On the Road to 2005: Who Loses to China?

NEW YORK — It’s the 1.28 billion person question.<br><br>That’s the population of China, and its sheer size — along with its citizens’ abilities to make tremendous quantities of a variety of merchandise — has...

NEW YORK — It’s the 1.28 billion person question.

This story first appeared in the November 26, 2002 issue of WWD.  Subscribe Today.

That’s the population of China, and its sheer size — along with its citizens’ abilities to make tremendous quantities of a variety of merchandise — has apparel executives across the world wondering how much of the manufacturing industry it will dominate in 2005, when quotas on all garments and fabrics are dropped among World Trade Organization nations.

China’s growing role in world trade was a key topic at last week’s Textile & Apparel Importers Trade & Transportation Conference, where speakers used the metaphor of standing on the edge of a cliff to describe the magnitude of change they expect to see in apparel sourcing patterns in 2005.

Everyone who addressed the topic Wednesday at Manhattan’s Marriott Marquis Hotel agreed that China’s share of the apparel market is likely to skyrocket, as evidenced by its explosive growth in the few categories of textiles and apparel from which quotas have already been lifted since 1995, when the rollback process began.

Less clear is what nations are most likely to lose out to Chinese competition. While speakers agreed that many apparel manufacturing nations are competitive today largely because they have quota rights, the fact that competitiveness varies from factory to factory within a country means the losers will be widely distributed.

That’s good news to the huge swaths of the developing world, from Latin America, to Africa, to central Asia, that rely on apparel manufacturing as a key economic driver. Robert Boynton, senior textile coordinator at the State Department, said his department is working on a report that will cover what effects the quota phaseout is likely to have on other nations. His research has included conversations with industry executives and diplomats abroad.

“The picture that it paints is not pretty,” he said. “The present system has set up some countries for a hard fall.”

He said firms that source fabric and garments from 40 to 50 countries have told him they intend to focus on as few as 12 to 15 in the years after quota’s elimination.

“It’s easier to pick the winners than the losers,” Boynton said. “Not everybody is pulling out of the same set of 10 to 15 countries.”

Boynton did not name countries, but according to sourcing executives, key countries with potential for losing ground are Thailand, Indonesia, Sri Lanka and Singapore. Boynton surmised that the effect of quota phaseout is likely to be “spread out somewhat.”

The open question was what, if any, steps the U.S. and other governments would take to limit Chinese imports. Several sourcing officials said they expected some restraints to be imposed on China. A White House official insisted that the Bush administration has no plans to try to break the trade-liberalization deals already on the table, though he acknowledged that the President’s term only lasts through the first 20 days of 2005.

Ron Shulman, vice president of strategic sourcing at The Limited Inc., said as the Columbus, Ohio-based company plans its post-2004 sourcing strategy: “The impact of China’s accession to the WTO is the variable. In a free-market environment, there would be a massive shift to China.”

He said that since quotas on synthetic-fiber bras were dropped at the beginning of this year, China’s share of U.S. imports in that category has skyrocketed from 2.4 percent to 17.7 percent.

“China does understand flexibility, speed to market and value pricing,” he said. “Left alone, China will continue to dominate and crush all competition.”

Julia Hughes, vice president of the U.S. Association of Importers of Textiles & Apparel, which hosted the event along with the American Import Shippers Association, said China has also seen surges in the other categories that have had quotas lifted. This year, its market share in cotton dressing has shot up from a little more than 5 percent to 21 percent, moving it from the U.S.’s fourth-ranked supplier to first. Likewise, in man-made fiber dressing gowns, its share has risen from less than 5 percent to around 22 percent, catapulting it from seventh place to first.

Overall, Hughes projected that prices on garments will drop 5 to 10 percent as quotas are lifted, as a result of intense competition.

The size and ability of China’s apparel industry threatens those of many other countries, said Peter McGrath, president of J.C. Penney Purchasing, based in Plano, Texas.

“Many textile countries exist today only for their quota holdings and will not survive” the tremendous changes in sourcing patterns expected in 2005, he said. “We are now on a cliff, and some will die and some will fly.”

Still, McGrath said it’s likely that some measures will be put in place to limit China’s possible growth and the expected ensuing damage to other nations’ apparel industries.

“Anti-dumping mechanisms will be the newest mechanism of trade disruption and protectionism,” he said.

Limited’s Shulman said: “We are planning that safeguards will probably be imposed on some products out of China.” He explained that there are several ways the U.S. and other nations could block Chinese shipments.

First, to join the WTO, China agreed to a provision that “allows any importing WTO country to unilaterally impose a new quota on any Chinese [textile] product for one year on the groups that China is causing market disruption,” he said. That provision lasts through 2008.

A second provision, which lasts through 2013, allows nations to impose two to three years of new quotas or tariffs on specific products in which Chinese exports surge. The U.S. has already imposed such a restriction on pedestal actuators — the foot-pedal mechanisms that barbers use to raise and lower their chairs.

Finally, Chinese imports are also subject to existing rules governing trade, such as those that prohibit dumping and the measures the U.S. used recently to impose extra duties on imported steel.

Given the amount of concern surrounding its WTO accession, Shulman noted there’s another, seemingly outlandish possibility that Limited is taking into account.

“What if China agrees to an extension of quota?” he asked rhetorically. “China makes money off of quota. It adds certainty.”

In China and in many other nations, quota rights are traded as a commodity and can be a significant cost. Ted Sattler, group executive vice president of foreign operations at Phillips-Van Heusen Corp. — who spoke at another event held in Manhattan last week sponsored by the Foundation for Accounting Education — said the typical cost to import a dozen shirts from Bangladesh to the U.S. is $16. That’s double what it costs to import the same shirts to the European Union, and the reason for the difference is quota charges, he said.

“Whether or not the factory is paying for it is not the issue,” he said. “That’s the going rate.”

David Spooner, special textile negotiator with the Office of the U.S. Trade Representative, contended that executives’ fears that the U.S. will try to limit Chinese imports after 2005 are unfounded.

“I don’t have such a gloomy picture about post-2004,” he told the USA-ITA conference. “The administration is serious about adhering to our commitments.”

While he acknowledged it’s possible that anti-dumping complaints will be raised against China, he said, “I’m hopeful that they won’t occur.” He noted that filing anti-dumping cases requires many hours of legal work and suggested that the tight financial situation at many mills, coupled with disagreements within the textile and yarn industry, make it less likely that companies will band together to bring complaints.

He noted that the American Textile Manufacturers Institute has already filed a petition asking the U.S. to limit imports of Chinese products on which quotas have been lifted. The USTR has not yet responded because it’s thinking about what precedent it wants to establish. The intent of its response, he continued, will be “spelling out, for fabric, how we’ll handle future petitions.”

Shulman, raising another key issue about the quota phaseout, said the fourth quarter of 2004 is likely to be a tricky time for importers. Quotas typically fill toward the end of the year, and importers seek waivers that allow them to borrow against the next year’s quota. But there will be no 2005 quota to borrow against, he pointed out, so, “the well will be dry.”

Since that quarter will also bring the final months of another presidential campaign, any effort to bend quota rules is likely to attract a lot of political attention.

“It’s going to be a critical stage for the importing community,” he said.