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South Africa Reaches Deal on Quotas With China

The South African government, supported by the textile manufacturing sector, and the country's top retailers have been heading for a showdown since June.

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JOHANNESBURG — The South African government, supported by the textile manufacturing sector, and the country’s top retailers have been heading for a showdown since June, when the Department of Trade & Industry said it had drafted an agreement with China’s Ministry of Commerce for quota restrictions on Chinese textile imports.

This story first appeared in the September 19, 2006 issue of WWD.  Subscribe Today.

On Sept. 1, the government announced that the Memorandum of Understanding on bilateral trade and economic cooperation between the two countries, one that Chinese Premier Wen Jiabao said during his state visit in June was “based on the principles of cooperation on an equal footing, mutual benefit and win-win,” had been signed. The MOU stipulated import restrictions in 31 categories for 200 items, effective Sept. 28 and running through Dec. 31, 2008.

On Wednesday, the government, taking into account retailers’ concerns over the potential loss of business during the busy holiday period, announced it would delay the implementation of the new quota restrictions to the beginning of next year. Until the end of the year, only 5 million units will be allowed in, anything over that amount will be confiscated or destroyed. Retailers are concerned that with holiday stock coming in, that number will be reached easily within the next month.

Percentages for next year and 2008 have yet to be determined and will be done in consultation with the industry.

The latest figures from the DTI show that South Africa’s year-on-year trade deficit with China rose to 27 billion rand, or about $3.6 billion, in June. This is 43 percent higher than the same period last year and 19 percent higher than at the end of last year. According to the latest trade balance statistics, South Africa imported goods worth 36.5 billion rand, or $4.86 billion, in the 12 months through June 30, while exporting only 9.6 billion rand, or $1.86 billion, in goods to China.

On the other hand, clothing and textile products imported from China during this period amounted to 5.7 billion rand, or $760 million, representing about 20 percent of South Africa’s total imports from China.

Domestic retailers — notably the top seven retail giants Woolworths, Edcon, Truworths, Queenspark, Pepkor, Mr. Price and Foschini — were up in arms about the quota deal, complaining that they had not been consulted at all during the negotiation stage and yet were given a mere seven days to respond to the DTI’s proposals.

Far from being a “win-win” situation, Simon Susman, chief executive officer of Woolworths, said, “It is a lose-lose situation.”

He said, “Had the DTI been able to set aside due time to do a full impact study, they would reconsider this an ill-advised measure. The impact will be significant. Customers will see higher prices, particularly in sensitive areas like children’s clothing, which could go up by 20 to 25 percent. Shelves will be empty over the holiday season, and ultimately there will be damage to South Africa’s textile industry, the industry to which these quotas are adding even further protection.”

Susman and the other key retailers in the market warned that they could lose up to 5 billion rand, or about $667 million, in the next three months due to the quotas.

“It’s completely unworkable,” said Martin Deall, merchandise logistics executive at the Edcon group. “We do not support quotas in any form, as they are the worst form of protection from a retail perspective and this view has been repeatedly made known to the DTI.”

The DTI dismissed the retailers’ fears as exaggerated and alarmist, and stressed that the quotas were being introduced “in response to an official application launched by labor and supported by manufacturers.”

It pointed out that the government’s economic liberalization policies have been “instrumental in the significant growth seen in our international trade,” which allowed the retail sector to flourish. Aggregate published profits of the top five clothing retailers, said the DTI, grew from 1.7 million rand, or about $227,000, in 2002 to 6.6 billion rand, or about $880 million, in 2006, “partly attributable to direct sourcing from markets such as China.”

“During the same period, though, our domestic manufacturers have seen substantial decline and experienced severe job losses,” the agency said.

“Some 67,000 jobs have been lost in the sector since 2003,” said Ebrahim Patel, general secretary of the South African Clothing & Textile Workers Union. “In the same period of time, there was a 480 percent increase in imports from China in dollar terms. The retail sector has made a killing. The quotas are an appropriate response.”

Patel admitted that the South African textile industry had taken a severe beating since the worldwide quotas were scrapped at the beginning of 2005, and that recovery will be a gradual, evolving process. The new quota restrictions on Chinese imports are more than “mere protectionism,” he said, and that, as the substantial domestic manufacturing capacity had been eroded by the influx of Chinese clothing, it was imperative that the industry work on “a new competitive plan.”

There was less vertical integration in the industry than in the past, he conceded, and said: “Spinning capacity, for instance, has decreased.” But he said the industry was more than capable of taking up the slack in supply that the retailers were bemoaning.

“We have a workforce of 160,000 people that are willing, able and available,” Patel added. “This number can increase by 50,000 to 60,000 workers with the necessary skills who are currently employed.”

Brian Brink of the Textile Federation of South Africa would like to share Patel’s optimism.

“Hopefully, some business comes back to our shores,” he said. “It’s a complicated issue. I would guess that importers will now try to scramble to source elsewhere. India and Vietnam are two countries that come to mind. I am not sure they will be able to find locally similar rock-bottom, bargain-basement prices as in China, and with the same quality.”

Deputy President Phumzile Mlambo-Ngcuka cautioned against retailers sourcing cheap clothing from other countries in an attempt to get around the new quotas. She called it tantamount to “treason,” adding that it would be grossly unjust to the poor and unemployed of South Africa.

However, Deall maintained that “the imposition of quotas will not save jobs in manufacturing.”

“It may very well cost more jobs and this job loss will probably spread across many other sectors,” he said. “The only way to save the local industry is through initiatives that promote collaboration across the entire supply chain and provide win-win opportunities for all players.”

In a surprise move, the Clothing Trade Council, known as Clotrade, which represents the clothing industry in South Africa, firmly sided with the retailers and rejected the government’s planned measures. In a joint statement, Clotrade warned the quota plan would cause “chaos and enormous disruption.”

It claimed that the government, in its haste to address the concerns of the manufacturing industry without thorough and proper consultation and investigation, failed to take into consideration several factors. These included “the lack of capacity of the local industry to meet demand, given the massive downsizing and restructuring that has taken place in recent years; the negative impact on the consumer in general terms, and particularly in relation to the welfare of poorer and unemployed consumers in South Africa who are desperate for cheaper clothing, and the impact of not taking lead times and committed orders into account.”

Patel nevertheless believed the quotas would revitalize the manufacturing sector.

“There has been an explosion of design innovation in South Africa in recent years, which has witnessed a growth in domestic brands,” he said. “Moreover, we have made fantastic progress in our manufacturing capability and technology. South Africa remains very strong in weaving and finishing, and we’re talking high-quality fibers, not cheap yarn.”

Susman stated that Woolworths always has been a supporter of the local clothing industry. Some 65 percent of Woolworths clothing for the next season, he said, “will be produced in South Africa by local manufacturers who have worked closely with Woolworths to produce high-quality product at competitive values using the latest technology. These producers, too, will be affected by both the fabric quota and the product quota.”

Clotrade also pointed out that quotas would “open the way for unscrupulous dealers and encourage a culture of dishonesty.”

Brink said, “The difficulty with this proposal is its actual implementation. Will it really stop illegal imports from China coming into the market? Will our customs and revenue departments be able to adequately police this situation and monitor all goods coming in? That’s the real challenge.”

Industry analysts estimated that there were around 2,000 to 2,500 operators engaged in the illegal importation of Chinese goods.

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