Publication: China Brief Volume: 5 Issue: 8

On January 1, the Multifiber Agreement (MFA), which had established a worldwide quota system for textiles and apparel products since 1974, expired. With no quotas in place, China is poised to dominate the world textile industry, having built excess capacity to put into operation as soon as the quota system ended. It is expected that China will capture 50% of the world market, up from 17% in 2004. These estimates are based on China’s spectacular gains in those parts of the market which had quotas phased out prior to the termination of the entire system, as reported by the United Nations COMTRADE database.

According to the first official data from China as reported by Xinhua news agency, the value of apparel exports was up 80% to the U.S. and 43% to the EU in January from a year earlier. The rise in exports was higher in volume than in value because prices dropped as competition surged. For example, exports from Jiangsu were up 40% in volume, but only 10% in value. To prevent “anarchic price competition,” the China Chamber of Commerce for Import and Export of Textiles wants to set floor prices, confident that Chinese firms can profitably out-compete rivals with their lower costs.

In an early attempt to head off foreign counter action, Beijing announced last December that it would levy export duties on textiles and apparel (ranging from 0.2 to 0.5 yuan per piece, accounting for less than one percent of value). These duties are far too small to effect trade and are better seen as a way for the government to replace the revenue it used to collect by auctioning off slices of its export quota to firms.

If China captures its anticipated new market share, 30 million textile and apparel jobs could be lost worldwide, and some $200 billion in trade redirected to China. Textiles have been a leading sector on the road to industrialization. Countries of strategic importance to the United States, such as Egypt, Turkey, Mexico and the Philippines, stand to suffer job and trade losses on a scale that could send their fragile economies into crisis and fuel radical political movements.

In response, American and Turkish textile leaders drafted the Istanbul Declaration in March 2004. It called for an emergency meeting of the World Trade Organization (WTO) and recommended that quotas be extended for three years. This meeting was indeed held on November 25 in Geneva, under the auspices of the WTO Council for Trade in Goods. China, however, supported by India and Pakistan, blocked any action.

With no prospects for a new world-wide system to regulate textile and apparel trade, the task has fallen to individual countries. Turkey has imposed quotas on Chinese imports to protect its domestic market. On April 4, the U.S. Commerce Department said it would investigate imports of specific Chinese products – cotton knit shirts and blouses, cotton trousers, and cotton and synthetic fiber underwear, with an eye to setting new quotas. Imports on those garments were up by 1,250%, 1,500% and 300%, respectively, in the first three months of this year compared to last year. The European Commission has also announced guidelines for regulating Chinese textile trade.

Beijing had to agree that countries have the right to impose safeguard measures against import surges as a condition for it joining the WTO. This has not prevented Chinese officials from protesting counter measures as violations of “free trade” principles.

Countries can take unilateral action to protect their producers in their home markets, but not to protect their export business. Turkey counts on textile and apparel exports for 36 % of its export earnings. Smaller counties which produce mainly for export cannot maintain their textile industries without help from the larger markets to which they ship. A number of countries, such a Bangladesh, Jordan and many African states, owe the existence of domestic producers to the quota system which assured them a share of the world market.

It is clear that preferential bilateral and regional free trade agreements (FTA) are taking on an anti-Chinese flavor. The Central American Free Trade Agreement between the United States, Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua is being touted as necessary to preserve the region’s textile and apparel industries, including those American firms which have relocated operations to the region. CAFTA is supposed to give garment manufacturers an incentive to stay in this hemisphere, rather than move to Asia where labor, materials and land are cheaper. “You have to look at this in the context of global competition,” says Assistant U.S. Trade Representative Chris Padilla, because “China is the 800-pound gorilla in this industry.” El Salvador’s ambassador to the U.S., Rene Leon, has declared, “A vote against CAFTA is a vote for China.”

But CAFTA may be a false hope for stemming the Chinese tide. It does not provide significant new tariff cuts for Central American goods beyond the existing duty free access available under the Caribbean Basin Initiative. Chinese government wage data is often unreliable, but estimates by the National Council of Textile Organizations show that Chinese workers earn 15 to 30 cents an hour. Wages in Central America are relatively higher, around $1.49 per hour in Guatemala, $1.65 in the Dominican Republic, and $2.70 in Costa Rica.

A U.S. International Trade Commission report in 2003 forecasting post-MFA trade found that Central America had several disadvantages vis-à-vis China. Central American workers are only half as productive as their Chinese counterparts; and middle management is reportedly far less efficient. Though textile and apparel work is labor intensive, China has invested heavily in modern equipment to boost productivity. According to the International Textile Manufacturers Federation, between 1994 and 2003, over 55% of weaving machines and 23% of spinning machines delivered world-wide went to China.

A World Bank study showed that the additional benefits that Central American textile exporters would have from preferential access to the U.S. market through a CAFTA-type arrangement are almost eliminated with the expiration of the MFA. The authors concluded that Chinese textile and apparel exports would have to face a U.S. tariff of at least 24% of the value of the imported goods for Central American countries to maintain their position after quota elimination. According to the 2004 WTO report “The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing,” Mexico and Central America’s share of the U.S. market can be expected to shrink by about 70%.

Mexico already has preferential trade access to the American market under the North American Free Trade Agreement (NAFTA), but has still fallen prey to Chinese competition as hundreds of maquiladora plants along the U.S.-Mexico border have been shut down after losing business to Chinese rivals. Ross Perot famously said that NAFTA created a great “sucking sound” of jobs going to Mexico. Jaime Serra Puche, a former Mexican trade minister and chief NAFTA negotiator, told a Harvard Business School conference last April that today, the “sucking sound” is coming from China.

Morocco is another example of how a FTA with the United States is inadequate to counter China’s mercantile power. Karim Tazi, the general secretary of the Moroccan Association of the Textile and Clothing Industry, told the Aujourd hui le Maroc newspaper that competition from China and India could mean “Morocco risks losing between 30 and 40% of its export markets” and that this was “an upheaval, a real earthquake” that could cost 200,000 jobs. This is because 41% of Morocco’s export earnings come from textile and apparel.

On December 14, Egypt, Israel and the United States signed a partial free trade pact that created Qualified Industrial Zones (QIZs), which opened the American market to goods produced in Egypt with Israeli inputs. The Egyptian government hopes this was the first step towards a full FTA with the United States and that in the meantime it will help Egypt weather the initial hit from the end of MFA. For Egypt, 23% of its export earnings come from textile and apparel. This February, further talks were opened with Cairo on the path to an FTA. Egypt is the only country in the Middle East that has a vertically integrated textile industry with its own supply of fibers (Egyptian cotton), a spinning industry, dyeing and finishing, apparel and textile manufacturing. The stability of Egypt is a vital strategic interest of the United States.

Turkey, Egypt and Morocco trade more with the EU than with the U.S., and the EU has done more to protect its own textile and apparel industries from Chinese competition than has the U.S. EU officials have been meeting with their trading partners, and the European Commission has stated that “a surge in Chinese exports to the EU, coupled with decreasing prices, could have severe consequences on third country suppliers.” But the EU appears to be waiting to see what actions are taken by the United States.

Major swings in world trade patterns have geopolitical effects. They can create wealth and finance the ambitions of some countries while destroying growth and spreading despair elsewhere. The end of the MFA has given China an avenue for commercial expansion. It has also posed a challenge to United States policy. Most bilateral FTAs negotiated by the Bush administration have had a strategic purpose beyond trade, but those agreements – along with the economic stability of other key nations – are menaced by China’s export surge. Washington will have to take stronger, more direct measures to give preferences to its friends and allies if it wants to use trade as a tool of diplomacy.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.