Faced with the threat of action by the US government and other countries, the Chinese government is voluntarily restricting its textile and clothing exports. But the measures adopted will do little to stem the surge in exports to Western markets, according to the latest issue of Textile Outlook International.

Taxes on textile and clothing exports were imposed by the Chinese government with effect from January 1, 2005, and will last until the end of 2007. The taxes will raise export prices and hence curb demand for Chinese goods in world markets.

The new taxes will also go some way towards replacing the revenue lost by the Chinese and other governments when quotas on international textile and clothing trade between member countries of the World Trade Organisation (WTO) were eliminated at the end of 2004.

Although quotas hindered export growth and hence industry development, they restricted supplies and therefore forced up prices. The additional revenue generated by higher prices was an important contributor to the economy in China and in many poor developing countries.

By the same token, quota elimination will cause supplies to increase and export prices to fall. The effect will be a transfer of wealth in the form of lower prices from companies and governments in poorer countries to retail buyers and Western consumers in richer countries.

The new Chinese export tax goes some way towards reducing the extent of this wealth transfer. But the tax is low, and the extent of the clawback is limited.

A further consequence of the Chinese export tax is that it will drive Chinese producers upmarket. This is exactly what the Chinese government wants, but is the worst outcome for Western producers.

The export tax will be applied on a volume basis, as a fixed renminbi value per garment or per ton, depending on the product. So, for high value products the tax will represent a relatively low percentage of the selling price. But for low value mass market products -- such as briefs -- the tax will account for a relatively high percentage of the selling price and force producers upmarket.

In the highly competitive market of 2005 and beyond, the margins on low value products will be squeezed further. Chinese manufacturers will be forced to move over to the manufacture of higher value products, and to enter the territory which companies in Western industrialised countries had hoped to reserve for themselves.

If prices do start to tumble, the margins of Chinese exporters could be seriously eroded. Fearful of the prospect, about 50 major textile and clothing exporters have agreed to set up six price coordinating panels which will keep an eye on export orders. The panels will oversee exports of textiles and clothing in six categories, comprising 148 individual product types, covering outerwear, dresses, trousers, knitted and non-knitted shirts and blouses, sleepwear and underwear, socks, and cotton sheets.

The panels will establish floor prices for the products but will not fix actual prices. Instead, prices will be adjusted by the 50 companies from time to time.

As for the export taxes, US manufacturers argue that they will do little to limit the huge competitive advantage of Chinese textile and garment exports.

In fact the Chinese government may be forced to increase them in order to head off further quotas by importing countries. The danger is that, if the export taxes go a lot higher, China’s textile and clothing industry could start to lose out to strong Asian competitors such as India and Pakistan.

Despite the Chinese government’s efforts at self-restraint, all predictions about China’s future point in the same direction: Chinese exports of items such as men’s T-shirts, men’s casual shirts, women’s summer dresses and girls’ summer wear are expected to grow dramatically now that quotas have been eliminated.

In 2001, before China joined the WTO, US buyers obtained only 6% of their garments directly from China in volume terms. But in the two years following WTO membership, that share doubled to 12%.

Most worrying for the Western world is China’s proven ability to capitalise on quota removal. On January 1, 2002, 29 categories of Chinese apparel were freed from quota. In 2001, before quotas were eliminated, China supplied only 9.2% of the US import market for these categories. But by 2003 that share had soared to 52.0%. Further analysis shows that US imports of these items from China soared by 729% between 2001 and 2003 whereas US imports of the same 29 categories from the rest of the world fell by 23%.

If anything stops the surge in Chinese textile and clothing exports it will be challenges such as inadequate and intermittent power supplies, and shortages of labour and raw materials.

Shortages may well have been a factor in the decision of the Chinese authorities to apply its own restraints to exports—in the interests of maintaining orderly growth.

The Chinese authorities are also well aware that internal competition among Chinese manufacturers is becoming more intense as producers fight for export orders. Such competition is already driving down prices, especially at the bottom end of the market.

If China’s export taxes did drive domestic producers upmarket, this would take some competitive pressure off the world’s least developed countries such as Bangladesh. But it would represent a worst-case scenario for struggling producers in high wage countries.

High wage producers would be forced to fall back on their only remaining competitive weapons: design, innovation and quality, and the ability to supply lean retailers on a quick response basis. But even in these areas, the Chinese are fast catching up.