China Distribution & Trading - Fung Group Distribution & Trading Issue 11 January 2004 ... a...

1Issue 11 January 2004

China Distribution & Trading Issue 11 January 2004

IN THIS ISSUE :

Li & Fung Research Centre

13/F, LiFung Centre

2 On Ping Street

Shatin, Hong Kong

Tel: (852) 2635 5563

Fax: (852) 2635 1598

E-mail: [email protected]

New Rules of the

Game - China’s Textile

and Apparel Industry in

International Trade

On 18 November 2003, the US Department of commerce

announced that the US would resume the quota system on

three types of textile imports from China, namely, knit fabrics,

bras, and dressing gowns and robes. Donald Evans, the US

Secretary of Commerce holds that ‘the America carries out fair

competition’ and that the ‘lack of reciprocity’ is the root cause

of friction in the Sino-US trade relation. However, the Chinese

Ministry of Commerce insists that the US decision does not

conform to CITA’s (the US Committee for the Implementation

of Textile Agreement) procedure on special safeguards against

Chinese textiles and apparel, and the pledges contained in

the Working Group1’s report on China’s WTO accession.

Such trade dispute between China and the US is no surprise,

even after China has become a WTO member and is,

supposedly, under a much more liberalized trade regime than

before...

I. Introduction

China’s exports of textiles and apparel have been restricted by

other countries in the form of quotas under various bilateral

and multilateral agreements since 1957. The Agreement on

Textile and Clothing (ATC) provides for the termination of quotas

among the World Trade Organization (WTO) member countries.

It is an agreement to phase out the Multi-Fibre Arrangement

(MFA) and remove all quotas by 1 January 2005.

As the demand for Chinese manufactured textiles and apparel

have already exceeded the supply of quotas available, and as

prices of China’s exports are extraordinary competitive, it is

I. Introduction 1

II. The international trade regime 2for the textile and apparel industry

III. New Trade Barriers in the 4‘Free Trade’ Era

IV. Overview of trade barriers 7facing China

V. Why so many safeguards measures 8are initiated against China?

VI. Impacts of the protective trade 9barriers on China

VII. Circumvention - A counter-measure 11of the Anti-Dumping charges

VIII. How can China respond to the 11new trade protectionism:Effective counter-measuresat the government level

IX. How can China respond to the 15new trade protectionism:Effective counter-measuresat the enterprise level

1 For reference, the Special Textile Safeguard is stated in paragraph 241 and 242 of

the Working Group report.


China Distribution & TradingLi & Fung Research Centre

almost certain that China’s export of textiles and apparel

to other countries, especially to the US, will explode in

2005. Many firms, China local, Hong Kong, Taiwanese,

Korean, etc. have already been building up production

capacity in China in anticipation of 2005. Buyers will place

orders in 2004 to be shipped quota-free in January 2005.

The upturn in quantities from January 2005 should be

seen as immediate.

However, although China is now a WTO member and

that the ATC applies, China is under a set of rules different

from all other countries. The Accession Agreement

signed by China in December 2001 explicit ly

acknowledges the possibility of safeguard actions and

other protective trade barriers after 31 December 2004

against China as a new member of the WTO. Moreover,

it is expected that other implicit protective trade measures

may also be used against Chinese exports. How China

should respond to the new international trade

environment becomes a key issue that China has to

address.

The first part of the essay presents an overview of the

international trade regime for the textile and apparel

industry, in particular, the new protective trade barriers

facing China in the post-WTO era. It then assesses the

impact of the new trade barriers, especially those

imposed by the US, on the economy and the textile and

apparel industry in China. The third part gives a number

of suggestions as to how the Chinese government and

the private sector could respond to trade protectionism,

and work together to strengthen China’s position in the

international trade arena.

II. The international traderegime for the textile and

apparel industry

1. The Multi-Fibre Arrangement

(MFA) Period (1974-1994)

Since 1974 world trade in textiles and garments has been

governed by the rules of the Multi-Fibre Arrangement

(MFA). During the MFA period (1974-1994), textile quotas

were negotiated bilaterally. This provided for the

application of selective quantitative restrictions on the

exports of most textile products to certain importing

countries, most notably, the US, EU and Canada.

These trade measures were viewed as necessary and

reasonable by the developed countries because the

labour-intensive nature of the textile and apparel

industries meant that the products of developing

countries would be highly competitive and would present

a major disruption to their domestic industries which are

much less competitive. The MFA was brought in as a

supposedly short-term measure, to give the developed

countries a breathing-space to allow their own industries

to restructure. The MFA did not apply to trade among

rich industrialized countries. For example, export of

apparel from Italy to the US would not be restricted.

The MFA greatly hindered the expansion of textile and

apparel exports of developing countries. It is estimated

that some developing countries have lost millions of

dollars of foreign exchange due to trade restrictions.

However, the MFA still could not reverse the trend

towards the relocation of textiles and apparel production

to developing countries. Nowadays, Asian countries are

the world’s biggest exporters of textile and apparel

products.

The MFA was a major departure from the basic GATT

rules and particularly the principle of non-discrimination

(or ‘Most Favoured Nation’ principle). On 1 January 1995

it was replaced by the WTO Agreement on Textiles and

Clothing which sets out a transitional process for the

ultimate removal of these quotas over a 10 year period.

2. The Agreement on Textiles and

Clothing (ATC) Period (1995-2004)

At the General Agreement on Tariffs and Trade (GATT)

Uruguay Round it was agreed that international textiles

and clothing trade should be integrated fully into GATT

rules, or the new WTO rules. The new WTO rules were

designed to encourage the expansion of international

trade through progressive removal of quotas and tariffs.



The protectionist policies under the MFA could not be

sustained within this framework. The Agreement on

Textiles and Clothing (ATC) was thus signed and entered

into force in January 1995 to replace the MFA.

According to the ATC, the quota restriction in international

textile and apparel trade is to be terminated over a 10-

year transitional period and the tariffs on such products

are also to be progressively reduced. The ATC applies

to all WTO members whether or not they are signatories

to the MFA. The phasing out of quota restriction is to be

achieved through two mechanisms: 1) product

integration, meaning the removal of textile and apparel

products from the product coverage of quotas, and; 2)

acceleration of growth rates of quotas still in effect during

the transition period. The mechanisms would be

implemented in four stages, from 1995 onward. The

below exhibit details the four stages:

Exhibit 1: Stages of Product Integration and Accelerated Growth of Annual Quotas under the ATC

Minimum percentage of textile

and apparel imports to be integratedMinimum percentage increase to be

(based on the respective 1990applied to annual quota growth rate

Stage Implementation Date import volume) Major suppliers Small suppliers*

1 1 January 1995 16% 16% 25%

2 1 January 1998 17% 25% 27%

3 1 January 2002 18% 27% 27%

4 1 January 2005 Full integration of the textile and apparel sector into GATT/new WTO rules

Note: * Those countries that supplied less than 1.2% of an importing country’s total quotas in 1991.

Source: Compiled from the Agreement on Textiles and Clothing, Internet address http://www.wto.org/.

To protect importing countries from being flooded by

cheap imports, the ATC includes a special transitional

safeguard provision, which could be applied to products

not yet been integrated into the GATT and which are not

already under quota. An importing country is allowed to

impose new quotas against individual exporting countries

provided that it can prove that imports of the specific

products are causing or threatening to cause serious

damage to its local industries. However, this special

safeguard mechanism will be replaced by the WTO

general safeguard rules that are non-discriminatory in

nature in 2005.

Besides, the ATC includes provisions to cope with

possible circumvention of commitments through illegal

transshipment, re-routing, false declaration concerning

country or place of origin and falsification of official

documents. The agreement also includes commitments

of increasing market access by WTO members.

However, the integration process within the ATC has

been far from satisfactory. The ATC requires the

integration of a designated percentage of all imports,

not a percentage of the previously restricted imports.

This allows the importing countries to “integrate” products

that were not restricted in the first place, as was the case

in the first stage of integration when most importing

countries included many products that were already

unrestricted. Also, although the integration list must

encompass products from each of the four groupings:

tops and yarns, fabrics, made-up textile products and

clothing, the ATC did not stipulate the proportions in which

the four product groups are to be integrated. Thus, the

ATC allows the importers to liberalize largely in the lower

value-added sectors, and to maintain discrimination

against higher value-added imports and protect their own

value-added apparel industries. It is generally believed

that the most sensitive quota products, such as T-shirts,

men’s shirts, ladies’ blouses, jeans, etc. will only be

integrated on the last day of the ATC.



3. China’s WTO Accession

China became a member of the WTO on 11 December

2001, which has far-reaching implications for her textile

and apparel industry. First, all restrictions regarding the

international trade of China’s textile and apparel products

are integrated into the ATC framework. Second, China’s

trade disputes with other WTO members will have to be

negotiated under a third party multilateral Dispute

Settlement Body, which ensures that China enjoys non-

discriminatory access to foreign markets on predictable

terms. It provides, through consultations and dispute

settlement, a coherent system based on rules, norms

and procedures rather than on the unilateral exercise of

economic leverage.

As parts of its WTO entry package, China has agreed to

significantly liberalize the market access of foreign

products, adopting measure such as lowering import tariff

rates, eliminating other trade barriers like import licensing

and quotas. Besides, China has committed to phase out

her import tariffs on textile and apparel products.

Uncertainty remains as other WTO members are allowed

to invoke special safeguards or other protective trade

measures against China’s imports under China’s Protocol

of Accession, which contains concessions made by

China to obtain her WTO membership status. In other

words, on top of the ATC framework, some forms of trade

barriers can be imposed on China’s textile and apparel

exports. Two major anti-surge mechanisms, namely, the

“Special Textile Safeguard” and the “Product Specific

Safeguard” will be discussed later.

III. New Trade Barriers in the‘Free Trade’ Era

1. Anti-surge mechanisms - China’s

concession in her WTO entry

To secure the bilateral agreement with the US, some

anti-surge mechanisms to restrict China-origin imports

in the form of “Special Textile Safeguard” and “Product

Specific Safeguard” were put in place. Given that all WTO

members enjoy the Most Favoured Nation treatment, the

anti-surge safeguards are not confined to the Sino-US

trade but are also applicable to trade between China

and all other WTO members.

i. Special Textile Safeguard

Under this provision, China allows, until the end of 2008,

the WTO members to restrain imports of textiles and

apparels from China due to “market disruption,

threatening to impede the orderly development of trade

in these products”. The safeguard provision covers all

textile and apparel products under the ATC. As soon as

a request for consultation of such safeguard is launched

by an importing country with WTO membership, China

has to limit its exports to that country at a specific level,

so that shipments from China shall not rise by more than

7.5% (6% for wool products) “in the first 12 months of

the most recent 14 months preceding the month in which

the request for consultation was made.” The restriction

shall be removed by the end of the year or after a 12-

month period if the request for consultation has been

made known less than three months before the end of

the year.

ii. Product Specific Safeguard

This safeguard lasts for 12 years from China’s WTO

accession in 2001, allowing other WTO members to

address to the rapid increase of the imports of specific

products from China in a targeted fashion if they consider

those imported products have disrupted or will disrupt

their market. In additional, a third country with WTO

membership can also initiate this safeguard measure

against China if it believes that China’s exports has

displaced or threaten to displace its market share in an

importing country.

This safeguard measure applies up to 3 years to any

product from China, including textiles and apparels. The

restrictions could be of any kind, such as tariffs and

quotas.



2. Other new Trade Barriers

In response to the restrictions of imposing tariff, quota

and license requirements as agreed in the international

trade agreements, countries can resort to other more

implicit trade protective measures to improve their trade

balance and to protect their domestics industries from

China. Major protective trade measures are listed below.

i. Anti-Dumping (AD)

If a company exports a product at a price lower than the

price it normally charges in its own market (which is called

the ‘normal value’), it is said to be “dumping” the products.

Many countries take action against dumping in order to

defend their domestic industries.

The “Anti-Dumping Agreement” of WTO disciplines

countries’ Anti-Dumping actions. According to the

agreement, governments can act against foreign

dumping where there is significant (“material”) injury to

the domestic industries. In order to do so the government

has to be able to show that dumping is taking place,

calculate the extent of dumping (how much lower the

export price is compared to the exporter’s home market

price), and show that the dumping is causing or

threatening to cause injury. The agreement provides

three methods to calculate a product’s “normal value”.

The main one is based on the price in the exporter’s

domestic market. When this cannot be used, two

alternatives are available - a calculation based on a

combination of the exporter’s production costs, other

expenses and normal profit margins, or, in case a country

is deemed not to be a ‘market economy’, the price

charged by the exporter in another surrogate country

may be used.

A detailed investigation has first to be conducted

according to specified rules before any measure is taken.

The investigation must evaluate all relevant economic

factors that have a bearing on the state of the industry in

question. If the investigation shows that dumping is taking

place and that the domestic industry is being hurt, the

exporting company can undertake to raise its price to an

agreed level in order to avoid Anti-Dumping duties.

Otherwise, Anti-Dumping measures will be taken, which

is normally in the form of charging extra import duties on

a particular product from the particular exporting country

to bring its price closer to the “normal value” and to

remove the injury to the domestic industry in the importing

country. The Anti-Dumping investigation will end

immediately in cases where the authorities determine

that the dumping margins are insignificantly small or that

the volume of dumped imports is negligible.

Anti-Dumping measures must expire five years after the

date of imposition, unless an investigation shows that

ending the measure would lead to injury to the importing

countries. The agreement also says member countries

must inform the Committee on Anti-Dumping Practices

about all preliminary and final Anti-Dumping actions,

promptly and in detail. They must also report on all

investigations twice a year. When disputes arise,

members are encouraged to consult each other. They

can also use the WTO dispute settlement procedures.

ii. Countervailing Duties (CVD)

Countervailing Duties are offsetting duties similar to Anti-

Dumping duties, except that these duties seek to

counteract subsidies conferred by foreign producers or

exporters by way of illegal bounties or grants which can

come in any number of forms, such as preferential

financing or tax credits.

The WTO Agreement on Subsidies and Countervailing

Measure disciplines the use of subsidies, and it regulates

the actions countries can take to counteract the effect of

subsidies. A country can use the WTO dispute settlement

procedures to seek the withdrawal of the subsidies or

the removal of its adverse effects. The country could

also launch its own investigation and ultimately charge

extra dues (known as “countervailing duty”) on subsidized

imports that are found to be hurting domestic producers.

The agreement only applies to specific subsidies, which

refers to subsidies available only to an enterprise, an

industry, a group of enterprises, or a group of industries

in the country that gives the subsidy. The agreement

defines two categories of subsidies: prohibited and

actionable.



Prohibited Subsidies:

Subsidies that require the recipients to meet certain

export targets, or to use domestic goods instead of

imported goods. They are prohibited because they are

specifically designed to distort international trade, and

are therefore likely to hurt other countries’ trade. They

can be challenged in the WTO dispute settlement

procedures. If the dispute settlement procedure confirms

that the subsidy is prohibited, it must be withdrawn

immediately. Otherwise, the complaining country can

take counter measures. If domestic producers are hurt

by imports of subsidized products, countervailing duty

can be imposed.

Actionable Subsidies:

In this category, the complaining country has to show

that the subsidy has an adverse effect on its interest.

Otherwise the subsidy is permitted. The agreement

defines three types of damage they can cause. One

country’s subsidies can hurt a domestic industry in an

importing country. They can hurt rival exporters from

another country when the two compete in third market.

And domestic subsidies in one country can hurt exporters

trying to compete in the subsidizing country’s domestic

market. If the Dispute Settlement Body rules that the

subsidy does have an adverse effect, the subsidy must

be withdrawn or its adverse effect must be removed.

Again, if domestic producers are hurt by imports of

subsidized products, countervailing duty can be imposed.

Subsidies may play an important role in developing

countries and in the transformation of centrally-planned

economies to market economies. Least-developed

countries and developing countries with less than

USD1,000 per capital GNP are exempted from

disciplines on prohibited export subsidies. Other

developing countries are given until 2003 to get rid of

their export subsidies. Least-developed countries must

eliminate import-substitution subsidies by 2003 - for other

developing countries the deadline was 2000. Developing

countries also receive preferential treatment if their

exports are subject to countervailing duty investigations.

For transition economies, prohibited subsidies had to be

phased out by 2002.

iii. Technical Barriers to Trade (TBT)

Under the WTO regime, the use of Technical Barriers to

Trade (TBT) is regulated by the TBT Agreement. The

prime objective of this agreement is to ensure that “no

country should be prevented from taking measures

necessary to ensure the quality of its exports, or for the

protection of human, animal, and plant life or health, of

the environment, or for the prevention of deceptive

practices, at the levels it considers appropriate”. On the

other hand, it also seeks to ensure that technical

negotiations and standards, as well as testing and

certification procedures, do not create unnecessary

obstacles to trade.

The TBT Agreement takes into account the existence of

legitimate divergences of taste, income, geographical

and other factors between countries. For these reasons,

the agreement accords to members a high degree of

flexibility in the preparation, adoption and application of

their national technical regulations However, members’

regulatory flexibility is limited by the requirement that

technical regulations “are not prepared, adopted and

applied with a view to, or with the effect of, creating

necessary obstacles to trade”.

The agreement encourages countries to use international

standards where these are appropriate, but it does not

require them to change their levels of protection as a

result of standardization. For many years, technical

experts have worked towards the international

harmonization of standards. An important role in these

efforts is played by the International Standardization

Organization (ISO), the International Electrotechnical

C o m m i s s i o n ( I E C ) a n d t h e I n t e r n a t i o n a l

Telecommunication Union (ITU).

Today, environmental protection has received

unprecedented attention and the Green Trade Barrier

(GBT) is commonly adopted in international trade,

especially in trading textile and apparel products.

Developed countries have already drawn up laws to

ensure the environment is protected in the production of

textile and apparel products. Any imported textiles and

apparels must now pass a strict examination. For



In the future, it is expected that more countries, not only

the developed countries but also the developing countries

such as India and Argentina, will initiate Anti-Dumping

cases against China. The products and dollar amounts

involved in the Anti-Dumping cases also show an

increasing trend. In the eighties, the dollar amount of

most Anti-Dumping cases were around hundred

thousands US dollars. However, in the nineties, cases

of millions US dollars were very common.

China has been losing a lot of business opportunities

because of the Technical Barriers to Trade. A survey

conducted by the Ministry of Commerce shows that the

exports of six major Chinese industries (agricultural

products, light industry, electromechanical, textile and

wear, mineral and metals and chemical, and medial and

health) were subject to technical barriers, suffering a loss

of US$9.5 billion, US$4.1 billion, US$1.7 billion, US$1

billion, US$700 million and US$300 million respectively.

The Technical Barriers to Trade is likely to exert a more

serious effect on the exports of labour-intensive products

where China is very competitive.

2 On January 1st 2002, the State Council promulgated the PRC Anti-Dumping Regulations and the PRC Safeguard Measures Regulations, which replaced the 1997 ones.

This was then followed by the promulgated of a series of procedural rules by the ministries involved (SETC and MOFTEC).

Exhibit 2: Anti Dumping (AD) Initiation and Measures against China, 1995-2002

AD Initiation AD Measures Taken

Reporting members to China to the world to China to the world

India 62 331 44 219

United States 42 292 32 192

European Community 40 267 24 164

Argentina 39 180 29 120

South Africa 15 160 13 107

Australia 14 155 3 40

Turkey 13 45 11 33

Others 83 730 56 383

Total 308 2160 212 1258

Source: World Trade Organization

example, some developed countries have drawn up laws

requiring imported textile and apparel products to pass

the ISO14000 - an environmental protection standard.

IV. Overview of trade barriers

facing China

Statistics indicate that China has been saddled with the

largest number of anti-dumping charges. Since the

1990s, every one-in-six anti-dumping and safeguard-

measure cases have involved Chinese products.

By the end of October 2002, 544 cases of anti-dumping

and safeguard-measure investigations in 33 countries

and regions have involved China, with commodities worth

US$16 billion at stake, according to official statistics. For

its imports, China has only initiated 21 anti-dumping

investigations against foreign exporters since 1997, when

China enacted her Anti-Dumping and Anti-Subsidy Law2.

The exhibit below shows that China accounted for one-

sixth of the total Anti-Dumping Measures from 1995 to

2002. The Anti-Dumping lawsuits were mainly brought

by India, the United States, the European Community

and Argentina, which accounted for 20%, 13.6%, 13%,

and 12.6% of the total initiated cases respectively.



With regard to the Green Trade Barrier, the environmental

standards of more than 70% of China’s products are

lower than those of the European Union (EU). The

Chinese government and enterprises have not placed

great emphasis to environment-related matters or the

rising environmental standards of imports. In such

conditions, many Chinese exports are refused due to

their low environmental qualification.

According to the Ministry of Foreign Trade and Economic

Cooperation (MOFTEC, now part of the Ministry of

Commerce), some new standards set by a number of

WTO members, developed countries in particular, are

increasingly limiting China’s expansion of exports. The

new standards these countries resort to include technical

standards, inspection and quarantine measures,

requirements for intellectual property protection, customs

requirements, environment protection as well as labour

standards.

V. Why so many safeguards

measures are initiated

against China?

1. Non-Market Economy (NME)

designation

Since China is not regarded as a market economy

country, a third country “analogue” market economy has

to be selected to establish the ‘normal values’ when

calculating the Anti-Dumping margin and assessing the

export subsidies of China. Such an approach of

determining dumping and subsidization will apply for 15

years from the date of China’s WTO accession, unless

China can show evidence that the market economy

conditions prevail in a particular industry or sector.

The non-market economy approach in determining

dumping and subsidization puts China in an unfavourable

situation and is easily abused by other countries. For

example, European Court (EC) has selected Mexico as

one of the third countries to determine Chinese products’

normal values.

.

2. World’s manufacturing powerhouse

and major exporting and importing

country

Despite a stagnant world economy, China’s total value

of import and export reached USD620.8 billion in 2002,

much better than most countries. The export value in

2002 grew by 22.3% to reach USD325.6 billion, and the

import value was USD295.2 billion, up by 21.2%.

Besides, China has enormous manufacturing capability

in low and middle-end goods. Given the abundant pool

of low-wage workers, China enjoys great comparative

advantage in producing such products. Both the price

and quality of the China’s exports are highly competitive

in the wor ld market . Fac ing the increas ing

competitiveness of Chinese products, to protect their

domestic industries and improve their trade balance,

many foreign countries are inclined to impose protective

trade barriers on Chinese products.

3. The fading out of traditional

protective trade measures

The idealistic notion of globalization and free trade is

increasingly being challenged by the worldwide economic

stagnation. Since the imposition of traditional protective

trade barriers such as tariffs, quotas and licenses are

restricted by the WTO agreement, many countries have

to resort to others trade measures like Anti-Dumping,

Countervailing Duties, Technical Barrier of Trade, etc. to

protect their domestic industries from the influx of

Chinese products.

4. Unsound legal footing

China was first charged with Anti-Dumping in 1979.

However, not until 1997 did the Chinese government

issue its first Anti-Dumping and Anti-Subsidy Law, which

enabled the MOFTEC to conduct Anti-Dumping

investigations against foreign exporters. Also, in light of

her WTO entry, China is obliged to bring its domestic

legislations and trade practices in line with the WTO

standards. Thus, there is an urgent need for China to

further develop and improve her legal system.



2. More and more trade measures

against China are expected

(i) Initiation of trade measures against China by other

countries due to trade diversion

The US trade measures restricts the surge in exports of

textile and apparel products from China. China may then

have to turn to other markets to absorb its production

capacity. However, the influx of imports from China will

in turn pose considerable pressure on other countries’

local manufacturers. China will also run into head-on

competitions with those countries which have been

exporting to the same markets. The chain reaction will

go on and new rounds of trade protective measures

against China are thus highly likely. If China fails to handle

the situation properly, the worst scenario is that China’s

textile and apparel products will be forced to exit most of

their foreign markets.

(ii) Comparative advantage on textile and apparel

industry

It is expected that the prices of China’s exports of textile

and apparel will be further lowered with the phasing out

of quotas in 2004. Given that China will continue to be

treated as a non-market economy when determining if

she is ‘dumping’ her products, the lower prices and thus

higher ‘dumping margins’ will surely invite more countries

to initiate antidumping measures against China.

3. Investment Incentives in China

harmed

China is fast becoming the global manufacturing

powerhouse. To enjoy the low manufacturing costs, many

foreign investors have invested in China’s manufacturing

industry and then export the products to other countries.

Given that products manufactured in China may at any

time be arbitrarily restricted or even banned from entering

the foreign markets, foreign investment incentives in

China will be greatly harmed. This is particularly true

since China is perceived to be particularly vulnerable to

foreign trade charges and actions. For example, the

safeguards provision leaves open the possibility that

there will still be quotas on some Chinese textile and

apparel products in the post-2004 era. The US political

situation adds to the uncertainties of the Sino-US trade

relations, which further discourages the US firms from

relocating production to China.

4. Unfavourable trade position of

China in the world market

Discriminative trade polices have been applied on China

even after her WTO entry. On 21st May 2003, the US

announced, and incorporated into its internal legal

system, a dispute settlement process for safeguard

charges against China. This dispute settlement process

in many ways exceeds China’s WTO commitments and

thus further pushes China to a more unfavourable trade

position. China’s exporters will then be even more

vulnerable to the abuse of trade measures by the US

enterprises.

First, the US has not clearly defined the term “market

disruption”, which leaves plenty of room for manipulation.

Final judgment could be made even without convincing

and objective supporting information.

Second, the dispute settlement process not only allow

those US manufacturers which are directly competing

with Chinese exporters, but also other US parties, such

as trade unions, labour unions and component

manufacturers, to initiate trade charges against China’s

exporters.

Third, according to China’s WTO commitments, the

Special Textile Safeguard can only last for one year.

However, under the new dispute settlement process, the

safeguards measures remain effective until an objection

is raised.

As for all other WTO members, they are also protected

by the safeguards agreement on China’s exports even if

they do not internalize the safeguards provisions into

their legal systems.



VII. Circumvention - A counter-

measure of the Anti-

Dumping charges

‘Circumvention’ refers to the circumvention of Anti-

Dumping rules. The major ways that international

exporters have been using to avoid being accused of

Anti-Dumping or charged the Anti-Dumping duties are:

1. Assembling done in the importing

countries

Exporting only the components and parts of the final

products - The rationale is that components and finished

products are usually treated under different categories

according to the customs rules of many countries.

2. Assembling done in third-party

countries — Transshipment

The final stage of production is done in another country

- and thus the goods will be viewed as exports from that

country but not the country charged with Anti-Dumping.

3. Slightly changing the products

Changing only the appearance or form of the product

but not its functions, nor will it affect consumer’s

purchasing decisions - and then the product no longer

fits the descriptions of the goods which are to be charged

the Anti-Dumping duties.

4. Product development at a later

stage

Changing the functions of the product using new

techniques and technologies - This turns the product into

a new product which exists only after the investigation

process of the Anti-Dumping case.

As Circumvention has become prevalent in international

trade, a number of countries have established their ‘Anti-

Circumvent ion’ laws, among which the Ant i -

Circumvention laws by the US and the EU are the most

comprehensive and well-established. These laws render

the use of Circumvention ineffective and have great

impact on China’s trade and investment.

More effective, long-term counter-measures are

therefore being called for.

VIII. How can China respond to

the new trade

protectionism: Effective

counter-measures at the

government level

A. Internal Policies

1. The government has been

speeding up the enactment of laws

and regulations on fair trade for

imports and exports.

The government should encourage domestic enterprises

to follow the WTO rules when competing in the

international market, and penalize those who do not

conform to the WTO rules. In fact, there are still quite a

number of small export-oriented enterprises which resort

to below-cost price competition to gain market share.

These enterprises will only tarnish the image of the rest

of the Chinese enterprises in the international market.

2. The government should further

promote the marketization process

of the Chinese economy. Market

reform should be accelerated.

Besides, the government should guide and help the

Chinese enterprises to establish modern accounting

standards so that a complete and accurate set of cost

data could be provided when they are being investigated.



Otherwise, the calculation of ‘normal values’ will continue

to be based on the prices in other economies, which

may be unfair to China.

3. It is imperative for China to adopt

Anti-Dumping, Anti-Subsidy and

other safeguard measures in

accordance with WTO rules to

protect the legal rights and

interests of domestic industries.

In fact, in the wake of China’s WTO entry, the Chinese

government has set up a new organ named the Bureau

of Industrial Injury Investigation under the State Trade

and Economic Commission to tackle dumping and

subsidies of imported goods. The Bureau will conduct

investigations into whether imported foreign products are

being dumped on the Chinese market. The Ministry of

Foreign Trade and Economic Cooperation has also set

up another new organ called the Fair Trade Bureau for

Imports and Exports. The two organs work closely

together in handling anti-dumping applications and

investigations of imported goods, investigating

international trade barriers and coordinating responses

of domestic enterprises to foreign lawsuits.

B. China in the International Playing-

field

4. A monitoring and alarm system

should be set up to closely follow

the latest trends and situation in

the international market, so as to

facilitate the formulation of

strategic plans by both the

government and enterprises

against foreign trade measures.

With the monitoring and alarm system, timely

adjustments of the exporting strategies of Chinese

enterprises could be made if it is found that foreign

countries are going to initiate a charge against them.

For example, Chinese exporters may need to reduce

the export amounts on their own, or that the Chinese

government may need to regulate the export amounts

by taking immediate measures such as imposing,

internally, temporary export duties or quotas. If it is still

unable to avoid such a charge, responses to lawsuits

could also be prepared and coordinated promptly.

The government is also advised to maintain an updated

database, which contains all the important information

such as the export and import volume of different

countries, the world market demand and prices, as well

as foreign competitors’ latest moves. The database and

information should be open to all the relevant parties

and be easily accessible, which is an important factor to

make prompt and timely responses against foreign

charges.

Since the system enables the Chinese government and

the enterprises to closely follow the international demand

and market prices, it will help to detect those enterprises

which are selling below market prices, and thus avoid

unnecessary charges against Chinese enterprises.

Chinese enterprise could also make use of the system

to better position their products in the world market and

design their pricing strategies so as to minimize the risks

of being charged of anti-dumping.

5. China should enhance its

bargaining power and respond

strategically in international trade

negotiations. The Chinese

government should also continue

to fight for a fairer set of

international trade rules.

In the midst of trade conflicts, China should be careful in

balancing the interests of different parties. Forming

coalitions with developing countries is an effective way

to promote common interests and thus reduce the

tendency to impose protective trade measures against

one another. Common interests will be reinforced through

regional economic cooperation, joint development



programmes and foreign trade and direct investment,

etc. For example, China can dispel her image as a

competitor to other developing economies by buying

more raw materials and agricultural products from them.

For the developed markets she exports to, China could

narrow the trade gap in textiles and apparel through

importing high-tech equipments and high-grade materials

from her trading partners. A closer relationship with other

developing countries could also be established by

providing them with technological support and

preferential market entry. In addition, China should try

to reach agreements with other countries to ban the

abuse of protective trade measures.

Among all foreign countries, the US is most likely to

initiate protective trade measures against China because

it is the biggest importer of China’s textile and apparel

products. Since the US trade measures may lead to

substantial losses in China, China should try to enhance

her bargaining power in the negotiation with the US

through different means. First, to alleviate the public

pressure on the US government to impose trade

measures on China’s exports, China could increase her

cooperation with the US importers and retailers, as well

as promote the idea among the US general public that

Sino-US trade and investment are in fact mutually

beneficial. Second, China could hint that counter-

measures or retaliate actions might be taken against

unfair or invalid US charges. Third, the Chinese

government could commit to combat illegal trade and

smuggling activities with the US government, which will

help to protect the interests of the US enterprises.

A special committee could be formed to tackle the US

problems. The committee should be familiar with the US

market situations and keep track on its latest trends. It

should also be responsible for preparing a thorough plan

of responses or counter-measures against the US trade

charges.

In addition, China should respond strategically in both

multilateral and bilateral negotiations. First, China has

to take a firm stand on fighting against the abuse of

protective trade measures, refusing to accept any

arrangement exceeding her WTO commitments, and

safeguarding her rights in WTO negotiations. Second,

certain concessions and preferential treatment, such as

early market entry, could be granted to other parties

judgmentally to avoid hostilities.

The current WTO Dispute Settlement Process is tedious

and complicated. The investigation process might last

for two years. Even if China wins the lawsuit, export and

investment incentives will still be harmed greatly.

Therefore, on the one hand, the Chinese government

should continue to bargain for a fairer set of international

trade rules, as well as the amendments or abolishment

of the WTO rules which allow unfair trade barriers (for

example, the revision of the anti-surge mechanism). On

the other hand, the Chinese government should demand

a better and more transparent dispute settling

mechanisms.

C. In supporting the domestic

enterprises

6. The Chinese Government should

offer more guidance, services and

help to the domestic enterprises to

defend their rights and interests

when facing international trade

lawsuits.

Firstly, the government should encourage and support

the establ ishment of non-governmental trade

associations of the textile and apparel industry. The

government should also enhance its communication and

cooperation with enterprises, guilds and associations.

Information flow, as well as the mutually supportive

relationship among exporters in the industry will thus be

strengthened. Given these, a sound responding

mechanism will be much easier to establish. Responses

to foreign charges will be strengthened and better

coordinated.

Secondly, at present, high fees and the lack of

experienced staff and lawyers in international trade

disputes have made it difficult for victimized Chinese

enterprises to respond. In view of this, the government



has started paying close attention to the training of a

group of professionals who are adept at the WTO rules

and international trade laws. The government may also

set up a special fund to help those enterprises which

are unable to respond to the lawsuits due to financial

difficulties.

Finally, for discriminative trade policies imposed by

foreign countries, the government should engage in

negotiations with foreign governments on behalf of the

domestic enterprises

7. The Chinese government has been

guiding the domestic

manufacturers towards adjusting or

even restructuring their product

mix, and improving their product

quality.

It is hoped that the Chinese enterprises could produce

higher value-added products, and be more customer-

oriented. This will reduce the need to compete by low

prices, or to markdown the prices below cost just for

clearing unwanted stocks. For example, the Ministry of

Finance has identified ‘promoting technical and

technological advancement of enterprises’ as one of the

five major areas where the funds raised from treasury

bonds issuance are to be spent on.

For example, for the textile and apparel industry, the

government has started to support, encourage or even

subsidize the following areas: (a) R & D activities; (b)

Imports of advanced equipments and devices; (c) The

transformat ion of OEM (Or ig inal Equipment

Manufac tu r ing) in to ODM (Or ig ina l Des ign

Manufacturing) and branding; (d) Exploring new types

of polyester; (e) Upgrading the production equipments

and technologies in all stages of production such as

spinning, dyeing, etc.; (f) The building of IT systems to

operate and conduct business more efficiently, to collect

the latest market information, to predict the fashion

trends, and to get to know the newest production

technologies; (g) Promoting a better understanding of

how modern global supply chains work to minimize

unnecessary inventory and respond faster to market

trends. In fact, since 2002, the Chinese government has

included the textile and apparel industry in her IT

development pilot scheme, working to provide a breeding

ground for e-business.

When the right time comes, China could consider revising

the foreign exchange rate of the Renminbi. The least

efficient, marginal producers and exporters in the textile

and apparel market will then be forced to exit the industry,

and the restructuring process of the industry will be

accelerated. However, it should be noted that labour

productivity has to increase accordingly so as to keep

the unemployment rate from soaring.

The allocation system of export quotas should also be

reformed. Currently, most of the quotas go to the hands

of the State-owned enterprises, which do not really need

all of these quotas. An active black market for quotas is

thus created, which raises the cost of doing business for

privately-owned enterprises. It is advised by some

Mainland economists that the government should

allocate the export quotas to the enterprises which are

the most-efficiently run and which create the highest-

value added.

8. The government should encourage

the domestic textile and apparel

manufacturers to ‘go abroad’, as

well as nurture a competitive team

of Chinese textile and apparel

exporters.

First, mergers and acquisitions, as well as forming

coalition between well-performing Chinese textile and

apparel enterprises and foreign enterprises could be

advocated. Through international cooperation, Chinese

enterprises can learn from foreign enterprises’ strengths

in international network, management expertise,

corporate governance and supply chain management,

and thus improve their competitiveness and finally build

up their own brands in the world market. To achieve these

goals, the government could contribute by formulating

the right policies to facilitate capital market operations

and offshore financing.



Second, the Chinese government should support those

competitive textile and apparel manufacturers to go

abroad and establish operations in places like the Central

America, the Middle East, the Eastern Europe, Russia

and Africa. It is hoped that through market diversification,

Chinese enterprises can enlarge her world market share

and influence.

Third, the Chinese government should encourage the

domestic textile and apparel manufacturers to participate

in international trade exhibitions and fairs. These

enterprises will then be able to increase their knowledge

and understanding of foreign markets and foreign

products, build up relationship network with foreign

competitors, buyers and trade organizations, and

promote their products to the world market. The Chinese

government could also organize activities of similar

nature within China or in other countries so as to increase

local enterprises’ participation in the international market.

Lastly, the Chinese government could provide resources

to the training of a group of international business and

supply chain management experts.

IX. How can China respond to

the new trade

protectionism: Effective

counter-measures at the

enterprise level

1. Chinese enterprises should have a

complete understanding of the

rules of international trade and

international practices.

They should observe these rules and practices closely

and be self-disciplined when competing in the

international market. In order to do so, they need to train

their own staff or to employ consultants whose expertise

is in international trade rules.

2. Chinese enterprises should also

improve their sense of self-

protection by making use of the

WTO rules, and responding

actively to foreign charges and

lawsuits.

For unfair foreign requirements and standards, Chinese

enterprises should learn to fight back by using WTO rules

and regulations, and firmly stop illegal limitations imposed

by foreign countries. Chinese enterprises should have

sound preparations when dealing with these new

challenges. They may also need to employ experienced

local or foreign lawyers and consultants to defend the

cases for them.

In the past, many Chinese enterprises did not know how

to respond when facing international trade charges. Many

of them simply gave up the market rather than responding

firmly and resolutely. This could induce great losses for

these enterprises and even harm the whole domestic

industry. For example, any enterprise charged with anti-

dumping and do not respond will be classified as ‘guilty’

and included in the study group that eventually

determines the anti-dumping duty to be imposed on the

whole industry. Individual enterprises that do respond

and prove they are not dumping can be exempted from

the general anti-dumping duty imposed on the whole

industry.

Since China’s WTO entry, a small but growing number

of Chinese enterprises have learned to protect

themselves in compliance with the WTO rules, and to

take advantage of relevant WTO rules. They are also

fast gaining experience in participating in the acute

international competitions.

For example, in the 1980s, only 30 percent of the Chinese

enterprises responded to foreign suits against their

exports. Nowadays, 100 percent of the cases involving

the US and EU are responded to.



On the other hand, enterprises should try to develop

modern corporate governance and establish a well-

regulated accounting system, so that they will be in a

more favourable position when facing the lawsuits.

3. Chinese enterprises should pay

more attention to product quality,

after-sale services, brand-building,

environmental protection and

intellectual property protection.

Chinese enterprises should try to use new techniques

or technologies to increase their valued-added, upgrade

their products and improve their product structures. Only

then can they sharpen their competitive edge in the

international market and reduce the need to compete by

low prices.

Besides, through better differentiating their products from

those of their foreign competitors, Chinese enterprises

will have more autonomy in setting the product prices

and, at the same time, make it more difficult for foreign

countries to initiate anti-dumping charges against them.

© Copyright 2004 Li & Fung Research Centre. All rights reserved.

Though Li & Fung Research Centre endeavours to ensure the information discussed in this material is accurate and updated, no legal liability can be

attached as to the contents hereof. Reproduction or redistribution of this material without Li & Fung Research Centre’s prior written consent is prohibited.

4. It is essential for Chinese

enterprises to produce according to

world market demand.

Chinese enterprises should keep an eye on the changing

demand in the international market at all times. Only then

can these enterprises make better production decisions.

This will help them to avoid producing goods which are

no longer demanded by consumers, and thus minimize

the likelihood of considerable markdowns. Chinese

enterprises should also better grasp market information

such as prices and factor costs. These will not only help

them to improve their profitability but also help them to

defend themselves in a timely way when facing foreign

charges.

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