THE DOWNSIDE OF PRC WTO ACCESSION: TEXTILES & CLOTHING

To accede, China must bring its trade regime into conformity with WTO requirements. There is however one significant area in which WTO members will have to adjust their treatment of Chinese exports. WTO members, including Canada, will accord China benefits under the WTO Agreement on Textiles and Clothing.

The Agreement on Textiles and Clothing (ATC) requires importing countries to increase base quota growth rates for major supplying countries with full elimination of restrictions on WTO Members scheduled to occur January 1, 2005. China therefore will receive future product liberalization benefits under the ATC, as well as existing quota gains granted to other countries over the past five years.

China is the world's largest exporter of textiles and apparel products, which represent over 25 percent of China's total exports. According to the Chinese Ministry of Foreign Trade, Chinese clothing and textile global exports are in the range of US$50 billion for 1999.

China's apparel industry needs to upgrade quality as well as production capability to remain competitive. Although the majority of apparel from China continues to be of low- to medium-quality, the apparel industry is becoming more quality oriented. It is beginning to produce higher-valued goods, particularly in those operations being guided by Hong Kong producers and designers.

China is restructuring its textile industry, replacing outdated capacity with modern production facilities. Textile industry modernization mainly relies on imported equipment and technology. Chinese plans through 2000 include investment of US$260 million on imported equipment and technology, $420 million on plant and infrastructure construction, and $460 million on domestic equipment. In addition, China has been promoting foreign investment in selected textile industries since the mid-1990s.

Given the political problem of labour rebalancing implied by technological upgrading, this is likely to be a gradual process. For the immediate future, the Chinese advantage is based on intensive labour utilization. The potential for growth is greater in China's apparel industry because apparel production is highly labor-intensive and China has an abundance of skilled, low-cost labor: China's textile and apparel industry wage rates are among the lowest in the world.

In 1996, China exported about US$6.5 billion of textile and apparel to the United States, three-fourths of which were apparel, almost all of which is under quota. According to a declassified report by the U.S. International Trade Commission (USITC) on the US economic impact of China's accession to the WTO, China's share of the U.S. textile market will increase to about 11 percent by 2010 and its share of the apparel market by 18 percent if quotas are removed by Dec. 31, 2004. This result represents a 30% share of the US apparel import market.

USITC acknowledges Chinese inclusion in the ATC phase out is likely to affect U.S. textile and apparel industries, with U.S. apparel producers and workers experiencing the more adverse effects. A study commissioned for the American Textile Manufacturers' Institute in September 1999 estimates direct textile and apparel job losses at over 95,000 as a result of China joining the ATC.

Because accelerated quota growth rates for China for many of the U.S. textile and apparel quota categories are low and the quotas are likely to constrain trade, USITC forecasts the adverse effects will arise after the ATC phase-out period (i.e., after December 31, 2004). Quotas will remain in place until the end of 2004, when the ATC expires.

It is perhaps for this reason that the US insisted on a four-year safeguard mechanism through December 31, 2008 for textiles and apparel. Precise details of its operational requirements (ie, trigger points) are not available. USTR information indicates that the provision permits US companies and workers to respond to increased imports of Chinese textile and apparel products when they constitute a "market disruption." The provision allows the imposition of quotas if market disruption or the threat of market disruption occurs. It covers all textile and apparel products under the ATC as at January 1, 1995. Restraints on market disrupting imports become effective upon receipt of a request for consultations. Restraints may remain in place for up to a year, and can be reapplied. China has no rights to retaliate against these restraints. The provision is drawn from the 1997 US - China Bilateral Textile Agreement.

In addition, China agreed to a product specific safeguard to address rapidly increasing imports from China that cause or threaten to cause market disruption on a product specific basis. USTR gives the impression this safeguard also applies to textile and clothing imports from China. This provision remains in effect for 12 years after accession. After an initial three-year period, China can act against US exports along similar lines. US anti-dumping laws, which treat China as a non-market economy, will remain in effect for 15 years, and provide a third avenue of defence.

It is possible that US Customs will close gaps in rules of origin regulations and marking requirements for textiles and apparel. This is an area of interest because there are potential issues related to "substantial transformation" involving trade among all three NAFTA partners that could arise as a result of rising Chinese imports.

Finally, it is unclear whether these provisions will apply to textiles and clothing originating in the Hong Kong SAR, which is a major source of textile and clothing imports for Canada and the US. This commentary does not take into account imports from Hong Kong.

A proper evaluation of the effectiveness of special textile and apparel safeguards will have to await a publicly available text. This is likely to occur in the US first, as there is mounting pressure to make it public.

In Canada's case, the terms of entry for Chinese apparel and textiles have not been made public. Pending more information, it could be assumed that the Canada-China deal corresponds in key respects to the US-China deal. In other words, it does not contain terms more favourable than the US provisions. However, this is no assurance that the terms are not less favourable.

Absent quota restraints, it appears likely that Canada's sectoral deficit will increase in the future. Like the US import profile, more than 75% of Canada's sector imports from China are apparel products, most of which are subject to quotas. Despite quotas on apparel, Canada received shipments valued at over $1 billion in 1998. The elimination of access limits for both textiles and apparel could have an effect similar to that expected in the US.

It is therefore of considerable interest to determine what special safeguard mechanisms have been built into the Canada - China protocol agreement to address import surges, and potential market disruption for the Canadian textile and clothing industries.

… This increase in China's share in the U.S. import market would occur as Chinese products would displace exports from other suppliers, particularly suppliers whose exports currently are not restricted by quotas (i.e., the "rest of world" group).

There are implications for Canadian textile and clothing sales to the US market as a result of the Chinese accession. The US industry estimates that by 2005 Canada and Mexico will export about CD$2.8 billion less in textile and apparel to the US market. This represents an overall 14% reduction in sales to the US market. Canada's share of the reduction, based on 1998 US imports, is valued at about $1.2 billion.

The general impact for Canada of increased Chinese market access in North America is:

The threat is not immediate, but enough is known to warrant a closer examination of the issue. Identifying specific regional industry competitive advantages may help to mitigate the ultimate challenge of quota free Chinese entry to the US and the Canadian markets. More generally, industries in which China has world export leadership or significant growth potential, should be examined more closely. Competitively vulnerable Canadian industries - textiles and clothing, leather goods, footwear, toys and electronic equipment - need to start planning for the ultimate shakeout.

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