Pondering The China Factor

In the U.S., textile producers are pitted against retailers as post-quota China trade issue heats up.By Carmen Pang, Executive Editor

Textile Business
By Carmen Pang,Executive Editor

Pondering The China FactorIn the United States, textile producers are pitched against retailers as post-quota China trade issues heat up.More than six months after all global textile and apparel quotas have been abolished, many in the textile business now consider the term “post quota”a code word to mean “Chinese dominance.”By now, the world has read how some categories of Chinese textile exports, such as cotton knit shirts and cotton trousers, have skyrocketed by hundreds and thousands of percentage points in the first three months of the year (See Textile World Asia, May/June, Page 65).In fact, the surge was alarming enough to prompt the U.S. government to take action. The Bush administration announced in May that it was initiating safeguard measures on seven categories of textile imports from China; meanwhile, the European Union also was considering similar actions. The safeguard mechanism, a provision included in China’s admission into the World Trade Organization (WTO), allows WTO members to establish quotas on individual apparel and textile items from China that are deemed disruptive to domestic markets.As early as last year, the Chinese government, faced with the threat of safeguards, announced new export tariffs on its textile products. By June of this year, nearly 150 textile products were to be subject to export tariffs.China’s hope, many believed, was that by imposing some control over its export growth, it could thwart off any safeguard measures that the United States and European Union were considering. When the move failed and the re-introduction of quotas by the U.S. government on certain items became apparent, the Chinese government rescinded the promise that it had only announced months earlier — it will not be collecting export tariffs on 81 out of the 148 products it identified, after all.At press time, the trade spat that China is engaged in with the United States and the European Union is only heating up. While many countries are concerned about post-quota textile trade and are watching closely to see what, if any, step China will take next, the United States undoubtedly will play a front-and-center role in this ongoing saga. However, even within the U.S., opinion varies when it comes to the China factor.An All-Around Post-Quota SurgeAs soon as January 1, 2005, rolled around and quota became a thing of the past, there was an immediate shake-up in international textile trade. In addition to the buzz surrounding the China surge, less reported was the increase of exports from a handful of other countries.“If you look carefully at the trade statistics, a number of countries have also greatly increased their imports to the U.S. [following the elimination of quotas],” said Joshua E. Chernoff, vice president and global practice leader — consumer industries and retail, A.T. Kearney Inc., a U.S.-based management consulting firm. “If you look at sub-Saharan Africa, in the first part of the year, imports were up almost 25 percent; the Indian region, up 22 percent; CAFTA and the Caribbean, up 13 or 14 percent.”Chernoff said how much these countries stand to gain moving forward depends on the individual country’s capability.“You have to look at the type of garment or the type of fabric,” he said.“Turkey has historical strength in woven cotton and toweling. If you look at the robe market, which is a significant market, Turkey has a disproportionate share of it, especially in terry cloth. Moreover, Turkey has been investing and expanding its capabilities and trying to pick up more and more work particularly from Europe and also from the U.S. Countries like India and Pakistan — whose economies are beginning to grow rapidly and they have lots of people — also stand to gain.“I think the reason China stands out in the public eye is one, the overall capacity of China to produce garment is greater than any other country. Two, China has been most curtailed by the old quota system. People marvel at the fact that when quotas were removed, China’s rate of imports jumped ten-fold. But, what that means to me is that the old system radically curtailed China’s ability to export garments relative to its capability and capacity. What you’re seeing is the marketplace recognizing that once quotas were removed, China is quite competent and it drives good quality and good value for certain types of garments.” Joshua E. Chernoff, vice president and global practice leader — consumer industries and retail, A. T. Kearney Inc.Out Go Quotas, In Come SafeguardsTo those countries that have already benefitted from quota-free trade, the newly imposed safeguards on China could prove to be another boost, at least for the time being, because it means retailers in the United States, one of the largest textile markets in the world, will still have to depend on a multi-source strategy.“The notion of safeguards has been widely discussed for months if not years, I don't think the approval of safeguards surprised anyone dramatically,” said Chernoff.“With the potential for safeguards out there, many people have been choosing to source from people who own production both in China and also, say, Taiwan or Macau or Hong Kong or Vietnam. That’s one way to hedge the concerns of safeguards.”“The safeguards on China have given a new lease on life for some other suppliers, like Hong Kong, Taiwan and Korea,” said Erik Autor, vice president — international trade counsel, National Retail Federation, a Washington-based trade group that represents U.S. retailers.“Initially, [following the elimination of quotas,] we saw a shift in production from highcost producers like Hong Kong, Taiwan and Korea to China. What the safeguards will do is shift that back.”Needless to say, the U.S. retail community is not particularly happy to see a comeback of quotas with the safeguard measures.“We really welcomed and strongly supported the elimination of textile and apparel quotas,” said Autor. “We saw them as a huge hidden tax on American consumers and they came at a huge cost to the American economy. We were very happy to get rid of that. And, quotas also forced retailers to source from different countries — with no real economic reason to do so other than those countries had available quota. Now, we have to face the reality that China is going to continue to be under quota for the next three years or so. Retailers have adjusted their sourcing strategies accordingly. This is just one more element of risk for doing business in China.” Erik Autor, vice president — international trade counsel, National Retail FederationChina's AdvantageIn addition to the ability to procure inexpensive goods, U.S. retailers flock to China as a sourcing destination for other reasons as well.“China is the most efficient producer and I think no one disputes that,” said Autor. “China sets the standard for productivity and for consistently high quality. China also has a well-developed infrastructure compared to other developing countries. It has huge amounts of foreign investments and modern factories. When you’re looking at all the elements that are necessary to be competitive in apparel manufacturing, China has every single one.“The other thing is it has an integrated industry. In the post-quota world and under the full-package production system, those producers that have ready access to a wide range of yarns and fabrics and other inputs are going to be at a significant advantage over those who don’t. Those who don't are like producers in Africa and Central America. Those who do are producers in Asia, particularly in big Asian countries like China.”More importantly, Autor added, many of the factories in China are owned by companies based in Singapore, Hong Kong, Macau, Taiwan and South Korea and have decades of experience selling in the U.S. market.“They know the U.S. market very well, they have long, established business relationships with U.S. retailers and they offer top-quality service,” he said. “All these elements combined make China by far the most competitive producer of clothing in the world.”In addition, according to Chernoff, China is out-competing U.S., as well as other textile producing countries, because of the large investment China has poured into the sector.“The fact is, both the private and public sectors in the U.S. have radically under-invested in the textile sector compared with many Asian countries, who have been throwing a lot of money into modernizing the sector,” he said. “The Chinese textile worker is much more productive per hour. The unit output is higher in China [because of machine upgrades] and the amount of supervision that a Chinese garment worker needs is far less. The private sector in the U.S. is voting with its investment dollars because very little capital is flowing into the textile sector.”According to A.T. Kearney calculations, China invested more than $21 billion in its textile operations over the past three years. Beyond SafeguardsDespite the advantages touted by many, not everybody in the textile industry was happy to see the quotas end. Among the voices calling on the U.S. government to take actions beyond the already announced safeguards, the loudest is coming from the American Manufacturing Trade Action Coalition (AMTAC), a trade group that represents the manufacturing sector of the United States.“We are pressing the government to go beyond the concept of the piecemeal safeguard process and sit down with the Chinese government to reach an overarching agreement that deals with trade in the foreseeable future,” said Auggie Tantillo, executive director of Washingtonbased AMTAC.“It does no one — the U.S. retailer, the U.S. textile industry, the Chinese industry — any good to have this enormous uncertainty about whether these limits will be in place or not. It would be best for all parties to reach some agreement that says here is what the structure is going to be for the next three years, so the U.S. industry can know what level of market penetration China is going to have and the U.S. importing community can know what amount of goods they can contract for.We are not calling for China to be excluded from the market. We’re not saying that its trade should be rolled back. We’re simply saying that its trade should be kept to a reasonable growth level.”AMTAC, as well as many in the textile manufacturing industry around the world, contends that China uses a system of unfair and illegal trading practices that give Chinese companies many advantages in the marketplace. “They manipulate their currency, they provide statesponsored subsidies for everything from the cotton to the utilities to the chemicals. They also give export rebates to their companies,”said Tantillo.“All these give them an enormous pricing power.” Auggie Tantillo, executive director, AMTACPolitically Charged Although the safeguard measures were designed to protect domestic markets that are threatened by the sudden onslaught of imports, some doubt that they will be able to provide long-term stability to the U.S. manufacturing sector.“I think the safeguards will slow things down for sure, but they ultimately are just stalling an inevitable shift to a more global economy,”said Chernoff. “China today is accountable for about 13 percent or 14 percent of the U.S. market, we believe over time it could account for 30 percent to 35 percent of the U.S. market. The issue is: Is it coming out of U.S. jobs? Or is it coming at the expense of Mexico or Guatemala or sub-Saharan Africa? We think [the latter] is a more likely scenario.”Looking at a broader scenario, many believe that safeguards are just the beginning of a new political dance between the United States and China that will include such economic and geopolitical issues as the free floating of the Chinese currency, the protection of intellectual property rights and the North Korea factor.“The elimination of quotas was long overdue and it’s a real turning point in the long term for the textile industry,” said Chernoff. “There are bigger issues at play, which include the [United States’] trade relations with China. The [U.S.’] relationship with China tends to run warm and cool and it makes the whole textile discussion all the more compelling. Many textile importers, retailers, manufacturers tend to think about China a lot and we remind them they shouldn’t ignore all the other countries. There are plenty of opportunities that exist in a post-quota world that don’t necessarily lead to China. There are other opportunities to improve their global sourcing and their cost and quality positions in many categories that have little to do with China.”
July/August 2005