Parsing China's Trade Surplus

Parsing China's Trade Surplus

JANUARY 13, 2006 NEWSMAKER Q&A
Parsing China's Trade Surplus
Nicholas Lardy of the Institute for International Economics explains how it has become so huge and how it will affect the yuan's valueSome numbers just make you sit up and take notice. After seeing those out of Beijing on Jan. 11 -- showing China's trade surplus had topped $101 billion last year, triple the 2004 figure -- the world definitely noticed. The big jump came in spite of a 2% revaluation of China's currency, the yuan, in July. With the latest figures, trade hawks in the U.S. and elsewhere are sure to call for a more significant appreciation of the yuan to slow the flood of exports from mainland factories. But would that really help cut the surplus? BusinessWeek Asia Editor David Rocks on Thursday spoke with Nicholas Lardy, a senior fellow at the Institute for International Economics in Washington, to get some perspective on the numbers. Edited excerpts of their conversation follow: What's driving China's trade surplus?The big driver isn't on the export side but on the import side. Export growth fell a bit, but import growth was barely half what it was in 2004, so there has been this ballooning of the trade surplus. Based on the data available so far, it looks like the biggest decline in imports is in machinery and equipment. Parts and components that go into export processing are still growing at 25% to 30% annually. But machinery and equipment is running at about a third the rate of 2004 -- that's to say at 10% rather than the 30%-plus growth seen in 2004. So what we're seeing in 2005 was some slowing in the pace of domestic investment. This comes against the background, you'll recall, of investment growth that began to accelerate in 2002 through early 2004. Then the government got worried about excess investment and overheating, so they started to put the brakes on the economy. This is evidence that the measures they took are starting to bite. What are the strongest export sectors?The big drivers of export growth have continued to be information technology, electronics, and telecom. Those have been the big drivers for the past few years, and it continued in '05. And a lot of those goods are produced by Western multinationals exporting from China, right?About 55% of all exports are from foreign-owned companies or joint ventures. That share has been growing about 1 or 2 percentage points annually in recent years but may be stabilizing now. It looks like foreign capital coming into China in 2005 is going to be down slightly -- the first time in many years that it will have fallen. That may mean the share of foreign-produced goods won't grow as fast as it has in the past. But even if you take out all the foreign-owned exporters, Chinese domestic companies have been growing their exports. Their share has been declining, but many companies are exporting more and more. And a lot of people don't recognize that about half of all the goods produced by foreign companies in China are sold in China. The auto sector is the best example -- 95% of the autos sold there are made by foreign companies or JVs. Will the trade surplus continue to grow?The big question for the overall trade situation next year is whether import growth starts to pick up again. Some people thought they saw a resumption of import activities in the closing months of the year. If that trend strengthens, then the trade surplus may be lower next year. If the world economy slows, then China's export growth will slow, but if global growth is strong, we'll see export growth from China continue at maybe 20%. How much would a further revaluation of the yuan affect the situation?I've been in the camp that has said the Chinese currency is undervalued and that the adjustment last July was far too modest. But even if China were to revalue its currency significantly, it would continue to have a trade surplus with the U.S. The fact is, most of the goods that are produced in China used to be made somewhere else. If you look at the overall U.S. trade deficit, Asia's share has been declining. We have a huge growing deficit with Germany. They have slow growth, so their imports are down. And there's a lot of energy imported from the Middle East. A revaluation would contribute to a reduction of the U.S. current account deficit. But what really has to happen is an increase in the savings rate in the U.S. and a simultaneous depreciation in the value of the dollar. It needs to fall further mostly against the yuan and other Asian currencies that have been heavily managed. China's leadership is seeking to increase internal consumption. Will that have much of an effect on the trade surplus?Not really. If you look at the composition of imports, there are almost no consumer goods. China has tremendous production capacity in most of the things people are buying -- consumer electronics, automobiles. So Dell (DELL ) may sell more computers in China, or other foreign companies may sell more flat-screen TVs, but those will be made in China. I don't see a lot of that consumption demand coming from imports. China's foreign currency reserves are heading toward $1 trillion. What effect might this have on the U.S.? Does it give China greater control over the U.S. economy?I don't think it gives them much clout. They're in the very unhappy position of being at risk of a significant decline in the value of their reserves. Eventually the dollar has to depreciate quite a bit, particularly against Asian currencies. So they're at risk of their reserves depreciating in terms of their domestic currency. They can't really diversify out of dollar holdings because the minute they start to do that they impose losses on themselves.

The History of Trade, Part 2 - New York Times

The History of Trade, Part 2 - New York TimesEditorial
The History of Trade, Part 2
Published: November 12, 2005
During the 1980's, the United States government, egged on by a Detroit auto industry terrified of Japan's low-cost, fuel-efficient cars, imposed quotas on imports of many Hondas and Toyotas. So Honda and Toyota - and Mitsubishi and Mazda and Nissan - started making luxury cars that could challenge Detroit in a far more profitable market. The results can be seen on the highways and byways of America: Acuras, Lexuses and boatloads of other high-end Japanese cars, which have steadily put the squeeze on a market niche previously dominated by the Americans and the Europeans.

Washington has apparently not heard that old chestnut about not learning from history and being doomed to repeat it. On Tuesday, the United States government, egged on by a textile and apparel industry terrified of imports of cheap Chinese T-shirts, bras and baby socks, announced that it had persuaded China to agree to export quotas for the next three years. Chinese officials say they will try to use the quotas to push their manufacturers toward producing more high-end garments. That will challenge American and European manufacturers in a far more profitable market, one in which American companies have staked their futures, and could hasten the demise of an already dying American textile and apparel industry.

But don't tell that to shortsighted American textile companies. They're too busy crowing and looking for other ways to limit Chinese imports. "We know we have three years to come up with other strategies to deal with predatory imports," James Schollaert, a Washington representative of the Hosiery Association, told The Times this week.

What Mr. Schollaert and other American textile lobbyists should be looking for are other strategies to make the textile industry here more competitive in a globalized economy - because China is not going to take three years to make up its mind. Indeed, all across the developing world, poor countries are increasingly starting to make a play for more high-end textile and apparel manufacturing.

Lafayette 148, a New York fashion house, sent a top knitwear expert to China two years ago to teach factory workers Italian knitting techniques. Celine, a unit of LVMH Moët Hennessy Louis Vuitton, is manufacturing $500 denim-and-leather handbags in China, according to The Wall Street Journal. It also reports that last year, Gucci began sewing some sneakers in Serbia, while Tod's, the fancy Italian shoemaker, is considering moving part of its Hogan sneaker line to China.

It is extremely frustrating that political leaders refuse to recognize that all of the protections created in the last 40 years to shield American textile jobs from foreign competition have failed. Employment in textile mills has fallen to about 400,000, from approximately 1 million in 1974. It would be better to find ways to get those workers into growth areas rather than keeping them in dying ones.

China Textile Agreement - New York Times

China Textile Agreement - New York TimesChina Textile Agreement

Published: November 19, 2005
To the Editor:

"The History of Trade, Part 2" (editorial, Nov. 12) criticizes the United States-China textile agreement as protectionist.

The United States textile market is open without restriction to exporters from around the world, with the exception of China, Vietnam, Belarus and Ukraine. We imposed safeguards on textiles from China because we believe that free trade must also be fair.

The imposition of safeguards was within our rights under the World Trade Organization.

Chinese textile exporters will see their shipments grow over the next three years, and the quotas will expire at the end of 2008.

The bilateral United States-China textiles agreement affects less than 3 percent of United States imports from China. There are many different ways to characterize a trading relationship that is 97 percent free of quotas, but "failed" is not one of them.

Franklin L. Lavin
Under Secretary for Intl. Trade
Department of Commerce
Washington, Nov. 17, 2005

Deal on Textiles May Only Delay China's Dominance

Deal on Textiles May Only Delay China's DominanceDeal on Textiles May Only Delay China's Dominance

By Paul Blustein
Washington Post Staff Writer
Wednesday, November 9, 2005; A24

The U.S. textile industry got its heart's desire yesterday -- an agreement limiting the amounts of shirts, slacks, underwear, fabric and other textile products that Chinese companies can ship to the United States over the next three years.

No sooner had the deal been announced at a London news conference by U.S. Trade Representative Rob Portman and Chinese Commerce Minister Bo Xilai than the industry began praising it. "U.S. textile and apparel manufacturing workers and their communities are big winners today," Augustine D. Tantillo, executive director of the American Manufacturing Trade Action Coalition, said in a written statement.

But it is far from clear that the agreement will do much to halt the steady erosion of jobs in the battered U.S. sector, much of which is concentrated in the Southeast. According to some trade and industry experts, the deal could even hasten the industry's decline, by giving China's export machine greater incentives to move into the higher end of the market, on which U.S. companies have staked their futures.

"This is going to backfire," said Grant D. Aldonas, who until earlier this year was undersecretary of commerce for international trade and the Bush administration's lead negotiator with the Chinese on the issue. "It's the orthodoxy in certain industries that protectionism is the answer and it is just shortsighted in the extreme."

For U.S. consumers who have become accustomed to the rapidly proliferating "Made in China" labels on the clothes they buy, the agreement will at least slow that phenomenon for a while. Imports of Chinese textiles and apparel will be allowed to rise at annual rates ranging from 8 percent to 17 percent, depending on the product and year, beginning on Jan. 1, 2006, and lasting until the end of 2008.

Winning such an accord with Beijing has been the top goal of the U.S. textile industry since the demise of a decades-old system of global quotas restricting the amount of clothing that individual countries could export. Once that system disappeared on Dec. 31, 2004-- freeing countries in Asia, Africa and Latin America to ship as many sweaters, bras and bedsheets as the market would bear -- China's network of factories, with its bottomless reserve of low-cost workers, threatened to dominate global markets.

But while yesterday's agreement will prevent the Chinese from dominating their competitors with the swiftness many had feared, the deal's three-year duration means that a day of reckoning still looms. And after the pact ends, Washington will no longer have the leverage it has exercised over Beijing in recent months: the right to impose annual caps, known as "safeguards," on Chinese textile and apparel imports. Beijing agreed to such restraints until 2008 as part of the price of its entry into the World Trade Organization.

"Under this new agreement, the U.S. industry will know with certainty that China will not be able to flood the U.S. market during the next three years," said James W. Chesnutt, president of National Spinning Co. of Washington, N.C., and chairman of the National Council of Textile Organizations.

But, he acknowledged, "the threat from China is not eliminated by this agreement, only delayed."

Furthermore, instead of shifting production to the United States, whose manufacturers generally do not compete directly with the Chinese, the agreement could mean that other Asian countries get more orders from U.S. retailers at China's expense, some analysts predict.

"There's a balloon effect. You squeeze in one place, and the pressure just gets transferred someplace else," said Peter Kilduff, a professor at the University of North Carolina at Greensboro who specializes in the textile industry.

Imports of clothing from China surged 71 percent over the past year, to $8.2 billion. Imports from India have risen 34 percent, to $2.7 billion; Bangladesh's shipments have increased 24 percent, to $2.23 billion; Indonesia's have risen nearly 17 percent, to $2.7 billion; and Sri Lanka's have increased nearly 18 percent, to $1.7 billion. Those countries' sales to the United States are likely to increase even faster now that China's are limited, Kilduff and others said.

None of those caveats has stopped industry officials from crowing. Chinese competition, they said, is far more unfair than that of other countries. They voiced delight that after five months of tough negotiating, the administration induced the Chinese to accept caps on most apparel products of 10 percent growth in 2006, 12.5 percent in 2007 and 15 to 16 percent in 2008. All told, China's shipments will increase only about 4 percent more over the life of the agreement than they would have if the administration imposed safeguards each of those three years, according to the industry's calculations.

Bo acknowledged that the figures were "a far cry from our original expectations." He said China could take comfort in that a three-year negotiated agreement affords greater predictability to its exporters than does the system of annual safeguards. Clothing importers, who opposed any sort of limits on Chinese imports, also said they were unhappy with the tightness of the caps.

But Aldonas, who is now in private legal practice, asserted that U.S. manufacturers would eventually regret pushing the administration for comprehensive caps on imports. With the Chinese compelled to limit their exports, "they'll move up the value chain, ceding the lower value stuff to the Pakistans and others," he said. "Those are the longer-term effects I'm worried about."

The U.S. industry lost jobs at a terrible clip even when the global quota system was in effect, noted Edward Gresser, a trade expert at the Progressive Policy Institute. Employment in U.S. textile mills has fallen from about 1 million when the quota system was established in 1974 to about 400,000 when it ended last year. The number of jobs in garment factories has plunged even more steeply.

Since worldwide quotas failed to stem job losses, Gresser said, "I'm skeptical that a quota on China alone will be more successful."

© 2005 The Washington Post Company

CNN.com - China awaits textile pact fine print - Nov 9, 2005

CNN.com - China awaits textile pact fine print - Nov 9, 2005China awaits textile pact fine print

BEIJING, China (Reuters) -- Chinese reaction to a textile trade deal signed with the United States ranged from relief to bitterness and uncertainty as Chinese exporters waited for details of the new quotas.

The deal that Chinese Commerce Minister Bo Xilai and U.S. Trade Representative Rob Portman sealed on Tuesday limits Chinese exports of 34 clothing and textile categories, such as shirts, trousers and underwear, for the next three years.

"The deal struck over Chinese-U.S. textile trade will create a stable, predictable environment for the trade, and greatly strengthen the confidence and determination of Chinese businesses and U.S. importers to accept and make orders," said the China Chamber of Commerce for Import and Export of Textiles in a written statement.

But even Bo and other Chinese officials voiced frustration at U.S. efforts to block rising Chinese textile exports after a global quota system expired at the start of this year.

Immediately after signing the deal, Bo said the quotas were "a far cry from our original expectations."

The deal generally sets growth rates for clothing imports from China at 10 percent in 2006, 12.5 percent in 2007 and 15 percent in 2008. For textile products, the rates are 12.5 percent in 2006 and 2007 and 16 percent in 2008.

After that, U.S. rights to restrict such imports will shrink.

The quotas are higher than the 7.5 annual growth allowed by current U.S. safeguard restrictions, and China's Ministry of Commerce and state-sponsored industry associations said the deal was the best Chinese manufacturers could expect.

A former Chinese trade negotiator, Zhou Shijian, told the Chinese-language China Business Daily: "China was in an innately unfavorable negotiating position" because of U.S. trade rules.

Clarity
Many Chinese-based manufacturers said they welcomed an end to uncertainty but were waiting for the Ministry of Commerce to explain the quotas.

"The deal is good for us, because it removes uncertainty for buyers," said Zuo Quntao, a manager at the Weida Garments, a shirt maker in the eastern Chinese province of Zhejiang that exports nearly all its shirts.

But Zuo said that Weida and other exporters had not seen the details. "For real buyer confidence, we need to know the details of how quotas will be allocated," he said.

While some manufacturers welcomed the deal, other manufacturers said that if the quotas threatened growth, they may move some production to Southeast Asian countries, or use those countries for final processing so orders escape quota restrictions.

"We've mostly remained outside the limits. We've been using other countries in Southeast Asia to transfer shipments," said a sales manager at Aotin Enterprise, a clothes exporter in the far southern province Guangdong, who gave his surname as Luo.

The deal came after five months of grinding negotiations between China and the United States. Washington imposed quotas after U.S. manufacturers and trade unions complained that cheap Chinese clothes threatened their survival.

Chinese textiles and clothes exports grew to $13 billion in the first months of this year, a rise of 65.5 percent on the same period last year.

In the deal, the United States said it would exercise "restraint" in using "safeguard" limits on Chinese textiles. But Fan Dabiao, the general manager of Soho International, a clothes exporter in eastern China, said he was worried about more restrictions.

"The U.S. promised only to exercise restraint, so who knows what the variables may be in the future," he told the Chinese-language International Business Daily.

Copyright 2005 Reuters. All rights reserved.This material may not be published, broadcast, rewritten, or redistributed.
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CNN.com - Bush urges China move on yuan - Nov 9, 2005

CNN.com - Bush urges China move on yuan - Nov 9, 2005U.S., China reach trade spat deal

LONDON, England (Reuters) -- The United States and China have reached agreement on reining in China's booming clothing and textile shipments to the United States until 2008.

U.S. Trade Representative Rob Portman and Chinese Commerce Minister Bo Xilai announced the deal at a joint news conference in London on Tuesday and hailed it as a success for both sides.

"I believe the textile agreement shows our ability to resolve tough trade disputes in a manner that benefits both countries," Portman said.

Bo described the outcome as a "win-win result", though he later said the agreement was "a far cry" from Beijing's original expectations.

The accord was reached after seven rounds of negotiations, at some of which Bo said the two sides had been "almost at the edge of a cliff".

The deal covers more than 30 individual products and contains quotas that a U.S. statement said would begin at low levels.

An unnamed U.S. official said the accord would allow hundreds of thousands of Chinese garments piled up in U.S. ports to be sold.

The deal is intended to smooth over a rough spot in the U.S.-China trade relationship before President George Bush visits Beijing in the middle of this month.

China's exports of clothing and textile products to the United States jumped more than 50 percent in the first eight months of 2005 to nearly $17.7 billion following the end of a global quota system on January 1.

That prompted U.S. textile producers to seek protection under a "safeguard" provision of China's 2001 entry into the World Trade Organisation. The measure allows WTO members to restrict the growth in imports from China to 7.5 percent annually when there is a market-disrupting surge.

The Bush administration has imposed safeguard curbs on billions of dollars' worth of Chinese clothing imports this year. But because the curbs have to be renewed annually, textile groups have pushed for a comprehensive agreement that would limit imports until 2008 when the safeguard provision expires.

Copyright 2005 Reuters. All rights reserved.This material may not be published, broadcast, rewritten, or redistributed.
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薄熙来称中国在对美贸易中并无意追求大额顺差 index

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???????????:???????? ?薄熙来评中美纺织品谈判：闹人的孩子多吃奶 评 www.XINHUANET.com　　 2005-11-09 11:39:14　　来源：中新网

中新网11月9日电　l1月8日中美纺织品备忘录在伦敦签署之后，中国商务部部长薄熙来现场回答了中外记者的提问。据商务部网站消息，薄熙来说，这次谈判是复杂的，也是困难的，正因为如此才谈到七轮，有几次已经走到了悬崖的边缘。

薄熙来表示，如果说到业界的压力，美国的纺织服装业涉及到几十万人就业，而中国则涉及近2000万人的就业，应该说，中方企业的诉求更大、更强烈。

薄熙来说，我知道美国业界给美国贸易代表波特曼先生施加了不小的压力，但有句俗话：“闹人的孩子多吃奶”，我们应做出正确的判断，不能说谁嚷嚷的厉害谁就有道理。

薄熙来说，众所周知，美国和中国的经济差距很大，美国的人均GDP和人均收入都30多倍于中国，如果中国的纺织企业不能实现合理的出口，很多工人将失去工作，这远比美国的人数要多。

薄熙来表示，波特曼先生最后表现出一定的灵活性，但还不够，按理应该让中国的纺织品完全享受2005年1月1日以后全球纺织品一体化的待遇。当然，有一个242条款，中方遵守一切WTO的现成规则。但发达国家应该了解，全球贸易自由化是大势所趋，数量限制是不合时宜的。

薄熙来：中国有权利享受纺织品全球一体化的成果

中新网11月9日电 l1月8日中美纺织品备忘录在伦敦签署之后，中国商务部部长薄熙来现场回答了中外记者的提问。据商务部网站消息，薄熙来表示，2005年1月1月实现纺织品全球一体化后，中国有权利享受这一成果。

薄熙来强调，纺织品涉及到中国近2000万人的直接就业，其中有很多是低收入的职工，他们还要养家，因此纺织业在中国是高度敏感的行业。他表示，对于像中国这样人口众多的发展中国家，培育起纺织服装这样有竞争力的行业很不容易，希望世界各国给予更多的理解。

在回答有关如何比较中美、中欧纺织品谅解备忘录的问题时，薄熙来表示，两个协议是平衡的。中欧的协议在今年6月11日就己达成，欧盟表示了诚意，对于营造中欧纺织品正常稳定的出口环境起到了重要作用。这次中美之间又在平等务实的气氛下达成协议，和中欧协议互为补充，成为通过平等磋商来解决贸易争端的两个成功范例。

Beijing, Washington strike deal on China textiles

Beijing, Washington strike deal on China textiles
Beijing, Washington strike deal on China textiles
(AFP)
Updated: 2005-11-07 17:21

The United States and China have agreed to a deal on the import of mainland clothing and fabric, resolving a bitter trade dispute between the two nations, a major Chinese textile association said.

A shop assistant puts socks on mannequin feet in a store in Beijing in this undated file photo. [AFP]
"Both the US and China have compromised in reaching this textile pact," China National Textile and Apparel Council spokesman Sun Huaibin said.

"China made concessions on the duration of the quotas, allowing the US to impose controls on access by Chinese textiles and apparel to the American market through 2008, instead of 2007," Sun said.

The US imports of China-made textiles will be limited to 10-17 percent annual growth rates through to 2008, a concession by China, which wanted it to expire in 2007, Sun said.

It provides for a progressive increase in imports of most major textile and apparel products from China -- by 8 to 10 percent in 2006, 13 percent in 2007 and 17 percent in 2008.

It also represents a concession by Washington, which had proposed keeping annual growth close to 7.5 percent, he added.

Sun said working under the new agreement would be better than being subjected to protectionist, unilateral safeguards and would increase certainty for the Chinese industry.

Beijing, Washington strike deal on China textiles
(AFP)
Updated: 2005-11-07 17:21

The council's statement echoes similar reports from the US media over the weekend.


Workers sew clothes at a garment factory in Hefei, Anhui Province in this undated photo. It is reported China and the US have reached an agreement on China's clothes exports to the US. [newsphoto]
The US reports said Beijing and Washington had agreed in principle to a three-year textile pact allowing for escalating annual import growth rates in 34 individual categories of China-made fabrics and apparel.

The Washington Post said the agreement was likely to be signed next week by US Trade Representative Rob Portman and Chinese Commerce Minister Bo Xilai.

Portman is due to hold talks in Beijing on November 14 to discuss copycat abuses of foreign brands by Chinese manufacturers and lack of access for US companies trying to enter the booming Chinese market.

The pact follows several rounds of Sino-US negotiations to slow the surge of Chinese imports following the scrapping of a global textile quota system on January 1.

China and the European Union finalised a similar deal in September this year.

An official at China's Commerce Ministry declined to comment on the new agreement, saying a statement would be released soon.

LexisNexis(TM) Academic - Document

Copyright 2005 The Financial Times Limited
Financial Times (London, England)

August 23, 2005 Tuesday
London Edition 1

SECTION: COMMENT; Pg. 14

LENGTH: 457 words

HEADLINE: Blair gives Mandy a Chinese burn CATHY NEWMAN - NOTEBOOK

BYLINE: By CATHY NEWMAN

BODY:


An e-mail from the prime minister to the European Union trade commissioner Peter Mandelson has been handed to the FT. In the public interest, we reproduce it here in full.

Tony Blair 22/8/05

To: Peter Mandelson

cc: David Hill, Kim Darroch

Subject: China textile quotas

Peter,

Barbadian communication being what it is, I've lost track of where we are on Chinese quotas. As far as I understand it, millions of trousers, shirts and bras are piling up in warehouses because the EU has breached the ceiling on Chinese imports agreed by you in June to protect the European textiles industry.

Dave tells me the Mail are onto the story - and your role in it - and are about to run a campaign about a shortage of M&S bras. (Cherie's not too happy either. She says, what with our exorbitant mortgage, she can't afford to splash out on European- made lingerie. I'm just hoping this has all blown over by the time we get back, so Paul Dacre doesn't catch her mouthing off about it.)

Anyway, this is fast becoming abig problem. You've simply got to

sort it out. I know you wouldn't give Chinese garments wardrobe-room, but as one who does, let me tellyou those stockpiles spell bad news.

Digby's already been onto me about businesses going to the wall - he reckons the stock shortage is going to cost retailers millions in lost sales. And the broader point is that for all our banging on about modernising Europe, the deal you did in June smacks just a little of old-fashioned protectionism. No wonder Jacques and Silvio have been keeping mum about the whole thing.

Have you done your homework on this Peter? It pains me to admit it, but I don't think Gordon would have under-estimated the level of demand for Chinese goods in the way you seem to have done. (OK, so maybe his intimate knowledge of Chinese textiles stems from the fact that he buys his suits from Primark.)

So here's what I think: I know that while we're hosting the EU presidency, we've got to observe the niceties of diplomacy blah blah, but really I think it's time to take on the French again.

After all, what have we got to lose? Our textiles industry isn't up to much, so letting in some more Chinese pullovers and bras isn't going to hurt UK plc . . .

We've got to be seen to be doing something. It's only a matter of time before the press realises that you, I and all the ministers responsible have been topping up our tans rather than getting ourselves briefed up on this.

Anyway, final word: get this sorted within the fortnight. (Yes I might be sipping a banana daiquiri, but I haven't forgotten the joys of the impending EU-China summit. An ongoing spat over textiles is the last thing I need.)

When I wangled you the EU job a year ago, I knew I could rely on you. Don't prove me wrong, please.

Tony

LOAD-DATE: August 22, 2005

LexisNexis(TM) Academic - Document

Financial Times (London, England)

August 24, 2005 Wednesday
London Edition 3

SECTION: INTERNATIONAL ECONOMY; Pg. 5

LENGTH: 532 words

HEADLINE: Limits force Chinese clothing makers to tighten their belts

BYLINE: By ALEXANDRA HARNEY

DATELINE: HONG KONG

BODY:

Wang Yongjun has a message for European Union negotiators as they head into talks with Chinese officials over the dispute that has stranded millions of pullovers at European ports this summer.

"It's no good limiting (the export of) Chinese goods. Nobody benefits - neither retailers nor consumers," says the general manager of Shenzhen Yiqingxiang Industrial Development, a children's clothing manufacturer that is based in the southern Chinese city of Shenzhen.

Mr Wang is not alone in his discontent. Some Chinese manufacturers have been as inconvenienced as European retailers by the EU's decision to prevent any goods shipped after mid-July from entering the bloc. Not all of the manufacturers whose goods have been stranded in Europe have been paid.

While many were able to ship their goods early enough to avoid the delay, it has forced some Chinese producers to reconsider their strategy.

In June, China agreed to limit its exports in 10 textile categories to the EU for the next three years. When the quota for pullovers and trousers filled, the EU stopped issuing import licences, though more garments were en route from China.

The question of how the export quotas will affect domestic industry is foremost in the mind of Chinese negotiators. China's textile sector comprises about 22,000 companies, employing an estimated 19m people.

Willy Lin, vice-chairman of the Hong Kong Textile Council, said many companies had shifted production to countries such as Thailand, India, Pakistan and Sri Lanka as a result of the restraints on China.

"Since last year, the textile council has been telling manufacturers: don't give up your offshore manufacturing yet." But he added some of these countries' textile factories were "extremely unreliable".

Easyknit International Holdings, a Hong Kong company, moved production of ladies' clothing from China to Malaysia and Vietnam months before goods began getting stuck at European ports.

"I knew sooner or later (shipments to Europe) would be embargoed," said Koon Wing-yee, president and chief executive.

The move to south-east Asia has raised his costs 2-3 per cent.

Not all Chinese manufacturers can afford to invest in factories abroad. Mr Wang of Shenzhen Yiqingxiang says he is mulling a move overseas. For now, he plans to increase production of clothes for children under the age of two because this category has not been affected by the textile trade dispute.

Other Chinese producers have been forced to look closer to home. Run Xing Fa Garment has very few orders from Europe these days, as its customers have turned to suppliers in Vietnam, Cambodia and elsewhere.

Although exports generate 50 per cent of the group's revenues, Ma Wenguang, the general manager, says he will be focusing on the Chinese market from now on.

Not all Chinese textile makers have as many options. Guangzhou Panyu Jieyi Garment, whose products include jackets and casual wear, shipped its products to Europe early enough to avoid the embargo, but because all of its customers were in eastern Europe, it was forced to halt production earlier this month.

"Now, I have nothing to do," said a company official. "It might be another two or three weeks before I get busy again."

LOAD-DATE: August 23, 2005

LexisNexis(TM) Academic - Document

Financial Times (London, England)

August 24, 2005 Wednesday
London Edition 3

SECTION: INTERNATIONAL ECONOMY; Pg. 5

LENGTH: 878 words

HEADLINE: How EU textile quotas became a Chinese puzzle: With imported clothing stuck in warehouses and retailers crying out for stock, the trade restrictions have been

BYLINE: By TOBIAS BUCK

BODY:
As sweaters, bras and shirts imported from China continue to pile up in warehouses across the European Union, there is one question on the minds of trade officials and diplomats, retailers and consumers: where did it all go wrong?

It is a question that is perhaps asked most strongly in a glass-fronted building in the heart of Brussels' European quarter.

Known as the Charlemagne building, this is where the European Commission's top trade officials spent the early days of June carefully preparing a deal which they thought at the time would solve once and for all a growing political crisis.

For months, the EU's executive body had been besieged by textiles and clothing manufacturers and politicians from countries such as Italy, with big textile industries.

Since the end of decades-old import restrictions at the beginning of the year, European groups were seeing their market share shrinking in the face of an onslaught by cheaper rivals from China.

The Commission was facing intense pressure, as data poured in suggesting that the rise in Chinese textiles and clothings imports had exceeded European producers' worst fears.

Shipments of shoes alone, Commission figures showed, had risen by almost 700 per cent since the quota regime was abolished in January.

Peter Mandelson, the EU trade commissioner, found himself in a bind. He knew that European producers had been given more than enough time to prepare for the end of the quota regime.

He also knew that - no matter how many obstacles politicians would put in the way of Chinese imports - the country's unrivalled manufacturing prowess would in the long run be impossible to beat.

But there were political forces to consider, too. The EU's draft constitution had just been rejected by voters in the Netherlands and France, plunging the Union into turmoil.

Much of the hostility faced by the EU institutions appeared to feed on the perception that the Union had allowed foreign competition to undermine national labour and social standards and caused job losses.

And finally, Mr Mandelson had his political masters to consider. Big EU member states were telling him to take action and curb the influx of Chinese goods. The Commission, they demanded, had to act fast or Europe's once-proud textiles industry would face annihilation.

Mr Mandelson favoured a voluntary deal with the Chinese rather than imposing trade defence measures unilaterally, and on June 10 he pulled off such a deal.

Ten categories of textiles would now be subject to voluntary import restrictions, which were expressed in quotas. As soon as the agreed level of imports had been reached, no further product could be shipped to Europe.

At the time, it all sounded simple enough, and speaking in Shanghai the commissioner hailed it as a "once and for all, overall agreement".

He also heaped praise on his Chinese interlocutors: "This is a significant demonstration of China's entry into the global economy as a responsible and valued partner," he said.

Back in Brussels, the deal met an overwhelmingly positive response. Only Sweden and Denmark - traditionally the Union's staunchest defenders of free trade - voted against it. Yet hopes that Mr Mandelson had brokered a lasting peace faded quickly. On July 21, less than two weeks after the agreement took effect, the first category was filled.

Any importer who had not yet secured a licence to import sweaters from China would from now on be unable to sell the goods he ordered on to the European market.

By yesterday, the number of pullovers which are blocked either on ships, at customs points in Europe or back in China exceeded 48m.

Five further categories have since been filled and retailers are warning that the shortfalls will be felt on store shelves across the EU. Shirts, trousers, bras, blouses and flax yarn have all been affected. Retailers and importers, meanwhile, are angry that their long- placed orders cannot be delivered.

Commission officials stress that it is neither surprising nor undesirable for the quotas to fill up. They point out that if quotas simply reflected European demand, there would be no reason for their existence.

However, in some categories at least, it appears that the Commission miscalculated.

With more than four months to go until the end of the year, Brussels has already been asked for licences to import pullovers enough to fill the quota twice. But in cotton fabrics, for example, the quota is nowhere close to being filled.

Brussels will this week try to address such mismatches, and is expected to propose that quotas be juggled to allow those goods on to the market that are currently being kept in warehouses in the EU.

However, officials insist that the Commission is unlikely to go beyond short-term fixes.

While the retail lobby is flexing its muscles and is receiving support from a growing number of governments, diplomats say that positions have not shifted much.

There would, Brussels officials and diplomats say, be no majority among EU member states for abandoning the June 10 agreement.

Any move in that direction, they add, would simply restart the fierce lobbying campaign that led to the deal in the first place.

As the Commission has found out so often in the past, when jobs and politics are at stake, there is rarely a majority for free trade.

LOAD-DATE: August 23, 2005