"The Outlook for U.S. - China Textile and Apparel Trade in 2009: From the Trade Policy Perspective"

By: Sheng Lu

The U.S.-China textile and apparel trade has seldom been able to avoid the heavy intervention of trade policy. Over the past three decades, from quota restrictions to safeguard measures, various kinds of trade management tools were creatively developed, mostly by the U.S. side, to prevent the surge of imports from China. But 2009 probably will turn out to be an exception: fewer trade restrictions are expected. Why is that?

U.S. domestic demand for trade protection definitely is far from waning. In September 2008, the National Committee of Textile Organizations (NCTO), the "spokesman" for the current U.S. textile industry, submitted three separate requests to the U.S. Department of Commerce, the United States Trade Representative Office, and the Congress, asking to apply a special import monitoring program on Chinese products at the end of the three-year U.S.-China textile agreement in 2008. In particular, NCTO strongly requested that the U.S. government instantly take safeguard measures in case the monitoring results "suggest" Chinese exports "disrupt" the U.S. market, the same vague standard that invoked the U.S.-China textile trade dispute between 2003 and 2005.

However, even if the Obama administration is willing to offer a positive response to that call, technically it is hard to realize. As a matter of fact, one fundamental change brought to the U.S. side after China joined the World Trade Organization (WTO) in late 2001 is the necessity to legitimize any trade measures affecting China's exports before putting them into practice. For example, Article 242 under the "Working Party Report" of China's WTO Accession will expire this year. That means the United States can no longer legally use the so-called "transitional textile safeguard" to restrict Chinese products, although it successfully caused the embargo of 24 categories of Chinese textiles and apparel in 2005.

Neither is it easy for the U.S. side to resort to other traditional trade remedies such as anti-dumping and countervailing duties for protection. That's because one prerequisite for invoking these measures is to prove that the U.S. domestic industry producing the directly competing "like product" has suffered from injury caused by the Chinese imports. But currently, it is the U.S. textile industry that actively looks for trade restrictions on Chinese apparel products while the U.S. apparel industry quite favors lower trade barriers, as a large portion of its business activities already rely on sourcing from China. Therefore, unless the U.S. textile industry justifies why they are hurt by imports that they do not directly compete with, their chances to win the case are slim.

On the other hand, the Chinese government is less likely to compromise on any major trade restrictions in 2009 compared with 2005. On October 26, 2008, China's Ministry of Commerce officially declared that it would not place licensing requirements on textile and apparel exports anymore beginning in 2009. This statement largely denied the possibility that China would continue self-managing exports as it did in 2008 under the pressure of the European Union. The Chinese governments shift to this stronger stance originated from the lesson it learned from this year's tough economic situation. Recently, the Chinese government had deliberately discouraged the development of the textile and apparel production sector as well as its further expansion in exports because they are regarded as low-profit margin, resource-intensive, and without a promising future.

As a result of rising production costs and slower overseas demand growth, over one-third of Chinese textile and apparel manufacturers in southern China shut down in 2008, causing hundreds of thousands of workers to lose their jobs. These unemployed workers demonstrated on the streets asking for their unpaid wages and posed great challenges to local social stability.

This has made the Chinese government realize that as a country with 1.3 billion people, it cannot afford to give up a labor-intensive industry that still plays important roles in maintaining the steady growth of the national economy and social stability. It also may take China a much longer time than any other economies to upgrade and transform its textile and apparel industry from being labor intensive to one that concentrates on capital and technology intensive sub-sectors. To bolster industry recovery, the Chinese government has taken the unprecedented step of raising the export tax rebate rate for textiles and apparels twice, from 11 percent at the beginning of 2008, to 14 percent by December, the highest level in 10 years.