The Hindu Business Line : Chinese textile exports — Threat versus opportunity for EU

JANUARY 1, 2005 saw the dawn of a new era in the textile export sector, with the expiry of the Agreement on Textiles and Clothing and the abolition of all quotas. It heralded unrestricted access to the European, American and Canadian markets for all World Trade Organisation (WTO) members.

In 2003, global textile and clothing exports were worth $395 billion and accounted for about 6 per cent of world merchandise exports. Of the total, $169 billion represented textile exports and $226 billion clothing exports.

In textiles, the European Union was the world's largest exporter, with a 15 per cent share. However, in textiles and clothing combined, its share of 11 per cent was second to China's. These magnitudes imply that Europe has a significant stake in the global textile and clothing trade and must be weary of aggressive competition from China in the new free trade scenario.

In 2003, the EU was the second largest importer of textiles and clothing, with an import value of over $70 billion and a share in world imports of 20 per cent, only marginally lower than the US's 22 per cent. Again, the implication is that the EU should watch out for any threat signals to its domestic industry from China.

The good news, therefore, is that the EU and China have agreed on orderly increases in the latter's exports to the former according to a deal struck in June. The quotas agreed on with the Chinese represent a considerable increase in China's exports for 2005 over the actuals of 2004. They range from an 88 per cent rise in cotton fabrics exports to a 329 per cent jump in men's trousers.

The agreement provides for further increases until the end of 2007 and total removal of restrictions thereafter. It is anticipated that even with the restrictions in place, China's share of the EU import market for clothing is expected to rise to a third by 2007 from a little more than 15 per cent at the end of 2004. In the first half of September, the agreement received formal approval from EU member countries.

Despite the agreement between the EU and China, there are those who believe that the textile industry in Europe will take a beating. The Financial Times of September 15 had a prominent advertisement inserted by the Spanish Intertextile Council. The gist of the ad is as follows: " By setting the value of currency below the market rate, China is artificially improving its competitiveness. If you combine their longer working day with their lower production rate, but without considering the tactics of the exchange rate, the real cost of Chinese products would be around two-thirds of the average European cost.."

The ad concludes by stating: "We demand competitive loyalty based on the equality of currency rates and regulations to access markets, respecting industrial property and equivalent personal safety and environmental regulations."

One needs neither an MIT degree in economics nor a Harvard degree in public policy to `manage the float' in such a way that the currency continues to remain undervalued. The yuan, for almost a decade, remained around 8.3 per dollar and, since July, moved `up' to 8.2 and, most recently, to 8.1.

Such minor currency appreciations can easily be synchronised with productivity increases and economies of scale and are, hence, no deterrent to export growth.

For instance, it is widely reported that the Chinese government has invested $21 billion over the past three years in textile and apparel manufacturing and about 3,800 textile plants are under construction. The dragon, thus, had done its homework and will not allow an excessive appreciation of the yuan to jeopardise its interests in textile exports.

China deserves congratulations and respect for its export effort. Its share in global merchandise exports remained less than 3 per cent until 1994. Since then exports zoomed and its share in 2003 was 6 per cent. Throughout the period, the exchange rate of the yuan remained at around 8.3 per dollar, despite accumulating current account surpluses and foreign exchange reserves. The relative under-valuation of the yuan has been of much concern to China's competitors and trading partners alike.

What are the different constituencies for continued maintenance of the yuan at around 8 per dollar? One easily identified constituency is the Chinese workers, who labour to clothe the people in Europe and the US and furnish their homes with all sorts of consumer durables. This is a well-known and much talked about constituency, as the most vocal critics in the Western hemisphere spend a lot of time alluding to it and pointing out to job losses in their home countries. What they seem to forget, or ignore, is the powerful domestic lobbies.

The Chinese leaders and policy-makers, as well as the diligent and hard-working labour force, have worked out a winning formula.

It is based on giving the best and cheapest to the consumers in the European Union and the US, ably assisted by trading deals with fashion-houses and retail chains such as Victoria's Secret, J.C. Penney, Liz Claiborne and Wal-Mart Stores.

As long as the businesses in the importing countries benefit from the weak yuan, any amount of discussion on the Chinese currency `management' will simply be an exercise in futility.

Despite the fact that the `stable' yuan is defendable, from the point of view of the welfare of the Chinese worker and the European/American consumer plus the bulging profits of Chinese state enterprises and the private enterprises of the West, the WTO will, sooner or later, have to come to terms with the thorny issues arising out of currency values and trade.

This author keeps hoping that currency values will one day be determined by some agreed upon global formula, killing two birds simultaneously:

Currency speculation and the temptation to achieve competitive advantage through exchange rate `management'. For now, however, the hope is almost a day-dream.

(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at bhanoji@gmail.com)

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