The Custom-House

What are the Chinese up to?

Are the new Chinese taxes on their own clothing and textile exports an attempt to stave off U.S. and E.U. import restrictions - or are they an attempt to exploit those restrictions, and benefit from them?

Alexandra Harney in Hong Kong, Alan Beattie in London and, Raphael Minder report on the tax increase for the Financial Times: "Beijing raises taxes on textile exports to head off import curbs".  As noted in the headline, Harney and her co-authors present the action as an attempt by the Chinese to head off U.S. and E.U. restrictions on their textile exports.

Peter Gallagher doesn't see the Chinese has trying to head off the restrictions, he thinks its more likey they're trying to exploit them for their own benefit: "US and EU quotas to force up world clothing price".

Steven Suranovic explains the economic theory of export taxes, here: "Welfare Effects of an Export Tax: Large Country".

What can the US and EU ask China to do about textiles?

What can the U.S. and E.U. ask China to do (under the WTO agreements) to limit its textile exports?

This Agence France Presse story explains: Outline of WTO agreements covering Chinese textiles, clothing exports (via  Channel NewsAsia , May 18).

Chinese textile and clothing exports can be restricted to 7.5% growth each year through 2008.  After that, the authority to impose the growth restrictions expires.

These quotas are a bad idea.  They'll impose costs on U.S. consumers out of proportion to the benefits they'll provide to the industry groups they benefit.  The cost of the quotas will fall relatively more heavily on poor and lower income U.S. citizens.  The quotas will increase the costs, and reduce the competitiveness of U.S. industries using textiles as inputs (furniture making, for instance).

The U.S. had ten years to gradually dismantle its clothing and textile import quotas.  Dismantling gradually would have moderated the impact on the domestic textile and clothing industries.  Instead it gamed the rules so that almost all of the impact of the  end of the quotas was delayed until this past January.

Irritating and costly as the quotas are : (a) Chinese clothing and textile exports to the U.S. would still be allowed to grow; (b) the limit on the growth has a definite expiration date; (c) the Administration may be able to trade off the imposition of the quotas for textile industry concessions on other trade issues (see below); (d) the pre-existing system of quotas on other clothing and textile exporters is not being reimposed - since January these countries can increase their exports to the U.S., and may, to some extent, offset the cost to U.S. consumers and producers of the delay in the lifting of the Chinese quotas.

With respect to the tradeoffs, Elizabeth Becker reported:

"...The fast action to reimpose quotas by the Bush administration today has saved thousands of textile jobs in this country and we are extremely grateful," said Cass Johnson, president of the National Council of Textile Organizations, a trade association.

The announcement came one day after President Bush met with the leaders of five Central American countries and the Dominican Republic to promote a trade pact with these nations that has stalled in Congress.

The textile industry has opposed the pact, the Central American Free Trade Agreement, as another threat to the American industry, but Mr. Johnson's organization broke with the other trade associations and endorsed the pact, known as Cafta, this week.

Kimberly Elliott, a trade specialist at the Institute for International Economics, said that the administration undoubtedly reached a quick decision in favor of the American textile industry in part to win more support for Cafta.

"The administration has been working the link between the safeguards and Cafta for some time, but I think they would have done this eventually even if Cafta didn't exist," Ms. Elliott said.

"If the administration is going to take a hit from China for this," she said, "it might as well get some benefit for Cafta."

via theledger.com, "U.S. Moves to Limit Imports From China ", May 14

What's wrong with the quotas on Chinese textiles?

Last Friday the Administration announced that it was going to pursue quotas to limit Chinese textile imports.  Elizabeth Becker reports: U.S. Moves to Limit Imports From China (via The Ledger of Florida, May 14).

The Bush administration, reacting to a flood of Chinese clothing imports since January, announced on Friday that it would impose new quotas on cotton shirts, trousers and underwear from that country...

Ironically, overall textile imports to the US haven't risen all that much. Alexandra Harney, Geoff Dyer, and Alan Beattie report: Beijing may raise textile tariffs to curb exports

...Analysis of data by trade economists reveals that the rise in Chinese textile and clothing exports to the US in the first two months of this year has mainly come at the expense of other exporters.

In January and February, US textile imports rose 14 per cent, and clothing imports 15 per cent, from a year earlier.

But that compared with total imports rising by 17 per cent. While US textile imports from China increased by 40 per cent and garment imports by 70 per cent, the increase in imports from elsewhere slowed sharply to compensate.

John Palmer, over at the Eclectic Economist, describes some of the problems with this quota program: U.S. Trade Policy: Tax Consumers and Give the Proceeds to China?

In the end, U.S. consumers will pay higher prices for their clothing. And, most likely, quotas on imported clothing from China will hurt poor consumers in the U.S. more than they will hurt rich folk.

Palmer has some useful links to other news stories and blog postings.

Parrying the Chinese textile "threat"

Guy de Jonquières argues that U.S. (and European Union) barriers to Chinese textiles imports are not a good idea ("Facing facts on China trade", Financial Times, April 18, registration required)

Chinese production may be up quite a bit over 2004, however, "...most of China's gains have been at the expense of other exporters and often reflect its producers' decisions to repatriate offshore production in anticipation of the removal of quotas."

It's not clear the U.S. industry has been harmed: "The steady decline in its employment and output has not quickened: the rate of job losses in the first quarter was actually lower than the average since the mid-1990s, while product prices firmed slightly."

Years and years of trade barriers have allowed the U.S. industry to remain competitive.  It is not likely that a few more years of trade barriers (allowed under WTO agreements) would allow it to do so. "More likely, the beneficiaries would be other low-cost exporters, such as India."

Suppose the textile industry gets its trade barriers:

"...China would win twice. First, it would get to keep all the "rents" generated by voluntary restrictions. Second, limiting export volumes would induce its manufacturers to maximise profits by moving into the kinds of more sophisticated products in which western companies currently have a competitive advantage.

That is exactly what happened in Japan, after the US strong-armed it into restraining voluntarily exports of cars and other products in the 1980s. Not only did the measures fail to save Detroit; they increased Toyota's incentive to attack the luxury end of the market by launching the Lexus..."

The other side of the textile quota fight

The Charlotte Observer serves a textile producing community, and does not share my view of textile quotas. This web page has links to Observer stories on textiles and clothing over the course of the fall:Textile Jobs: Goodbye U.S., hello China -- Charlotte.com

The latest story, by Stella Hopkins, describes the fight by the textile industry to protect itself from foreign competition in the face of the end of the quota regime: "Fighting a flood of textiles". This is a nice piece, describing how the textile industry sought support from other countries that were threatened by Chinese competition, and how the industry used petitions for temporary "safeguard" quotas in a masterful series of rearguard actions.

Joe Johnston's Atlanta Campaign was good, but not better than this.

The end of textile and clothing quotas

The multi-year phase out of U.S. textile and clothing quotas (and similar quotas for some other developed countries) is done on January 1. The Economist covers the ground: "The freeing of the world's textile trade"

This isn't the end of restrictions and burdens on textile and clothing trade, but it is the end of a particularly unpleasant one:

"Quotas are a particularly perverse kind of protectionism. Like tariffs, they distort markets and harm consumers: they restrict the supply of a good, thus raising the price consumers must pay. But unlike tariffs, which are collected by the government, quotas are of value to the exporter that fills them, not the state that imposes them. They give exporters the opportunity to overcharge an underserved market."

The Economist is saying here, that when the U.S. raises consumer prices using tariffs, at least the U.S. gets the tariff revenues; when it restricts imports with quotas, it exports the profits associated with the import restrictions and the higher U.S. prices to exporters in foreign countries.

The U.S. took steps to continue to protect the domestic industry from competition, at the expense of domestic consumers:

"...America?s Commerce Department has already slapped new restraints on imports from China of bras, gowns and knitted fabrics, which were freed from quotas earlier than other textile goods, in 2002. America will impose a month-long embargo in January on Chinese goods that were reportedly ?overshipped?, that is, imported in excess of their quota, in 2004. And it is contemplating no fewer than 11 requests from industry lobbyists to block imports of several other products, such as trousers and shirts..."

As a result:

"To placate its protectionist antagonists, China this month decided to impose taxes on its exports. This will raise their price and blunt their competitiveness, much as an import tariff or quota would do. But this way at least the Chinese government gets to collect the revenues."

That is, U.S. consumers get higher prices and the Chinese get the tariff revenues.

Addendeum 12-29-04: Guy Berger, over at Full Context, suggests that the Chinese may have been looking for an excuse to impose this export tariff: "Clever Trade Policy and the Mercantilist Fallacy". For a detailed look at the theory underlying Berger's post, see this web page by Steven Suranovic: "Welfare Effects of an Export Tax: Large Country".

Thank God we've got the WTO now!

Deirdre McCloskey reports,

"In one decade in the eighteenth century, according to the Swedish economist and historian Eli Heckscher in his book of 1932, Mercantilism, the French government sent tens of thousands of souls to the galleys and executed 16,000 (that?s about 4.4 people a day over the ten years: you see the beauty of statistical thinking) for the hideous crime of...are you ready to hear the appalling evil these enemies of the State committed, fully justifying hanging them all, every damned one of their treasonable skins? ...importing printed calico cloth..."

This is from her paper, "The Secret Sins of Economics." This sort of thing undoubtedly violates some sort of multilateral trade agreements, or certainly will with the expiration of the rules allowing clothing and textile quotas at the end of the year.

There are many sins, but "in the end they are one, deriving from pride, as all sins do." I can't tell you what the one sin is yet. I've worked my way through the "Virtues misidentified as sins," "Venial Sins, Easily Forgiven," and have reached, "Numerous Weighty Sins Requiring Special Grace to Forgive But Sins Not Peculiar To Economics." The last section is "The Two Real Sins, Almost Peculiar to Economics." She doesn't tell you what the ultimate sin is until the end, and I'm not sure I should tell you when I find out. I don't want to spoil the surprise for you.

I learned about this from a posting by Tyler Cowen: "The Secret Sins of Economics"

P.S. 11-11-04; 11 PM:

After thinking it over this evening, I'm wondering about this estimate of 16,000 executions. Is this really true? It sounds unlikely. John McDermott indicates, in footnote 12 to "Mercantilism and Modern Growth" ) , that Robert Ekelund and Robert Tollison disagree with the 16,000 estimate in their 1981 book Mercantilism as a Rent-Seeking Society. (College Station: Texas A&M University Press).

Time runs out for textile and clothing quotas

The U.S. is supposed to have been phasing out a set of quotas on imports of clothes and textiles during the last 10 years, under the Agreement on Textiles and Clothing (ATC) . The phase-out period will end December 31, this year. (for details on the ATC see the WTO web site: "Textiles Monitoring Body (TMB). The Agreement on Textiles and Clothing") However, we didn't take advantage of the time we were given. We've waited until the last minute to do the "heavy lifting."

How we procrastinated

Under the ATC the U.S., Canada, Norway, and the E.U. maintained import quotas for individual products, like work gloves and cotton pants, from specific countries. The products covered by the ATC were listed in the agreement.

The countries involved agreed to gradually dismantle their quota systems product by product, and to gradually increase the size of the quotas for goods that remained under quota.

But they have procrastinated in every possible way that they can. The history of the process is described by Hildegunn Nord峠in Section III of the WTO publication "The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing".

The ATC set out four target dates by which products accounting for stated percentages of the volume of a country's 1990 imports of listed products were to come out from under the quotas. All products were to be out from under the quotas (more accurately brought within the trade rules of the General Agreement on Tariffs and Trade (GATT) ) by the end of 2004. Countries had considerable freedom to select the products they wanted to bring out from under the quotas for each of the four target deadlines.

Countries with clothing and textile quotas under this agreement have complied fully with it, but have managed to avoid serious de-quotafication.

The listed product count was inflated by including products that had not been subject to quotas under the predecessor Multi-fibre Agreement (MFA). Let trade analyst Hildegunn Nord峠pick up the story:

"The products to be included in the agreement are listed in the Annex to the ATC. This Annex includes, however, items that were not restricted under the MFA and the list therefore served to inflate the basis from which liberalization was calculated...

Turning to the integration process

[the integration of the products into the GATT and out of the ATC, and associated ending of the quotas - Ben]

, it is fair to say that progress has been limited. Stage 1 brought the integration of one single restricted product by one country into the GATT ? Canada integrated work gloves. Nevertheless, all the restricting countries complied with their first stage commitments. This was possible because of the extension of the list of products in the Annex to ATC, as mentioned above. The opportunity to integrate non-restricted products had not been exhausted during step 1, so step 2 saw more of the same ? it was the unrestricted products that were integrated first. When the third stage was reached, the opportunity to integrate products that previously had not been restricted under the MFA had been exhausted. However, the Textiles Monitoring Body observed that there was a tendency to integrate products where quota utilization was particularly low... in the United States, out of 43 specific constraints to be eliminated, 21 had utilization rates below 50 per cent and of these the utilization rate was zero for three quotas...

The number of constraints does not reflect the value or volume of imports, and it is important to stress that the Members...have fully complied with their obligations under the ATC. Nevertheless, the large number of constraints left to the fourth stage

[the large number left to expire with the end of the program this December] and the low share of clothing in the volume of integrated products so far suggests extensive back-loading and that the most sensitive products and the products with the highest value-added have been left to the final stage of integration. In short, the table leaves the impression that liberalization has been kept to a bare minimum."

Dan Ikenson provides another description of the procrastinatory process in the 2003 CATO Institute report "Threadbare Excuses. The Textile Industry?s Campaign to Preserve Import Restraints".

"The ATC includes a detailed list of products?well over one thousand specific tariff provisions?to which its rules apply. Each importing country is required to integrate (remove from quota restraints) products from the list covered by the ATC in compliance with the following schedule:

By January 1, 1995?Products that accounted for at least 16 percent of the country?s
1990 import volume
By January 1, 1998?Products that accounted for at least an additional 17 percent of the country?s 1990 import volume
By January 1, 2002?Products that accounted for at least an additional 18 percent of the country?s 1990 import volume
By January 1, 2005?All remaining products ...

The ATC allowed the importing countries to decide which products would be integrated
at each stage, with the condition that the list at each stage should include products from four subgroups: tops (unspun fibers) and yarns, fabrics, made-up textile products, and clothing.

In implementing the ATC, each of the importing countries took full advantage of thediscretion afforded them. The list of products to be integrated under the ATC was included as the annex to the agreement. It included a substantial number of products that were never even restricted under the MFA [the agreement which was replaced by the ATC - Ben]. According to estimates in a 1994 Journal of World Trade article, previously unrestricted products accounted for 37 percent of U.S. total annex import volume in 1990 (the base year for integration considerations). For the EU, previously unrestricted imports accounted for 34 percent of the annex, and for Canada the figure was 47 percent. Each of those members included previously unrestricted products in their respective integration schedules for the first three stages of the ATC, thus enabling them to claim compliance without really liberalizing the quotas for many products.

Exercising more discretion, the importing countries chose to integrate primarily products in the tops and yarns, fabrics, and made-up textile categories in the earlier stages, pushing off most clothing categories to the final stage. Of course, developing countries have the greatest comparative advantage in labor-intensive clothing production. Clothing has also been more heavily restricted than the other groups of products."

Ikenson describes several other strategies used to avoid compliancewith the spirit of the ATC.

Domestic political response to the looming deadline

And now, here we are. The ATC is going to expire. There are no more opportunities to procrastinate. Like a student who has put off the semester's work until the last week, we have a lot to do in a short time.

The expiration is no surprise. The Progressive Policy Institute prepared a short "brief" on the expiration of the multi-fibre agreement a year ago: "America Will End Its 'Quota' System for Clothes, Yarn, and Fabric Dec. 31, 2004". I posted on it this past July: "Phasing out the textiles agreement ".

There is a widespread expectation that Chinese producers will edge out many other foreign importers, and some U.S. production as well. Textile lobbyists have filed petitions requesting some additional protection. The Bush Administration agreed Friday to consider a petition from domestic textile manufacturers to limit textile imports.

Paul Blustein of the Washington Post wrote about the filing of the petitions on October 13 he wrote about the filing of the textile petition: "Textile Makers Fight for Limits. With Caps Expiring, U.S. Industry Fears Glut of Chinese Imports".

"The petitions that the U.S. industry is filing this week, if approved by an interagency U.S. government committee, would limit the annual growth of Chinese imports in nine targeted textile and apparel categories to as little as 7.5 percent. Those limits, known as safeguards, apply only to China under the terms of the agreement that gave Beijing membership in the World Trade Organization and could continue until 2008."

Martin Crutsinger also wrote about this for the Associated Press: "Textile industry seeks protection. Flood of Chinese goods feared when quotas end". On October 22 the administration implemented safeguard quotas on socks. Blustein reports again: "U.S. Limits Chinese Sock Imports". The sock decision broke some new ground:

"The government's ruling yesterday on the U.S. sock industry's petition, which was filed in June, could have important implications for the other markets at stake by indicating how officials will decide the other cases. The administration last year imposed safeguard limits on imported Chinese brassieres, dressing gowns and knit fabric -- all categories where quotas had already been lifted -- but the socks case is the first in which the "threat of disruption" is being used to bolster the argument for such an action.

On October 30 Blustein had a story on the administration's intent to consider additional safeguard quotas: "U.S. to Consider Limiting Pants Imports From China". Again, this is a "threat-based" action that is under consideration:

"Yesterday's action was just a procedural step, in which an interagency committee accepted for consideration a petition filed by the industry seeking to impose safeguard limits on cotton trousers. But it was important because the petition was based on the "threat" that Chinese trousers would "disrupt" the U.S. market once quotas are lifted, rather than on evidence that market disruption was actually happening. Retailers and wholesalers that import Chinese clothing have objected that safeguards should be considered only after it is clear that the market is being disrupted"

Elizabeth Becker describes the impact of the loss of North Carolina textile jobs vividly in the New York Times: "Textile Quotas to End, Punishing Carolina Towns".

"Meanwhile, here in the slowly beating heart of the remaining American textile industry, workers and owners of factories still operating along a stretch of Interstate 85 from Charlotte to Greensboro see the dawning of 2005 as a death sentence. More companies, they fear, will go bankrupt. More communities will wither like Kannapolis, and thousands more workers will be desperate for training, employment and health insurance.

In hopes of staving off the worst, politicians in the Southeast from both parties are taking advantage of the close outlook for the presidential election to win last-minute concessions from the White House that could slow the flood of imports from China.

And, seriously weakened as it is, the American textile and apparel industry is still flexing its political muscles. [On Oct. 29, days before the election, the Bush administration accepted the industry's petition seeking relief, promising to consider special steps to limit Chinese exports.]...

And lost in the swirl of anxiety are the benefits that the change will bring to tens of millions of consumers. Americans alone are expected to save an estimated $6 billion in lower-cost goods once the quotas are gone, allowing clothing makers and designers from New York to Milan the freedom to choose factories based on cost and quality rather than a complicated system of 1,300 categories for every nation.

But that is little consolation to this Carolina community of 36,000, which was reduced to an economic ghost town in little more than a year once Pillowtex, Ms. Harrington's former employer, fell into bankruptcy. The residents have remained, but the factories are being dismantled and the stores and shops shuttered on Main Street after this one-industry town lost its industry...

While American consumers' household budgets will benefit from lower prices for blouses and pillowcases, the shock to the affected workers and communities will be immediate and gut-wrenching..."

A cautionary note

Peter Gallagher was here before me, posting on the end of the ATC in November 2003 ("What the textile quotas mean":

"A decade ago, the United States and other industrialized countries agreed to abolish all textile and clothing quotas from 1 January 2005, replacing the quantitative barriers, which are otherwise illegal in WTO, with tariffs. It was one of the two most important agreements ever signed in WTO (the other is the 1994 Agreement on Agriculture); the pre-eminent trade policy contract between the industrialized 'north' and the industrializing 'south'...

Any sign -- such as these new 'temporary' quotas on competitive production -- that the USA might welch on its commitment to replace its remaining textile and clothing import quotas with tariffs on schedule on 1 January 2005 will deeply sour global trade relations particularly with developing country governments in parts of East Asia..."

Gallagher makes other interesting points, and has useful links.

Phasing out the textiles agreement

Textile quotas authorized under the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC) are scheduled to end in January 2005. The WTO web site has background here:

"From 1974 until the end of the Uruguay Round, the trade was governed by the Multifibre Arrangement (MFA). This was a framework for bilateral agreements or unilateral actions that established quotas limiting imports into countries whose domestic industries were facing serious damage from rapidly increasing imports.

The quotas were the most visible feature. They conflicted with GATT?s general preference for customs tariffs instead of measures that restrict quantities. They were also exceptions to the GATT principle of treating all trading partners equally because they specified how much the importing country was going to accept from individual exporting countries.

Since 1995, the WTO?s Agreement on Textiles and Clothing (ATC) has taken over from the Mulltifibre Arrangement. By 1 January 2005, the sector is to be fully integrated into normal GATT rules. In particular, the quotas will come to an end, and importing countries will no longer be able to discriminate between exporters. The Agreement on Textiles and Clothing will itself no longer exist: it?s the only WTO agreement that has self-destruction built in..."

Link to the page itself for more.  The WTO has more on the agreement on this page.

The end of the quotas creates opportunities for some developing countries, and threatens others.  Some developing countries are given special access to developed markets as a form of foreign aid or as the by-product of a bilateral agreement. These countries will lose this advantage as barriers are reduced for everyone else. Mauritius, for one, is concerned, as this article from the weekly trade newsletter Bridges indicates: "Mauritius Calls For WTO Meeting on Textile Quota Phase-out"

"Mauritius sent a letter to WTO Members on 20 July, calling for a meeting to discuss the impeding phase-out of textile quotas at the end of the year. Textiles coalitions have been calling for an emergency meeting, but only a WTO Member government can make the move (see BRIDGES Weekly, 23 June 2004). According to trade sources, Mauritius would like to see the meeting focus on vulnerable countries in sub-Saharan Africa. A number of developing countries that currently enjoy preferential access to developed country markets, through schemes such as the US African Growth and Opportunity Act (AGOA), fear they will loose all access after quotas are lifted and more competitive producers, such as China and India, pick up large market shares. These small and vulnerable economies are concerned that the development gains that their infant textile industries have allowed them to make will be lost and the industries devastated. The EC recently reviewed its preference schemes in light of the upcoming quota phase-out (see BRIDGES Weekly, 14 July 2004).

"Mauritius Requests WTO Meeting To Discuss Textile Quota Elimination," WTO REPORTER, 21 July 2004."