CASE STUDY 6: TRADE IN TEXTILES – HOLDING THE CHINESE JUGGERNAUT IN CHECK Since 1974, international trade in textiles has been governed by a system of quotas known as the Multi-Fiber Agreement (MFA). Designed to protect textile producers in developed nations from foreign competition, the MFA assigned countries quotas that specified the amount of textiles they could export. The quotas restrained textile exports from some countries, such as China, but in other cases created a textile industry that might not have existed. Countries such as Bangladesh, Sri Lanka, and Cambodia were able to take advantage of favorable quota allocations to build significant textile industries that generated substantial exports. In 2003, textiles accounted for more than 70 percent of exports from Bangladesh and Cambodia and 50 percent of those from Sri Lanka. This is now changing. When the World Trade Organization was created in 1995, member countries agreed to let the MFA expire on December 31, 2004. At the time, many textile exporters in the developing world expected to gain from the elimination of the quota system. What they did not anticipate, however, was that China would join the WTO in 2001 and that Chinese textile exports would surge. By 2003, China was making 17 percent of the world’s textiles, but this may only be a start. The WTO forecasts that China’s share may rise to 50 percent by 2007 as the country’s producers take advantage of the removal of quotas to expand their exports to the United States and European Union, displacing exports from many other developing nations. China’s gains are due to its comparative advantage in the manufacture of textiles. Not only does the country benefit from low wages and a productive labor force, but China’s huge factories also enable its producers to attain economies of scale unimaginable in most developing nations. Also, the country’s good infrastructure ensures quick transport of products and a timely turnaround of ships at ports, a critical asset in the clothing industry where fashion trends can result in rapid changes in demand. Chinese producers have been able to reduce the order-to-shipment cycle to as low as 60 days, far below the 90 to 120 days achieved by many other producers in the developing world. In addition, Chinese textile producers have garnered a reputation for reliably delivering on commitments, unlike those in some other countries. Producers in Bangladesh, for example, have a reputation for low quality and poor delivery that offsets their low prices. Fearful that they will lose market share to China, trade associations from more than 50 other textile-producing nations, many of them low- and middle-income nations, signed the “Istanbul declaration” in 2004 asking the WTO to delay the removal of quotas, but to no avail. Many developing nations now fear that they will lose substantial market share to China. This could conceivably cripple the economies of countries such as Bangladesh, where some 2 million people, most of them women, are employed in the textile industry. Other developing nations, however, think that they might benefit from the removal of the MFA. They believe that buyers in developed nations will need to diversify their supply base as a hedge against disruption in China. Among this second group are Vietnam, India, and Pakistan, all of which expect rising textile exports after 2004. The Indian textile manufacturers group expects Indian textile exports to grow by 18 percent a year after 2004, reaching $40 billion in 2010, or one-third of the country’s exports. In developing nations, too, the prospect of surging imports from China causes unease. In the United States, textile producers lobbied the government to impose quotas on Chinese imports after the MFA expired. Under the terms of China’s entry into the WTO, the United States and other major trading nations reserved the right until 2008 to impose annual quotas on Chinese textile imports if they are deemed to be “disruptive.” China tried to head off protectionist pressures in December 2004 by announcing it would impose a tariff on textile exports. By raising the costs of Chinese textiles, the tariff was designed to reduce overseas demand. However, the tariffs are modest, ranging from 2.4 to 6 cents per item, with most at the low end of the range. Many observers see them as little more than a token gesture. The first eight months of 2005 provided a glimpse of what may be to come. Imports of Chinese textiles into the United States surged 64 percent compared with the same period in 2004 to $15.4 billion. Chinese textile imports into the EU also rose. However, others noted that total textile imports into the U.S. remained flat, and that the surge represented a shift from other producers to China, rather than an absolute increase in the volume of imports. Notwithstanding this, the increase in imports resulted in renewed calls in the United States for quotas on Chinese textile imports. Recognizing reality, in mid-2005 the Chinese entered into bilateral negotiations with the United States to limit imports of Chinese textiles. In November 2005, they reached an agreement that capped the growth in Chinese imports into the United States to around 15 percent per annum through until 2008, after which restrictions will be lifted. The EU struck a similar deal with China some months earlier. Sources: “The Looming Revolution—The Textile Industry,” The Economist, November 13, 2004, pp. 92–96; “A New Knot in Textile Trade,” The Economist, December 18, 2004, p. 138; “Textile Disruption,” The Wall Street Journal, April 11, 2005, p. A21; M. Fong and W. Echikson, “China Bristles at U.S. Inquiry on Textiles Trade,” The Wall Street Journal, April 6, 2005, p. A9; and M. Fong, “China, U.S. Sign Three-Year Pact on Textile Trade,” The Wall Street Journal, November 9, 2005, p. A14. Case Discussion Questions 1. Was the removal of the Multi-Fiber Agreement a positive thing for the world economy? Why?