China looms as textile giant

Posted in China , Asia | 10-Mar-04 | Author: Ted Plafker| Source: International Herald Tribune

BEIJING - Spend an afternoon at the shopping street known as Silk Alley in eastern Beijing, and it is easy to see why the rest of the world's producers of apparel and luxury accessories are nervous.

All manner of clothes, outerwear, sunglasses and leather goods are on offer at rock-bottom prices. They range from pure kitsch like Che Guevara T-shirts selling at $2 apiece, or E1.60 - to more upscale items such as cashmere sweaters, silk suits, pashmina scarves and faux designer handbags that bear specious "Made in Italy" labels but can nevertheless be had for $15. Or less, with a bit of aggressive bargaining.

Catering to foreign tourists - and to a steadily increasing proportion of chic locals - Silk Alley itself is not about to alter any international trade balances.

But this market, beneath all the hustle, bustle and color, is essentially a demonstration site attesting to the vast potential of the Chinese apparel industry.

Already a leading player in the lucrative business of clothing and outfitting the world, China stands to gain even more from the changes to be wrought by the World Trade Organization Agreement on Textiles and Clothing, which are due to be fully implemented on Jan. 1, 2005.

That day will mark the final step in the 10-year process of phasing out all the quota restrictions that have governed the textile and apparel trade between all 146 WTO members.

Producers from around the world, and across the fashion spectrum, have been sounding alarms about China's potential to take advantage of the new free trade regime and move into a thoroughly dominant position.

In Bangladesh, industry leaders have warned of the "social anarchy" that could erupt when that nation's 10 million textile workers find their jobs threatened by Chinese competitors.

Speaking last year at a European Union trade summit meeting, the WTO director-general, Supachai Panitchpakdi, voiced similar concerns, acknowledging that the economies of many developing countries could be "highly vulnerable" after quotas are lifted.

For their part, Chinese officials have sought to allay such fears, and promise that the changes in 2005 will benefit everyone.

"Extensive complementarity between countries in different stages of development will become the basis for a new type of international division of labor," according to Chen Shujing, the vice chairman of the China National Textile Industry Council.

He added that as Chinese exports grew, so too would its imports of advanced equipment, cotton, and chemical fiber.

Another industry official, Cao Xinyu, recently dismissed dire predictions of Chinese domination as "sensational."

"China is a major player but will not sweep the world," Cao said. He also pointed out that 40 percent of Chinese apparel exports now come from international joint ventures, meaning China is splitting the profits of that business with its foreign partners.

All the same, Chinese producers are looking forward to 2005. Since they now have to pay the government for quota allotments, the new quota-free regime will bring immediate savings.

"It will mean an instant reduction in our overall costs and a big, immediate boost to our overall competitiveness," said the manager of a state-owned maker of mid-range fashion apparel in southern China's Jiangsu Province.

His company's gains, he predicted, would come mainly at the expense of competitors in Southeast Asian nations such as Indonesia, Malaysia, Thailand and the Philippines.

"They are already at a disadvantage because they have higher labor costs and a higher risk of political instability, so this will just make it harder for them," said the manager, who did not want his name used.

More developed economies likewise expect to feel the impact. Auggie Tantillo, the Washington coordinator of the American Manufacturing Trade Action Coalition, expects China to make huge and rapid gains in the United States when all quotas are removed.

"It would not be unrealistic to expect China to capture 70 to 75 percent of U.S. market share in two to three years," he said.

According to a study released in November by the American Textile Manufacturers Institute, gains of that magnitude by Chinese suppliers would cost 630,000 American textile and apparel manufacturing jobs.

The damage could be even more devastating for developing countries with less diversified economies, especially in Africa.

Constrained by quota restrictions on their volume of direct exports, Chinese firms have for years been shipping fabrics to African processors, who can then ship finished goods on the preferential terms they have been granted by developed Western countries.

But with the end of quotas in 2005, Chinese firms will be able to bypass the added time and expense of dealing with such intermediaries. As a result, the nations that lack their own fabric milling infrastructure will be out of the loop and out of luck.

A new report on the impact of quota eliminations, issued by the U.S. International Trade Commission, identified Lesotho, Kenya, and Mauritius as especially vulnerable on this front. Citing China's "ability to make almost any type of textile and apparel product at any quality level at a competitive price," that report predicted that China would become the "supplier of choice" for most U.S. importers.

The same factors will likely lead to similar Chinese gains in the lucrative European market. And, according to Tania Marini, the China representative of the Italian fashion and accessory firm, Visibilia SpA, China is getting ready to move further up the quality chain.

"They have been investing heavily for the past 15 or 20 years, importing the best machinery, and the Chinese standard of quality is now getting much closer to European levels," she said.

The last piece to fall into place, said Marini, will be designing skill. "This of course is a cultural thing, and it will still take some time for Chinese designers to learn how to express individual feeling and creativity, but already it is starting," she said.

Ted Plafker is a correspondent in the Beijing bureau of The Economist.