Lunch debate on Chinese textiles on 28th June Chinese Textiles-Undressing the Issues Hylke Vandenbussche Professor Faculty of Economics and Applied Economics Catholic University of Leuven

Lunch debate on Chinese textiles on 28th June The Facts In 1995: Multi-Fiber Agreement ( ) which offered protection to the Textiles/Clothing industry in developed countries December 2001, China entered the WTO, giving it preferential market access to other WTO members Since January 2005: huge increase in Chinese textiles/clothing exports worldwide March 2005: complaints from the EU Textiles federation about Chinese unfair practices and call for protection June 2005: EU-China Agreement: export growth is limited but only for 3 years. By 2008 trade will be fully liberalized again. This type of protection is admitted under WTO since following the entry of China in the WTO, China agreed to allow countries to impose temporary limits on exports of textile and clothing for three years should markets become distorted.

Lunch debate on Chinese textiles on 28th June What products are we talking about ?

Lunch debate on Chinese textiles on 28th June Question 1: Does the strength of the European Economy really lie in the production of T-shirts, pullovers and flax yarn ?

Lunch debate on Chinese textiles on 28th June How bad is the current situation in the EU textile/clothing ? Pretty bad! Many jobs at risk Around 2 million employed in EU15 alone! countryEmployment Belgium Germany Spain France UK Italy

Lunch debate on Chinese textiles on 28th June How bad is the current situation? This sector represents around (2003) firms in EU 200 bn Euros annual sales 5 bn Euro investment figure 68 bn Euro annual imports 42 bn Euro annual exports (negative trade balance!)

Lunch debate on Chinese textiles on 28th June Where are the textiles firms located in Europe ?

Lunch debate on Chinese textiles on 28th June Evolution of Employment in EU15

Lunch debate on Chinese textiles on 28th June Evolution of number of firms in EU15

Lunch debate on Chinese textiles on 28th June Did EU Commission strike a good deal ? Yes ! I believe so Temporary protection, when CREDIBLE, can induce firms to reorient their production towards other types of products in which Europe can have a leading edge Research by Vandenbussche et al. (2005) is the first to show that temporary trade protection results in more restructuring and innovation than under Free trade

Lunch debate on Chinese textiles on 28th June A good deal for EU ? BUT!! For this to work it is important that firms know the protection is TEMPORARY and the government is serious about liberalizing afterwards. If the government is subject to lobby powers than firms have an incentive to innovate less in order to convince the government they need more protection to survive. This is what happened during the Multi-Fiber Agreement: Textile firms in EU had 10 years ( ) to prepare for liberalization, but their efforts have not been sufficient. Strong lobbying on behalf of the Textiles Federation has now gained them extra time.

Lunch debate on Chinese textiles on 28th June Are the Chinese doing something ‘unfair’ or are they just very good at producing t-shirts? The Chinese comparative Advantage: Low wages Long working hours Specialization in mass textiles Hard working  …yes! They are very good at this! Should we deny them their comparative advantage ?

Lunch debate on Chinese textiles on 28th June Unfair Chinese ? Subsidization ? Allegation: Chinese firms are being subsidized in a direct and indirect way (cheap loans, no tax collection, cheap utilities,…) Solution: when there is direct subsidization, the WTO has a legal tool: Countervailing duties (5 year tariffs) When there is indirect subsidization: harder to prove and WTO tools are limited

Lunch debate on Chinese textiles on 28th June Unfair Chinese ?  Lessons from Central-Europe: governments of former communist countries have a tradition of subsidization and government steering of the economy. They find it hard to suddenly commit to ‘hard budget constraints’. A tariff on EU side can help governments to get the necessary commitment to reduce subsidization. Since a tariff by the EU will hurt Chinese exporters (Everaert & Vandenbussche, 2001, LICOS working paper,”Does protection harden budget constraints?”)

Lunch debate on Chinese textiles on 28th June Child labor and no environmental standards Should the West put a stop to this ?  No, income of children for some families is only way to survive (Daems !) But market forces will make sure that as China develops further, child labor is bound to die out. As families get richer, children are the first ones to pull out of the labor market (Pavnic and Edmonds 2005, Journal of International Economics) And the same applies for environmental standards.

Lunch debate on Chinese textiles on 28th June Is there a future for textiles in Europe ? Yes! But in different types of products: high value added type of textiles that require R&D and innovation (construction, protective clothing, medical uses,…) Instead of a ‘threat’ we should see China as an ‘opportunity’ with a market of 1 bn consumers it offers a lot of possibilities for the EU provided we operate in different types of goods and sectors This will require substantial restructuring and perhaps downsizing of the textiles sector in EU, but this is an adjustment phase. For those that will no longer be employed in textiles can engage more in service type of jobs where most of the growth of the EU economy is. Basic course in Management accounting suggests one of two succesful strategies for firms 1) compete in costs; 2) differentiate products. Wrt the Chinese we whould engage in vertical product differentiation and compete in quality

Lunch debate on Chinese textiles on 28th June Conclusion Textiles industry had more than 10 years to restructure since they knew Multi-Fiber was ending but they did not sufficiently do so Government was not very credible in terms of ending date of protection, I hope they will be in 2007 and give a strong signal to textiles industry they will be ! China has a comparative advantage in this type of textiles therefore we should not try to cost compete with them but instead move into higher value added textiles T-shirts, socks, pullovers and flax yarn is not our future !

Lunch debate on Chinese textiles on 28th June Conclusion Thank you for your attention ! Questions and Comments ?