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W2W: What to Watch – All Eyes On China

Two years remain until the 144 World Trade Organization nations lift all quotas on apparel and textiles. That event is expected to bring radical changes in the realm of production and sourcing.<br><br>Most industry observers agree China stands to gain...

Two years remain until the 144 World Trade Organization nations lift all quotas on apparel and textiles. That event is expected to bring radical changes in the realm of production and sourcing.

Most industry observers agree China stands to gain the most from that event, as its massive population of 1.28 billion people, low wages and high unemployment levels make it a highly desirable and competitive location to manufacture just about any consumer product. Those expectations are reinforced by China’s surging export levels to the U.S.

For the twelve-month period ended in October, U.S. imports of Chinese textiles and apparel soared 23.8 percent to $8.09 billion, according to Commerce Department data. China is rapidly gaining ground on Mexico, currently the U.S.’s top supplier of those products, which saw its shipments fall 7.7 percent to $8.52 billion in goods. In the few categories of apparel that have seen quotas lifted as part of the 10-year phaseout process, like bras and some children’s wear, China has quickly become the dominant player.

These developments come even though Mexican products enjoy duty- and quota-free entry into the U.S. under the terms of the eight-year-old NAFTA trade bloc. This raises the question of how well other countries that enjoy special trade access, like the nations of the Caribbean Basin and sub-Saharan Africa, will be able to fend off Chinese competition in 2005.

Another example of how imports can surge in a quota-free environment is Vietnam. In the seven months since the U.S. granted that country Permanent Normal Trade Relations status, its imports have surged. For the year through October, its imports were up more than twelvefold to $668.4 million. U.S. government officials have indicated they intend to impose quotas on Vietnamese imports. Vietnam is not a member of the WTO.

There are a number of factors that will limit China’s growth, though. One is competition: India and Indonesia also rely heavily on exports of apparel and have large populations and low wages that could keep them competitive with China. However, more developed countries with higher wages, including Thailand and South Korea, are seen as more vulnerable.

A major wild card is whether the U.S. government will take advantage of its options to limit Chinese imports. Its concern is that a surge in Chinese production could wipe out nascent garment industries in many developing countries and have a destabilizing effect on their economies that could cascade into political and social unrest.

With that in mind, as well as the knowledge that it can take six weeks to ship goods from China to the West Coast, sourcing executives aren’t planning to put all their production eggs into China’s basket.