China's textile sector greets US quota decision
China's textile industry breathed a sigh of relief recently when the United States promised to stick to international obligations negotiated more than a decade ago to phase out remaining textile and apparel quotas at the end of this year.
The Bush administration rejected an appeal from more than 130 Republican and Democrat members of Congress who had asked it to persuade the World Trade Organization (WTO) to delay scrapping textiles and garment quotas.
All quotas restricting textile and clothing trade between WTO members will be eliminated by December 31, 2004, according to the Agreement on Textiles and Clothing (ATC).
About 72 textile and apparel groups from 36 countries last month in Turkey urged the WTO to extend the deadline until December 31, 2007.
The "Istanbul Declaration" expressed concern over China's apparel trade monopoly. "If quotas are removed this year, the global textile and clothing trade will be monopolized by a few countries including China. The consequence will be massive job disruption and business bankruptcies in dozens of countries dependent upon textile and clothing exports," it said.
The US stance makes the quota extension almost impossible and improves the prospects for China's textile industry.
Chinese textile producers are looking forward to next year, as the quota-free regime will produce immediate savings for them, as they currently have to pay the government for quota allocations.
Although China has the capacity to flood the global market, analysts cautioned that local manufacturers should not be overoptimistic.
If Chinese textile producers want to maintain their leading position, they should prepare for challenges from India, Pakistan and Indonesia, said Cao Xinyu, deputy director of the China Chamber of Commerce of Import and Export for Textiles.
China will not be able to become the world leader if the industry continues to focus on low-end products and increasing its production quantity, Cao said.
This scenario would create a huge demand for cotton and drive up the cost of cotton imports. Surging prices would blunt China's edge in terms of cheap and large quantities of textile goods and push foreign buyers to other countries, he said.
And the country does not have an advantage in regard to labour costs compared with Pakistan and India. Labour costs in China are even higher than those in Viet Nam and Bangladesh.
So Chinese producers should develop a capital and technology-intensive textile industry rather than the current labour-intensive one which requires a lot of work, but generates meagre returns, Cao said.
More efforts are needed by Chinese manufacturers to build their own brands, which will be a key issue in mastering liberalized global trade.
Cao said 30 per cent of the textile industry's profits are generated from branding, 50-60 per cent from distribution and the remainder from manufacturing.
These moves will enable China to become a leading player in the global textile trade, rather than having a monopoly over the sector.
If local manufacturers shift to higher-quality products, they will gradually quit the low-end market and surrender it to other developing countries.
Neither is it in the country's best interests to flood the global market with its textile products after the quota is lifted.
"We committed ourselves to a unique mechanism in order to enter the WTO on December 11, 2001," said Li Yueyin, adviser on WTO textile issues at the Shanghai WTO Affairs Consultation Centre.
Under the terms of China's accession to the world trade body, other WTO members may impose safeguard measures, such as increased tariffs or quotas, if they consider that shipments from China disrupt or threaten their markets.
Under the textile-specific safeguard, WTO members could unilaterally reimpose quotas on apparel and textile imports from China for one year, from 2005 until 2008.
A second provision embodied in the agreement, known as the product-specific safeguard, allows other countries to invoke safeguards on behalf of most industries until 2013.
And the threshold is much lower than those usually applied under WTO rules, Li said.
The United States used the weapon this year to reintroduce quotas on Chinese imports of knitted fabrics, dressing gowns and bras.
Specific safeguard measures are just one of the several barriers that can be erected to prevent China from achieving its full potential. Other issues on the list are: labour standards, the environment, anti-dumping and rules of origin, Li said.
Countries can refuse or restrict imports from a particular country based on the claim that the dye used in the production of that cloth is hazardous to the environment or humans.
Therefore, it is quite evident that even if quotas are phased out, countries will find other ways to prevent China from maximizing its capacity.
"Local manufacturers should mind their behaviour and not give any excuse for trade barriers to be imposed," Li said.