all components of the pipeline present within it” that could “fight the cheaper imports from Asia.” Although such regional arrangements are called trade blocs, their purpose is to replace trade.

The Pan EuroMed Zone was planned in 2003 by trade ministers meeting in Italy, but it is the current struggle with China that has brought the retail side of the equation into support. As Albrecht von Truchsess, spokesman for German retailer Metro AG, told The Wall Street Journal on September 14, “There are retailers who focused primarily on China as a source of textiles….This is a risk that no one will take again” because of possible future EU-China political turmoil.

Clothing manufacturers in India have also seen orders from European and American retailers increase by up to 25 percent since June as stores have switched from Chinese producers. Unfortunately, the right of the U.S. and EU to apply safeguard limits on Chinese textile exports under the terms of Beijing’s accession agreement to the World Trade Organization only runs through 2008. If CAFTA and Pan EuroMed have not established textile alliances that can withstand Chinese competition, a new round of disputes and negotiations will likely ensue.

By then, other trade problems will have emerged in sectors even more valuable from both an economic and strategic perspective.

The composition of U.S.-China trade flows is changing. The dispute over textiles plays into a false public perception that the U.S. imports mainly low-value products, produced by cheap labor, in sectors of little consequence to the future progress of the American economy. A 2004 OECD working paper on Chinese growth, however, reveals “the largest contribution to this expansion was made by high technology manufacturing.”

Ten years ago, over half (52 percent) of China’s exports to the United States were in what the OECD terms “low technology” (meaning labor intensive) goods—mostly textiles, apparel, and footwear. The volume of these exports has continued to grow, but has fallen as a share of total exports to 35.8 percent in 2004.

It is “high technology” trade that has risen, from 15.5 percent in 1995 to 30.2 percent in 2004. When “medium-high technology” items are added (21.8 percent), a majority of Chinese exports to the U.S. in 2004 are now at the upper end of manufacturing. In its first Economic Survey of China (released September 16), the OECD sees no slowing in the current pace of economic growth—averaging more than nine percent annually for two decades—and predicts that China could overtake the U.S. and Germany to become the largest exporter in the world by 2010, with ten percent of global trade (up from six percent today). These gains will not come from increased labor-intensive goods, but from Beijing’s ambition to jump to the top of the industrial system. According to Chinese customs data, the increase in high-tech exports between 2000 and 2004, heavily concentrated in computers, telecommunications, and electronics, was greater than the total value of all labor intensive exports. During this period, high-tech exports went from $37 billion to $165.5 billion, compared to an increase from $59.2 billion to $104.2 billion in labor intensive sectors.

This development challenges the assumption of mutual gains from a division of labor that would leave high value-added sectors in American hands even within an overall trade deficit. Although foreign direct investment has been the engine of Chinese technological advancement, that investment has been guided within joint ventures and co-production arrangements that have diffused knowledge to the state-owned sector and other Chinese rivals of Western firms. Head-to-head competition will spread across many strategic sectors, including eventually even commercial aircraft as Aviation Industries of China I (AVIC I) has stated its desire to win back its home market from Boeing and Airbus.

As China increasingly becomes a major high-tech exporter to the United States, the problem of intellectual property protection has now moved to the top of the U.S. business agenda. The President’s 2005 Annual Report on the Trade Agreements Program stated that intellectual piracy was “at epidemic levels and causes serious economic harm to U.S. businesses in virtually every sector of the economy.”

Beijing’s economic challenge is advancing beyond imitation. In a report for the U.S.-China Economic and Security Review Commission, Michael Pillsbury cites an April statement from Premier Wen Jiabao, “Science and technology are the decisive factors in the competition of comprehensive national strength…independent innovation is the national strategy.” The term “comprehensive national strength” is important because it refers to the nexus between commercial success and military power in Chinese writings.

Trade issues will thus escalate and interact with national security and foreign policy well beyond what was touched on in the CAFTA debate.