How Should China and America Respond to the Age without Textile Quota

September 27, 2004 • Commentary
By Daniel J. Ikenson, Gary Clyde Hufbaue, and Yong Tang
This article appeared on People’s Daily Online on September 27, 2004.

According to an agreement reached among GATT members ten years gao, the global textile quota system will come to an end on January 1, 2005. However, ATMI, AMTAC and some other industrial organizations in the world have made an Istanbul Statement in March 2004. The statement has requested WTO to extend the ending of the textile quota system till December 31, 2007 so that the world textile industry could be free from China threat. The Istanbul Statement has been listed on the agenda of WTO meetings due to be held in this October.

Will the textile quota system be terminated as planned? What are the implications of the termination of this system to the world trade regime? Is China a so‐​called threat to the international textile industry? How should America and China work together to solve trade disputes arising from the post‐​quota era?

With these intriging questions in mind, Yong Tang, People’s Daily Washington‐​based correspondent has recently conducted an exclusive interview respectively with two prestigious American trade experts. One of the experts is Daniel J. Ikenson, a policy analyst with Cato’s Center for Trade Policy Studies while the other is Gary Clyde Hufbauer, Senior Fellow of the Institute for International Economics.

Yong Tang: Will the textile quota system be terminated as planned? How big is the chance of putting off the termination of the quota system? If the quota system could not be killed as planned, what implications and impacts could then be imposed on the international textile trade and even the overall international trade regime?

Ikenson : Despite the Istanbul Statement and the proposed meeting of the WTO to discuss this issue next month, the Agreement on Textile and Clothing will be fully implemented on January 1, 2005, as planned. In order to delay full implementation, all WTO members (including China, India, Pakistan) would have to vote in favor of such a resolution. I think this is simply too unlikely, given the presumed commercial benefits that will accrue to these countries when the quotas are lifted.

Hufbauer: I am almost certain that the textile quota system, known as the Multi‐​Fiber Agreement (MFA), will be terminated as planned on January 1, 2005, whether Bush or Kerry is elected as president. However, I am also quite certain that alternative “safeguards” will be put in place by the United States, the European Union, and others (both industrial and developing countries) to limit the growth of textile and clothing imports.

Yong Tang: If the quota system is to be killed as planned, what does it mean to international textile trade? Is the time ripe for the termination of the quota system? Developed countries have been given 10 years to make major adjustments to their own textile industry. Is the time enough?

Ikenson: All countries have been given plenty of time to prepare for the end of quotas. The whole point of the gradual phase‐​out (in 4 distinct phases — 1995, 1998, 2002, and 2005) was to allow countries to adjust to changing trade flows without being overwhelmed instantaneously by new patterns of trade. For the U.S., Europe, and Canada, this meant preparing their industries for new competition by encouraging the development of niche markets, preparing workers and communities for new types of employment, becoming less dependent on textile and apparels and more diversified into other industries.

Hufbauer: Ten years — from ratification of the Uruguay Round in 1995 until 2005 — was enough time for industrial countries to downsize their own textile and clothing industries. However, under the Uruguay Round agreements, they were allowed to “backload” the pace of trade liberalization — in other words, to wait until the last two or three years to accomplish most of the liberalization. Since it’s not possible to adjust in two or three years, the industrial countries will not be ready to free imports on January 1, 2005. The result will be a series of safeguard measures. My guess is that the world will not have comparatively free trade in textiles and clothing (such as we already have in electronics) until 2015 — ten years from now.

Yong Tang: What does the ending of the textile quota system mean to America? How much damages will be afflicted on American textile industry? And how many chances?

Ikenson: For the United States, there may be some job loss, but the economic impact is likely to be buffered by the fact that this is a very diversified economy here. Most of the apparel producers have already moved offshore, so there shouldn’t be a large impact there. Textile jobs will likely decline in some commodity products, but demand for specialty and upscale U.S. textiles should increase. And, if the most efficient apparel producers are increasing output as a result of the lifting of quotas, demand for U.S. textile inputs could rise too. U.S. textile exports to China in 2004 have been very large!

Hufbauer: It’s always hard to predict the long‐​term consequences of structural change in an industry. The United States now produces about $55 billion of clothing each year and $94 billion of textiles. Employment in the clothing industry is about 475,000 workers, and employment in the textile industry is about 650,000 workers. The US imports about $63 billion of clothing each year and about $16 billion of textiles. Over a period of 10 years, I would expect clothing imports to rise to about $100 billion and employment in that industry to drop to under 200,000 workers. Over the same period, I would expect textile imports to rise to about $40 billion, and employment to drop to under 500,000. If these guess are approximately right, the US textile and clothing industries face very big adjustments.

Yong Tang: What does the ending of the quota system mean to China? How many gains and losses could Chinese textile industry harvest?

Ikenson: China is likely to be the biggest winner after January 1, 2005. It has a vertically integrated industry and produces all types of inputs that could conceivably be used in apparel production (i.e., zippers, buckles for brassiers, handles and wheels for luggage, etc.). It is also an efficient, low cost producer of many types of products. Developing countries that are not vertically integrated and that do not enjoy proximity to consumer markets and that do not have preferential access arrangements whereby their exports pay lower tariffs will have a hard time competing.

Hufbauer: Everyone expects China’s exports of clothing to rise dramatically. Clothing exports are now about $41 billion annually, and textile exports are about $20 billion annually. Over a period of 10 years, both figures could double or triple. However, China’s imports will also rise considerably, especially imports of textiles.

Yong Tang: To developing countries excluding China, what does the ending of the quota system mean?

Ikenson:For the developing countries that are not vertically integrated (those countries that have insufficient thread, yarn, and fabric production to feed their apparel operations), they were supposed to diversify into other industries, seek preferential market access arrangements, and/​or increase investment in basic textile production so that they could become vertically integrated.

For some of the developing countries, the change will be dramatic, and quite possibly calamitous. The economy of Bangladesh, for example, is heavily dependent upon apparel exports. But it is not a particularly efficient producer. Infrastructure is relatively poor and labor is less productive and prone to going on strike. As a less efficient producer without close proximity to major markets (unless there is some integration of Bangladesh and India), the end of quotas (which guarantees access for certain volumes of Bangladeshi apparel) is likely to have an adverse economic impact.

Hufbauer: Nearly all developing countries that export clothing, except for India and China, expect to lose market shares when the MFA comes to an end. In fact, their clothing exports will probably drop. That’s the main reason why so many developing countries quietly favor the imposition of safeguards on US and EU imports from China.

Yong Tang: Is China the so‐​called threat of the world textile and garment trade? Once the quota system has been killed, will China and a few countries dominant the global textile market? From a long‐​term perspective, will China collide with other developing countries in the development of the textile industry?

Ikenson: I don’t view China as a threat, but as an opportunity to consolidate production in the locations that are most efficient. This frees up resources throughout the world to be used for other purposes.

Hufbauer: Over the course of a decade, I expect a few countries to dominate the clothing export trade — especially, China, India, Pakistan, and Bangladesh. However, many other countries will produce and export specialty and fashion textiles. For example, Italy will remain a major exporter of fashion women’s apparel; Indonesia will export batiks; Peru will export wool garments and carpets. The textile story is also complicated, because many textiles require advanced technology, and the United States, Europe and Japan produce highly sophisticated and extremely competitive textiles. In short, there will be more concentration once the MFA system and safeguards are fully phased out, but that does not mean China and India will capture the entire export market.

Yong Tang: According to the agreement reached between China and America before the China’s accession into WTO, America has been authorized to take some special protective measures to curb the rapid import of China’s textile products so that China’s export growth rate could be limited around 7.5%. According to a Washington Post news story, a high‐​ranking official from the Department of Commerce has strongly suggested that the Bush administration is likely to take some actions within a few weeks to curb the import of some Chinese garment products. When the quota is over, what protective measures will American government possibly take in order to keep its consumers from buying too many Chinese textile products? Will these measures be effective? If these measures are to be taken, will it affect the overall Sino‐​American trade relations?

Ikenson: With respect to U.S. protectionism, it is always a possibility. However, I don’t think the bilateral trade relationship will get as heated as the political rhetoric of late suggests. The U.S. can impose special safeguard measures if import surges from China are causing or threatening market disruption. But the most the U.S. can do is impose a import growth limit of 7.5 percent. The current uproar concerns comments by Grant Aldonas of the U.S> Department of Commerce who appears to have opened the door to the filing of safeguard cases by U.S. industry even before the surge has occurred. The U.S. industry is claiming that once the quotas are lifted on January 1, the surge will begin. But in my view, allowing cases to go forward now, before the surge, would violate the agreement signed between China and the U.S. upon China’s accession into the WTO. My view is that the current administration wants to appear to be doing something for the U.S. textile industry, and this will likely encourage the filing of 5 to 10 cases before the U.S. election in 43 days, but ultimately the administration will back away from imposing any new restrictions.

Hufbauer: As I have suggested, safeguards of various kinds will be applied to limit Chinese clothing exports, and possibly textile exports. The various kinds of safeguards are explained in detail in my Policy Brief, “China Bashing 2004”, posted on the website of the Institute for International Economics, www​.iie​.com. Limits on cotton trousers and socks and may be imposed in the next few weeks. The limits will last for a few years, and then be relaxed. But this will be a step‐​by‐​step process that will go on for at least a decade. Obviously trade frictions will result, but I think US and Chinese trade officials will manage the disputes. Chinese exports to the United States will rise, but not as fast as free market conditions would allow.

Yong Tang: If there are some disputes arising from the textile trade between China and Amercia, how will these two countries resolve these problems? Will they negotiate to make agreements and how? China will definitely profit a lot from the ending of the quota sytem, but it will also suffer some losses in other fields under the WTO regime. How could China and America work together to solve these problems?

Hufbauer: I have already given a forecast as to how trade relations will unfold — case‐​by‐​case, step‐​by‐​step. Lots of work for lawyers and trade officials. Gradual progress. Now I will give a recommendation. China should take the initiative in trade liberalization. It should abolish all tariffs, discriminatory taxes, and other barriers that in any way restrict clothing and textile imports into China. Moreover, China should require that all textile and apparel workers be paid a reasonable wage and have good working conditions, taking into account the level of the Chinese economy. China should invite the WTO to evaluate the new and completely free Chinese trade regime, and it should invite the ILO to report on labor conditions. By following these recommendations, China can answer the unfair criticisms that have been leveled in the Western trade press, and thereby accelerate the liberalization of trade.

Yong Tang: How should developing countries do during the era of post‐​quota system? Is the competition the only solution? Will the strategy of Encircling China be effective? How could China do to dissolve the encirclement led by America and followed by a group of developing countries?

Hufbauer: My advice to developing countries that have built clothing industries under the protection of the MFA regime is as follows. First, if possible, enter into a free trade agreement with Europe or the United States that will allow exports into those markets free of tariffs. (China will still pay tariffs of 10% to 30% on textile and clothing exports.) Second, ensure that quality standards are high and delivery times are rapid. Third, nourish any specialty or fashion items produced locally — for example through design or marketing assistance. Fourth, after the previous four steps, let the market work — don’t try to save firms that can’t compete in the new environment. -For China, I have already given my advice: lead the world in free trade in clothing and textiles, and establish a reputation for decent working conditions, taking into account the level of the Chinese economy.

Yong Tang: If America works together with some other countries to set up import ceilings for China’s textile products, will it set a bad example for trade protectionism? If the answer is yes, what should we do?

Ikenson: I think the U.S. wants to be mindful of its WTO commitments for several reasons: first, it has been found in violation of agreements on several matters before the WTO in recent years; second, the Doha Round could collapse if the U.S. continues to flout the rules; third, the U.S. would like to make sure China abides by its own WTO commitments, and the best way to do that is by setting a good example.

Hufbauer: I doubt that the United States will work with Europe, Japan, and other industrial countries to set up a “new”, but re‐​named MFA system. Instead I expect that each country will apply its own safeguards, tailored to local conditions in individual product markets. That said, my strong recommendation to China is lead the entire world as a champion of trade liberalization — slash barriers on other imports besides clothing and textiles. And slash the barriers ahead of any negotiated cuts in the Doha Development Round. China can best fight trade protectionism by setting an example of free trade.

Yong Tang: Today China’s textile industry has been trying hard to upgrade its industrial structure and improve the added value of its products. Meanwhile they are shifting their focus gradually from international market to domestic market. Do you think it is a good way to solve problems?

Hufbauer: I think China can do both — enlarge its exports, and upgrade its quality, both for the domestic and international markets. It doesn’t have to choose between these goals.

Yong Tang: How should China cope with the challenges during the era of post quota system? The challenges may include China’s market economy status, a lot of regionalized trade zones, anti‐​dumping, environmental barriers and technological standards etc.

Hufbauer: You are right: China will face challenges on all these fronts. Again, I sound like a broken record, but my best advice, in China’s own interest, is to slash its own trade barriers and eliminate any discrimination against foreign products or foreign firms. As China imports more from the world, its own economy will become even more competitive, and its own exports will expand even faster. Meanwhile, China will stand on a high moral ground to challenge unfair foreign barriers in the WTO.

Yong Tang: How do you evaluate the trend of the Sino‐​America trade relations within a few years? The Dean of the School of Management of Yale University said recently that China and America will go to more violent economic confrontation within a few years. He said that China’s economic growth rate is so high that America feels it unable to cope with it. He even predicted that the economic confrontation between China and USA is just like a tsunami which may drown both side. How should China and America do in order to prevent that prediction from becoming a reality?

Ikenson: Antidumping (and China’s NME status) will be a major point of contention between the two countries, but I am not as pessimistic as Yale’s Dean. I think the relationship is complementary and necessary, and that from time‐​to‐​time there will be flair‐​ups, largely due to some domestic political considerations. I think we need more education in both countries about the importance of this relationship. That is something that is difficult to convey in the U.S. when there has been manufacturing job loss and economic sluggishness, even if those trends have little to do with trade. Trade and foreigners tend to get blamed by displaced workers and their elected officials when times get tough, largely because foreign interests are not represented in our democracy. But as China accumulates more wealth and purchases more American products, people will have a better idea of the importance of the relationship.

Hufbauer: With due respect to the distinguished Dean, I think he is too pessimistic. A high Chinese growth rate is good for the United States, because it ensures that all of Asia will prosper. It means that China and the rest of Asia will be better export markets for American goods services. But it is critical that China NOT pursue neo‐​mercantilist policies — huge trade surpluses, protected local markets, IPR violations, etc. If China instead becomes the world leader in free trade and investment, economic confrontations will not erupt. And China itself will be that much stronger and more admired.

About the Authors
Gary Clyde Hufbaue
Yong Tang