In the escalating China-E.U. and China-U.S. textile trade dispute, the Chinese government recently flip-flopped its policies almost overnight. On May 20, China announced increases in export tariffs on 74 categories of textile products as of June 1. The tariffs on these textile products increased in some cases by 400 percent. On May 30, however, before the United States or the European Union had had enough time to react to the "good news," the Chinese government suddenly announced the withdrawal of export tariffs on 81 categories of textile products as of June 1, completely annulling the "good news" on export tariff increases announced on May 20.
Why the Sudden Change?
In just 10 days, China had shifted its policy from an export tariff increase of up to 400 percent to the actual withdrawal of export tariffs. What happened during those 10 days? Why did China change so dramatically?
The China-E.U. textile trade dispute intensified after the E.U.’s publication of Guidelines on Special Safeguard Measures on Textile and Clothing Imports from China, which suggested that China impose limitations on its own textile products. On May 17, an E.U. commission decided to impose quotas on T-shirts (Category 4) and flax-yarn items (Category 115) made in China. Since May 18, besides cotton trousers, cotton shirts, and cotton and man-made fiber underwear made in China, the U.S. government has added four other categories of cotton products made in China to its "Safeguard Measures" list. Under great pressure, China announced significant increases in export tariffs—in some cases four times the previous tariffs—on 74 categories of textile exports beginning June 1.
The Chinese government had expected the compromise would lead to positive reactions from the European Union and the United States. The Deputy Minister of Commerce of China, Gao Hucheng, was sent to Brussels for emergency talks with E.U. Commissioner Peter Mandelson. After the talks, the E.U. Commission postponed the start date for the "Safeguard Measures," and the last meeting was scheduled for May 31. Even as the dispute seemed to be cooling off, the E.U. Commission issued a brief statement on May 27 to start "Safeguard Measures" immediately on two categories of Chinese textile products.
The United States, however, did not give any response that pleased the Chinese government. U.S. Secretary of Commerce Carlos Gutierrez was scheduled to pay a three-day visit to China from June 2 to 4. According to The Wall Street Journal of May 27, Gutierrez said of his upcoming visit to China, "This is an opportunity to explain the United States’s view. I’ll also explain the importance of implementing quota limitations." Gutierrez also announced through the Department of Commerce that, during his trip to China, he would try his best to explain that the decision of the United States to place constraints on Chinese textiles was a legal action based on World Trade Organization (WTO) agreements.
To the Chinese government, the repeated levying of quota limitations on Chinese textiles by the United States and the European Union are simply hostile acts that totally ignore the Chinese government’s kind gesture of self-imposed export tariffs on textiles. Plus, the Chinese government knew early on that this time the two parties would discuss China’s notorious weakness—the one thing against which China has no defense—namely, intellectual property rights. In order to take charge in the negotiations, the Chinese government had to re-establish the bottom line. That is the reason for the sudden change of policy.
Are the United States and Europe Intimidated by China’s Growing Strength?
In terms of trade, China is in a weak position, because China needs the U.S. and E.U. markets. The United States and the European Union are in a strong position, because similar products from other countries can be easily obtained in the absence of Chinese products.
In terms of the mechanics of setting trade policy, China, as a totalitarian government, is a formidable presence. So far, the United States and Europe have been talking about economic issues in terms of countries’ economies and have shown no signs of extending the discussion into the political arena. Even if an individual politician wanted to resolve a trade dispute by political means, the business community would not follow the government’s or senate’s lead, because it is extremely time-consuming to establish new policies. China, in contrast, can change its policy almost overnight. The current change of policy in 10 days is just one such example. China can also incite nationalistic sentiment by using the media to forge "the people’s opinion" and then use this as a diplomatic gambling chip. Since 1990, in order to cover up its diplomatic incompetence, the Chinese government has often used this secret weapon of "public opinion" in dealing with the United States and Japan. This time when the United States and Europe proposed to re-impose quota limitations on Chinese textiles, it was very difficult for the Chinese government to get satisfactory results through diplomatic channels, so it again employed nationalistic sentiment.
How did the Chinese government play the "nationalism" card this time? They first politicized the issue of foreign trade through its public media. Once again the theory of the United States and Europe’s "conspiracy" to prevent China from rising peacefully as an economic power was very much in the air. An article entitled "Their Target Is Not the Textile Industry" states, "The United States and the European Union have an ulterior motive in maintaining quota limitations on Chinese textile imports, viz., to hold back China’s rise as an economic power. The U.S. and E.U. governments know that nothing can prevent China from rising as an economic power. Given this, it will be most desirable if they can decelerate China’s rise to some extent and gain as much profit as possible before that happens. The textile industry is a place where the United States and Europe can work to hold back China’s rise." According to the article, China’s export of textile products makes up 16 percent of China’s entire export. The textile industry directly employs 19 million, and the employment in related industries exceeds 100 million. More importantly, the implementing of quota limitations on seven categories of textile products by the United States has decreased China’s exports by US$300 million and has affected employment accordingly. The textile industry is one of the main channels by which China is able to absorb the vast surplus labor pool from the countryside. Therefore, the imposition of the quota system amounts to fostering social conflict in China.
The article reviews the heartbreaking process of China’s effort to join the WTO, when China was treated unfairly by the United States and the European Union, "To engage China in a U.S. and E.U.-dominated world trade system, they imposed more rigorous conditions than they did on other countries. First, they insisted on treating China as a non-market economy as far as anti-dumping is concerned; second, special protective annexes were appended to Protocol on the Accession of the People’s Republic of China as regards China’s export; third, within 15 years of China’s accession, there will be an annual evaluation on how China is fulfilling its commitments. This shows how far the United States and the European Union will go to restrain China from rising economically." The article was published in the May issue of International Finance and was subsequently put on almost all major websites. Tsinghua University students later relied almost exclusively on this article in questioning the U.S. Secretary of Commerce.
Since it is related to "the conspiracy by the international anti-China forces to prevent China from strengthening itself," it is "natural" for China to resort to nationalism to resolve the issue. Since the end of May, many Chinese websites have subsequently launched an online signature campaign to "support the export of China’s textiles." Unfortunately, the campaign has not been as successful as that of the Anti-Japanese movement. Otherwise, the number of supporters would have been made public to show how much the Chinese people oppose the "Western conspiracy."
The China Association of the Textile Industry also issued a press release to strongly protest the quota imposed by the United States, which it claims violates WTO’s principles and the spirit of the "Textile and Apparel Agreements" and contradicts the WTO’s merit of free trade. Interestingly, the association’s complaints dovetailed perfectly with the media attacks. As a matter of fact, although all the various industries’ associations appear to be non-official, the government controls every one of them. As stated in a Chinese high school textbook on politics, "The concept of non-official organizations is clearly defined as ‘the official organs in the name of folk organizations.’"
On the first day of his visit to Beijing, U.S. Secretary of Commerce Carlos Gutierrez certainly "smelled the smoke" after the Chinese students bombarded him with questions on the "issue of Sino-U.S. textile trade." Carefully designed by the Chinese government, the students’ questions demonstrated how well they played the "ethics" card. "The new quota on China’s textiles by the U.S. will lead to a dramatic increase in unemployment in the nineteen-million-strong Chinese textile industry and will negatively impact local businesses and employment," the students commented. To prove China’s victory of "diplomacy in the people’s war," the Chinese media was obsessed with exaggerating how uncomfortable Mr. Gutierrez was.
China Is Overly Relying on Overseas Markets
The less-than-polite manner demonstrated by the Chinese government during the textile trade war actually reflected its anxiety, which can be attributed to China’s heavy reliance on overseas markets for the health of its economy.
The ratio of the import and export values over the GDP of a nation is called the degree of reliance on foreign trade, which represents how much an economy depends on foreign trade and how much the country is involved in the world division of labor. It also reflects various elements of its strategy for the economic development of the country. Finally, it greatly affects the country’s foreign policies as well.
In the past 10 years, the scale of China’s foreign trade has expanded rapidly. In 2004, out of the US$1.65 trillion of China’s GDP, 70 percent, or US$1.1547 trillion, was attributed to foreign trade. This is equivalent to a reliance degree of 70 percent, a 60 percent increase from that of 1978. In terms of this measure, China certainly ranked very high among the major economies in the world.
In contrast, between 1980 and 2001, the United States, Japan, India, and Germany’s reliance on foreign trade was between 14 percent and 20 percent. It is apparent that China’s economy has a distinct characteristic: Its products rely very heavily on foreign markets.
Although China knows where its weakness lies, it is not able to overcome it. This is because the only way for China’s economy to take off is to mimic the "Four Little Dragons of East Asia" by taking advantage of foreign capital and building a relationship with foreign markets according to the "theory of comparative advantages."
According to this theory, only through exporting products with comparative advantages and importing those without comparative advantages can a developing country optimally utilize the efficiency of labor distribution in the world to serve its national economy. Although the theory has been successfully applied to the "Four Little Dragons of East Asia" in the past, its application to China will surely cause serious problems. This is because, in the history of world economy, China’s rapid development and its excessive reliance on world markets are unprecedented. Indeed, the Four Little Dragons of Singapore, Korea, Taiwan, and Hong Kong did develop rapidly in a short period of time and quickly surpassed many of the developed countries, but their economies are not very large. On the other hand, the United States once jumped from a second-class world economy to a first-class one, but it had a large and fairly stable domestic market.
Trade Counterforces Always Accompany China
The reason why it is problematic to apply the theory of comparative advantages to China is twofold. First, as a result of chasing "comparative advantages" and the excessive production capacity in many of its industries, China is bound to face the awkward situation that whatever it produces will be cheap. Second, lacking a domestic market supported by effective demands, China will surely have to rely excessively on overseas markets. Because of the heavy weight of China’s foreign trade in the overall world trade stage, the effect of China’s pricing in its trade with the world economy cannot be underestimated. In particular, the concentration of China’s exports in several countries and regions is problematic. For example, China’s trade volume with the United States, Japan, and the European Union accounts for half of the overall trade. Consequently China’s dumping of any products on these three markets will surely create tremendous pressure on these countries.
China has been trying to rely on the gigantic world markets to support its own economy and to feed its huge supply of cheap labor. Such strategy may work well for a short period of time. As time goes by, however, it will surely create friction with other countries due to the conflict of interests. The textile trade war is only the beginning of a larger war of the upsetting of markets caused by China’s tremendous supply.
Mrs. He Qinglian is a renowned economist and journalist from China. She is currently staying in the United States as a guest researcher.