The Hindu Business Line : Textiles: Cashing in on a dispute

The China-US/EU dispute opens up opportunities for countries like India. The strategic objective may not be to displace China as the US market's principal textile goods supplier but to drive home the point (in US textile trade circles) that Indian exporters are reliable and can be chosen as dependable long-term suppliers of items now sourced from China.

WHAT IS almost certain is that the ongoing dispute between China, on the one hand, and the US and the EU, on the other, will not last for very long.

This is because, on the part of Beijing, strategic economic self-interest will sooner rather than later lead to a softening of its stand in the dispute, which will essentially translate into actions that will serve to douse the flame of US opposition to the flood of cheap textile imports.

On the part of Washington, the chances are that the hard line adopted by the Administration will be persisted with mainly because of the pressure of the powerful domestic textile lobby (one report says that around 275,000 people have lost their jobs in the US textile industry because of cheap imports).

But, in strategic terms, there is little doubt that Washington will try to "control" the dispute and ensure that it dies down in the course of the year, an objective with which Beijing will be in full agreement.

The point is that while the dispute lasts countries like India can make the most of the situation, the strategic objective being not to displace China as the US market's principal textile goods supplier but to drive home the point (in the US textile trade circles) that Indian textile exporters are reliable and that they can be chosen as dependable long-term suppliers of items now sourced from China.

The huge gap separating India and China as textile goods exporters to the US market is clearly indicated by the fact that during January and February, Chinese apparel exports to the US ballooned by as much as 117 per cent.

According to one study, even if India is able to take full advantage of the present hiatus between Washington and Beijing on the textile exports issue, its textile exports to the US are not expected to grow very much more than by 50 per cent by the end of 2005.

In fact, latest reports suggest that importers in both the US and the EU have begun tapping Indian exporters for supplies during the winter of 2005 and for 2006, offering prices which are higher than the levels negotiated earlier. Since January, when the textile post-quota regime came into effect, industry sources have been quoted as saying that prices fell by 7 to 10 per cent mainly because of the general Chinese trade tactic of driving down prices in an effort to increase volumes with the strategic objective of driving competition out of business altogether.

But now, after the dispute with Washington has flared up, it is being expected that Indian textile export prices will rise by 2 to 5 per cent during the first half of 2006.

The question is whether Indian industry will be able to make full use of this income bonanza in a way which will yield medium to long term benefits, essentially creating a situation where Chinese suppliers will find getting back to their numero uno slot and staying there a bit more difficult than previously. Everything will of course depend on the sense of urgency on the part of Beijing to put the dispute behind it and resume its campaign of flooding the world market with its cheap textiles in the post-quota regime.

There are ample indications that this is precisely what Beijing's policy-makers intend doing.

This is despite the fact that, in the initial stages, they adopted a strident tone in criticizing the initial May 14 US action of imposing quota restrictions (at 107.5 per cent of total shipments of the categories concerned as calculated over 12 of the last 14 months) on three categories of Chinese textile imports, subsequently (May 18) extended to another four categories.

(The quotas will take effect from the day the US requests formal consultations with China on the issue, which is expected at the end of this month.)

To start with, Beijing flatly rejected Washington's charge that the US textiles market was being disrupted by cheap Chinese products and that it violated agreements signed under the auspices of the WTO.

It also declared that while it reserved the right to take action "within the framework of the WTO", it would not put additional curbs on the Chinese textile exports.

But, of course, this was only the starting point because, by May 20, the Chinese Government backtracked enough to announce that it would increase tariffs on 74 textile export lines from June 1.

Clearly, Beijing took the step to assuage the strong feelings of those opposed to cheap Chinese exports flooding the US market, the impact of the measure being to increase the price of these products and therefore make them less cheap.

Indeed, in some cases, the tariff increase will be as much as 20 times (from 0.2 yuan per item to 4 yuan), which, by any standard, is not an insignificant step-up.

But even then, some analysts say that the new prices will still be quite low, reflecting the immense production advantages yielded by the "huge, modern" Chinese textile factories — some of them set up with the help of foreign investment — and the associated cheap labour.

Apart from the price of textile products, there is a more fundamental issue brewing, one which has been seized on by Washington as being the principal culprit in the entire textile export controversy.

This is the under-valuation of the yuan (pegged at around 8.28 per US dollar since 1997-98), the precise allegation being that the Chinese currency is actually 40 per cent cheaper than it should in fact be, thus giving an undue advantage to Chinese exports.

True to expectations, Beijing has rebutted this charge saying that unless its overall financial system (especially banking) is reformed, freeing the yuan in the currency world would be an unwise step which could have serious financial repercussions (there are about $200 billion in bad debts in China).

Even so, on May 18, Beijing launched a new foreign exchange dealing system which will allow domestic trading in currencies other than the yuan.

This is a reform measure — criticial to an eventual free-float of the currency — which is being interpreted as being timed to act as a sop to the fixed-rate yuan's critics.

It remains to be seen whether the move will have enough impact on Washington, but the prospects are not bright in view of the fact that a cheap yuan is heavily fuelling bilateral trade deficits with China, which includes economies other than the US.

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