At midnight on December 31, Americans will toast the new year with a drunken round of “Auld Lang Syne.” On the other side of the globe, China will be celebrating by opening new factories -- more than 3,000 new textile and apparel factories that will begin their work as decade-old quotas are lifted on China's access to the lucrative American marketplace. Thousands of Chinese workers will file into position and fire up brand-new spinning, weaving, and sewing machines. Within hours, blouses, pants, towels, and bedding will be ready for shipment to U.S. stores like Wal-Mart and Target.
Though it's music to the ears of the Chinese government, the din of the new mills could be a death knell for beleaguered manufacturers in the United States and other foreign markets. According to rules set when creating the World Trade Organization (WTO) in 1993, quotas limiting foreign-manufactured textiles and apparel from entering the United States will disappear starting in 2005. Then the market will become a free-for-all, one in which China is set to dominate. The only power to stop this lies with the Bush administration, whose decision is very much up for grabs. Unless trade advocates can persuade George W. Bush to extend the quotas, 2005 will mark the beginning of the end for textiles in places like Turkey, Bangladesh, Mexico -- and the United States.
On November 3, the U.S. government accepted for consideration five separate petitions for China safeguards, the Bush administration's only tool for extending the quotas, on some of the most lucrative products still restricted by quotas, including non-cotton shirts and trousers. These came from the American Manufacturing Trade Action Coalition (AMTAC) in Washington, five other U.S. apparel-, textile-, and fiber-producing trade associations, and the labor union UNITE HERE in an effort to stall China's takeover of the global apparel market and give lawmakers time to lobby the WTO for a permanent solution. The Bush administration has 90 days to decide whether to enact the safeguards -- and, in so doing, draw the ire of Chinese manufacturers.
Countries around the world have joined the call for safeguard quotas. The stakes are high: Once quotas are lifted, China will take over $220 billion in world garment trade -- one of the biggest short-term transfers of wealth ever. If China captures its anticipated new market share -- including an estimated 50 percent of the U.S. market -- 30 million textile- and apparel-manufacturing jobs will disappear worldwide, including an estimated 650,000 in the United States. To date, 52 countries, including Turkey and Mexico, have signed on to the Istanbul Declaration, which calls for governments worldwide to pressure the WTO to convene an emergency meeting on the issue.
The quotas date back 30 years. Under a 1974 global agreement called the Multi-Fiber Arrangement (MFA), 47 nations receive a share of the European and U.S. markets for apparel and textiles. Though the MFA's original intent was to protect declining textile industries in the United States and Europe, it also encouraged less-developed nations like Sri Lanka -- suddenly guaranteed a market -- to grow their textile capacities. (Apparel is a low-capital, high-labor industry, which makes it a good fit for the cheaper labor so abundant in developing countries.) These efforts were largely successful, resulting in millions of new jobs in countries desperate for the stability a manufacturing sector brings. Smaller nations like Cambodia and Bangladesh even began to grow a modest middle class. At the time, China's was a closed communist system, and no one anticipated the economic reforms of the last 15 years.
Then, as part of the 1993 deal that created the WTO, the United States and Europe each agreed to a 10-year phaseout of MFA quotas on clothing and textiles beginning in 1995. The idea was to help developing countries that 20 years earlier had been boosted by the quota system but that had long since complained that those quotas were impeding their development. At the same time, the World Bank estimated that the quota system, by limiting market access, deprived poorer nations of twice what they received in foreign aid. The Americans and Europeans were not happy about the decision, but conceded in exchange for new international rules protecting intellectual property and loosened investment requirements. Even then, China was not a party to international trade rules, and most manufacturers did not perceive it as an imminent threat to the global apparel market. This turned out to be a miscalculation of Herculean proportion.
In 2001, China officially entered the world market when it joined the WTO, which for the first time allowed the Chinese to trade in the richest market in the world, the United States. Competitors in Europe and the United States were blindsided. Just four years later, China is the world's largest exporter of apparel and now employs 6.8 million workers in its textile factories. According to the National Council of Textile Organizations, China's share of the U.S. apparel market in 29 quota-free categories rocketed from 10 percent in 2001 to a remarkable 72 percent as of June 2004. (It is projected that that number will reach 80 percent by January.) The WTO estimates that when quotas are lifted in January, China will control 50 percent of all textiles and clothing imported to the United States.
China's meteoric success is due partly to low labor costs, but also to its ability to keep its manufacturing flexible, fast, and efficient -- key elements to maintaining competitive advantage in an era of low-inventory, big-box retail stores. But the real difference, critics charge, is China's unfair and anti-competitive practices, which violate WTO regulations and make competition nearly impossible. For instance, China pegs the yuan to the dollar at a fixed rate and strictly regulates imports and the allocation of foreign exchange. (This gives China a 30-percent to 40-percent price advantage in the U.S. market.) According to the safeguard petitions filed by U.S. trade advocates, the Chinese government subsidizes the production of textiles, and state-owned textile companies account for nearly 12 percent of all factories. (More than a third of those are reportedly producing at a loss.) The petitions also describe the proliferation in China of nonperforming loans (loans that never need to be paid back) and hefty government subsidies for startup textile manufacturers.
Trade advocates also contend that the Chinese government turns a blind eye to manufacturers that break trade laws to maximize profits. These include transshipment regulations (China gets around its quotas in part by shipping its goods through other countries) and content labeling (allowing China to use cheaper materials on the sly). Additionally, China keeps its labor costs low, in part by restricting workplace organizing and disregarding workers' rights. After the quotas are lifted in 2005, it will become clear that even the cheapest labor and most streamlined production in Bangladesh cannot compete with a stacked deck in China.
As part of the deal Beijing made with Washington in the late 1990s that enabled China to join the WTO, the United States has the right to impose selective “safeguards” -- effectively, new quotas -- on textiles and apparel imports from China if the U.S. government can prove they are disrupting the U.S. market. These trade restraints are limited to one year, and can be renewed annually until 2008 if Washington can prove continued disruption. These are the safeguards that WTO member states and U.S. manufacturers are now pressuring the United States to invoke.
Free-trade advocates oppose the safeguards and maintain that China will eventually comply with WTO regulations as it “grows into” its role as a global manufacturing power, and they argue that U.S. access to cheaper goods is a benefit that far outweighs the cost of short-term job loss. The big-box retail lobby is a powerful one in Washington; Wal-Mart's Pac for Responsible Government gave $700,000 in contributions during the last election cycle -- mainly to Republican candidates. These lobbyists are urging the Bush administration to allow the quota expiration to proceed as planned. As far as they are concerned, the lower the price, the wider the profit margins.
What's interesting is that the Bush administration may not be all ears to corporate interests this time around. U.S. consumers pay a dramatic hidden cost when we stuff the market full of cheap imported goods. When a factory closes up shop and moves overseas, there are the obvious costs in terms of jobs, wages, and health and pension benefits for workers. But the community also loses a major contributor to the tax base, which means that the local government increases property taxes, even though property values may be stagnant or even declining. When this happens, the state has difficulty balancing its budget, and subsequently raises tuition at public universities, for example, to cut costs. Administration trade officials are all too familiar with this scenario, which has played out particularly in southern and Rust Belt states, and they will likely push to protect U.S. jobs.
What's more, the administration may also worry that if the quota is lifted, China could indirectly threaten America's national security. The fear is that as China takes more market shares, the economies of developing countries that benefited from the quotas will falter -- and suffering populations will take it out on the United States. In Turkey, for example, the textile and apparel sector constitutes one-third of the nation's industrial employment, and nearly $30 billion in export earnings each year -- the single greatest industrial component of that country's economy. Turkey is the model nation for what Bush hopes to accomplish in Iraq: an Islamic nation governed by a secular democratic system, its economy hovering in the purgatory that exists between industrialized and developing countries.
China's monopolizing of the world market in record speed will effectively yank the textile industry out of Turkey, explains AMTAC Director Augustine Tantillo. “Pull those 4 million jobs out of Turkey, and the huge export earnings as well. The Turkish economy destabilizes, and the nation experiences political unrest. … What in the world are we thinking?” he nearly shouts into the phone during an interview. “Are we going to willingly create a breeding ground for terrorists who prey on hopelessness and unrest?”
U.S. concern on this front mainly focuses on Indonesia, the Philippines, the Asian subcontinent, and the Middle East. According to Tantillo, the Bush administration is concerned enough that it has asked security officials to review the China safeguard petition. Still, at the end of the day, it may be China itself that exerts the most influence over the Bush administration's decision on the textile safeguards. If Washington moves to maintain quotas on Chinese textiles, Beijing will undoubtedly react swiftly with a retributive tit for tat in another market, perhaps wheat or cotton, areas in which the United States is dependent on foreign, specifically Chinese, markets for export.
Even if the administration invokes the safeguards, these late-game efforts are largely beside the point: By 2008, the crisis will revive unless cool heads can devise a longer-term solution that balances the interests of smaller countries against those of global superpowers. “And that is a very significant challenge on our part,” sighs Tantillo.
Ayelish McGarvey is a Prospect writing fellow.
