China's clothing and textile industry - already undermined by rising costs and competitors snapping at its heels - is especially vulnerable to fallout from a World Trade Organization dispute (WTO) brought last week by Mexico.

It claims that Chinese government subsidies and tax-breaks for its textile and clothing sector break WTO agreements - and if a disputes settlement panel is set up to make a ruling, Beijing will be under pressure to end these.

The Chinese Academy of International Trade and Economic Cooperation, a state-owned consulting firm based in Beijing, has assessed the risk and found it significant.

A researcher said the case was particularly problematic since it was brought by an emerging market country that is a direct competitor of China. Success for Mexico could set a precedent and lead to more similar cases in the future from other developing countries.

"Other developing countries will see Mexico as a model and follow it to file against China, and they will not be limited to the textile industry," he told just-style.

And a WTO verdict against China could make buyers worried their suppliers might lose government support, causing prices to rise: "There would be more orders going to other countries," predicts the researcher.

A spokesman from China's ministry of commerce said China will "address the matter properly under the WTO dispute settlement process." If the two countries fail to reach an agreement in 60 days, Mexico could then demand a WTO disputes panel judges the case.

Tough time for China
The dispute comes at an awkward time for China. Once the darling of low-cost outsourcing markets, the China no longer has the price advantage it used to create the dominant manufacturing base of the global textile and clothing market.

US-based Boston Consulting predicts that from 2012 to 2016, Chinese manufacturing labour costs will rise by at least 10% annually, twice as fast as many rival emerging market countries, including comparatively rich Thailand and poorer Vietnam.

Chinese language media recently reported that in Dongguan, home to clothing manufacturers in Guangdong province, companies are admitting that their wages, already more than CNY3,000 (US$473.90) a month, is still not enough to keep workers from seeking new jobs.

According to China Customs, textile product and clothing exports to the European Union (EU) fell 21.4% year-on-year to US$5.5bn from January to August. Meanwhile, clothing exports to the US were stagnant, edging up slightly by 2% year-on-year to US$18.8bn.

Some Chinese textile and clothing companies predicted a softening of mature markets once the financial crisis set in during 2008, and started to seek clients in emerging markets.

Yiwu, Zhejiang province-based Quickman Imp&Exp is one of them. The T-shirt maker now serves clients mainly from South America, the Middle East and Africa, while before the crisis, its orders mostly came from the US and the EU.

"Even if there was no WTO dispute, I think it would be inevitable that Western clients will seek suppliers outside China because the costs here are too high," says Quickman general manager Alex Hong.

He says that compared with his current clients, working with US customers "is such as pain," as cost-conscious Americans are getting incredibly demanding.

"More and more Chinese manufacturers have realised this and are seeking clients elsewhere. So in this sense, I think it actually could be a good thing if Mexico wins," Hong adds.