WASHINGTON — Trade relations between the U.S. and China took a dramatically downward turn Wednesday.
The U.S. filed a World Trade Organization case against China, targeting a broad export subsidy program and seven sectors, including apparel, textiles and footwear, and could have broad ramifications for the industry’s sourcing strategies.
The U.S. is challenging China’s “Demonstration Bases-Common Service Platform” export subsidy program that American officials claimed provided $1 billion over a three-year period to suppliers, which then gave discounted or free services to Chinese manufacturers that export in the sectors identified. The value of subsidies provided per base varied depending on size, industry and location, but officials said there is evidence that certain “base enterprises” have received at least $635,000 worth of annual benefits.
Exports from the Demonstration Bases program comprise a “significant portion of China’s global exports,” U.S. trade officials claimed.
In 2012, 16 of the estimated 40 “demonstration bases,” or clusters of companies, in the textile sector allegedly receiving subsidies accounted for 14 percent, or $33.25 billion, of China’s textile exports to the world, trade officials said at a news conference. The other six sectors identified by the U.S. as being subsidized by China’s program include advanced materials and metals, light industry, specialty chemicals, medical products, hardware and building materials, and agriculture.
“China designates certain companies in these sectors as being demonstration bases, which is contingent on them exporting their products,” said U.S. Trade Representative Michael Froman. “Once designated, they are eligible for subsidized services provided by the ‘common services platform.’ So if you are a Chinese textile firm designated as a demonstration base, you might get subsidized IT services, subsidized product design services and subsidized training services for your employees. All of these services are provided for free or at a discount and undermine fair competition.
“In our view, this program violates the commitment China made when it joined the WTO not to provide certain export subsidies,” Froman continued. “In doing so, it injures American workers and businesses, really anyone who plays by the rules and wants to compete fairly on the merits of their hard work and the quality of their products.”
Froman said that is why the U.S. is challenging China’s export subsidy program in the WTO. He noted that it is to “hold China, one of our most important trading partners, to its word and do our utmost to guarantee that the rights of Americans are not subverted by unfair foreign giveaways that reduce fair competition and threaten jobs and wages here at home.”
China’s Ministry of Commerce said on Thursday that its designated model zones for exporters meet WTO rules, according to a report on the official Chinese news agency, Xinhua.
According to Xinhua, the Ministry of Commerce, in response to U.S. charges that China “unfairly subsidizes” its exports through a broad subsidy program in seven sectors, including textiles, apparel and footwear, said: “the purpose of these model zones is to transform China’s foreign trade and promote its sound and stable development.”
The Ministry of Commerce said it will “settle the issue according to WTO dispute procedures,” Xinhua reported.
U.S. textile producers lauded the action, while apparel and footwear importers and retailers said they would keep a close eye on the case.
For the U.S. textile industry, which has lost hundreds of thousands of jobs in the past decade to international competition but has seen a mini-resurgence in U.S. production tied to the Made in USA movement, the new enforcement action was seen as a positive.
Rep. David Price (D., N.C.), representing a big textile-producing state, said at the news conference that the state knows “firsthand the benefits and drawbacks of liberalized international trade.”
“We know that the textile and apparel industry in particular has been undermined by unfair foreign competition,” Price said. “I’m convinced that American workers and industry can compete with anyone in the world if given an even playing field and a clear set of rules. That’s why today’s action against China is important to American industry, particularly the textile industry, which has suffered from the lack of enforcement of international standards over the years. While the WTO rules we are talking about here are limited in scope, they do provide an important framework for our international relationship and it is imperative that our trade representative enforces them.”
A U.S. trade official who spoke not for attribution in a briefing with reporters after the news conference said U.S. jobs are significantly impacted by the Chinese subsidies.
“These hundreds of thousands of jobs in furniture, in seafood and other aquaculture, in agriculture, as well as in light industry and certainly in textiles are put at risk by this kind of program in China,” he said.
Auggie Tantillo, president and chief executive officer of the National Council of Textile Organizations, said the action is a “validation of what we have claimed for many years — that China’s astounding growth in the marketplace was, to a degree, artificial.
“Certainly there are competitive suppliers [in China], but you don’t go from a small portion of the U.S. market to nearly 50 percent [China’s share of the U.S. textile import market is 46 percent] in basically a dozen years without some help along the way,” he added.
Tantillo said if the U.S. is successful in the WTO, which could take years for a resolution, the U.S. textile industry will benefit. A WTO case the U.S. filed in 2008 against China involving a $10 billion annual value-added tax-rebate program was settled in 2010 when Beijing agreed to end the program.
“In a best-case scenario, China’s prices will start to reflect what is much more of an accurate structure in terms of what it costs to produce textiles and apparel,” he said. “That, of course, makes us more competitive and allows us to hold on to market share, hold on to sales and programs and, most importantly, hold on to our workforce to a much greater degree, which is potentially a significant benefit for the U.S. economy.”
Importers were taking a wait-and-see approach to the case. Most industry officials said they did not expect an immediate impact on prices from China, but they could expect to see rising prices and a shift in sourcing if the case is successful.
Apparel and textile imports from the U.S. to China totaled $41.8 billion in 2014, according to U.S. government figures. China has a 38.9 percent share of the combined U.S. apparel and textile import market. Footwear imports from China to the U.S. were $16.6 billion last year.
Retailers and apparel brands have been facing rising labor costs in China for several years, forcing companies to shift some of their production to other Asian countries, such as Vietnam and Bangladesh; Central America, and back to the U.S.
Marguerite Trossevin, outside trade counsel to the Retail Industry Leaders Association, said the WTO cases typically take several years to play out. If the U.S. is successful at the WTO and China eliminates its export subsidy program, the cost to manufacture products in China could potentially go up, she said.
“If they are in fact benefiting from substantial subsidies and if they lose those benefits, then presumably that will impact their [Chinese supplier] costs,” Trossevin said. “How big the impact is will vary a lot from company to company. Not [all Chinese manufacturers are] taking advantage of subsidies at the same level. The impact would not be the same across the board.”
Trossevin also said retailers could see an offset to any increase in costs in China if the Trans-Pacific Partnership agreement is completed and implemented. The U.S. is negotiating TPP with 11 other countries, including Vietnam, the second-largest apparel supplier to the U.S., behind China.
“Retailers already diversify sourcing where they can and the opportunities in TPP will allow them to diversify even further and will mitigate the impact from a situation like this,” she said. “Also, since it will take some time before this case plays out, it will give people time to do planning and adjusting.”
Stephen Lamar, executive vice president at the American Apparel & Footwear Association, said it is too early to tell what the potential impact of such a case might be.
“There is a process the WTO has…and this takes a period of time,” Lamar said. “Hopefully it will lead to a resolution in a very predictable manner, but it’s too early to say.”
Julia Hughes, president of the U.S. Fashion Industry Association, said, “I don’t think anyone should panic about this case raising prices in China, certainly in the short term. For anyone who may feel concerned there is going to be an impact on business tomorrow or even next year, that is not very likely because these cases tend to take time.”
Hughes said China has already invested in other parts of Asia, a process which might be “accelerated” if the WTO case moves forward.
“One assumes as you would see here in the U.S. that when you take away a subsidy program, you take away some support for an industry and that may have an impact on how much manufacturing is done in China that is then exported to the U.S. market,” she added.