This storm is no 'Katrina', but has economic implications for the EU and China. Can India cash in? By Shubha Madhukar
Mandelson proposes, the EU disposes. That's the latest on the EU-China textile crisis for the moment. To resolve the long drawn deadlock, on Thursday, the EU trade commissioner, Peter Mandelson, proposed to the 25-member states to either raise the quotas for China for 2005 or allow the products ordered before July 12, 2005, to enter the EU. On Friday, the member states turned it down.
The stalemate continues and threatens trade ties between the EU and China.
The alarm bells had started ringing by early April 2005. The EU commission had realised that there had been a substantial rise in Chinese exports of some of the liberalised textile product categories, in the preceding three months of the year. The commission immediately launched an investigation into the nine categories.
Urgent action was taken on curbing the import of Chinese t-shirts and flax yarn, imports of which had increased by 187 per cent and 56 per cent respectively since the beginning of the year. The swamping of the EU markets with cheap Chinese exports had hit some member countries hard - T-shirt output in Greece, Portugal and Slovenia was down 12 per cent, 30 - 50 per cent and 8 per cent respectively. Production and sales of European flax yarn in the EU markets has fallen by 25 per cent. Consequently, the EU has been faced with a 13-per cent job cut in the textile sector alone.
On June 10, 2005, the European commission and the ministry of commerce of the People's Republic of China reached an agreement, which was to have been effective till the end of 2007. The agreement covered 10 of the 35 textile categories of Chinese imports that were made quota-free on January 1, 2005, in accordance with the new WTO agreement.
Quotas for each of these ten categories were agreed upon (See ). The categories -pullovers, men's trousers, blouses, t-shirts, dresses, bras, flax yarn, cotton fabrics, bed linen, table and kitchen linen - addressed most of the more serious concerns identified by Euratex, the European Textile Association. Growth in imports of the ten categories was capped at an annual 8-12.5 per cent for the year 2005, 2006 and 2007. The EU agreed not to investigate further the imports in these categories.
What should have been smooth sailing thereafter, wasn't. The Chinese imports met and, in some cases, even exceeded the quotas agreed upon in eight of the ten categories in July itself. EU's trade commission swung into action and stopped the unloading of consignments from China at the docks, creating panic among importers, retailers and manufacturers, who claimed that unless the authorities relented, they faced the prospects of empty shop shelves. An estimated 80-million pieces of Chinese clothing has piled up at various European ports and customs warehouses. Though the retailers' fears of empty shelves might be far fetched, their winter sales would, without doubt, be affected.
The crisis looms and the effort to solve the row is on. The EU commission team in Beijing has not reached any consensus. The talks in Brussels between experts from the representative states have failed. Now, on the eve of the EU-China summit, Mandelson will hold fresh talks with China in Beijing on Sunday hoping to resolve the issue.
Mandelson's efforts, thus far, to resolve the crisis have not borne fruit. The potential deal is likely to exclude some blocked goods (those which were ordered in good faith by EU importers before the June deal), transfer quota limits from under subscribed categories to oversubscribed categories and offsetting excess Chinese exports against the 2006 quotas.
From the Chinese point of view any curbs to their exports to bring them in line with the agreed limits could lead to an economic slowdown in China. The issue, in fact, is just the tip of the iceberg. There is a divide among EU member-states themselves. The northern states with big retail interests like Denmark, Finland, Germany, Sweden and the Netherlands have voiced their concern that the quotas could mean layoffs of their retailers' staff and therefore want the quotas lifted. Ranged among them are the southern textile producing states - France, Greece, Italy, Portugal and Spain - who want some curbs against free trade to prevent the European textile industry from being wiped out.
Complicating the 'bra war'(as the dispute has been nicknamed) is the United States' attempt to use the dispute to leverage its position in its own dispute with China. The US wants to force a further devaluation of the Chinese currency, and also resolve its own textiles dispute with China since cheap clothing imports are reportedly depleting American jobs. According to US manufacturers, since the beginning of the year, 19 textile plants have been forced to close leaving 26,000 people jobless.
To protect its trade interests, the US has introduced legislation in both houses of the Congress to impose a 27.5-per cent tariff on all Chinese imports if China does not allow the yuan to appreciate against the dollar enough to make Chinese products more expensive and less attractive. The revaluation of the yuan on July 21, 2005, by 2.05 per cent against the dollar, does not satisfy US business interests.
The deadlock, paints an uncertain picture. Panic has set in the EU and retailers have begun looking to Bangladesh, Vietnam, Cambodia and India.
The EU-China imbroglio and the fears of empty shelves improves the prospects for Indian textiles. For the EU, the Indian sub-continent (India along with Pakistan, Bangladesh and Sri Lanka) is fast emerging as the favoured region. Harminder Sahni, principal and associate director, retail and annuities practice, KSA-Technopak, a sector-specialist consultancy, says, "India has a major advantage of being integrated from cotton-to-textiles-to-finished garments. It will derive the maximum advantage."
However, Sahni points out to the reality, "Indian garment exporters are not really geared towards taking major advantage from this as their capacities are already full and it takes time to build new capacities." Besides, India has little or no capacity in the pullovers and bras category. In the bed linen, table and kitchen linen categories, Indian mills are now investing in capacities now but Pakistan is already very big in the sector and ready to seize the advantage.
The brighter side is the in the trousers, t-shirts, women blouses and cotton fabrics categories where India has immediate business upside. In the event of the EU holding firm on Chinese quotas, the