A temporary truce on textiles

Sep 7th 2005
From The Economist Global Agenda

The European Union has finally come to an agreement with China over how to handle the mountains of clothes that have been piling up at Europe’s borders since textile quotas went into effect this summer. Over the longer term, however, Europe’s textile industry must find some way to compete with low-cost competitors

HEADLINE-WRITERS, witty as ever, have dubbed it the “Bra Wars”, a conflict that the European Union (EU) has been heading into inexorably since June, when it slapped quotas on soaring textile imports from China. As first sweaters, then men’s trousers, blouses and, yes, bras hit their quotas, mountains of clothing began piling up in warehouses and customs checkpoints around Europe. Retailers, many of whom had placed their orders before the quotas were imposed, began howling that their shelves would be bare for the autumn and winter seasons unless the clothes were allowed to clear customs. Dire threats of bankrupt stores and topless consumers soon followed.

EU governments split along predictable lines: nations with big textile industries, such as France and Italy, fought fiercely to protect the quotas, while northern countries with small industries supported their retailers’ desire to get cheap Chinese apparel flowing again. EU trade officials worked overtime trying to hammer out a deal that would satisfy both parties, and the Chinese. But Beijing was in no hurry to accommodate the flustered Europeans.

Finally, after gruelling negotiations that began on Sunday September 4th and stretched into the early hours of Monday, Peter Mandelson, the EU trade commissioner, and Bo Xilai, China’s commerce minister, announced that they had come to an agreement. The stockpiled goods would be allowed into Europe, but half of them would be counted as part of other quotas, either in 2006 or in still-unfilled categories. On Wednesday, after a two-day conclave, EU member states announced that they would ratify the deal—though Reuters news agency reported that Denmark's prime minister had slammed the agreement, saying that “such protectionism is bad policy for Europe”.

Europe’s retailers and textile manufacturers can breathe a sigh of relief; neither will be devastated by the compromise. But over the longer term, the textile industry faces a grim calculus. It is a relatively low-tech business in which profit margins are cruel and labour costs can make the difference between success and failure. With China’s workers willing to accept a small fraction of rich-world wages, it is hard to see how any but the high-end brands can continue to compete. Nor can they expect too much help from quotas: under World Trade Organisation rules, these must be lifted by 2008.

Maladjusted

The textile industry says it simply needs time to adjust. But this reckoning has been coming for a decade, since the world began phasing out the quotas that had protected rich-world clothing markets against poor-world competition. Those sympathetic to the textile firms point out that Europe’s industry did not know way back when that China’s economy would grow by such leaps and bounds. But they certainly could have seen it coming over the past few years. And even setting China aside, there are many other poor countries, such as Bangladesh and Morocco, that would love to put more of their low-cost labour supply to work stitching sweaters and jeans.

But it is not surprising that textile manufacturers have chosen to lobby for government intervention rather than quietly file for bankruptcy. The same issues have cropped up across the Atlantic, where the Bush administration is facing strong pressure to shield America’s clothing industry from the perils of low-wage competition. According to the Commerce Department, American imports of “brassieres and other body-supporting garments” in the first six months of 2005 increased by 35% over the same period a year earlier, while imports of synthetic fibres jumped more than tenfold. Trade officials had hoped to finalise a comprehensive agreement that could be signed by George Bush and Hu Jintao, the Chinese president, who were due to sit down together in Washington this week but cancelled their meeting because of Hurricane Katrina. Negotiations failed to produce a deal, however, and last week America placed further restrictions on Chinese imports, with more threatened in October.

In the short term, these protectionist measures will give some breathing space to an ailing industry. But in a radio interview with the BBC, Mr Mandelson gave warning that, over the long term, firms pouring energy into securing government protection may be distracted from the necessary task of making their businesses more competitive. When 2008 arrives and the quotas disappear, European and American manufacturers seem unlikely to be ready to take on their global rivals—unless the textile quotas have bought them enough time to move their factories to China.

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