By and  on December 14, 2004

NEW YORK — China’s bold gambit in the high-stakes world of international trade has left the rest of the global players waiting for the country to show its full hand.

China’s move to impose tariffs on its own textile exports caught observers off guard Monday and many called the action by Beijing politically astute, given the complaint that the looming end of the quota system could put at risk as many as 30 million jobs in the developing world.

Experts disagreed over whether the proposal was a sign that Beijing truly wanted to alter the course of its industry, or whether it simply was an effort to convince the U.S. that it was unnecessary to take aggressive steps to limit China.

The Chinese Ministry of Commerce unveiled its plan to impose export tariffs on its Web site in a posting late Sunday night.

“This is part of a string of measures China will take to ensure a smooth transition for textile integration following the end of the quota system,” the state-sponsored Xinhua news agency quoted a ministry spokesman as saying. “Seeking a fundamental change in export growth patterns is a top priority facing China’s textile sector.”

The official statement offered no details on how much the tariffs would be, what products would be affected or when they would take effect. Calls to the Chinese embassy in Washington seeking further explanation were not returned.

But an executive with a major U.S. retailer who had been briefed on the plan said the tariff rate would be higher on lower-priced merchandise and lower on higher-priced goods, as part of an effort to discourage price slashing and encourage Chinese makers to focus on better quality merchandise.

The tariff is intended to set “a floor price” on Chinese apparel and textile exports, said Peter McGrath, a J.C. Penney Co. Inc. executive, who said he was briefed on the idea last week in China by a representative of that country’s Ministry of Commerce.

He said ministry officials told him the tariffs would likely be imposed in January and would first be applied to highly competitive categories such as cotton tops and pants — products that are facing safeguard petitions in the U.S.In addition to imposing the export tariffs, the Chinese government plans to begin issuing export licenses for textile and apparel fabrics that will be required to allow shipments to leave China and will identify the destination of the shipped goods. The licenses are intended to discourage the illegal transshipment of Chinese products through third countries, said McGrath, Penney’s president of purchasing, who also serves as chairman of the U.S. Association of Importers of Textiles & Apparel.

Under the plan, the export tariffs and export licenses would be administered by trade groups, not the Chinese government, McGrath said, adding that he was “somewhat skeptical” about that approach.

Tariffs on imported products are commonly applied by many nations because they both protect domestic industries — as well as domestic jobs — and provide revenue. Imposing tariffs on exports is a much rarer step, though nations including Brazil and Malaysia impose export taxes on some raw materials to encourage companies to process them within their borders.

McGrath said he believed the move came in reaction “to worldwide pressure about [China’s] production capacity and its ability to flood the market.”

McGrath said the new export tariffs would also help the Chinese government to recoup some of the revenue it will lose when the quota system expires. Quota rights trade like a commodity in China, and at times can represent half the cost of a garment or more.

The expiration of those quota charges has been one factor causing importer executives to predict that garment prices could drop by 15 to 30 percent next year.

Wendy Wieland Martin, vice president for international trade at Kellwood Co., said executives at her company “don’t like anything that makes things more expensive.” But she said she doubted that the proposed export tariffs would be heavy enough to cause the company to pull orders out of China.

“It could have some effect to some degree, but we will have to see what the details are,” she said. “This is just part of the things we look at. This could be nothing and relatively invisible. We just don’t know.”

U.S. manufacturers met the news with skepticism, and said the tariffs would have to be hefty to offset the advantages conferred upon Chinese exporters by the nation’s fixed exchange rate and tax rebate programs.“I think China is beginning to feel the heat and realizes it needs to do something,” said Cass Johnson, president of the National Council of Textile Organizations. “To even the score, the tax would have to be 30 to 50 percent….I would be very surprised if China is willing to do that.”

Erik Autor, vice president and international trade counsel at the National Retail Federation, which primarily represents importers, said, “If they think this will somehow dampen down the trade pressures with the U.S., I have my doubts. This won’t stop one dumping case or safeguard case from going forward.”

A spokeswoman for the U.S. Commerce Department said: “While China’s reported announcement that it will place export tariffs on some of its textile products seems to acknowledge concerns expressed by a number of countries regarding a potential surge in exports from China following the end of global quotas, China has yet to provide critical details of its intentions. We will continue to work with China and other nations to facilitate an orderly transition from the textile quota system and to promote the competitiveness of U.S. industry and level the playing field for American workers.”

The disclosure came at the end of the final year of the quota system that has regulated the global textile and apparel business for more than three decades. The 148 nations of the World Trade Organization are set to drop those quotas on Jan. 1, setting the stage for what’s expected to be a surge in Chinese exports.

Over the past year, industry representatives from the U.S. and European Union — as well as more than 50 poor nations that depend heavily on apparel exports — conducted a lobbying campaign in Geneva to try to convince WTO officials to rethink dropping the quotas. Their argument has been that without quotas, Chinese apparel manufacturers will rapidly come to dominate the trade in apparel, a sector that’s been a crucial stepping-stone on the path to economic development for dozens of countries.

In Geneva, trade ministers said they’d withhold judgment on the move until the Chinese revealed specifics. By Monday evening, the global organization had received no official notice of China’s plans, according to officials.“We look forward to hearing more about the Chinese taxes on exports of textiles and ready-made garments and, in particular, the rate that they expect to levy the taxes,” said Toufiq Ali, Bangladesh’s ambassador to the WTO.

Bangladesh is very dependent on textile exports and a loss of market share could take a heavy toll on its economy.

WTO officials said the move would be allowed by international trade laws as it focuses on the price of goods, not restricting the quantity of merchandise the company exports. Quantitative restrictions on exports will also not be allowed after quotas are lifted.

Andrew B. Bernard, professor of international economics at Dartmouth’s Tuck School of Business, said at a time when China’s trade practices are increasingly facing scrutiny, the country is wise to “signal goodwill” to its competitors.

Even with quotas in place on most products, China’s apparel and textile exports have been rising rapidly. According to U.S. government data, American companies imported $13.79 billion worth of Chinese goods over the 12-month period ended in September. That represented a 24.9 percent increase and gave China a 17.1 percent share of the U.S. market.

Industry executives — including apparel manufacturers from other developing countries that compete with China — suggested the move was made in part to discourage the U.S. from applying safeguard quotas. Those quotas, which are allowed by the WTO, can be imposed by importing countries on categories of merchandise where imported goods cause market disruption. U.S. manufacturers in recent weeks have filed 12 safeguard petitions covering $1.9 billion worth of Chinese imports.

On Monday, the Committee for the Implementation of Textile Agreements in Washington accepted the 10th of those petitions for review — this time agreeing to look into reimposing safeguard quotas on imports of Chinese knit fabrics.

The current round of safeguard petitions have been controversial because they’ve largely focused on categories of merchandise that will remain under quotas till Jan. 1. The petitioners have argued that they’re reacting to the “threat of market disruption,” a standard that China has claimed is too low to allow the U.S. government to act. China agreed to the safeguard measures when it joined the WTO in 2001.Jesus Juan Canahuati Canahuati, general manager of Elcatex, a Honduran maker of knit apparel, said he hoped China’s move would not discourage the U.S. from imposing additional safeguards.

“China is disrupting the markets, and the safeguard mechanisms that are in place through 2008 are specifically designed to be used when the market is disrupted,” he said in a phone interview. “I hope that this move from China will not prevent those from being imposed.”

McGrath, however, said the move seemed to be part of a campaign to change the Chinese garment industry, and focus its producers on making higher-end products in China, while also investing in factories outside China to make lower-end goods.

“They’re acquiescing the lower-end product to places like Bangladesh and Pakistan and sub-Saharan Africa and the Russian republics,” he said.

Many Chinese apparel companies already have factories outside their home country, often in places in sub-Saharan Africa and Central America, where they can get access to quota-free treatment under U.S. trade laws.

Bernard of the Tuck School said there was some risk to China’s effort to move upmarket.

“China’s advantage is in the lowest end right now. Still, one can understand their desire to move up,” he said. “They may feel they have the luxury of doing that.”

The 1.3 billion people in China are living through a time of extreme economic change. Unemployment in the country’s major cities averages 10 percent and there’s a major migration of people from rural areas into cities in a search for work, particularly as many former state-owned businesses convert to private ownership. That means that the nation needs to create hundreds of thousands of jobs every year.

Observers have said that by moving upmarket, Chinese manufacturers can earn fatter profit margins, pay their workers higher wages and thus stimulate more domestic spending. The country is also focusing much of its economic development hopes on industries other than textiles and clothing — just last week, China’s largest personal computer maker, Lenovo Group Ltd., said it would buy IBM’s personal computer business.

Ziya Sukun, president of the ITKIB Association, a Turkish trade group that was instrumental in organizing the unsuccessful campaign by developing nations to have the quotas extended, said China’s move seemed to signal a realization that its moves had a major effect on the economies of many other nations.“The Chinese government has finally recognized that the quota phaseout is actually causing a giant worldwide problem,” he said. “This will cause a huge worldwide surge in economic and political problems.”

— With contributions by John Zarocostas, Geneva

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