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Is a textile trade war breaking out?

On May 18 the US Department of Commerce decided to impose special restrictive measures on three categories of Chinese textile products. Two days after that the US placed import quota restrictions on another four Chinese textile categories.

In Europe, the EU Textile Committee conducted an investigation during April and May on whether to put in place special safeguard measures on Chinese textile imports, and requested formal consultations with the Chinese government regarding the problem. It does seem that a global trade war is brewing.

At the beginning of this year the Chinese government was already aware of the possible repercussions from the US and EU in reaction to an expansion of Chinese textile exports. On Jan 1 they increased export duties on a total of 148 textile products, and on May 22 they did the same for 74 more products. These were acts of good will designed to placate the US and EU and prevent any retaliatory measures.

Nevertheless, the US and EU considered Beijing's new duties to be too small to have any real effect, and insisted that China make more compromises. Under these circumstances the Chinese government changed course. On June 1 it removed export duties on 81 products until agreements can be reached in bilateral talks with the EU and the US.

On June 11, China and the EU signed a Memorandum of Understanding (MOU), in which China agreed to limit its annual growth rate of textile exports to the EU to between 8 percent and 12.5 percent for the next three years.

The EU, for its part, promised to halt its investigation into 10 categories of Chinese textile imports, and to exercise restraint in applying Article 242 of China's accession agreement to the WTO to the textiles in those categories. After 2008, it will exercise restraint on all categories of Chinese textiles.

Article 242 refers to a paragraph in the agreement made by China when it entered the WTO saying that although quotas on textile imports were to be lifted on Jan. 1 this year, WTO members would retain the right to adopt special safeguard measures until the end of 2008 if imports of Chinese textile and apparel products led to "market disruption."

In fact, the rapid influx of Chinese clothing and textile products since the beginning of this year is the main culprit behind the serious trade imbalances between China and the US and China and the EU.

In previous years, faced with foreign quotas that limited their textile exports, Chinese textile producers faced a situation in which their costs accounted for up to 30 percent of the retail price. When quotas were lifted this year, these companies' costs plummeted.

To add to all this, China opened up foreign trade agencies this year, drastically increasing the number of textile-exporting firms. The result was that Chinese textile exports to the US and EU rose 250 percent and 82 percent, respectively.

During the first five months of this year textiles and clothing exports represented an average of 14.9 percent of China's total export value, but increased by an average growth rate of 48.6 percent.

In particular, the gross value of Chinese textile and clothing exports to the US for the period January through April equaled US$6.33 billion, representing a hike of as much as 54.2 percent.

Closer examination reveals that in the first quarter of this year alone, exports of seven categories of Chinese textiles, including cotton and man-made fiber non-knit shirts, pullovers and corsets, increased in volume by 285 percent; 241 percent; 2,270 percent; 11 percent; 3,274 percent; 373 percent and 327 percent, respectively.

Up until the end of April, Chinese exports of pants, shirts and underwear to the US increased by 1,422 percent, 600 percent and 917 percent.

During the same period, the prices of these commodities fell by 24.7 percent, 20.5 percent and 43.1 percent. With such an increase in volume and drop in prices, it's no wonder there's been such a strong reaction from the US and EU.

By June 23, out of the seven categories of Chinese textiles subject to quota restrictions by the US, four have already reached 80 percent of their annual quotas.

The entire annual quotas for the cotton shirts and pants categories have already been filled.

In order to placate the US, the Chinese government intends, as of July 20, to require textile producers exporting to those countries which have placed import restrictions on these goods to apply for a temporary export permit.

China and the US held two rounds of bilateral talks on textile trade in June.

If the two countries fail to reach agreement this month, thousands of Chinese textile producers will be forced to close shop -- and this will involve many Taiwanese businesspeople in China.

Tung Chen-yuan is director of the China Economic Analysis project at the Cross-Strait Interflow Prospect Foundation.

Translated by Paul Cooper
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