Textile-trade politics. A knotty problem

Unpicking the tangle over Chinese textile exports

LIKE a badly stitched dress, global textile trade is fraying at the edges. Five months after the death of the quota regime that had for decades governed and distorted the world's textile industry, those dastardly quotas are making a comeback, at least as far as China is concerned. The result is rising tempers and name-calling on all sides.

In recent weeks America has slapped “safeguard quotas”, which limit the rise in imports to 7.5%, on seven categories of Chinese textiles, including trousers and shirts. The European Union plans similar restrictions on T-shirts and flax yarn. Furious at what it regards as “unreasonable” protectionism that “lacks legal grounding”, China announced on May 30th that it was immediately scrapping export tariffs it had introduced earlier this year on 81 textile products to slow the surge in exports. Only ten days earlier the Chinese had said they would increase these taxes on 74 products, by up to 400% on some of them.

The re-emergence of quotas should surprise no one. The rules of the agreement surrounding China's accession to the World Trade Organisation (WTO) specifically allow such “safeguards” against Chinese products. (Normally, WTO rules forbid the variation of tariffs or other restrictions against one country alone.) Until December 2013, safeguards can be applied on any product if importing countries can show that the Chinese goods are causing “material injury” to domestic producers. Special measures, with less strict criteria, apply to textiles. Safeguards can be imposed almost automatically whenever imports create or threaten to create “market disruption”. There are limits: Chinese exports must be allowed to rise by 7.5% a year; the controls must last only one year, although they can be renewed; and the safeguards must go by the end of 2008.

Without these special terms, America's Congress might well have refused to agree to China's accession to the WTO. And given the political clout of textile lobbies, it is lamentable, but not surprising, that America has resorted to safeguards so soon. Many textile groups were lobbying for their imposition even before the quota regime was gone. Sharp rises in Chinese exports in 2005, albeit often from a tiny base, gave the protectionists the scant evidence the rules require. Overall Chinese textile exports to America were 62% greater in the first three months of 2005 than a year earlier. In the categories where safeguards are being imposed, the increases were far higher.

The reason to worry, however, is that the textiles spat is part of a broader, more dangerous, rise in trade tension with China. In the European Union, the pressure for textile safeguards reflects growing fears about globalisation in general and China in particular. In America, the Bush administration's decision to impose safeguards was taken both to placate a rising chorus of anti-Chinese fervour in Congress and to drum up legislative support for CAFTA, the regional free-trade agreement with Central America.

America's lawmakers are furious about what they see as China's unfair trade methods. The litany of complaints run from China's exchange rate to outrage at the Chinese authorities' inability (or unwillingness) to crack down on counterfeit goods. By sounding tough and imposing safeguards where the rules allow, the Bush administration hopes to stave off more damaging anti-Chinese action in Congress.

More pressing, as far as the White House is concerned, is the scramble for CAFTA votes. Mr Bush has declared the passage of CAFTA to be his top legislative trade priority this year. The president would like Congress to agree to the trade deal by this summer, but he lacks the necessary votes. Virtually all Democrats are opposed; so are many Republicans, particularly those beholden to the powerful sugar lobby. The safeguards on Chinese textiles are part of a strategy to win votes from textile states. Although textile politicians have been staunchly against trade agreements, the administration points out that CAFTA would help stem the surge of Chinese textiles, by offering duty-free access for Central American producers, who in turn buy American fabric.

Domestic politics also lies behind the hardening of Beijing's mood. The prospect of rapid growth in the labour-intensive textile sector was one of the most attractive aspects of WTO membership for China. Not surprisingly, China's textile industry is furious about the safeguards. This week's decision to scrap voluntary export tariffs was simultaneously a bone to the domestic industry, which would otherwise be hit both by export tariffs and safeguard quotas, and a sign of China's willingness to escalate the textile quarrel. And that is the real worry. With all sides focused on domestic politics and seemingly willing to raise the stakes, a few textile safeguards could be only the beginning of a much nastier trade fight.