WASHINGTON — The Obama administration may be near a turning point in U.S. trade policy toward China, leaving industry executives pondering the impact on billions of dollars in global apparel and textile commerce.
This story first appeared in the February 9, 2009 issue of WWD. Subscribe Today.
At stake is a trading relationship involving $30.4 billion worth of products imported from China from January through November 2008. Industry and government experts speculate that President Obama is set to confront what many believe are China’s undervalued currency and unfair trade practices.
In his first weeks in office, Obama and administration officials indicated they could move swiftly on China’s currency, but they also said a deepening recession is not the time to engage in a trade war, referring to a “Buy American” provision some Democrats wanted in the economic stimulus package. Obama pledged during the campaign to examine the impact of trade on jobs and the economy, leading executives and experts to predict a new policy that could bring stricter interpretation and enforcement of antidumping and illegal subsidy laws, particularly relating to Chinese imports.
The controversial “Buy American” initiative seeks to ensure that only U.S. iron, steel and manufactured goods are used in infrastructure projects. But the President has signaled that he wants to avoid being seen as a protectionist.
“I think it would be a mistake…at a time when worldwide trade is declining for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade,” Obama said last week during a TV interview. “I think we need to make sure that any provisions that are in there are not going to trigger a trade war.”
His remarks came after Canada and the European Union urged the “Buy American” provisions be dropped.
Retailers and apparel brands are producing clothing globally in a quota-free environment for the first time in three years, after the elimination on Jan. 1 of quotas on 34 Chinese apparel and textile import categories that had been established in a bilateral accord in 2005. That agreement came about after global quotas were eliminated and Chinese imports to the U.S. surged.
“Clearly, Obama is looking beyond his campaign rhetoric to the realities of today’s world,” said Kevin Burke, president and chief executive officer of the American Apparel & Footwear Association. “In the atmosphere we are in right now, do we want to erect protectionist barriers that create a trade war? I don’t think Obama wants to be leading a trade war.”
The President’s statement, however, followed tough talk on China and its currency policies from top administration officials. Treasury Secretary Timothy Geithner told members of the Senate Finance Committee that Obama believes China is manipulating its currency, which provoked strong words from China’s premier. Then Vice President Joe Biden said the U.S. would “get blunter” with the Chinese to pressure the economic giant to “play by the rules” on trade and currency. Biden said the administration had not made a determination yet on whether China manipulates its currency.
“It’s important to continue engagement with China and not give in to the protectionist sentiments,” said Mark Jaeger, senior vice president and general counsel for Jockey International. “It’s also important to enforce consistently both U.S. and Chinese obligations under various trade agreements. Trade with China is part of the economic solution, and we need to be sensitive to taking steps that undermine that important relationship.”
Frank Kelly, former vice president of international trade compliance and government affairs for Liz Claiborne, and now running his own consulting firm, said Obama isn’t a “protectionist” but he thinks the President will “tighten trade issues with China, and I think countervailing duties will be the big thing.”
If Democrats in Congress prevail with currency manipulation legislation that could impose sanctions on China, Kelly said it will put “a big air of uncertainty over doing business in China.”
Some sourcing executives are undeterred by a change in policy toward China and plan to stay the course.
“The early days of the Obama presidency are important for them to establish some bulkheads, but from our perspective and what’s going on in the world, it’s a footnote we’ll take note of and monitor,” said Jeff Streader, senior vice president of global sourcing for Guess Inc.
The company won’t create a new strategy in anticipation of any policy changes from the U.S. government, he said. The global recession and mounting problems in China, including rising job losses as consumer demand for apparel plummets, are larger concerns for sourcing decisions, Streader said.
China’s currency has been a flash point on Capitol Hill for years, but little action was taken under former president George W. Bush, who vowed to veto most of the legislation and chose to push China toward reform through diplomacy that coincided with the People’s Bank of China ending a peg to the dollar in 2005, tying it instead to a basket of currencies, and then seeing the currency appreciate moderately.
China’s subsidy programs and contaminated imports have also come under scrutiny and are on the fashion industry’s radar because they spawned several pieces of punitive legislation last year that did not gain enough critical mass to move past the House and Senate to Bush’s desk. Several members of Congress joined the domestic manufacturing sector in arguing that the yuan is undervalued by as much as 40 percent, which puts U.S. manufacturers at a competitive disadvantage against lower-priced Chinese imports. A more aggressive stance by Obama on China’s currency could add impetus to some pending legislation that stalled last year.
“I’m not sure how much we can tell right now” in terms of how Obama will approach the currency issue, said Cass Johnson, president of the National Council of Textile Organizations, which is a member of the China Currency Coalition that has been lobbying for legislation that would make currency manipulation a subsidy and actionable under U.S. trade remedy laws. “But there will be action-provoking incidents soon that will give us more information about how his administration” will address trade and currency issues with China.
Johnson pointed to several barometers the industry is watching, including the Treasury report on currency in April and the anticipated reintroduction of a bill that would define currency manipulation as a subsidy, forcing Obama to take a position.
Most experts predict that Congress will pass legislation punishing China for its currency policy, but it’s unclear on how strongly Obama will back it. An aggressive stance against China at a time when the U.S., China and the world is in a global recession might just be the kind of action Obama will try to avoid, at least in the short term. Terse words from China’s Premier Wen Jiabao could make a lasting impression as Obama develops his trade policy.
“To allege that China is manipulating its currency exchange rate is completely unfounded,” Jiabao said in London on Feb. 2, according to the official Chinese news agency Xinhua. He said China has been reforming its exchange rate since the second half of 2005, and added, “I think that it is confusing right and wrong when people who have been overspending blame those who lent them the money.”
He said the U.S. and China would need to work together to move past the looming global recession.
“Geithner’s comments set off some alarm bells in China,” said Joseph Fewsmith, professor and director of the East Asian Studies Program at Boston University. “I think the background is that Obama is simply not a known quantity in China. I think the administration is very well aware of our complex and important relationship with China, and I can’t imagine that anyone in the administration wants to set out a hard line against China, especially on currency issues, in these difficult economic times.”
White House Press Secretary Robert Gibbs indicated last week that any significant determination about Chinese currency will be made this spring when the Treasury Department releases the first of its twice-yearly reports on the topic. Gibbs said Geithner’s comments reflected Obama’s stance throughout the campaign.
Former trade officials and industry executives are bracing for stronger action against China on several fronts, including antidumping and countervailing duty cases, as well as World Trade Organization cases. There is a pending WTO case against China on textile subsidies. Countervailing duties make it more expensive to import goods from countries deemed to be giving their producers inappropriate subsides. Dumping occurs when goods are shipped into a country below market value or at less than the cost of manufacturing.
“The whole trading relationship with China will come under more scrutiny,” said Scott Quesenberry, former special textile negotiator under the previous U.S. Trade Representative, Susan Schwab.
The Bush administration was willing to challenge China through official WTO channels and expressed concern about its currency, but stopped short of publicly labeling China a currency manipulator, he said.
“It is clear that there are political risks on the horizon and companies have got to manage those political risks,” Quesenberry said. “It doesn’t matter if they are huge multinationals or more limited fashion houses or they are a niche product.”
David Spooner, former assistant secretary of commerce for import administration, said Obama’s “tough line” on China on the campaign trail and the early signals from the administration indicate “at least a desire to be tougher.”
Spooner expects approval of legislation reintroduced by House Ways & Means chairman Charles Rangel that would codify a Commerce Department decision last year to apply antidumping laws to nonmarket economies such as China.
“The issue of China and subsidy law will be litigated like crazy at both the Court of International Trade and at the WTO,” Spooner said. “We’ll also see a spike in antidumping and antisubsidy cases in 2009, as well as an increase in executive branch activity.”