Textile Quotas in China

By Klaus Koehler, Managing Director, Klako Group

Abolition of Textile Quotas - Background

China's power as a textile production machine has grown ever larger since the 1970s. Exports boomed during the 1990s and since China's entry into the World Trade Organization (WTO) in 2001 it has awed its competitors by increasing the volume of textiles and apparel exported to the US by 125 percent.

On December 31st 2004, all quotas restricting textile and clothing trade between World Trade Organization (WTO) member countries was eliminated according to the Agreement on Textiles and Clothing reached under the General Agreement of Tariffs and Trade (GATT) in 1994. GATT is a predecessor of the WTO, of which China became a member in 2001. The agreement is the result of decades of negotiations between developed and developing members and will ultimately be conducive to the health and sustainable development of the global textile industry.

The old quota system has for a long time greatly restricted the textile exports of developing countries, hindered their comparative advantages and overturned the free trade principles of the WTO. Only 30 percent of quotas have expired over the past 10 years because of the arrangements and safeguards made by developed countries and regions. These are the major factors causing the current problems in textile trade.

Although the developed countries stated that they would lift the quotas at the proper time, there was a belief that the integration of the global textile trade would not be smooth. The industry experts generally agreed that while it was unlikely for rich importing countries - in particular the US, the EU and Canada - to create any permanent new structure to replace quotas, they still have a great scope under current WTO rules to impose a limit on imports if they wish to. It was believed that developed countries would lobby for protection against the unfair competition with China. The current law allows such restrictions only when imports have actually caused disruption.

It was always anticipated that with the abolition of the quotas, many foreign companies would place more production orders in China. These foreign companies knew that they all had to come to China at some point to take advantage of what China has to offer. A competitive advantage of China is that it can manufacture anything due to having no government restrictions. This makes it an attractive destination for someone looking for a broad range of products in one market. With the development of China's textile industry, its appetite for imports of raw materials and machines will also surge. Except cotton and wool, which are under an import tariff quota, other textile products are free to enter the Chinese market.

China's Efforts to curb the impact of the elimination of quotas

As some developed and developing countries have joined forces, ready for setting up restriction on China's textiles export, China will suffer serious loss in its rights in textiles, while other related products will also be severely threatened, and even may have to exit from the international market as a whole. In order to soften the shock wave and achieve balanced trade, the Chinese government has taken voluntary measures, including adding a textile export tax, strengthening self-discipline among textile producers and exporters, curbing investment in the sector, encouraging big textile companies to invest abroad.

From January 1st 2005 to December 31st 2007, China will adopt transitional and interim measures of imposing export tariff on the basis of specific tax for 148 clothing duty paragraphs exported outside, for example, outer wear, skirts, shirts, trousers, pajamas and underwear. For commodities taking suite as measuring unit with a comparatively higher price, the tax rate is 0.3 yuan per suite; for those with a lower price, the tax rate is 0.2 yuan per suite. For commodities with weight as measuring unit, the tax rate is 0.5 yuan/kg. According to measurement, the average tax burden is 1.3%.

After January 1st, there has been an increase in quantity and decrease in price for partial textiles' exports causing the possibility of other countries making use of the opportunity to implement trade protection. As a consequence, from March 1st 2005, the Interim Method for Automatic License of Textiles Export will be implemented, namely, an export license has to be applied for textile exports. According to the Ministry of Commerce, export licenses are required for 216 textile products, shirts, underwear, trousers, and children's clothing are still sensible textiles. Licenses can be applied for online or at the designated bureau. The application takes between 2-3 days (no longer than 10 days).

China is actively adopting measures to avoid trade friction that may be triggered by quota cancellation and sharp increase in textiles export. The government has introduced an industry self discipline agreement which covers the following:

- Determine the categories of sensible textiles. List the textiles that easily trigger trade friction and protectionism of importing countries as sensible products, and put emphasis on monitoring the export of these products.

- Set up a coordinative system for the lowest price. It requires that the enterprises involved in the self discipline agreement do not go lower than this price when exporting such commodities

- An industry access system will be setup for the self discipline agreement. Enterprises running counter to trade laws and regulations and disturbing the export order will be reported or their import and export rights suspended.

- Set up a precaution system. If a red light is on for certain types of textiles means that a certain country has started to limit the import of the product; a yellow light means that the export of a certain type of textile is on tremendous increase and has caught the attention of importing countries and they may employ certain measures to restrict import of the commodity.

Recently the Chinese government has also agreed to raise export tariffs on 74 products starting from June 1st. While the increases are five times higher than previous taxes for most of the items, the EU and US say that the duties will not slowdown the growth in exports. China has countered by saying that it will drop the export taxes on textiles should other governments impose quotas.

Effect of the Elimination of Textile Quotas

There have been booming sales of items such as underwear, trousers, blouses and shirts in both US and EU markets. Since quotas on clothing and textiles were removed, Chinese textile and apparel exports to the US increased by 62.5% overall in the first quarter of 2005 versus the first quarter of 2004 and in some categories by 1,500% in a single month. China now controls 17% of the US clothing market, up from 12% in December. The EU states that imports of Chinese textiles rose in the first quarter anywhere from 51% to 534% depending on the item. The result has resulted in an outcry from the US and the EU manufacturers and a rush to re impose quotas on Chinese textiles and clothing within months.

Reactions from the US and the EU

The US reaction came on the 13th of May, four months after the abolition of the textile quotas, when Secretary of Commerce Carlos Gutierrez said the US government will re impose quotas on cotton knit shirts, cotton trousers and cotton and artificial-fiber underwear imports from China. China's reaction to the US has been pure dissatisfaction as China has stated that the rules stipulate that WTO members can impose limits on certain types of Chinese clothing when an import surge causes market disruption, however according to the Chinese this has not been the case in the four months since the elimination.

The EU also launched an investigation into nine categories of textile products from China. Guidelines for Chinese textile imports were set by the EU's head office in early April. The new rules specify that when the import volume of textiles increases between 10 and 100 percent over 2004 levels, the EU can initiate investigation and informal talks with the relevant Chinese parties on potential protection measures. The guidelines provide a framework for seeking quotas as European textile companies are looking for a way to defend against low-priced Chinese goods. Manufacturers have been requesting the EU to control Chinese exports following the expiration of the global quota system which led to an increase of imports from China.

Following the US in seeking to protect the domestic industry and with pressure increasing from textile manufacturers all over Europe, EU Trade Commissioner Peter Mandelson has given China a final chance to limit exports of T-Shirts and flax yarn to the EU before it also imposes quotas. The EU commissioner has felt market disruption in these categories and has requested that formal consultations begin immediately between the EU and China. At the end of the consultations, the EU will be entitled to place reasonable and temporary limits on these categories unless China makes it unnecessary. Restrictions placed would be temporary and remain in place only until the end of the year. It is estimated that the consultations can last up to one year.

The imposition of the US safeguard measures may divert the affected products to Europe, meaning that it is more likely the EU will need to block the same categories. However, even if new quotas are imposed, they are unlikely to provide relief for the US or EU industries. According to rules that China agreed to when it joined the WTO in 2001, such safeguard measures can last only until the beginning of 2008. China would still be allowed to increase its textile exports to the US and the EU during that period by 7.5% a year. And even if China loses some of its new export business, that doesn't mean work will flow back to the textile industries in the US or the EU as China's low-wage competitors are going to grab the orders if buyers shift away from China.

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.