China's strategy on foreign investment, outlined in last week's 11th five-year-plan, gives priority to quality investments and schemes to restructure traditional industries such as textiles and clothing. A raft of other new regulations could also mean that China will never again be the cheapest place to find a T-shirt, as Mike Flanagan explains.

China has been selling fewer clothes to the US and EU this year - largely as a result of Europe and America's quota restrictions on Chinese imports.

By mid-August, 63% of the way through 2006, only 36% of China's quotas to the EU had been taken up, and only 28% of its quotas to the US.

And there's no sign of these quotas being snapped up as the year-end approaches: in the past two months (accounting for 16% of the year), importers have used only 6% of Europe's quotas and 16% of America's.

So it looks very likely that the year will end with China's manufacturers selling a great deal fewer clothes to the West than they're allowed to.

Operators have a number of explanations, all of which have some truth.
• There's some illegal transhipment going on, with Chinese-made clothes being passed off as Indonesian, Korean or whatever. At Clothesource we think the extent of this is exaggerated, since European and US customs officials are trying hard to find cases but have come up with surprisingly few examples.
• Allocation of quota may have been mishandled.
• Chinese factories are hiking their prices.
• Buyers are spreading their eggs over lots of baskets.
• Some Chinese/Taiwanese/Hong Kong businesses are rapidly developing quality operations outside China, because they want to spread their risks should protectionism ever bite again.

And some people might conclude that these explanations will be immaterial when temporary quotas are lifted at the end of 2007 (for the EU) or 2008 (for the US). They won't, of course.

Mid-2005 mess
For a few years at least, most buyers and manufacturers will remember the mess so many people got into in mid-2005.

They'll stay determined to keep some production in countries they can be sure aren't going to be affected by sudden new restrictions. And should they be tempted to forget, US and EU protectionists will resume their endless lobbying for more restrictions the moment the current batch are lifted.

Manufacturers will keep on finding new places that might offer even better value.

Politicians in Uganda, for example, are claiming that Tristar Apparels, pretty well the country's only clothing factory that's managed to carve itself a niche in the US market since the introduction of AGOA, is shifting some production to the Southern Sudan.

The extraordinary Russian-backed Transdniestria, the minute Leninist province that's broken away from Moldova, saw industrial output collapse 38% in the first half of 2006 - but claims its apparel production - almost certainly being passed off somewhere as Romanian - has grown "up to eightfold."

New investments in India, throughout South East Asia, in countries getting new duty concessions (like Egypt and the members of the DR-CAFTA agreement), as well as in less fashionable supply centres, will mean a wide range of outstanding, high productivity, factories in many places outside China when quotas come off.

China less exciting?
But there's another reason China may not be as exciting in 2008. Because China is unlikely to be quite the same country as it is now. China's bureaucrats are queuing up to "help" the country's apparel industry.

The 11th five-year-plan (2006-2010) requires lower water and energy use in the apparel and clothing industries, more factories to be relocated to the west of the country, and more clothing brands to be created for exports.

Indeed the State Commerce Administration has now issued a directive demanding a "world-class" clothing brand be developed to compete internationally.

Five Year Plans in China have a habit of being followed; they are emphatically NOT just pious lists of government wishes.

China's proposed Labour Law includes a maximum 40-hour working week, mandatory double pay for overtime, improved redundancy payments and procedures for downsizing and workplace discipline to be agreed with trade unions.

Politburo member Wang Zhaoguo published on 5 June a proposed decree requiring unions to be recognised in any foreign-owned business. Wal-Mart has already announced it will comply - but all China's Hong Kong-owned textile and apparel companies will have to as well.

Ouyang Song, vice-minister of the Communist Party's Organisation Department, announced that 85% of eligible private businesses have set up workplace Party committees.

The country's State Council in its recently-published "Interim Provisions on Structural Adjustment" required less low-technology investment in clothing or textiles, threatening even to ban it.

Meanwhile, the National Reform Commission, in a joint report with a number of other ministries and public agencies, has ordered investigations into all capital projects this year - including those in the private sector - involving investments of $12.5m or more, naming the textile sector as a particular target.

Projects will be halted if they are found not to comply with the government's industrial policy, to have received land allocations or bank loans without proper procedures, to be an environmental hazard or to have inadequate industrial safety.

Re-assert authority
Chinese government plans, notoriously, aren't always implemented 100% everywhere. But that's the point of this raft of new regulations. China's central government wants to re-assert its authority, as the past few years' boom has created more local power centres than it's comfortable with.

And for many hard-line centralisers in the Chinese government, grabbing authority back is a lot more important than risking killing the golden egg. Even less hard-line officials retain a faith in the value a few good new rules can add to businesses: China, remember, is still a country ruled by people who think Marx knew what he was talking about.

Most of these rules will inevitably make business more expensive in China. Some - like the belief that brands can be invented to a bureaucrat's orders - are plain potty.

But China, once the current round of temporary quotas are all lifted at the end of 2008, will be a very different place from the no-holds-barred, unregulated, paradise for cost-cutters many people think it was in 2005.

Businesses there might not be quite as regulated as they are in, say, Sweden. But China, with or without new barriers from rich countries, is unlikely ever again to be the cheapest place on earth to find a T-shirt.

Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.