EU Trade Protection on China Textiles - Essay Example

1. Introduction The demand for textiles among countries in the European Union (EU) is mostly high in the south part of the region. This fact, however, fails to generalize the exact necessity of textile products within EU. Indeed, most of the countries in EU require the surplus in the supply of textiles. At present, the industry of textile is undergoing massive changes. Such evolution is being motivated by the liberalisation of the trade regime controlling textiles. Most important, the Multi-Fibre Agreement had been phased-out as stated in the Agreement on Textiles and Clothing (ATC) created by the World Trade Organisation (WTO). It is undeniable that EU maintains restrictions on textile imports through tariffs and quotas. Although such policies are designed to protect local textile producers, several partner counties are complaining. The most logical step that EU made was to forge agreements with different countries and drafted new stipulations on textile trade. Safeguarding its own textile producers is a priority for EU policy makers. On the other hand, EU has to maintain its trading relationships with its partners. These contradictions are hard to reconcile, but such has to be done to ensure that win-win solutions are achieved. Among partner countries, China is one of the most active exporters of textile. China, however, has experienced sudden decline in exported textile products to EU countries. EU has been strict especially with its trading relationship with China. Moreover, the restrictions have been defined to avoid misconceptions by any parties. Furthermore, additional agreements are being forged to ensure that policies are maintained. 1.1. Statement of the Problem The research attempts to focus on four key areas. These are important sections that will contribute to the goals of the research. First, the study will provide an overview of the situation. In relation to this statement, the research will provide information that is critical to the research. Second, the study aims to determine the current trends relative to subject. Most of the data associated with the study are usually obtained from past studies and recent developments that are occurring between EU and China. Third, the research will analyse the available information gathered from different sources. The analysis will be in-depth and based on theories that govern the industry. Finally, the research will also tackle various policies that have been outlined and are being implemented in relation to textile trade. These are relevant agreements that will eventually define the relationship of the region and China including future trading. Overall, the study will zone in the actual control being implemented by EU on the China. 1.2. Project Structure The flow of the study will be based on traditional processes being used in other studies. An overview of the project will be provided, which includes various trends and theories. From the bigger perspective, the study will dissect every significant detail and linked with the subject. After the significant data has been presented, analysis will be manifested. The analysis will involve factual observations as referenced by previous studies. In addition, the analysis will point at several relevant perceptions. Aside from the analysis of trends, policies of trade restrictions will be discussed. The discussion will also focus on several agreements made and other understandings. It is critical to present such information to define the current relationship that EU and China. The study will present a recap summarising the different arguments raised and explanations provided. The structure of the study conforms to the method, which seeks for organized flow of discussion. 1.3. Methodology There are a plethora of data sources. Finding quality information is as challenging as analysing the gathered data. The researcher will start through general research, and subsequently will go through the task of identifying and analyzing information that has already been compiled and published in any form. Secondary data is usually obtained through desk research (Ruskin-Brown 1999). This method provides researchers enormous economic benefits and other advantages. One of the major strengths of desk research is its inclination to practicality. It is a quick method of collecting information and is easier to conduct than field research. For this study, the secondary sources of data were gathered from published articles in international business journals, articles, magazines, current events news, and books relating to the effects of international business on intangible assets. Primary data to be gathered from the other relevant studies will be compared with the secondary data. This is done to determine whether the results of the research support or reject assumptions and arguments provided by earlier researchers. 2. Theoretical Overview International trade is embedded with several restrictions and explanations. According to Krugman (1979), trade protection is being viewed beyond the idea of monopolistic competition. Countries usually justify restrictions based on welfare, employment, and transfer. This contention is being supported by several empirical researches, which include the study Magee (1972) involving the effect of trade restrictions in the US economy. The usual restrictions involve quotas and tariffs. Using these methods, countries discourage the entrance of products coming from foreign countries. Although discounted, the idea of income distribution is the primary catalyst for trade restrictions. The difference in income among individuals and households contribute to policy-making. This discrepancy contributes to the preference of individuals in relation to buying decisions. Because imported products are sold at cheaper prices, these commodities are preferred by households belonging in the lower echelon of the society. Because most individuals tend to value price, governments are concerned with the influx of imported products. As a result policies are made balance such deficit. The textile industry in EU generates massive employment. The textile industry employs millions of individuals in several countries that part of EU. Based on the data provided by the Communications of European Communities (2003), the textile industry covers approximately 7 percent of the total employed workers in the manufacturing sector. This significant number makes the sector vital to the growth of the region. Another theoretical perspective that can be used in this study is the use of trade quota. Conventional analysis shows that the presence of quotas greatly benefits developed country producers and inefficient but unrestricted developed country suppliers. On the other hand, efficient but restricted producers are expected to suffer immensely. A large but inefficient supplier outpaces a small but efficient producer because the former has the capacity to control quotas. Eventually, the consumers will shoulder the burden of such difference. Gereffi (2001) asserts that policies regarding quotas have to be uniform to ensure that huge manufacturers are prevented from manipulating the system. Globalisation is considered as one of the drivers of trade. Because markets have opened, several countries have ventured on exporting their products to these economies. The creation of organizations such as the WTO is instrumental in creating a free trade global environment. In addition, the creation of several trade agreements has cultivated the international trade. Moreover, trade organizations continue to bolster the relationships among countries. These changes in the environment along with the several plans to widen trade are interesting perspectives to examine. Comparative advantage is an economic theory that is still being used as basis for trade. Massive exporters of textile consider the sector as the driving force of their economies. Therefore, focusing on textile is a priority over other economic activities (Francois, et al., 2000). Aside from the benefits, these countries eliminate the tendency of wastage in their experimental ventures. Concentrating in efficient industries can create better results and income. 3. Review of Related Literature Essentially, this section will tackle on the various literatures that will serve as guide throughout the discussions. The segment highlights relevant literatures that are both directly and indirectly influential to the subject discussed. This section will assess the extent of research that has been conducted related to topic. The scope covered by the subject suggests that several explanations were documented before the research came to the period of conception. 3.1. Industry Update The textile sector is considered as one of the pillars that contribute to the stability of economies. At present, textile and clothing is 6 percent of the total global exports. The figure translates to $342 billion, which can provide income and employment. Traditionally, the textile sector is controlled by several developing countries. As time progressed, industrialised countries have already equalised the difference. This turnaround is attributed to several aspects, but competition is the mostly considered factor. Among these developing countries, textile comprises the majority of the economic activities. The numbers make trade restrictions even more compelling (Kearney, 2005). Labour is an important component of the textile industry. In developing countries, most textile manufacturers depend heavily on the manpower that is abundant. In contrast, most developed countries are more focused on technology. This is evident in the huge machines and equipments seen in big producers. Efficient manufacturers, however, balance labour and technology to ensure efficiency in production. 3.2. Textile Industry in EU The big four of EU, which is represented by Germany, United Kingdom, France, and Italy require majority of textiles coming from developing countries. Despite of this, most of the import requirements are being satisfied through intra-trade. Using quality and value as criteria for comparison, EU textiles are better than non-EU textiles (Baden, 2002). While there were significant numbers of employed workers in the textile sector, the level of employment is still dwarfed by the individuals who lost their jobs. There were several manufacturers that went bankrupt because customers shifted their focus on imported textiles. Given the mentioned losses, the textile industry is still valuable because the industry accounts at least 10 percent of the industrial enterprises in EU. The industry is providing average annual revenue of 186 billion Euros. Majority of the countries in EU limit their imports to selected countries. Exporters such as India, Turkey, US, and China are considered as the main providers of textile in the region. Interestingly, the imports from China have been increasing consistently by 15 percent every year since 1990. 3.3. The Presence of China China is known to have the advantages in terms of low-cost and large-scale production. Many analysts including pessimists have predicted that China will eventually dominate the industry once trade quotas are lifted. Although the prediction is made out of long-term considerations, the pace of China's development is phenomenal. Gradually, China has spread its network across the globe and domination is definitely in sight. Because of the threat, U.S. was alarmed and imposed several safeguard measures. Several manufacturers in the US were concerned that their revenue will be greatly affected by the influx of China textiles. China was made to agree with certain barriers that will take effect until 2007 (Barrett and Paris, 2005). EU also followed the move of the US through the creation of various safeguards. The policy was clear indicating that China needs to reduce productivity levels in certain textile products. China, however, was protesting as several textile commodities have already been shipped. 3.4. ATC Phase-out Quotas were implemented to protect domestic producers from being outdone by foreign suppliers. Through the WTO, such perception slowly changed direction. The Agreement on Textile and Clothing (ATC) serves as the most glaring barrier to textile trade. Phasing out ATC was implemented in a systematic process (Delpeuch, 2007). First, some textile products were removed from the list of commodities under quota. The next stage involved the total removal of quotas after a ten-year period ending in 2004. In effect, production levels have increased tremendously and China is expected to be benefited by the strategy. The focus of importation in the textile sector was shifted to low-cost regions. Competition has become the fundamental driver of the ATO disposal. Indeed, developed countries will be pressured to lower textile prices because low cost products are penetrating significantly. Most industrial regions were concerned that the lack of protection will make their own industry suffer and sidetrack their economic progress. 4. Descriptive Data Since the ATC was eliminated, there have been trends showing an increase in the percentage of textile being allocated by China to EU. In 1995, China covered 9 percent of the total textile import requirements of EU. Subsequently, the amount increased to 11 percent as of 2002 (Nordas, 2004). Indeed, questions regarding the reduction of quotas will be raised since the growth was considered as measly. It has to be noted, however, that EU created the restrictions to avoid China from completely dominating the scene. Until today, the China is still in the level as it was five years ago. Because of the protection from EU, China has dedicated most of its textile commodities to Japan and other neighbouring countries. The interesting figure being shown is that the Japan has doubled its requirements for Chinese textiles while some countries in EU upped their demands at minimal rates. Considering the idea of free markets, it is ironic that China has shifted its focus on Japan instead of EU. Quotas are strictly imposed and the tariffs have been increased significantly. In addition, agreements made by EU with China have cut the supply of Chinese textile penetrating the region. Another trend that needs to be presented is the tax equivalent of quotas imposed by EU on China. Currently, China along with India is ranked on the same tax value. This will continue to be sustained because the provision will lapse after another agreement is reached. EU has successfully limited the increase in textile imports from non-EU countries. Less than 1 percent was augmented to the total contribution of textile imports by the mentioned countries. When quotas were implemented, China controls at least 10 percent of the total EU market. It is surprising that after the restrictions were removed, China only managed to increase its market share by 2 percent. It appears that China has concentrated more on more proven markets than EU. Such observation, however, is explained by the numerous barriers created by EU. EU has managed to control the expected domination of China effectively. Although China criticised this strategy, EU is confident that its regional providers will have the capacity to compensate for the deficit in supply. Since trading with China involves more than textile and other related products, EU along with the US were wise to provide a different view in safeguarding their own textile industry. The region will lose more if it pushes for a unilateral decision regarding the increased influence of Chinese textile. What EU did was to initiate market investigations and the results show prevalent market disruption. Since China has conformed to the findings, the Chinese government was pressured to agree with EU by signing Memorandum of Agreements. Stipulations in such accord involved different forms of restrictions designed to prevent China from controlling the EU textile market. Under the agreement, China needs to control the growth in production involving 40% of textile products exported to EU (Cuisson, 2006).China agreed that the growth will be limited from 8 to 12.5 percent with an average annual growth of 10 percent. Logically, China needs to transfer its available textile for EU to other countries. Most important, EU continues to propagate its local textile industry through these agreements. 5. Data Analysis There are three important aspects that have to be analysed to determine the extent of protection being implemented by EU. First, EU devised several schemes that will increase the tariffs on Chinese textile. The idea of this strategy is motivated by the likely low prices in which textiles from China are sold. In a competitive market, price is considered as one of the main determinants of success. Production cost in China is low and the bulk of manpower can produce massive textile products. Therefore, China has the luxury of selling textile products below the average market price. Since EU is disallowed to impose a universal rate on textile tariffs, then it has to approach its partners and create bilateral agreements. In the situation of China, EU has provided higher rates of tariffs since the policy makers are pressured by several local investors. Through these understanding, China needs to comply because EU is recipient of most of its exported commodities. Some Chinese textile exporters, on the other hand, were discouraged to bring their commodities to Europe. EU has succeeded in striking the balance of trade without hurting its relationship with China. In addition, the imposition of tariffs will make Chinese produced textiles at par with EU prices. Tariffs are burden to producers and such can only be unloaded when transferred to the consumers. Since prices are likely similar, EU is confident that the quality of textiles will serve as the deciding aspect. Technology enhanced textile goods manufactured by EU producers are perceived as better in terms of quality. Aside from creating equilibrium in valuation of textiles, EU also included quotas in the import of textile indirectly. Quotas are imposed to limit the quantity of textile products. There are several rationales that make quota imposition an effective safeguard. Logically, limiting the supply of Chinese textile within EU will make it a scare commodity. Using the theory of supply in demand, the lack of available products means that price will go up. Even without directly affecting production cost, the scarcity of textiles from China is enough to shoot up the price. For EU textile manufacturers, such method will allow better competition and expanded choices for consumers. Quotas will ensure that the dominant textile products in the market are made by EU countries. Intra-trade is being promoted because textile from countries in the EU is given free passes. Consumers in the market make decisions out of the capacity of manufacturers to provide adequate supply. With the limited supply of Chinese textile, EU manufacturers can shift their focus on controlling the market. Establishing EU textile products is vital for the region. It is the EU that will be affected once China successfully makes a penetration. Impending unemployment and economic activities loom without the safeguards. Since the influx of Chinese textiles is controlled, small textile producers in EU will be able to compete for other market segments. Increasing the number of players based within the region is necessary. On the other hand, EU needs to ensure that outside players will only be provided with the leftover of the region. Although this goal sounds unethical, EU is only preventing more pressing problems in the future. The most compelling strategy of EU in controlling the dominance of China is manifested through agreements. Definitely, several Chinese textile traders were complaining by this move of EU. China, however, considers EU as crucial partners in trade; thus, having disagreements can affect the economy. On the other side, EU also values the presence of China in several aspects. The cheap goods provided by Chinese manufacturers are helping several industrial firms in Europe. Another important consideration that needs to be considered is that there are several agreements on free trade. The challenge for EU is to act as a facilitator instead of a disruptor in textile trade. In response to these predicaments, EU set up China in forging mutual understandings. The idea of EU is to maintain robust trade with China without China making the decisions in the market. Although several critics view this as a violation of trade pacts, EU perfectly crafted the agreements to agreeable deals. The agreement made by EU centred on the control of production by China. As mentioned previously, China can increase its export to EU by a percentage between 8 to 12.5 percent. The twist in this stipulation lies on the average growth which is only at 10 percent. Furthermore, EU has to make the deal more equal that one-sided. To compensate for the discrepancies, EU has provided rooms for changes in the earlier agreement. Both EU and China were accorded with capacities to negotiate augmentations and reductions in the agreement. Such process allows more interactions and can eventually create better options for both countries to improve their trading relationship. 6. Policy Discussion The WTO through its principles has instructed EU and China to settle their disputes and come up with mutual agreements on trading textiles. It was stated that the deal will be effective until the end of 2008. The policy crafted was precise and involved several stipulations. Part of the agreement has limited selected textile products to experience controlled growth until 2007. To be more specific, the policy has listed 1o of the 35 products of Chinese imports that were liberalised last 2005. These categories were determined after several studies and examinations were conducted by EU in collaboration with the WTO. Another policy that EU implemented was that investigations on these products were stopped. It was discussed earlier that EU determined market imbalance after quotas were lifted and ATC was out-phased. China and EU policy makers agreed on the level of growth for the next three years. Certain figures were included to ensure that consistency is maintained. Since the understanding is two-way, both EU and China are responsible to ensure administrative arrangements for the management of agreed import levels are completed and made known. The policy of created by EU is guided the Textile Specific Safeguard Clause under the ruling of WTO. For EU, three years is given for it to adjust in the new market setting. It is expected that free trade will be in full swing once the agreement has been completed. Accordingly, the average growth in exports for EU has to be in the level of 7.5 percent. Therefore, the policy has substantially allowed Chinese textiles to improve on a higher level. Part of the policy was to allow importers and retailers to plan and make acquisitions in China provided that the purchase is easily predicted and market distortions are prevented. This appears to so restrictive but can generate better options for textile traders. Basically, the policy attempts to ensure that relationships of both China and EU are maintained. The agreement underlines the responsibility that China needs to perform. In the same manner, Europe has to respect the ideas being propagated by trade liberalisation. By adequately conforming to these principles, it is almost a guarantee that the relationship of China and EU will improve further. Moreover, the policy provides leverage for adaptation for manufacturers in developing countries with textile exports to the EU were displaced by the imports from China. Although it appears that EU is only protecting its interest, it is hard to discount that other countries will also be affected by China's surge. Since the focus on textile in on China, it is possible that other suppliers will be ignored. The policy also considers the aspect of balance in making such agreement. Some economies that depend heavily on textile trade have more to lose than China which is starting to become a world economic figure. According to Mandelson (2005), the threat of unemployment is a vital consideration in pushing for the policy. The most logical action for this matter concerns the implementation of a progressive trade policy. Under this strategy, EU will become sensitive of the overall picture instead on concentrating on its own. This only proves that EU seeks to set the balance and ensure that no single country will take advantage. 7. Conclusion EU is in a position where it can harm its trading relationship or destroy its local textile industry. Definitely, EU will address the latter than the former. Establishing a strong textile industry within the region is a primary goal. The textile sector has been employing millions and revenue generated from such activities boosts the economy. Unfortunately, China has some power to influence and EU is in a predicament. To ensure that no further problems will occur, WTO stepped in the scene. From there, an agreement was made and policies were approved by both parties. The core of protecting the textile industry is observed in the growth limitations maintained by the region. EU has computed for the growth level in which China can aspire. Although some insist that this is in contrary to trade liberalisation, EU used figures that show above average targets. Instead on focusing on tariffs and quotas, the policy makers concentrated on the increase of imports being attributed from China. After the agreement, it is important for EU to successfully adjust because liberalisation will take effect. For EU, the challenge is to ensure that the policy will conform to the WTO standards and principles. China also needs to be accorded with ethical procedures with regards to its trading practises. It is good that China and EU made a decision and agreed on the stipulations. EU is expected to continue safeguarding its industry because of economic interests. The region, however, will value China as a trade partner and will sustain the robust relationship that was nearly tarnished because on textiles. References Baden, S. (2002). Prus Working Paper No. 9. "Trade policy, retail markets, and value chain restructuring in the EU clothing sector. Barrett, C. and Paris, C. (2005). Executive Action. "Fighting over fabrics: The textile wars and the politics of free trade." Commission of the European Communities. (2003). COM (2003) Final. "The future of textiles and clothing sector in the enlarged European Union. Cuisson, P. (2006). Interview with Philip Cuisson Deputy Head Unit, Negotiation and Management of Textiles Agreements and Footwear. European Commission. Delpeuch, C. (2007). A Culture pf Evaluation in the Open World. "EU and US safeguards against Chinese textile exports: What consequences on West African cotton-producing countries." Francois, J.F., Glismann, H., and Spinanger, D. (2000). The Cost of EU Trade Protection in Textile and Clothing. Stockholm, Sweden: Ministry of Foreign Affairs. Gereffi, G. (2001). Journal of Textile and Apparel, Technology, and Management. "Global sourcing in the apparel industry." Kearney, N. (2005). Disaster Looms for Textile and Clothing Trade after 2005. International Textile, Garment, and Leather Workers Federation. Krugman, P.R. (1979). Journal of International Economics. "Increasing returns, monopolistic competition, and international trade." Magee, St. P. (1972). Brookings Papers on Economic Activity. "The welfare effects of restrictions on US trade." Mandelson, P. (2005). EU-China Textiles. "Manage change and adjustment and not trade." Ruskin-Brown, I. (1999). Mastering Marketing: A Comprehensive Introduction to the Skills of Developing and Defending Your Company's Revenue. London: Thorogood. Read More