What's going to happen to textile and clothing trade between the European Union and China at the end of this year? Will current restrictions be lifted as planned and normal trade resume, or will a raft of other measures be rolled out to place to protect European producers? Mike Flanagan suggests European importers should start giving it some serious thought.

Back in 2004, lots of European and American importers were fretting over whether quotas would disappear at the end of 2004. Looking back, there were surprisingly few asking the important question: what would happen if Chinese imports soared when quotas came off.

The result? Importer industries were woefully ill-prepared when the EU slapped quotas on garments in the middle of 2005.

And it looks like no-one's learning the lessons of history. People are still asking if the anti-Chinese quotas due for suspension at the end of this year in the EU, and the end of next year in the US, are really coming off.

Last month the EU Trade Commissioner, Peter Mandelson and Bo Xilai, his Chinese counterpart, were reported to have confirmed that Europe's temporary quotas against China would indeed be lifted at the end of 2007.

But as soon as this had registered, Francois Fillon, France's newly appointed Prime Minister, was demanding that quotas be extended. "We will fight to push back the 2008 date for the lifting of quotas on Chinese textiles, like the United States," he said on 19 June.

Quotas next January?
So are we going to spend the next six months watching the European Commission and France squabbling over whether there are going to be quotas next January? And is there the remotest chance they'll bother telling us poor traders before next year starts?

Well, if the French have any sense, things aren't going to be quite as messy as they sound. In fact, if they've really got any sense, things will be even messier - and that's the issue that should concern the industry.

First of all, if France really does want the current quotas extended after 31 December it's going to have a real fight on its hands. The EU - in a decision unambiguously endorsed by France - agreed with the Chinese in June 2005 that quotas would stop at the end of this year.

The only legal basis on which they could be reimposed would be by long-winded hearings. But these couldn't start until early 2008 and would be unlikely to be concluded before June 2008 - with any resulting quotas having to stop on 31 December 2008.

So on the face of it, what the French say they're going to fight for is something that will enrage the Chinese (who thought they had a deal in 2005, and had that belief endorsed in early June this year), and can only result in a few months' extra quota anyway.

And it isn't just the Chinese they'd enrage. Europe's rich northern members (like Britain and Sweden) can't see the point of measures that put up prices for all Europeans and merely send jobs to Bangladesh or Sri Lanka instead of China.

And many other EU members are a lot more interested in promoting sales to China than in protecting an industry even Indonesia's Central Bank describes as "sunset".

And it really does seem odd the French would upset so many people when there are far fewer politically dangerous ways of achieving the same objective.

Return to normal trade
Realise first that Mandelson didn't say in early June that free trade between Europe and China would be unleashed in January 2008.

What he actually said was that he and his Chinese opposite number "were both cognisant of the re-entry problems of the return to normal trade and we agreed that we wanted to avoid any destabilisation of the market…

"…[The EU's] automatic licensing system will continue through 2008 so we can continue to monitor market developments and discuss jointly with Chinese authorities any action that we need to take to ensure a smooth transition from the textiles agreement to normal trading."

In other words: the EU has pledged to withdraw quotas on 31 December 2007; but if Chinese imports look set to grow too fast in 2008, the EU will do something about it.

One option might be to get the Chinese to do something - which can often happen a lot faster than in Europe's more publicly accountable system.

On 19 June, for example, while M Fillon was signalling six months of debate, China announced that export rebates would be cut or abolished from 1 July.

For garments, rebates are going to be 2% less - roughly equivalent to the net margin a factory makes on a garment. Pretty much every single Chinese garment in production for export today will have to be sold at, or close to, a loss.

A 2% cut in tax rebate doesn't sound much - but it sent a powerful signal to Chinese traders that in future they need to set prices that aren't going to become loss-making if there's a small change in the tax code.

Existing protection rules
Another thing the EU might do is to become even more devious in the way it runs its existing protection rules.

Importers don't actually mind quotas too much: as long as they're properly managed, everyone can easily know whether a supplier has quota to cover a contract. Quotas also affect everyone in pretty much the same way.

There are much nastier things than quotas. Anti-dumping rules for one. If someone can prove China's selling things below cost, savage extra import duty can be imposed on whatever it's been accused of selling. That duty can hike the price 20% or more - and it's not unheard of for it to be imposed while the goods are on a ship on the way to the customer.

And there's any number of little sub-rules that protectionists can get inserted into the small print. About the onus of proof. About who can bring the case - or whether public officials, after monitoring what's going on, can bring a case at all. And about what constitutes below-cost selling.

And that's where the real damage can be done to importers.

Bear in mind, first, that the EU is currently reviewing its policy on anti-dumping and similar duties (together known as "Trade Defence Instruments"), after reasonably wide consultation and is likely to reveal some changes later in the year.

US twists
At the same time, the US has developed a few fiendish new twists. Its recent adjudication on imports of paper from China comes close to saying that all Chinese imports can be assumed to be below cost, whatever the evidence.

Its system of "self-referral" for clothes from Vietnam means that the US Department of Commerce doesn't need to wait until someone complains they're being damaged by Vietnamese exports: the DOC can start an investigation if it ever thinks imports are rising too fast.

And under some circumstances, if it thinks Vietnam's been selling clothes too cheap, it can even slap extra duty retrospectively on what was imported months ago.

Now if I were a French Prime Minister wanting to slow Chinese imports down, I wouldn't be lobbying for the public tearing up of an agreement. I'd be working my socks off to exploit every possible loophole in Mandelson's agreement with Bo Xilai to "discuss jointly with Chinese authorities any action that we need to take".

I'd want to see that the EU's proposed list of changes to its Trade Defence Instruments included a good selection of the sneaky little refinements the US has developed over the past year.

One reason focusing on Trade Defence Instruments might be a good policy for protectionists can be seen in a recent letter of complaint from ten major industry associations to Jose Barroso, President of the European Commission.

Their complaint was that there had been no new anti-dumping cases this year, after 36 last year. "The Commission's changed practice is more and more widely perceived as an anti-industry policy bias," they claimed.

There is a considerable head of steam building up in Europe to make some importing tougher, and France probably has more allies in wanting to see nastier, anti-dumping duties used more often than in pushing for quotas that can only last a few months anyway.

I'd say it's pretty clear the Chinese understand that. Some Chinese officials might even welcome it. Limiting exports is one thing; giving them ammunition that persuades businesses to drive prices up is something altogether different.

For importers, though, anti-dumping duties can be a nightmare. They can damage some importers immensely, they're difficult to fight against and they're just too obscure to get many people interested.

Serious uncertainty
And that's why I predict France will soon switch from public pressure for high-profile pointless gestures like quotas to behind-the-scenes lobbying for import duty rules that will create serious uncertainty, and ensure no-one puts all their eggs into a Chinese basket again.

Now if France does do that and it works, it'll be the poor of Cambodia, Bangladesh and Sri Lanka who'll benefit. European consumers will be worse off, and no jobs will come back to Europe for the same reason they didn't come back when quotas were first slapped back on in mid-2005.

But European importers with contracts to buy clothes for more than they thought are going to have some serious problems too.

And if I were in their shoes, I wouldn't be worrying about whether quotas will go. I'd be lobbying the politicians right now to make sure that when - not if - the lobbies for anti-dumping duty start up, we don't find the kind of chaos we got in the middle of 2005.

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.