Monday, December 31, 2007

Textiles: The Beginnings of Free Trade[?]

Way back in 1974 the Multi Fibre Arrangement (MFA) or Agreement on Textile and Clothing (ATC) was signed by the developed world to impose quotas on imports of textiles from much of the developing world in order to protect the textile production of the developed world because of the natural advantage that the developing world has in textiles due to intensive labor costs. The World Bank and IMF have estimated that this agreement cost the developing world 27 million jobs and $40 billion/year in exports.

During the Uruguay Round of GATT, which lasted from 1986 until 1994 and ultimately resulted in the founding of the WTO, the participating members agreed to gradually lift the quotas and formally end the MFA by January 1, 2005. The quotas had long allowed all developing countries to compete at the same level, and some countries, such as Bangladesh, were not even given quotas because they were so poor. In 2002, this all changed.

2002 saw the lifting of a large number of textile quotas. The developing world had long awaited this day, but a newly admitted member to the WTO, China, saw fit to spoil their party. China saw exports in virtually all categories increase by over 100%, and the countries that were previously filled the demand saw their exports decline below quota levels. The strongest exports from China were in robes (exports increased more than 1,500 percent), baby clothes (increase of more than 2,000 percent), and knit fabrics (increase of 21,000 percent). China's market share of the US import market share of apparel not subject to quota increased from 24 to 86 percent. And, China lowered worldwide wholesale prices by greater than half. The MFA expired in 2005 and conservative estimates saw China's market share of US clothing imports increasing from 16 to 50 percent, and it was even estimated that China would eventually have an 85 percent share of the US apparel industry. And, it was predicted that the developing world would lose 30 million jobs in the textile industry to China. The price/quality ratio for China manufactured apparel was better than anywhere else in the world, except for Bangladesh which featured extremely low wages. (All figures in this paragraph taken from an NPR radio piece that I was listening to on the long drive to San Diego,
yesterday. Really, you can't drive for 8 hours without hearing something about China.)

As predicted, EU and the US were flooded by inexpensive apparel from China in 2005 as soon as the MFA expired. Both the EU and the US quickly set up new quota systems on textile imports from China. The US quota system ends on December 31, 2008. The EU quota system, the Memorandum of Understanding on China-EU Textile Trade, ends today, December 31, 2007. Sort of...

In November 2007, the EU and the China Chamber of Commerce for Import and Export of Textiles, China National Textile and Apparel Council, and China Association of Enterprises With Foreign Investment, set new standards for Chinese exporters that would be exempt from quotas. The new standards require textile exporters to Europe to apply to the Ministry of Commerce and the General Customs Administration for export licenses. These export licenses are subject to bilateral monitoring by China through the granting of licenses and the EU through monitoring when then they enter the EU, and allow unlimited exporting of T-shirts, pullovers, men's pants, blouses, dresses, bras, bed linens and flax yarn, through 2008.

Chinese textile exporters in these eight categories will be granted an export license if they satisfy the following three requirements:
  • minimum registered capital of RMB 500,000 ($68,250)
  • at least two years of export experience
  • no IPR or environmental protection law violations
This system is not guaranteed to continue. The WTO provides in paragraph 242 of the Report of the Working Party on China's Accession to WTO, that WTO members are allowed to reinstate quotas if China's textile exports disrupt the market. Chinese bureaucrats have suggested that Chinese exporters "exercise restraint" and develop in-house brands, to discourage WTO members from reinstating quotas in the face of massive Chinese imports.

The Xinhua article from which most of this is drawn, suggests that if this EU-China system is successful, then the US may continue a similar system come similar date next year.

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