After a couple of months' intensive lobbying and mind-changing in Beijing, Washington and Brussels, we're pretty close to seeing what the regulatory background is going to be for global apparel trading. More interestingly, though, the first winners and losers are starting to appear among supplier nations. But they're not quite what the experts envisaged, says Mike Flanagan.

We're nearly at the end of the first round of the post-quota world. It hasn't worked out at all the way the pundits expected, and poses some very interesting questions as to how the second post-quota round is going to look.

First the regulatory stuff
The EU has imposed quotas for three years on imports from China of T-shirts, pullovers, blouses, men's trousers, bras, dress and household linen, and has signalled it doesn't want to impose quotas on anything else at present, and doesn't want to impose any quotas at all after 2008.

These quotas are roughly four times the level of 2004 imports, freezing China's share of EU imports in these categories at 35 per cent in 2005 (they averaged 9 per cent in 2004), and allowing overall 21 per cent growth to 2008, which would probably give China a 40 per cent share of imports.

Although a fourfold increase seems a pretty generous quota, the new limits came into force as from June 11, and limit average daily imports for the rest of 2005 to half the amount imported in the first three months of the year.

Although China's Minister of Commerce Bo Xilai claimed on May 27 that China's apparel exports had started to slow, he clearly shows the same uncertain grasp of what his economy is doing as politicians in democratic societies.

No sooner had he spoken than China published its April 2005 export data, showing that the volume of his country's apparel exports to the EU and US in April had grown faster (148 per cent) than in the first three months of the year (120 per cent) - and were accelerating to the EU marginally faster than to the US.

All of which means there is going to be a serious quota famine in the affected categories. Unfortunate, as China had not, as this article went to press, announced how quotas were going to be managed. All it had revealed, nigh on a month after the EU had imposed the quotas, was the level and that they would be allocated to factories in line with recent exports.

We know what the EU limits will be for the next three years. But traders still don't know how that will actually be managed for the rest of the year, and the Clothesource Chocolate Poker award for useless activity this month really must be awarded to China's Ministry of Commerce.

Uncertain certainties
China likes its deal with the EU: it gives its industries some certainties within which to plan, and it's trying to persuade the US to accept a similar deal to replace the current unpredictable system.

The US announced new temporary quotas (expiring at the end of the year) on knitted shirts/blouses, underwear, men's trousers and shirts, with judgements on further quotas due later in the summer on sweaters, woollen trousers, bras and dressing gowns.

The problem is, of course, that the US isn't the EU, and the US Dept of Commerce is a great deal more accountable to its voters and lobbyists than the European Commission (which rarely has to trouble itself with pesky nuisances like public opinion).

The EU has simply decided that some industries which pitched for quotas - like its hosiery industry - can be ignored in the greater good of creating a long-term deal with China to help all Europe's traders, including those outside textiles.

But that's a lot tougher in the US, where any affronted party to a Dept of Commerce deal can - and inevitably does - sue.

So our betting is that the US won't be able to agree any long-term deals with China, but that for the next few years we'll be seeing a short, but near-continuous, war of attrition, with manufacturers pitching for year-long quotas, then pitching for renewals, while importers and other groups counter-lobby.

The quotas that emerge will always be a good deal higher than they were before. But on June 23, China's Chamber of Commerce for Textile Import and Export announced that trouser and underwear exports to the US had already got virtually to the total permitted under the new quotas. So expect even more serious quota famine in the US for some categories this year.

So for absolute limits on exports, it's pretty predictable.

EU quotas on ten categories - and nothing else - till Dec 31, 2007. Constant battling between different parts of the trade, CITA and the US courts about what limits can be imposed, going on till 2014, but producing increasingly feeble (but still a nuisance for importers) new barriers, as America's fabric and yarn industry gently fades away.

Taxation on trade
Taxation on trade has also got a little clearer. The EU has produced new rules for its Generalised System of Preferences (GSP) which force China to pay full import duty on all textiles (it used to get a slight reduction on some fabric and yarn).

India is also forced to pay full duty on fabric and yarn (where it used to get a slight reduction), but continues to get a reduction on apparel. If Indian apparel exports to Europe increase about 40-50 per cent over the level it achieved in January-March 2005, India will lose its duty reduction. As we'll see in a minute, this is pretty unlikely.

And the EU will exempt a further handful of countries - almost certainly including Sri Lanka - from duty altogether on imports after January 1, 2006.

Meanwhile, the likelihood grew that America's CAFTA treaty would get through Congress by the summer recess - but after such an exhausting campaign, it really has to be doubted whether the Bush administration will want to try any more serious changes in trade policy in its lifetime.

Never say "never" in trade politics - but for the next few years, we'll see a fair few squabbles, but very few more real attempts in Europe or America to change the underlying rules of textile and apparel trading.

The real issue
So we can all swing our attention to the real issue: how apparel manufacturers around the world are responding to the impetus quota abolition has given to sharpening their trading.

And, after the first quarter of the year, here's how the main exporting countries are shaping up.

The table below shows, for the 50 major apparel exporting countries, how the number of garments imported into the EU and US has changed in the first quarter of the year compared to the same period in 2004. (For the purposes of this table, 'EU' refers just to the 15 countries that were members at the beginning of 2004.)

click table to enlarge

From which there are some important lessons:

1. The market seems to be showing very healthy growth. For all the gloom about how poor countries would be destroyed by quota abolition, the volume of clothes imported by Europe and the US has grown about 10 per cent.

But that's pretty uneven: the EU has increased its imports by just 4.8 per cent, while US imports have grown by 14.2 per cent. While part of that growth is the result of lower prices, a lot of America's growth is also due to the country's rapid rise in consumer spending (generally down in Europe) and to some panic trading by buyers unsure that quotas would stay off.

2. A couple of the predictable effects have happened. Among the exporters too small to make it to the Top 50, there are some savage falls, of around 50 per cent, in US imports from Fiji and Nepal, which have always been difficult countries to source from. Reports of the death of Fiji's apparel industry are very exaggerated though, since most of its manufacture goes to Australia and New Zealand, for whom Fiji is the convenient neighbourhood supplier, just as Mexico is for the US and Romania is for the EU.


Large, developed Asian exporters, such as Taiwan and Korea, have seen volumes tumble, as have some of the larger exporters previously depending on quota more than manufacturing or design strengths, like Russia and the UAE.

Several countries very dependent on the EU, like Morocco, have also been hurt. And of course imports from Hong Kong and Macau are down. But did anyone ever think shirts saying "made in Hong Kong" really were?

3. But, so far, we're simply not seeing the devastation in poorer, vulnerable countries so many lobbyists have been predicting. Imports from Cambodia, Bangladesh and Sri Lanka are up.

In the larger, poor, Asian countries like Thailand, Indonesia, the Philippines and Pakistan, volume is either healthily up or more or less stable. Some poor countries that have been hit by internal disorder recently (like Haiti and Madagascar) are showing reasonable growth too. And most of the Central American countries are still showing good growth.

4. Two major players are performing well below expectations. Vietnam's sales to the US, though held back by the continuing quota limits Vietnam suffers as a non-WTO member, are down 5 per cent. But its sales to the EU, even though the EU has waived quota limits against Vietnam, are down 22 per cent - the result, traders say, of poor sales programmes and an unsatisfactory delivery record.

And India's growth is spectacularly behind China's. Indeed, even with quotas gone, the world's second largest country sells fewer garments to the EU and US than Turkey, Mexico, Bangladesh or Honduras.

Here, undoubtedly, the reason is simply that Indian manufacturers haven't invested in new manufacturing capacity. They blame India's high interest rates, tax complications and labour laws. But that hasn't stopped most of India's textile majors significantly investing in new retail chains, and brand-building marketing management to develop them. It's beginning to look as if Big Apparel in India has decided that exporting just isn't fun, and there are many easier ways to develop a business than by selling to Arcadia or Wal-Mart.

5. But the real difference between countries doing well and badly right now seems to have little to do with trading rules or export management.

Quite simply, America is importing a lot more clothes, and Europe isn't. Europe isn't because its consumers have stopped spending. Is it just possible that the best thing Europe can do for poorer countries isn't to create ever more ingenious duty concessions, but to encourage its taxpayers to spend more?

Exporting countries refuse to conform
So far, exporting countries have refused to conform to the models of doom so many observers created for them.

Not that all is sweetness and light: with prices tumbling, margins are being heavily squeezed even in countries with strong sales growth. But in the first post-quota phase, it's been exporters able to sell to customers still spending who have fared best.

Now, of course, with both the EU and US re-imposing quotas on Chinese trousers and blouses, with EU quotas already in place, and US quotas likely, on Chinese sweaters and bras, and with quotas from one or other in place or likely on shirts, underwear, dressing gowns and dresses, some pressure will be off many of the developing world's manufacturers.

With the "they'll all die" Cassandras being proved wrong, what's the next great received wisdom of 2004 we need to re-examine? Answer in next month's exposé of the confusions we all laboured under last year.

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.