Possible protection by the US

Seventh of a series

Editor’s Note: The following is a Deloitte Research study that looks at the changing landscape of the worldwide garment industry in the face of the lifting of trade restrictions in January this year and the potential reverberation of such action on global trade. The report was written by Ira Kalish, the Global Director of Consumer Business at Deloitte Research. The Saipan Tribune is re-printing the study in a series of articles, with permission from Deloitte Touche Tohmatsu.

The biggest risk to the new trade regime is the possibility that the US will offset the benefits of the ATC by implementing new protectionist measures. Indeed, such measures have already been implemented in some categories. Moreover, there is a huge gap between what the WTO predicts will happen to Chinese apparel exports to the US and the potential limits that the US government can impose under WTO rules. For apparel purchasers and producers, this creates a very uncertain environment in which to make plans.

Safeguards
There has been plenty written about the details of trade rules. Instead, let us consider here a summary of the rights of the US government under the WTO. First, under the so-called “safeguards” rules, the US may impose quantitative limits on imports of apparel from China if they “disrupt” the pattern of trade. Under most traditional rules, such limits may only be imposed if imports “damage” domestic producers. The difference is more than semantic. Disruption can entail simply a drop in imports from Mexico replaced by a surge from China. This can involve no damage to any US producer at all. Yet under such circumstances, the US has the right to limit Chinese imports.

Moreover, under the rules the US can implement restrictions on China while ignoring the role of any other country. In other words, the US may discriminate against China, something that is not usually the case in international trade agreements.

The US has already implemented quantitative restrictions under these rules in the case of several apparel categories. The restrictions generally entail a limit on import growth of 7.5 percent per year. Some members of Congress have called for further restrictions, including increased tariffs, if China fails to revalue its currency. In addition, US apparel and textile producers have petitioned the US government to impose new limitations on the basis of anticipated or potential disruption to trade. China claims that such a move would be a violation of the spirit of the WTO.

It is difficult to predict what the US government will do next. Yet it is reasonable to expect that protectionist sentiment will diminish if China revalues its currency. On the other hand, the protectionist lobby has been powerful and effective, especially given that industry employment is relatively concentrated geographically. Still, it should be noted that, as of February 2005, the outstanding petitions for safeguard protection cover 60 percent of apparel and textile imports from China. Consequently, even if all petitions are accepted by the government, 40 percent of imports would experience an end to quotas with no offsetting protection. Thus the prices of many products will decline substantially. Moreover, the quotas will still be eliminated for all other countries.

It is surprising that the anti-liberalization movement is so powerful given the relatively small number of apparel and textile jobs remaining in the US. Consider the fact that, from 1970 to 2002, the number of apparel manufacturing jobs in the US fell from 1.1 million to roughly 300,000. The number of textile jobs fell from 1.1 million to roughly 600,000. Thus there are today fewer than one million industry jobs remaining. Yet the magnitude of the US job losses to date clearly demonstrates why the issue is so sensitive. In Europe, on the other hand, there have not been such large losses of apparel and textile jobs (see Figure 10). Hence European politicians are not as vexed over this issue. Moreover, the ascent of several Central European countries into the EU will probably entail a shift of employment within Europe rather than toward Asia. (See Figure 10.)

Given the fact that protection can be imposed when no damage to the US industry takes place, it becomes clear that the issue in the US is really part of a larger debate about the role of trade and manufacturing in the US economy. Efforts to limit Chinese apparel imports are, therefore, necessary for opponents of trade to demonstrate their political effectiveness.

Dumping

Aside from the “safeguards,” the other significant way that apparel and textile imports into the US can be limited is through traditional anti-dumping lawsuits. Specifically, dumping is considered to take place when products made in one country are sold in another at a below-cost price. The real issue is how to measure the cost of production. This depends on whether the exporting country is considered a “market” or “non-market” economy.

If a country is a market economy, then production costs in that country are sufficient for determining if dumping has taken place. If, on the other hand, the country is considered a non-market economy, then domestic costs are considered potentially distorted. Therefore, costs in a third country are used to determine if dumping has taken place. Given that there will usually be a third country with high production costs, proving the existence of dumping becomes quite easy—and quite politically driven.

The US considers China a “non-market” economy. Thus, demonstrating dumping is not difficult. China wants to be considered a “market” economy. Yet under US law China must meet several requirements before its categorization can be changed. Among these is a currency revaluation.

Recently, Chinese exporters have found a loophole in US law that enables them to avoid serious penalties from dumping. Specifically, several exporters have claimed in US court that, although China is a non-market economy, these privately owned companies operate in the market-oriented part of the Chinese economy. Therefore, these company’s own production costs should be used in determining dumping. The result has been that several exporters have avoided draconian fines. For example, in a recent case against Chinese wood furniture manufacturers, duties of 8.6 percent were imposed on imports as punishment for dumping. Yet if the nonmarket method of determining costs had been used, the duty would have been in the range of 150-200%. Now the US government is considering eliminating this loophole

The bottom line is that political decisions of the US government will determine much of what transpires in the near future. Again, this creates a great deal of uncertainty for market participants.