Some sense of normality was restored for retailers and importers when the European Commission (EC) abolished quotas on imports of Chinese clothing at the beginning of this year. But the silence that has followed doesn't convince international trade expert Emma Ormond the matter is now closed. Anti-dumping complaints are a near certainty she tells Leonie Barrie.

"There's an overall sense of slight unease because everything's gone so quiet," explains Emma Ormond, international trade consultant at PricewaterhouseCoopers.

She adds: "I can't believe the industry is just sitting back and waiting to see what will happen."

Behind the scenes, the EC and China are monitoring shipments of eight product categories (T-shirts, pullovers, men's trousers, blouses, dresses, bras, bed linen and flax yarn) to the European Union (EU) until the end of 2008.

The monitoring measure was agreed to ensure a smooth transition to quota-free trade - but any sudden surges in shipments from China are likely to trigger some form of protectionist measure again.

Ormond believes it's inevitable that there will be a surge of imports in early 2008 "because a lot of merchandise was held over for shipment in January so it wasn't covered by last year's quota," but adds the shipments should start to settle down by March.

She also thinks the most likely protectionist measure is an anti-dumping complaint rather than textile specific safeguard measures - since memories of the 'bra wars' fiasco in 2005, when millions of Chinese-made clothes were stranded in ports and at sea after new textile quotas were rapidly exceeded, still run deep within the Commission.

Launching the process
Instigating an anti-dumping complaint requires evidence of both dumping (goods sold on the export market at prices lower than on the domestic market) and damage to the EU industry before the Commission will launch an investigation.

"The advantage of anti-dumping duty from the Commission's point of view is that it doesn't just target China and is more a stance against proven unfair trade.

"So it would have to look at all other countries potentially dumping and causing damage, which means it could also be extended beyond China."

Dumping is not that difficult to demonstrate. But because China is a state trading economy and not a market trading economy, instead of using its domestic prices to determine dumping, an analogue or reference country would be chosen instead.

China's export pricing would then be compared with that country rather than with China's domestic prices.

"So that's the first thing that can have an adverse impact on China because very often the analogue countries they select are not particularly appropriate - and ultimately mean they'll always be able to demonstrate dumping."

In the anti-dumping case brought by the EU against leather footwear from China and Vietnam in 2006, for example, Brazil was used as the reference country.

The next issue is to demonstrate injury to the EU industry and assess the level of that damage by looking at things like import penetration, and export prices versus EU domestic prices. "They can nearly always prove damage," Ormond explains.

"We've seen quite significant price deflation over the last few years and it was beginning to turn round, but as we're starting to go into recession, there'll be a lot of pressure back on pricing.

"That said, China's not as cheap as it was, and it's getting more expensive as labour rates are going up, and raw material and shipping costs are soaring."

Import issues
The implications for retailers and importers are enormous. Not only do they need to be aware of what product categories from China are vulnerable - but also what is potentially vulnerable from other countries.

"And I don't think people have really thought about that."

Recent research carried out by Ormond and her colleagues in the customs and international trade team at PwC, studying trade volumes and values from China into the EU since the beginning of 2005, has demonstrated both dumping and damage in the six clothing categories still subject to surveillance.

And this is one reason why Ormond says she is "convinced" anti-dumping measures will come into play.

However, she adds: "I suspect the industry is probably biding its time and waiting for at least four months' worth of trade data, so it's unlikely we would see a complaint much before the end of the first half of this year."

It's hard to predict which product category or categories a complaint might be lodged against because "the six clothing categories which were subject to quota and are now subject to surveillance licensing have very similar profiles."

Take dresses, for instance, whose imports look huge because they have been so on-trend, but also because a lot of tunic tops were actually imported as dresses.

Order implications
"For retailers and importers, my view is that their orders for 2008 are safe, and that spring/summer 2009 is possibly vulnerable," Ormond says. She adds that provisional anti-dumping measures are most likely to hit garment orders for autumn/winter 2009, if they kick in at all.
 
In terms of the timescales, from the date the notice of initiation of an anti-dumping investigation is published in the Official Journal of the European Union, the Commission has 15 months to conclude its investigation.

In theory it could be significantly quicker, particularly in politically sensitive cases, and provisional measures could come into play within nine months.

"So if we saw an investigation at the end of June this year, then the chances are we wouldn't see provisional duty until March next year," Ormond explains. "And by that time, spring/summer merchandise is in.

"But there is still the prospect of disruption because of the possibility they could bring it [the provisional duty] in after nine months; and if provisional duty's imposed that would generally be for six months - which takes you to the end of the 15-month period and then the definitive duty kicks in."

Duty rates?
What are the duty rates likely to be? Ormond says they're virtually impossible to predict. "Definitive duty is very often not at the same rate as the provisional duty, and so suddenly you have this huge uncertainty that just hangs over all your sourcing decisions."

There are various mechanisms to calculate the rates, she says, "but if it's fairly straightforward anti-dumping duty then it's usually based on the lower of the dumping margin and the injury margin.

"So the dumping margin is the difference between the export price and the domestic price, and the injury margin is effectively what the EU industry feels it's being damaged by in difference in prices, volumes etc."

But often - as happened in the footwear case - the final duties don't actually bear any relationship to either the dumping margin or the injury margin.

"And there's no doubt at all that any clothing case would be hugely political again."

Be prepared
Feedback from retailers and importers suggest most are concerned by the uncertainty. And for a lot of people who are monitoring the situation the view seems to be that "it's a question of when, not if."

Advice for companies is to be prepared.

Importers and retailers should look at where they can shift production, or whether they can mitigate the effect of anti-dumping duty out of China and anywhere else by using different raw materials, for example.

And individual companies must be willing to submit data about their own businesses which would be used by the Commission in its damage calculations.

But they only have 45 days from an anti-dumping complaint being filed to completing the relevant questionnaire. And a lot of the required information isn't data an importer or retailer would readily have to hand.

"Which is why we keep telling companies they must be in a position to complete this documentation as and when anything happens," Ormond notes. "The more they're prepared to get involved, the better."