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Countdown to 2005: China Safeguard Ruling Threatens Trade Frenzy

The news that the U.S. was slapping quotas on several categories of apparel imports from China was dramatic and could have deep domestic and global...

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NEW YORK — The decision was dramatic enough, and the reverberations could have domestic and global implications.

Following word from the Bush administration that it planned to reimpose temporary quotas on four varieties of textiles and apparel imported from China, industry officials around the world stepped back and tried to determine what this bump on the road to 2005 would mean.

The immediate debate centered on what effect the move would have on the price of bras, dressing gowns, robes and knit fabric — categories on which quotas were removed last year as part of the 10-year quota phaseout. But the longer-term question was what the move presaged for the anticipated end of quotas on textiles and apparel among the World Trade Organization nations on Jan. 1, 2005.

Executives representing domestic textile concerns and apparel importers said the approval of the safeguard petitions meant it was highly likely that the U.S. industry would be filing waves of additional requests in early 2005, when Chinese imports in many categories of merchandise are expected to take off.

The Chinese government released a statement opposing the White House’s decision to limit its exports on more than $600 million worth of goods, but stopped short of retaliating or filing a complaint with the WTO.

“The U.S. administration’s decision to request negotiations regardless of China’s strong opposition runs against WTO principles on free trade, transparency and non-discrimination,” said the statement from a China Ministry of Commerce spokesman. “As a WTO member, China reserves the right to lodge lawsuits with relevant organizations of the WTO to safeguard the interests of Chinese industries.

“The decision to impose quotas on China’s textile products would harm trade between China and the U.S., and the interests of the U.S. China hopes the U.S. will fully recognize the barrier that special safeguard measures will have on the China-U.S. textile trade and the negative impact on bilateral trade and economic relations.”

The safeguard provision was part of the U.S.-China bilateral trade agreement that paved the way for China’s WTO entry in November 2001. In categories where Chinese exports have been found to cause market disruption, it allows the U.S. to unilaterally impose quotas for one year limiting growth in Chinese exports to no more than 7.5 percent above the previous year’s level.

The safeguard quotas could be reimposed for additional years, but that would require the submission of additional petitions. The safeguard provision as a whole expires in 2008.

Through the first nine months of this year, total U.S. imports of Chinese textiles and apparel rose 71.5 percent on a volume basis, according to U.S. Commerce Department data. That growth was driven by enormous increases in the integrated categories that have already seen quotas lifted, where expansion was measured in the hundreds of percentage points.

The safeguard agreement calls for representatives of the U.S. and China to meet to discuss how to enforce the quotas.

Among U.S. textile executives, who for years have been complaining that foreign exports have been driving domestic mills out of business at a cost of thousands of jobs, the reaction was almost one of relief.

Textile titan Roger Milliken, chairman and chief executive officer of Spartanburg, S.C.-based Milliken & Co., called the decision “the result of a groundswell of concern and anger on the part of U.S. workers over our failed trade policy.”

“It’s important to recognize that the approval of these three safeguard petitions is a first step in developing a much more comprehensive and rational trading environment with China,” Milliken said. “We simply must address this issue, not only for the textile sector, but also for all manufacturing in order to prevent the continued loss of millions of high-paying manufacturing jobs in the U.S.”

A spokesman for Wal-Mart Stores Inc. — the world’s largest retailer and the U.S.’s largest importer — said the Bentonville, Ark.-based company imported $12 billion worth of Chinese merchandise last year and is on track to import $15 billion worth of goods this year. He declined to say how much of that volume was in the affected categories.

A Wal-Mart spokeswoman said it was not clear how the decision would influence the company’s sourcing strategy and denied that the retailer had a position on the matter.

“We see this as a matter for the two governments to resolve,” she said.

The domestic textile industry’s campaign for the safeguard action drew in a broad coalition of interests, including traditional voices of the textile industry such as Milliken, trade groups including the American Textile Manufacturers Institute, the apparel union UNITE and a relatively new voice, that of investor Wilbur L. Ross, who recently bought Burlington Industries and has also submitted a bid for bankrupt Cone Mills Inc.

Representatives of the domestic industry hammered away at a message that the U.S. has lost 312,500 textile and apparel jobs since President Bush took office in January 2001, and blamed allegedly unfair competitive trade practices by the Chinese for much of the nation’s economic ills.

Industry executives joined the chorus of domestic manufacturing concerns who complained that China’s fixed exchange rate undervalues the yuan by as much as 40 percent, making that nation’s exports seem unnaturally underpriced. They have also charged Chinese industry with illegal trade practices ranging from transshipping their goods through third countries to circumvent quota rules to running operating losses while accepting loans from state-owned banks that amounted to subsidies.

Jim Chesnutt, president and ceo of Washington, N.C.-based yarn maker National Spinning Co., called the decision “a first step, the acknowledgement on the part of the Bush administration that there is a lot of unrest in Congress as it relates to losing textile and apparel jobs, especially manufacturing jobs.”

For years, the domestic industry has found that its concerns largely fell on deaf ears in Washington. With a presidential election approaching next year, Chesnutt, who also serves as chairman of the ATMI, said the move “shows that there might be a change in the political climate in Washington.”

James Gutman, president of New York-based Pressman-Gutman, a textile and garment importer that brings about 70 percent of the fabric it buys out of China, said he believes the threat of a wave of safeguard petitions in 2005 might prompt China to reexamine its trade policy.

“This decision will, I would suspect, force the Chinese to make some modifications in their export policy, to just try to control it so it doesn’t explode, so it comes in more slowly,” he said.

Jonathan Gold, vice president of international trade policy for the International Mass Retailers Association — an import-supporting group — acknowledged that the decision “opens the door for more petitions coming down the pike.”

In the face of the possibility of a flurry of category-specific safeguard petitions in 2005, the U.S. could opt for some sort of broader control agreement with China, said Grant Aldonas, Undersecretary of International Trade at the Commerce Department.

“If the industry files so many [individual safeguard] cases, it could be more disruptive to trade,” he said. “It may be there is a need for a broader agreement.”

Sources said there has been a sharp decline in Chinese prices in the categories in question since the quotas were lifted. That’s because importers typically pay for quota rights in China and most other major apparel exporting nations. The cost of quota tends to rise during the course of a year, and as the supply gets tight can come to cost as much as it does to produce a garment, according to sources.

Peter McGrath, president of purchasing at Plano, Tex.-based J.C. Penney Co., said in 2005 he expects the ending of the quota system — which will result in increased competition, as well as the end of quota charges — to drive down the average price of Chinese goods by 40 to 57 percent.

Gold, at IMRA, claimed Tuesday’s safeguard ruling would lead to “immediate cost increases” for U.S. retailers.

But supplier sources suggested that retailers — particularly the heavyweights that make up IMRA — would be unlikely to pay higher prices. Rather, suppliers believe that they will face further margin pinching.

“We’re seeing a lot of cost increases, which are bad for us because we can’t seem to pass them along,” said Gutman of Pressman-Gutman.

He noted that in addition to any cost increases that result from the reimposition of temporary quotas on these categories, on Jan. 1 the Chinese government is cutting the tax rebate it pays to exporters to 13 percent from 17 percent of the value-added tax. That too will drive up suppliers’ costs.

But investment bank J.P. Morgan released a report Wednesday contending that the safeguard quotas would not likely increase costs for most major retailers. Costs would only rise, the bank reasoned, if retailers decided to pull sourcing out of China. That would not be necessary since the quotas would only restrict the growth rate of China’s exports, not reduce the total amount exported.

“A significant reduction in the volume of imports from China would lead to large price increases in these categories. Such an abrupt change in trade patterns, however, is highly unlikely,” the report said, adding that retailers that specialize in intimate apparel — like Victoria’s Secret — would feel more of a pinch.

Other economists said they were concerned about the implications of the safeguard moves.

“Anything that increases tariffs and barriers to trade to imports will have an upward pressure on prices. The impact will be relatively modest on retailers. My concern is more than this is the nose of the camel under the tent,” said Carl Steidtmann, chief economist with Deloitte Research. “One of the reasons to get China into WTO was to open up markets to Chinese goods and open up China and move toward a general liberalization of global trade. This is a step backward in that process.”

Sources have speculated that safeguard actions by the U.S. — particularly any across-the-board actions in 2005 — would result in a surge in Chinese exports to the European Union if Chinese producers turned to that large and wealthy market as another likely customer.

In Geneva Wednesday, EU Trade Commissioner Pascal Lamy said he would be keeping a close eye on the effects of the safeguard actions.

“We are aware that this sort of safeguard can create trade diversion,” Lamy said. “We will be assessing this carefully and I will draw my own conclusion when I have this assessment.”

The EU would be in a touchy position to act on Chinese imports if it experienced a surge. That’s because the EU and U.S. are in the midst of dispute over U.S. steel tariffs that have been ruled to violate WTO guidelines.

Lamy also reiterated Wednesday his threat to slap retaliatory tariffs on over $2 billion worth of U.S. products if the steel tariffs are not lifted.

Within the U.S., the safeguard action — and the possible effects of total quota removal — is likely to remain a political hot potato for the coming year, particularly if the employment picture remains grim.

The President’s reelection hopes are tied to many trade issues, and the safeguard move could help politically in key textile battleground states in the South.

Many trade veterans and pundits are questioning whether the Bush administration is turning its back on its free-trade agenda. In addition to the steel tariffs — which have angered the EU and Japan — the U.S. subsidization of agricultural products has angered developing nations and contributed to the collapse of the recent WTO talks in Cancún, Mexico.

“There is a lot of contradiction,” said Ed Gresser, director of trade policy at the Progressive Policy Institute, a think tank in Washington. He said he believed trade policy had “proved to be pretty hard and more politically painful than [the administration] had ever thought it might be. That is why you are seeing some areas where what they are doing isn’t what they talked about.”

The concerns of the effects of 2005 on employment are not limited to the Southeastern U.S. Across the world, developing nations from Africa to Asia to Latin America have counted on textiles and apparel as important stepping stones in the industrialization process. For many countries, apparel exports are the only viable source of hard currency unless they begin exporting natural resources.

Cheidu Osakwe, director of the textiles division at the WTO, said in New York Tuesday that the textile and apparel industries represent 6 percent of the global merchandise trade and 14 percent of worldwide employment. Textiles represent 94 percent of Vietnam’s exports, 83 percent of Lesotho’s, 72 percent of Cambodia’s, 71 percent of Pakistan’s, 68 percent of Bangladesh’s and 65 percent of El Salvador’s, but only 19 percent of China’s.

“Even as the value of Chinese apparel exports increases, their share of China’s total exports is decreasing,” he said.

Chinese apparel industry executives have reported in recent months that it’s harder to get the government’s attention when trying to open a garment or fabric factory in southern provinces, where Beijing is now trying to encourage the development of more high tech industries.

Still, given the massive industry in place and the enormous amount of capacity still under construction, industry observers predict that China’s share of the U.S. apparel market will skyrocket if quotas are lifted in 2005. In Japan and Australia — two nations where apparel imports are not regulated by quotas — China holds more than three-quarters of the market. For the year ended September, China held 18 percent share of the U.S. market for imported apparel, as measured by volume.

Observers said that a surge in Chinese markets could devastate the economies of many developing countries, particularly in sub-Saharan Africa and the Caribbean Basin.

“What about AGOA, what about CBI? What are we doing negotiating all these deals with our neighbors…if in reality, we’re basically going to accept that China’s going to have 75 percent of the market?” Gail Strickler, president of New York converter Saxon Textile Corp., asked rhetorically.

Carlos Arias, executive vice president of the Guatemala City-based garment maker Koramsa, said losing market share to China is a major concern for many in the developing world.

“The consequences to our economies are very big,” he said. “We are very heavily reliant on agriculture as a region, and we’ve been hoping to have the apparel industry be — as in many cases it has been in the past — a road to industrialization and exports. I think that Central America is very vulnerable to a decreasing apparel industry. We have massive numbers of unemployed in Central America and adding to those numbers would be catastrophic to us because we don’t have the options that other countries have. We don’t have the alternative industries.”

The nations covered by the African Growth & Opportunity Act are seen as even more vulnerable in 2005. That’s because they lack the geographical advantage of Caribbean nations and also because most of their apparel factories are reliant on fabric shipped in from Asia. Executives have said there will likely be no good reason to continue to ship fabric from Asia to to be sewn in Africa for U.S. consumers once quotas are lifted.

Referring to the AGOA nations, Osakwe said, “There will be a shock for those countries on the first of 2005.” Still, he said that they will need to diversify their economies: “Countries will have to change their trade priorities…that is how the market works.”

If the safeguards quotas are imposed, they will likely not come as a surprise to major Chinese apparel manufacturers, who have spent months wondering what will happen but proceeding with major construction projects anyway.

In an interview last month, Willie Tan, executive vice president of Luen Thai International Group Ltd., a multinational contractor headquartered in Hong Kong, said his company is proceeding with massive factory expansion in China despite the safeguard issues.

 

“Long term, it is clear that there will be no quota,” he said. “That is what the WTO wants.”

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