The world’s textile workshop

Date: 28/04/05

"No, we are not ganging up on Beijing," one EU official muttered shortly after Trade Commissioner Peter Mandelson announced that he was launching a politically explosive investigation into the surge of textile imports into the EU from China.

Seen from Beijing, however, the world is beginning to look rather different, hence the warnings from China's Commerce Ministry spokesman Chong Quan about the "negative influence on bilateral trade relations" from the textiles decision.

Mandelson's move on textiles follows quickly on the heels of the EU's decision, after intense hectoring from the US, not to lift swiftly its embargo on arms exports to China. It comes, too, in the wake of the move by US Treasury Secretary John Snow, after this month's Group of Seven (G7) meeting in Washington, to wind up even further the pressure on China to revalue its currency the yuan. And it follows an ominous outbreak of "China bashing" on Capitol Hill as the US industry too winces at the pain it is suffering from China's emergence as the industrial workshop of the world.

"Ganging up" is indeed the wrong phrase to describe what is happening. There is too little transatlantic co-ordination on strategic, economic or trade policy, to justify such a description. What is, belatedly, under way in the EU, however, is the beginning of a reappraisal of Europe's relations with the Middle Kingdom.

"We need a proper strategic assessment of where we stand with China. We cannot continue to allow our relations to be dominated by individual countries' short term interest in exploiting China's booming economy," says a Brussels-based official. "We have to ask ourselves: do we want China, an autocratic and unreliable state, to become the dominant hegemonic power in East Asia? There is also much that China still needs to learn about behaving responsibly now that it is becoming so influential a global player," he adds.

It is against this subtle change in the diplomatic weather that the Commission's move on China's textile imports needs to be seen.

The textile crisis is easy to understand. According to the Commission's figures, textile imports from China on a range of products worth €1.1 billion have surged dramatically in the first quarter, threatening domestic producers. Brassiere imports, for example, are up 63% and pullovers 534% compared with a year ago.

The EU investigation could result in the formal imposition of World Trade Organization authorised quantitative import restrictions within three months if China does not act voluntarily to curb its exports of the products covered.

By Monday (25 April), however, a dozen EU countries, including France and Italy, were asking for an emergency accelerated procedure to protect their textile industries, putting additional pressure on the Chinese to respond.

What is remarkable about this textile trade crisis is that for years everybody has seen it coming. Developing countries in 1995 secured an agreement that on 31 December 2004, the complex international trade agreement that had protected the industrial countries' textile companies from cheap foreign competition would end. Nobody expected in 1995, however, that the biggest beneficiary would be China, rather than Bangladesh, India, Thailand or Egypt, countries which had pressed for, and expected to profit from, the change.

The timing of the crisis with China is not unexpected either. "China's game plan has always been to wind up its exports as quickly as possible as the old quota regime expired last year so that they would have a high base on which any new restrictions would be set," says David Woods, a consultant with World Trade Agenda.

Several factors are complicating the challenge facing Mandelson. First is the fact that so many European manufacturers have made so little effort to adjust to the long-planned change in international textile trade rules.

Second, as Mandelson himself acknowledged, some of the targeted imports are coming from joint ventures owned partly by European companies that have moved production to China and do not want to see their exports to the EU curbed.

And third, any new restrictions will only encourage China to export higher value textile products to the EU, so competing more directly with more sophisticated goods being produced in Europe.

When Japan was forced 'voluntarily' to limit the number of cars it exported to the US in the 1980s, it simply started building and exporting more expensive (and profitable) vehicles. Is Europe shooting itself in the foot like the US did with Japan?

There is another, still bigger, concern. Europe and the US are not ganging up on China. But both are being pressed by domestic lobbies towards protectionism and the main country they have in their sights, China, could do an awful lot of damage if it cuts up rough.

"With America beset by record trade and current account deficits [of e475bn] the drumbeat of protectionism is getting louder and louder in Washington," says Stephen Roach, chief economist at US investment bankers Morgan Stanley. If the threat of protectionist tariff hikes were to be realised, he says, "China could then retaliate by reducing its purchases of US Treasury bills - sparking a full-blown dollar crisis."

Unlike the US, Europe's economy is not being kept afloat by Asian and Chinese central bank purchases of euro-denominated bonds. That, however, will not insulate it from the global economic crisis which would result from Chinese retaliation against perceived western protectionism. Mandelson will have to tread carefully in the weeks ahead.

• Stewart Fleming is a freelance journalist based in Brussels.

Analysis feature in which the author suggests that the announcement of the European Commission to launch an investigation into spiralling textile imports from China was a sign for the beginning of a reappraisal of Europe's relations with China.