US-China Trade: Textile safeguards blocked
The Economist
 

A US federal court has prevented the US government from imposing "safeguard" restrictions on Chinese garment shipments, increasing the short-term likelihood that China will benefit from the recent expiry, at the beginning of January, of international textile quotas. However, the respite could be short-lived, as the ruling makes it more likely that Chinese garment exports to the US will surge in the next few months, triggering attempted restrictions that are less open to legal dispute.

The December 30th ruling by the US Court of International Trade is the latest twist in a trade policy battle that has pitched the interests of the domestic US textile industry against those of US importers and retailers. On January 1st 2005, under the World Trade Organisation (WTO)'s Agreement on Textiles and Clothing (ATC), a 30-year-old system of import quotas that restricted shipments from developing countries to the US, EU and Canada expired. In theory, the abolition of quotas gives exporters in countries like China and India unlimited access to these big markets, a development US textile and apparel makers claim threatens US jobs. At the same time, US importers and retailers welcome the removal of quotas because it should, in theory, allow them to consolidate their sourcing among fewer suppliers, thereby lowering procurement costs.

China has been at the centre of the controversy, as it is almost universally regarded as likely to increase massively its market share in the world garment trade once quotas are lifted. As a consequence, in recent months the US textile-manufacturing lobby has petitioned the US government to impose special "safeguard" quotas on Chinese imports of various categories of clothing, as permitted under China's WTO accession agreement. Safeguards may apply even after the expiry of the quota system, and stand to restrict growth in shipments from China in the categories targeted to 7.5% over recent prior levels (very roughly, 7.5% a year). These petitions are the object of the US Court of International Trade's preliminary decision on December 30th.

The most contentious aspect of the petitions is whether "threat-based" safeguards--that is, those based on the threat of a flood of Chinese imports, rather than on actual increases in import levels--are justified. It was partly in response to the prospect of threat-based safeguards that the US Association of Importers of Textiles and Apparel (USAITA), a trade group representing major apparel chains, filed its lawsuit with the US Court of International Trade, seeking to block the petitions. The court's latest decision temporarily bars the US government from considering safeguard petitions, and Chinese shipments to the US can therefore go ahead without restrictions for the time being. This is good news both for Chinese manufacturers and for US importers.

However, the battle is far from over. The US government plans to appeal against the decision, and even if it does not succeed in having the decision overturned, the injunction is only temporary (how long it will apply remains unclear). In any event, discussions of hypothetical threats from Chinese imports will soon be superseded by the politically charged business of analysing on-the-ground trade activity. If, as actual US trade data come in over the next few months, there is evidence of dramatic increases in imports of Chinese-made garments, then protectionist lobbies in the US will have a stronger case for safeguards.

With the end of quotas, China does seem highly likely to increase its share of the US market, in turn increasing the likelihood that it will face restrictions later in 2005. China's past performance in categories where quotas have been removed early, prior to the end of the ATC, certainly supports such a view. In 2002, for example, the US lifted quotas on product categories that included dressing gowns, knitted fabrics and man-made-fibre bras. China's shipments of the newly liberalised items immediately soared, with US imports from China of synthetic-fibre bras, for instance, rising by 235% in value in just 12 months. That imports in the same category rose by a staggering 2,772% in volume over the same period underline China's ability to offer lower prices than many competitors. However, such success has made China vulnerable to accusations of dumping.

How the legal battle over safeguards will end remains uncertain. Chinese exporters are highly likely to see rapid growth in sales to the US and EU in the months ahead. However, even if safeguards are not imposed, a short-term restraint on China's export growth will be the uncertainty caused by the possibility of future restrictions. China can face special textile safeguards until the end of 2008, and so-called "product-specific" safeguards--which can apply to any goods--until 2013. Although buyers in the US and EU will begin to source from fewer suppliers now that quotas have been abolished, the need to limit their exposure to any one country will ensure that they continue to do business with producers in countries other than China.