Even a Decade was not Time Enough to Prepare for the New Textile Market

The EU-China agreement on textiles negotiated in Shanghai June 10 was greeted vigorously by both sides as an achievement of cooperative consultation in direct contrast to the unilateralist approach taken by Washington in the same and other trade problems against both the EU and China.

The still unanswered question was whether such arguments would have a convincing effects on European and Chinese critics of various types. The dispute and its settlement should also be seen in the context of the fact that this sector represents some 7% of total trade between China and the EU, which amounted to more than €90 billion in 2004.

The accord was said to affect some 10 product categories, including the T Shirts and flax yarn that were the subject of the immediate monitoring and actions by the EU, and were said to limit Chinese shipments to the EU to growth rates of between 7.5% to 10% over the next three years. This would assure some significant growth for Chinese exporters but limit the surge and possibly provide time for Europe producers to adjust.

Reaction in the French press, the Monday following the weekend agreement, for example, reflected some of the conflicting signals in this complex dispute­with some quarters arguing that the European textile industry had to modernise and others beginning a campaign for EU financial aid for restructuring.

The two main negotiators, Bo Xilai the Chinese Trade Minister and Peter Mandelson, the EU Trade Commissioner, naturally praised the outcome as an example of moderation and cooperation and could not avoid their own specific detractions of the American hard-line.

Mandelson told the press afterwards that “Today’s agreement is a significant demonstration that China is entering the global economy as a responsible and valued partner. And I say this too. China is entitled to reap the comparative advantages and its WTO accession, while managing its integration into the global economy in a way that avoids fear of China , and in a way that does not provoke a protectionist backlash by European industry and the general public.”

Whether this accord will stand the test of time and become a new “paradigm” in relations between the EU and China, as the Peoples’ Daily affirmed, was immediately uncertain, especially most trade difficulties are basically one-of-a-kind. But it could become a sort of template of the favoured negotiating style that reflects the political realities of the two. The EU is essentially condemned to seek compromises among its ideologically and economically diverse membership and China appears largely committed to its “peaceful rise” identity.

But it seems certain that the EU approach did no harm and possibly did much good in establishing a sound and productive working style between Mandelson and Bo Xilai that might stand up as a model. This could stand in stark contrast to the confrontational and unilateral strategy deployed by the US, where the political clout of certain lobbies can be more direct and intense.

The EU from the start of the difficulty had to tread a thin line between its free-market and its more protectionist minded. Veering toward unilateral quotas or duties in step with the US and favoured by France and Italy would have been impossible and subject to veto by other members. Mandelson therefore was propelled on the path of moderation and dialogue with all parties, not always a comfortable or criticism-free ride.

Interests of European textiles producers and their Chinese competitors, as well as some European importers of Chinese products were also in contradiction. In some cases European firms had also invested in Chinese or sold equipment to these producers, establishing a complex of interests. The Peoples’ Daily noted that Bao Xilai had calculated that of each shirt made and exported from China brings in some 30 or 40 cents per shirt while EU and US investors, equipment makers, retailers and other interests earn 90% of the profit on the shirt.

Another issue of the Peoples’ Daily also noted the arrival in China of a delegation of French producers of high-value garments and fashion attire who already have made China a major market for their products and are hoping to increase sales further.

The situation and trade frictions in textiles were in fact a happening foretold 10 years earlier when Governments agreed to phase out the previous system of textile quotas allocated by the consuming and importing countries to the producers and exporters in developing countries. The decade was supposed to have been used by all sides to prepared their positions and markets, only to realise when the event finally arrived that even a decade was insufficient.

Even China’s textile firms and exporters appeared less than overjoyed at the deal, saying only that it would bring order into the market, but probably realising that without the agreement, their access to Europe could be even more restricted.

The EU-China plan also ran into some scathing editorial criticism, for example, in the London Financial Times June 14 which commented “It is hard to see anything to commend in the deal­other than to Europe’s mollycoddled textile industry. However dressed up, it is pure protectionism. No amount of public relations spin can conceal the fact that it was reached only after Brussels threatened to use against China the same import quota provisions in its World Trade Organisation membership agreement that the EU now piously condemns the US for invoking.” It carries on in the same vein that “This is cynicism of a high order. But it is what happens when politicians pander cravenly to narrow vested interests.” The European edition of the Wall Street Journal takes the same tone on the same day, castigating both the EU for giving in to both China and its textile interests and the US for muddling “its message to China unnecessarily by caving in to protectionist demands…”

But some of these textiles interests were also displeased. Euratex, the industry association which represents some 170,000 firms employing more than 2.6million persons, asked for even more severe measures and reserved the right to safeguard action in other categories beyond 2007. Febeltex in Belgium was concerned that the accord covered only 10 categories of products in a total of several dozens and said it changing nothing about prices that amounted to “dumping.” It also said that the growth of some 10% allowed for the 10 products covered by the accord would allow China to increase its market share. The same message, for example, emerged in Belgium and Italy. Li Edelkoort chairman of Pratotrade in Italy direct his anger at the China’s undemocratic system of “hidden slavery” that threatened to “kill off your own culture.”

But chairman Luco Cordero di Montezemolo of Confindustria in Italy said the plan “allows for us, starting now and up until 2008 to invest, modernise, and to specialise our manufacturing industries…that’s why we should use the next three years to work hard at making our agreement a positive one, and ensuring that China becomes an export basin for our products over the next 20 to 30 years.”

The developments were taking place at the same time as other potential important other EU-China issues were also being discussed. For example, reports surfaced that the EU was also concerned about increases of imports of footwear from China in recent month, presenting another sensitive trade problem between the two.

These were also coinciding with a sudden fall in the exchange rate of the €uro on international markets, giving rise to the prospects that this could act as a brake on imports into the EU as well as a boost for EU product exports, giving the EU additional margin of manoeuvre in its balance of trade.

On a more political subject, declarations by political leaders were emerging in Europe suggesting that the recent interest within the EU to lift a 16-year old embargo on defence equipment shipments to China would probably not take place as originally forecast in the first half of 2005 and also that the likelihood that this could take place in the foreseeable future were receding. The issue had been the subject of intense counter-pressure from the US and Japan. A major factor was expected to be the German elections in which the more conservative Christian Democrats were favoured to win, with major leaders of that political party indicating their strong opposition to the lifting of the embargo and in general their closer association with American foreign policy, including its views on China.