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Knickers in a Bind

Mises Daily: Tuesday, September 27, 2005 by

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In recent weeks tens of millions of trousers, dresses, brassieres, T-Shirts and other categories of clothing and textiles have amassed at European ports, prohibited from reaching retail outlets by customs officials.

The consumer goods were held in abeyance because of an ill-conceived trade agreement limiting exports to the European marketplace struck in June between China and the European Union, a mere six months after the highly distortionary global quota textile regime expired.

Between the start of the EU-China negotiations and the enforcement of the new quotas on July 20, Chinese textile producers and European retail customers utilized the brief window to apply and receive import licenses for a volume of textiles well above the threshold endorsed by their respective governments. The upsurge in orders, driven by the desire for both parties to serve the needs of consumers, quickly exceeded most of the quantitative restrictions established for the 10 categories of textiles covered in the agreement.

European consumers faced the prospect of higher prices and a reduced selection of apparel as the holiday season approached. Retailers that already paid for their merchandise owed additional storage and shipping fees and some even courted bankruptcy, as the items they bought weeks ago were not released until September 13. The impasse at European ports has been rescinded by a hastily-negotiated accord in early September. This accord waved approximately half of the 87 million detained goods through without applying them to quotas, and counts the other half either against Chinese textile import allowances for 2006 or against other unfilled quotas. Trade restrictions in a briefly-liberalized industry have again been renewed.

Why textiles?

Like agriculture, textile production is a basic and highly-politicized industry. Labor-intensive and requiring little capital equipment, textiles furnish developing countries a comparative advantage and a starting point for the manufacture of more sophisticated products.[1] After the Second World War, however, textile and apparel production continued to account for a significant portion of developed countries' employment and economic activity, prompting political pressure to apply trade barriers to developing countries' exports, namely those in Asia.

The cartelization of the global textile trade began in the 1950s with America coercing a major developing exporter, Japan, into short-term "voluntary" export restraint arrangements that became commonplace between protectionist rich countries and poor countries seeking to shield nascent export industries from full-scale retaliation. Short-term agreements became long term, which in turn evolved into four rounds of Multi-Fiber Arrangements, which institutionalized governments' management of the trade.

As in America, Europe maintained elaborately restrictive trade regimes predicated on the need to protect jobs and the spurious desire to facilitate the "balanced and predictable" evolution of the textile industry. Exempt from the General Agreement on Tariffs and Trade's (GATT, the World Trade Organization predecessor) liberalization disciplines, the increasingly discriminatory and expansive Multi-Fiber Arrangements became untenable in the 1980s due to the waning economic significance of domestic textile production in rich countries and pressure from developing countries.

The Agreement on Textiles and Clothing, part of the 1995 Uruguay Round of GATT, abolished the MFA over a 10-year transition period. MFA restrictions fully expired on Jan. 1, 2005, freeing textiles in a manner consistent with global trade (WTO) rules.

China, home to highly efficient textile producers, has long been warily eyed by domestic manufacturers in America and Europe. Normally forbidden by the trade organization's rules, Beijing's protocol of Accession to the WTO permits member states to apply trade restrictions against Chinese products until 2013 if they can demonstrate that the goods are causing "material injury" to domestic producers. Regarding textiles specifically, safeguards can be invoked and renewed annually until 2008 whenever Chinese imports initiate or threaten to initiate "market disruption."

Already the world's largest textile exporter, China's 22,000 textile firms and 19-million-strong workforce severely threatens the EU, the world's second-largest exporter, particularly the domestic industries in France, Italy, Spain, and Greece, which have benefited tremendously from the global politicalization of the $437 billion annual trade. Since the demise of the quota system in January, European imports of selected Chinese textiles rose in some cases as much as three or four times compared to a year ago, albeit from a low starting point. On the contrary, new orders of EU textile and clothing products were 4.6% lower in June than a year ago, while all EU industries' combined orders increased more than 5%.

Pressured for several years by textile lobbies to re-institute quotas immediately after the expiration of the MFA, the European Commission launched investigations in April into the acute influx of Chinese imports, which spurred bilateral consultations with Beijing to dictate the number of textile products European firms could purchase from Chinese suppliers.

The EU praised the resultant June 10 agreement as a balance between granting member states' textile enterprises an additional three years to restructure while generously permitting the growth rate (8.5%-12.5%) of pertinent Chinese textile imports to exceed what would otherwise be permitted (7.5%) under the safeguards provision of China's WTO Accession. Beginning in June Beijing also imposed "voluntary" export taxes of as much as 400% on 74 categories of clothing products, a decision reversed as the EU began blocking Chinese textiles at its ports and augured for a re-negotiation of the June 10 pact.

The follies of state interventionism

The EU's haphazard imposition of quantitative restrictions and frenzied negotiations to rectify flaws in the agreement reveals several lessons. First, the muddled and chaotic response by the European Commission, which temporarily pitted member states in retailer and textile camps, demonstrates the ultimate inability of governments to remedy perceived economic problems. Not only are political means (compulsion) counterproductive, but such interventionist measures generate real dislocations in its wake where only supposed ones existed.

The Chinese foreign minister blamed the "irrational activities" of enterprises in China and the EU for precipitating the stand-off at European ports. While these comments are unsurprising considering governments often fault "speculators" and "private interests" for instigating economic crises of the state's making, the decision by Beijing and Brussels to curb the importation of textiles to Europe merely prompted retailers to purchase goods demanded by customers in large quantities before the pact's enforcement. It is ironic that EU member states, even the governments most trenchantly hostile to Chinese textile imports, abetted these orders by approving a multitude of applications for import licenses before the July 20 enforcement of the agreed quotas.

Accustomed to shielding domestic textile producers for almost five decades, the Commission acquiesced to renewed protectionism, threatening to bankrupt retailers and attenuate consumer choices, all without convincing evidence that European producers would be able to continue to compete on cost in a predominantly labor-intensive industry. Unresponsive to profit and loss and reliant on confiscating property for its existence, the supposedly omnipotent state cannot intimately know the intricacies of the textile or any other market better than firms, much less gauge consumer preferences. Nevertheless, such limitations rarely convince state officials to stand idle while the mutual benefits inherent in voluntary economic exchanges determine the course of "strategic" or "sensitive" industries. Application of force on behalf of ascendant political interests is the state's only recourse.

But why would an institution such as the EU and its constituent states, which prize the nebulous notions of democracy and human rights, favor the narrow interests of one class of producers over retailers, and more importantly consumers? A classic collective action problem exists as a relatively small and politically-connected industry seeks to employ the state's coercive apparatus to compel a much larger and diffuse lot of consumers and retailers to purchase its wares. Without quotas textiles producers stand to lose significantly, while superficially it makes scant difference to consumers to pay an additional euro for an article of clothing. The fact that the EU-level consumer association relies on the Commission for about 50% of its budget testifies to the want of consumer clout vis-à-vis textile producers.

It is also worth noting the political context in which the EU Trade Commission, reluctant to intervene in the bloc's textile trade with China, found itself. The rejection of the EU Constitution by voters in France and the Netherlands earlier this year placed considerable pressure on EU institutions to convince circumspect citizens in EU member states that Brussels would not permit foreign competition to unravel cherished social welfare states. Indeed, 23 out of the 25 EU member states endorsed the June 10 agreement to limit Chinese textile imports.

Nevertheless, higher prices for protected products do adversely affect European pocketbooks. Some estimates suggest that a four-person household pays an additional 250-350 euros per year for apparel and textiles, which like all government interventions, disproportionately harms the poor. Ironically, the man responsible for the re-introduction of Chinese quotas, Peter Mandelson, said as much before the European Parliament.

Third, this situation demonstrates just how fraudulent the notion of government-negotiated "free" trade agreements — whether in the WTO orbit or not — actually are. It logically follows that if neighbors both benefit from voluntary trade based on absolute or comparative advantage it should be equally applicable between individuals or firms 10, 100, 1,000, or 10,000 miles apart from each other. However, because of the state's monopoly on the provision of justice and defense services and its unique ability to seize property in the territory it controls, it can be employed by caretakers and connected political interests to prohibit, limit or allow economic exchanges between the inhabitants of different states. Consequently, free trade is held hostage by governments and is only partly liberalized through a negotiating mindset that former Mexican trade minister Luis F. de la Calle described as "mercantilist in nature."[2] Indeed, genuine free trade agreements would not entail hundreds or thousands of pages of stipulations, qualifications and opt-outs that characterize state-to-state "managed" trade accords.

Textiles producers were given ten years to adjust to the demise of the MFA that favored Europe and America. Unable or unwilling to properly plan and invest for a competitive global market, textile lobbies and allied politicians have preferred to stymie liberalization and petition for renewed quotas every step of the way. Nearly two-thirds and then half of the textiles covered by the MFA did not expire until 2002 and Jan. 1, 2005, respectively. Few categories dear to developing country producers were liberalized until the last possible day, as America and the EU opted to eliminate quotas in relatively capital-intensive textile products early. Conversely, EU retailers were given just one month to adapt to the EU-China quota agreement.

A Chinese textile monopoly?

Whereas the state tends only to create economic problems, participants in the marketplace rely on competition and the signaling mechanism of prices to arrive at outcomes that allocate scarce resources to their most desired ends, satisfy the subjective valuations of buyers and sellers and incidentally subvert the will of the state.

It is disingenuous for American and European opponents of quota-free trade in textiles to present it as a measure solely benefiting Communist China. English-speaking India, the world's largest democracy, boasts a textile industry rivaling its Chinese counterparts. Despite the government's democratic credentials, Indian producers too were deliberately, but unofficially, a target of MFA restrictions. To a lesser extent, Pakistan and other segments of South Asia with high labor concentrations, availability of raw materials and scant capital are well-placed to increase textile production.

The absence of quotas also allows for the consolidation of textile and apparel manufacturing, fostering economies of scale in an industry rife with small and inefficient firms as well as promoting greater specialization and division of labor. The MFA pushed production, particularly on the finishing end, beyond China and India, depriving the countries' producers of the opportunity to integrate fiber and fabric production with the outsourced activities, which would improve quality and attenuate production times. Established Chinese firms already distinguish their wares on the basis of excellence, punctuality and delivery as much as price. These developments will certainly squeeze competitors in the Americas, Africa and other parts of Asia guaranteed textile exports under the MFA, not to mention protected American and EU producers.

However, it would be a mistake to conclude that Chinese producers are poised to control the market. Retailers have an interest in conducting business with textile firms in a number of countries, given the array of threats — political instability, natural disasters — that can threaten supply chains. More importantly, consumers are a fickle lot; consequently, success in the clothing business in part depends on delivering fashionable products to customers as quickly as possible. In that vein, Western European retailers have and continue to tap apparel producers in Central and Eastern Europe, Turkey and the Mediterranean in an effort to curtail the period between placing an order and merchandise landing on shelves.

Taken together, quota-free textile trade, competition, economies of scale and the tendency of retailers to diversify sourcing options enables producers threatened by China to improve efficiency and seek niche markets based on proximity, distinction, or other factors. Consumers enjoy the improved quality and larger variety of products available for purchase.

As for Europe, most of the pain from trade liberalization is being felt chiefly among small enterprises found in the EU's Mediterranean countries specializing in white goods in direct competition with China. Hard-hit Italian shops, for example, lack not only trade barriers for support, but also the competitive advantage calculated devaluations of the lira furnished before the advent of the euro. Many of the larger textile producers in the EU have already shifted operations to lower-cost countries.

Even if it was desirable to save all of the European textile producers, trade barriers, especially against China, will not suffice. There are suppliers in dozens of other countries with the cost structure capable of filling China's void.

By contrast, EU exporters should take comfort in the Commission's estimates that in less than a decade there will be as many as 250m Chinese consumers of European luxury goods. A substantial market is opening up for goods possessing the quality, precision and care that Europe's luxury goods makers devote to their products.

Rather than fearing China, it would be instructive to note that five decades ago a developing Japan, now the world's second-largest economy and critical trade partner of the EU, was a target of textile protectionism. Likewise, 20 years ago South Korea, Hong Kong and Taiwan comprised over a quarter of the world's textile exports only to move on to the production of higher valued-added goods. It is to be hoped that the Chinese economy will continue to develop and eventually cede textiles to businesses operating in even poorer parts of the world so that their economies too may grow.


  What the Austrians think, and why: $5

Meanwhile, Brussels and EU member state officials have embarrassed themselves and exposed some of the fundamental flaws of state-managed trade by bowing to protectionist sentiments and demonstrating an inability or ambivalence (fortunately) to promptly impose trade restrictions on retailers and suppliers. The short-sighted meddling has created problems where none existed. The face-saving amendment to the June 10 agreement has indeed lifted the growing backlog of textiles at European ports, but it has also merely relegated an unresolved trade dispute to another day.

Meanwhile the global marketplace in textiles continues to evolve according to the voluntary interactions of buyers and sellers. Eurocrats and national politicians are nevertheless willing to risk precipitating artificial shortages, protectionism-induced bankruptcies and deny individuals the benefits of genuine free trade for the sake of domestic producers, an illiberal, wasteful and self-defeating proposition.


Grant Nülle is a Research Fellow with the Ludwig von Mises Institute. He can be reached at grantn007@yahoo.comComment on the blog.


[1] Hoekman, Bernard M. and Michel M. Kostecki. The Political Economy of the World Trading System. 2nd ed. 2001.

[2] Moore, Mike. World Without Walls: Freedom, Development, Free Trade and Global Governance. 2003.