Will the US and EU impose limits on Chinese apparel exports, or won't they? And does it matter that much anyway? asks Mike Flanagan.

In the whirligig of discussions about imposing limits on Chinese apparel exports, four crucial points seem to be getting seriously distorted.

1. Who's planning what?
Some relatively small apparel importers - such as Peru, Turkey and Brazil - have invoked the safeguard provisions in China's WTO Accession Treaty allowing them to impose, for one year, limits of 7.5 per cent annual growth in imports from China of some apparel categories.

Interest at present, though, is concentrated on what the EU and US are going to do. Some US lawyers have raised the spectre of anti-dumping actions, in which the EU or US have virtually limitless scope to impose punitive duties on Chinese exporters if there is evidence that clothes are being sold below their real cost.

But since Clothesource Clothes Rail shows that China's apparel prices to both the EU and US are, even after the sharp drops of early 2005, still about the same on average as prices from Bangladesh, below-cost selling really would be hard to demonstrate.

And it's not China's below-cost selling that worries the EU and US textile industry: they're interested in the hits they're taking from China, not how China can afford it. And we can't find a single successful example of an apparel-related anti-dumping case.

So at the time of writing, EU or US action is likely to be concentrated in China safeguard actions under China's WTO accession treaty.

The US
currently continues to have China safeguard limits of 7.5 per cent growth (on the year to October 2004) on hosiery (categories 332/432/632) until October 28.

Petitions from the textile industry applied in October 2004 for China safeguard limits to be imposed - based on the threat of damage to US manufacturing once quotas went on 1 January 2005 - on trousers (347/348, 647/648 and 447), knit shirts (338/339, 638/639), woven shirts (340/640), underwear (352/652) and dressing gowns (350/650).

Later in autumn 2004, the textile industry applied for an extension of the limits imposed in 2003 on bras (349/649).

These applications were opposed by importer groups, and the US Court of International Trade has found a number of technical reasons for suspending hearings. Further action on these applications is mired in the US courts, and it is impossible to predict when hearings may re-start.

However, the US government has now begun its own investigations into imposing safeguard limits on cotton knit tops (338/339), cotton trousers (347/348) and underwear (352/652). No legal objection has been received.

Submissions to the Committee for the Implementation of Textile Agreements (CITA) need to be made by 9 May, and CITA has until early July to decide whether to impose limits - a process that includes discussions with China. After a decision is announced, there is then a further one-month consultation period with China.

In early April, the US textile industry applied for safeguard hearings into limits, based on alleged actual damage suffered by Chinese imports, against men's shirts (340/640), sweaters (345/645/646), bras (349/649), dressing gowns (350/650), knitted shirts (638/639) and MMF trousers (647/648). As this article was written, the US government had not decided whether to begin these hearings.

The EU

meanwhile has had a different set of squabbles. Officially, it has been far more concerned than the US about staying friendly with China. And its trade commissioner, Peter Mandelson, has been sending stronger and stronger messages to China looking for it to stem to the flow of garments to Europe and help the EU avoid imposing limits.

Pressure to impose barriers was expected from the new, apparel-dependent, Eastern members. But France is in danger (as EU officials see it) of rejecting the new EU Constitution in a mid-May referendum, is looking for hard evidence that the EU can defend its interests, and is getting increasingly firm that it wants to see Chinese imports cut.

On 24 April, trade ministers from the individual nations agreed to start the investigation process on T-shirts (category 4), sweaters (5), blouses (7), hosiery (12), men's trousers (6), women's overcoats (15), and bras (31).

With formal ratification of the recommendation expected for 28 April, timing is similar to the US: 21 days for receiving submissions, followed by 60 days for deliberation would mean a decision by mid-July and implementation by early August.

On 26 April, however, it transpired this was insufficient for the French, who were looking for faster implementation of more wide-ranging controls.

So, at the time of writing, all we can say for certain is that both the EU and US will conduct relatively leisurely investigations into reapplying quotas on some categories. They may do more than that.

The smart money seems to be on the US and EU imposing limits after. But how smart is that money?

2. So what will happen?
Whatever investigation the EU decides over the next few days will be the EU's last chance to make an announcement that might influence the 23 May French referendum. The importance of this referendum is so great to the EU it's quite likely there will be a stern announcement.

But the results of any investigation will inevitably be after that referendum. So the EU investigation will not mainly be influenced by the EU's domestic concerns; it will be influenced - as commissioner Mandelson consistently repeats in his speeches - to a large extent by what measures China tables to reduce exports. Similarly, decisions from America's CITA are required to listen to whatever proposals China might make.

Signals from China are very mixed. Some reports are of plans to increase Chinese apparel export tax sharply, from the current ineffectual level of half a cent per garment to around 50 US cents - which would dramatically undermine Chinese competitiveness in products like T-shirts and underwear, and trim it on products like sweaters and trousers.

Other reports still float the idea of compulsory minimum export prices - though China did in fact establish trade committees at the end of 2004 to create price controls, and these committees seem to have been quite ineffective.

Some Chinese government spokesmen hint at voluntary controls, and others drop dark threats about the damage the EU and US will do to their export prospects if they go ahead with apparel/textile import limits.

Whatever domestic pressures the EU and US administrations are under for protective action, both believe it is far more in their long-term interests to avoid confrontation with China. No-one is smart enough to predict precisely how, at any one moment, they reconcile short-term and long-term pressure.

It is perfectly possible the EU or US might end up with limited - or no - restrictions on China, if China can produce a convincing plan to slow growth. All we can say for certain at the end of April is that by midsummer there will be more control or taxes on China's textile exports. Whether those controls are mainly imposed by the US/EU or by China itself is still uncertain.

And China isn't the only obstacle to tougher import controls. We've already seen how US government action can be challenged in its courts. And discontented EU importers have the same option in Europe.

The EU's procedures on China safeguard measures are embodied in rules - and the European Commission's interpretations are open to legal challenge. Indeed one criterion for imposing limits the EU has published - damage to other developing countries - is simply not in China's WTO accession treaty and is an open invitation to disgruntled retailers to ask courts to overturn any proposed restrictions.

Uncertainty is the key unknown - and things will stay like that till at least 2008, when the main provisions of China's WTO accession treaty expire. Anyone who claims to know for certain the outcome of political debate and likely court challenges is simply a charlatan.

3. What does all this mean for China?
Both the EU and US are currently reviewing imposing limits on cotton trousers. The US has published fuller data about the issue, but the general principles apply to the EU as well.

Had the US imposed such a limit at the beginning of 2005 - as lobbyists tried to ensure in autumn 2004 - the limit would have been 7.5 per cent higher than the 2004 level - which was 0.99 per cent of all America's trouser imports. If America's annual trouser imports continue for the rest of 2005 at the rate they've grown in the first three months, and a limit is then imposed, the limit will be 7.5 per cent of the 2005 level.

And, although lobbyists make great play with the rapid rate of import growth, the actual volume of growth is a lot less than meets the eye. In the first three months of 2005, the US imported a staggering 1,564 per cent more trousers from China than in the first three months of 2004.

That looks a lot less staggering of course when it's remembered that China (population 1.3 billion) still sold America only 0.03 per cent more trousers in Q1 2005 than Mexico (population 105 million) and accounted for only 14.1 per cent of America's foreign trouser purchases. But the difference between the two levels means a lot for the world's manufacturers.

If, as seems reasonably likely, the US opts in June to impose restraints on China, the restraints will be set on sales in the year up to about May 2005 - giving China around 8-9 per cent of the US market.

At the present rate of Chinese import growth, each month's delay in setting limits adds around a 1 per cent market share - or about one and a half million pairs of cotton trousers - to China's eventual quota.

As we see below, what that means to the US (or the EU) is complicated. But it's very clear what it means to Chinese factories.

To Chinese manufacturers, the announcement in October 2004 that the US government was starting hearings on import limits meant there would be limits: the thought that a bunch of shopkeepers could use the courts to stop the US government doing what it wanted is not an easy idea for modern Chinese to grasp.

And the re-established quotas would doubtless be based on an individual factory's sales achievements during the unregulated period.

So for the past few months, Chinese factories haven't been selling trousers: they've been buying long-term trouser quota. The collapse in Chinese prices we've seen so far this year tells us how far factories are prepared to go to get those quotas: it doesn't tell us what the stable price is.

Nor does it tell us how much capacity there really is in China. Scare headlines, trumpeting 1,000 per cent increases in some categories' sales, imply infinite manufacturing capacity. But there are signs that rapid growth in categories newly quota-free has come from sharp declines in sales elsewhere.

US imports from China of men's knitted shirts in the first three months of 2005 were 326 per cent up on 2004. But EU imports were down 50 per cent in the latest period we have data for: Chinese knitted shirt manufacturers were turning away European orders to better certainty of US quotas if they were re-imposed.

China has always depended above all for exports on countries that do not impose quotas. In 2004, non-quota countries accounted for 77 per cent of China's apparel exports by value. And, until January 2005, that market boomed for China, consistently showing double-digit annual growth rates.

But in the first two months of 2005, growth China's exports to what used to be the non-quota countries moved sharply down, to 3.5 per cent.

China's export growth to the US and EU is partly fuelled by diverting production from its traditional customers.

4. What does it mean to the rest of the world?
Now here we have a real gap between the claims and the apparent reality. But lying behind it is possibly the most interesting aspect of the whole issue.

For the past year, many of the world's poor countries have been loud in their claims that quota abolition would destroy their apparel industries. In fact, in the first three months of 2005, countries other than China actually increased the volume (in square metres) of clothing and textiles the US imported from them. Admittedly only by 1.1 per cent, and there may well be short-term explanations (for example that US retailers were building up inventory for protection against possible quota reimposition).

Nonetheless, the US is simply not stopping buying clothes from countries other than China. Even making the most pessimistic assumptions - assuming that in a more normal year, Chinese sales to the US would have increased by the same amount, but US total imports stayed the same - countries other than China would have reduced sales to the US by only 15 per cent.

15 per cent volume loss overall would be serious for many factories, and for their low-paid workers. But it's light years from fanciful claptrap about "a unipolar world with China at its heart" being churned out by the over-excited (and under-informed) ITGLWF labour federation in 2004.

Conversely, the issue of quota reintroduction against China is relatively marginal for the rest of the world taken as a whole.

Again let's take trousers. When (or whether) the US reintroduces quota affects the volumes Chinese factories can ship tenfold and more. But even the most unfavourable possible outcome for the rest of the world (that US imports stay static, but China's growth stays as fast for the rest of 2005 as it did in the first three months) merely reduces the cake for the rest of the world by 18 per cent - tough trading for the rest of the world, but not a lot different from any normal tough trading period - like the months right after September 11, 2001

What seems to be happening is actually a great deal more interesting than a global takeover by China. To understand, we need to go back to what's been happening around the world for the past 15 years.

To oversimplify heavily, the movement of most apparel manufacture and some textile manufacture to poorer countries destroyed about10 million jobs in rich countries - but created about 20 million in the countries the jobs moved to.

In that rapid rush offshore, few of the factories that were quickly developed were over concerned about optimising productivity: getting the clothes made and out in time dominated most thinking. The fact that, on average, two people were doing work one could have done in the Carolinas or East Midlands tended to be put into the "sort out next year" list.

Quota abolition has brought that next year around. Chinese factories may not intend their panic-stricken price-cutting to last - though I'd love to watch them try to persuade Gap and Wal-Mart to accept higher prices - and Clothesource PriceTrak shows few signs of serious price reductions yet from other countries.

But it's clear that businesses in Bangladesh and Mexico are going to have to offer sharper prices and better service to keep their customers. However low any quotas set by the EU or US might be.

That inevitably means cost-saving - and labour productivity will inevitably be on the list of ways to save some costs. For those on the receiving end of labour cuts, this is often disastrous. Unforgivably, though, those claiming to represent workers exaggerate - and frankly distort - what's happening.

Numerous sources are currently claiming that Kenyan factories will cut 20,000 apparel jobs this year as China destroys Kenya's AGOA-linked exports to the US. But in the first three months of the year, America's apparel and textile imports from Kenya actually grew 17.8 per cent.

Similarly, doom-mongers are predicting the collapse of Namibia's new apparel and textile industry, as Malaysia's Ramatex closes one relatively unprofitable factory there. Yet, with American imports from Namibia up 42 per cent in the first two months of 2005 (latest available), doom still seems a fair distance away.

But behind the headlines are thousands of factories steadily improving their standards and costs - which is why, for all the excitement about China, virtually every developing country has sold more clothes to the US in 2005 than it did in the same period in 2004.

Sadly, it's not these success stories that are getting the headlines.

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.