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CHINA’S WTO ACCESSION
Implications for Atlantic Canada
BACKGROUND
As part of the process of acceding to the WTO, China must bring its trade regime into
conformity with WTO requirements. There is however one significant area in which
WTO members will have to adjust their treatment of Chinese imports. WTO members,
including Canada, will accord China benefits under the WTO Agreement on Textiles and
Clothing (ATC).
The Agreement on Textiles and Clothing requires importing countries to increase the
base quota growth rates for major supplying countries by 16 percent for WTO members
on January 1, 1995; by an additional 25 percent on January 1, 1998; and by another 27
percent in 2002. Full elimination of quota restrictions on WTO members is scheduled to
occur on January 1, 2005. China therefore will receive future product liberalization
benefits under the Agreement on Textiles and Clothing, as well as existing quota gains
granted to other countries over the past five years.
CHINA’S INDUSTRY
China is the world’s largest exporter of textiles and apparel products. Clothing and
textiles together represent over 25 percent of China's total exports. According to the
Chinese Ministry of Foreign Trade, Chinese clothing and textile global exports are in the
range of US$45 billion to $50 billion for 1999, exclusive of Hong Kong reshipments.
Currently, China's largest export apparel markets are Hong Kong, Japan, Europe, and the
United States. A significant issue in China's apparel industry is the need to upgrade
quality as well as production capability, if China is to remain competitive in the
international market. The materials for clothing and fashion accessories are often
imported from Taiwan or Hong Kong, assembled in China, and then re-exported.
Although the majority of apparel from China continues to be of low- to medium-quality,
the apparel industry is becoming more quality oriented. It is beginning to produce highervalued goods, particularly in those operations being guided by producers in Hong Kong.
During the early 1990s, exports grew at annual rates of 10 to 30 percent in China's
textiles industry. The main goal of export-oriented factories is to provide the world with
finished products. To this end, the Chinese textile industry imports natural fibers such as
cotton, wool, silk, and ramie, and will import more synthetic fibers in the future.
The production of textile products, such as fibers, yarns, and fabrics, is capital intensive.
China is restructuring its textile industry, replacing outdated capacity with modern
production facilities. In order to compete in the international market, China's textile
industry modernization mainly relies on importing equipment and technology. Chinese
plans through 2000 include investment of US$260 million on imported equipment and
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technology, $420 million on plant and infrastructure construction, and $460 million on
domestic equipment. Major import groups include equipment for cotton spinning,
weaving, dyeing, and finishing, as well as for wool processing and garment production.
China has been promoting foreign investment in selected textile industries since the mid1990s. According to a State Planning Commission decree issued in June 1995, the major
groups targeted for foreign investment are:
1. Chemical fibers with properties such as being ultra-thin, electrostatic-resistant, fireretarding and high emulation; special chemical fibers such as aryl, spandex and carbon
fiber;
2. Textile dyeing and after-treatment;
3. Highly simulated chemical fiber and fabrics;
4. Oils used in textile industries;
5. Special industrial textile products.
However, this is likely to be a gradual process, given the political problem of labour
rebalancing implied by technological upgrading in China. For the immediate future, the
Chinese advantage is in large part based on intensive labour utilization (see graph below,
from Economist, November 21, 1992). The potential for growth is greater in China’s
apparel industry because apparel production is highly labor-intensive and China has an
abundance of skilled, low-cost labor. In comparison to developed and developing
countries, China’s textile industry wage rates are among the lowest in the world. Wages
in the clothing and apparel industry are broadly comparable.
US – CHINA TEXTILE AND CLOTHING TRADE
In 1996, China exported about US$6.5 billion of textile and apparel to the United States,
compared to US$6 million that the United States sold to China. About three-fourths of
US sector imports from China consist of apparel,
almost all of which is under quota. According to a
newly declassified report by the U.S. International
Trade Commission (USITC) on the US economic
impact of China’s accession to the WTO, China's
share of the U.S. textile market will increase to about
11 percent by 2010 and its share of the apparel
market by 18 percent if quotas are removed by Dec.
31, 2004. This result represents a 30% share of the
US apparel import market.
According to the report, China's entry into the WTO
will increase the US bilateral trade deficit because
the volume of Chinese imports to the U.S. will increase more than U.S. exports to China.
Chinese tariff reductions could increase U.S. exports by as much 10 percent but Chinese
imports to the U.S. would go up by 7 percent as a result of increased competitiveness.
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US DIRECT IMPACTS
The USITC notes that certain unspecified data limitations prevented the Commission
from providing estimates of changes in U.S. textile and apparel production, employment,
imports, and exports. However, economic simulation results suggest that inclusion of
China in the ATC quota phase-out will likely have a comparatively smaller impact on
U.S. imports of textiles, and a larger effect on U.S. imports of apparel.
USITC acknowledges that U.S. textile and apparel industries could be affected, with U.S.
apparel producers and workers experiencing the more adverse effects. A study
commissioned for the American Textile Manufacturers’ Institute in September 1999
estimates direct textile and apparel job losses at over 95,000 as a result of China joining
the ATC.
While the labour issues are not exclusively tied to the textile and apparel sector, it is
interesting that on February 25, AFL-CIO labor federation President John Sweeney,
President Jay Mazur of UNITE! (Union of Needleworkers and Industrial textile
Employees), and President Lenore Miller of the Retail, Wholesale and Department Store
Union resigned from the President’s Advisory Committee on Trade Policy and
Negotiations. Until February 25, the Committee, which is expected to endorse the China
agreement, had included 27 corporate representatives, three from labor unions, and one
each for environmental and consumer causes.
From a political perspective, the textile issue is likely to be a factor in the November
election. The winning candidate must secure 270 of 538 Electoral College votes. The
major textile and apparel states – California, Georgia, New York, North Carolina, and
Pennsylvania – account for 137 votes. In 1996, the Democratic Party took California,
New York, and Pennsylvania for 110 votes.
SAFEGUARDS
Because the accelerated quota growth rates granted China for many of the U.S. textile
and apparel quota categories are low and the quotas are likely to constrain trade, USITC
forecasts the adverse effects are likely to be experienced after the end of the ATC phaseout period (i.e., after December 31, 2004). Quotas will remain in place until the end of
2004, when the ATC expires.
It is perhaps for this reason that the US insisted on a four-year safeguard mechanism
through December 31, 2008 for textiles and apparel. However, the precise details of its
operational requirements (ie, trigger points) are not available. USTR information
indicates that the provision permits US companies and workers to respond to increased
imports of Chinese textile and apparel products when they constitute a “market
disruption.” The provision allows the imposition of quotas if market disruption or the
threat of market disruption occurs. It covers all textile and apparel products under the
ATC as at January 1, 1995. Restraints on market disrupting imports become effective
upon receipt of a request for consultations. Restraints may remain in place for up to a
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year, and can be reapplied subsequently. China has no rights to retaliate against these
restraints. The provision is drawn from the 1997 US – China Bilateral Textile Agreement.
In addition, China agreed to a product specific safeguard to address rapidly increasing
imports from China that cause or threaten to cause market disruption on a product
specific basis. USTR gives the impression this safeguard also applies to textile and
clothing imports from China. This provision remains in effect for 12 years after
accession. After an initial three-year period, China can act against US exports along
similar lines. US anti-dumping laws, which will treat China as a non-market economy for
the next 15 years, provide a third avenue of defence.
It is possible as well that US Customs will address weaknesses in rules of origin
regulations and marking requirements for textiles and apparel. This is an area of interest
because there are potential issues related to “substantial transformation” involving trade
among all three NAFTA partners that could arise as a result of rising Chinese imports.
Finally, it is unclear whether these provisions will apply to textiles and clothing
originating in the Hong Kong SAR, which is a major source of textile and clothing
imports for Canada and the US. This discussion does not take account of imports from
Hong Kong.
At this point it appears that a proper evaluation of the effectiveness of special textile and
apparel safeguards will have to await a publicly available text. This is likely to occur in
the US first, as there is mounting pressure to make it public.
THIRD COUNTRY IMPACTS
Although US industries will be affected, USITC considers it likely that increased Chinese
exports will come mainly at the expense of other suppliers to the US market.
The USITC summary states,
… This increase in China’s share in the U.S. import market would occur as
Chinese products would displace exports from other suppliers, particularly
suppliers whose exports currently are not restricted by quotas (i.e., the “rest of
world” group). [Emphasis added]
CANADIAN TRADE PROFILE
In Canada’s case, the terms of entry for Chinese apparel and textiles have not been made
public. Pending more information, it could be assumed that the Canada-China deal
corresponds in key respects to the US-China deal. In other words, it does not contain
terms more favourable than the US provisions. However, this is no assurance that the
terms are not less favourable.
The trade data show the scale of Chinese dominance in bilateral trade with Canada.
Whereas Canadian exports over the last four years grew by less than 3% annually,
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Chinese exports averaged almost 14%. In the absence of quota restraints, it appears likely
that Canada’s sectoral deficit will increase in the future.
CANADA – CHINA TEXTILE AND CLOTHING TRADE
1994
1995
1996
1997
1998
Exports 109,270,000
149,613,000
114,216,000
324,343,000
234,843,000
to
China
Imports 1,027,000,000 1,189,000,000 1,086,000,000 1,389,000,000 1,598,000,000
from
China
Source: Statistics Canada. SIC 1800, 1900, and 2400. This table includes sub sectors of SIC 1800, accounting for the
difference in tabular presentations.
CANADIAN IMPORTS BY INDUSTRY
1994
1995
Clothing 606,000,000 670,000,000
Primary 95,921,000 119,245,000
Textiles
Textile
113,939,000 161,410,000
Products
1996
1997
1998
662,000,000 876,000,000 1,008,000,000
96,556,000 123,489,000 144,790,000
134,299,000 143,016,000 156,080,000
Source: Statistics Canada. SIC 1800, 1900, and 2400
Like the US import profile, more than 75% of Canada’s sector imports from China are
apparel products, most of which are subject to quotas. Despite quotas on apparel, Canada
received shipments valued at over $1 billion in 1998. The elimination of access limits for
both textiles and apparel could have an effect similar to that expected in the US.
It is therefore of considerable interest to determine what special safeguard mechanisms
have been built into the Canada – China protocol agreement to address import surges, and
potential market disruption for the Canadian textile and clothing industries.
Clearly, there are also implications for Canadian textile and clothing sales to the US
market as a result of the Chinese accession. Both the US industry and the government
recognize that to be the case. Though the impact is smaller for textiles than apparel, all
foreign exporters to the US lose share to China.
The US industry estimates that by 2005 Canada and Mexico will export US$1.9 billion or
about CD$2.8 billion less in textile and apparel to the US market. This represents an
overall 14% reduction in sales to the US market. Canada’s share, based on 1998 US
imports, is about $1.2 billion.
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US IMPORTS FROM NAFTA PARTNERS
TEXTILES AND CLOTHING
1998
Exports
Mexico $11.6
billion
Share
58.6%
2005
Reduction
$1.6 billion
Canada
41.4%
$1.2 billion
$8.2
billion
Thus, the general impact for Canada of increased Chinese market access in North
America is:
1. An erosion of US markets for Canadian textiles and clothing, with potential for
competitive pressures to accelerate after 2005;
2. Increased pressure on Canadian apparel manufacturers in the domestic market,
particularly from higher quality Chinese products; and
3. Long term competitive pressures as China modernizes and expands its textile and
apparel production capacity, and makes its way up the quality ladder.
ATLANTIC CANADA TRADE
IN TEXTILES AND CLOTHING
Compared to other industries, the bilateral trade in textiles and clothing with the US is
small even by regional trade standards. However, it would be a mistake to consider SMEs
in these sectors as unimportant to the region’s employment and future economic
prosperity. Moreover, the issue is not simply about export challenges in the US market; it
is also about competing against potential displacement by Chinese products on home turf.
The US is the key non-domestic market for the region’s textile and clothing firms.
Almost 95% of the region’s exports from the clothing, primary textiles, and textile
products industries are shipped to the US.
ATLANTIC CANADA – US TEXTILE AND CLOTHING TRADE*
Imports
from
US
Exports
to US
1994
1995
1996
66,724,853 64,011,108 60,773,297
1997
64,237,132
1998
70,299,610
23,359,165 27,702,905 40,832,174
48,825,061
50,717,444
Bilateral 90,084,018 91,714,013 101,605,471 113,062,193 121,017,054
Total
*SIC 2400, 1800, and 1900 (Clothing, Primary Textile, and Textile Products Industries, respectively)
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These industries have enjoyed growth rates for exports to the US market of more than
25% annually over the last four years. This has pushed Atlantic exports from 26% as a
proportion of bilateral sector trade to more than 40%.
Because Atlantic Canada’s share of total Canadian sector exports to the US is 0.62%,
we could expect the regional share of the reduction to be $7.4 million. While not a huge
number, in the context of regional exports valued at $50.7 million, this represents a
decline in export sales of 14.5%. This does not take into account any adverse affect
arising from Chinese competition in the domestic market. Nor does it account for other
related light manufactures such as footwear and leather goods, which USITC also
identifies as likely to be adversely affected by the Chinese accession.
Unpacking the export data, the most important export segment, based on shipment
ATLANTIC CANADA – US TEXTILE PRODUCTS TRADE
Imports
from
US
Exports
to US
1994
1995
1996
1997
1998
38,887,760 35,031,431 33,537,639 39,004,837 42,002,420
13,991,377 18,302,765 26,518,216 27,328,519 30,415,731
Bilateral 52,879,137 53,334,196 60,055,855 66,333,356 72,418,151
Total
Source: Statistics Canada. Carpets, rugs, canvas products including sails, covers, tents, trims and ribbons.
values, is the textile products sector. Over the last five years, over 90% of exports from
the textile products industry in Atlantic Canada has been shipped to the US. Reflecting
their dominance in the cumulative figures, textile products exports have averaged over
29% growth annually in the last four years. The strong US new home construction and
renovation markets are a key factor in this performance, aided by the persistent foreign
exchange differential.
A key issue will be ensuring that this market development success is not unduly curbed
by the imminent entry of Chinese product. It is noteworthy that China has been among
the top textile exporters to Atlantic Canada over the 1994 – 1998 period. Annual
shipments thus far, however, have averaged under $1 million.
Bilateral trade in primary textiles has grown on average more than 10% annually.
Exports, however, have expanded rapidly, increasing about 40% annually in the last four
years. In 1998, over 90% of regional exports were shipped to the US.
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ATLANTIC CANADA – US PRIMARY TEXTILE TRADE
Imports
from
US
Exports
to US
1994
1995
1996
1997
1998
23,619,237 26,228,778 24,555,946 22,318,342 26,318,927
6,104,959
7,468,168
11,454,130 18,362,555 15,797,088
Bilateral 29,724,196 33,696,946 36,010,076 40,680,897 42,116,015
Total
Source: Statistics Canada. Knitted fabrics, spun yarn, man-made fibres.
Imports grew less than 3% annually in the same period. As an input to the further
manufacturing process, this industry is also a potential casualty of Chinese accession.
It is evident that the apparel trade is the least developed, and perhaps the most exposed
segment. While 79% of product goes to the US market, it is this segment of the industry
that faces the most severe test.
ATLANTIC CANADA – US APPAREL TRADE
Imports
from
US
Exports
to US
1994
1995
1996
1997
1998
3,238,000 2,298,000 2,405,000 2,563,000 1,623,000
3,110,000 1,736,000 2,644,000 2,781,000 4,093,000
Bilateral 6,348,000 4,034,000 5,049,000 5,344,000 5,716,000
Total
Source: Statistics Canada.
Given the modest exports from the region, it is possible that Chinese products in a very
brief time span could displace them. Atlantic apparel exports – including a wide range of
garments and clothing, men’s, women’s and children’s wear, shirts, underwear, and so on
– are at risk.
STRATEGIC CONSIDERATIONS
During the 1990s, segments of the Canadian textile and clothing industry increased
spending on technology applications, and became more export intensive. The textile
products industry, for example, has become more export oriented. Exports as a proportion
of total Canadian shipments increased from 9.2% in 1991 to 30.5% in 1998. The primary
textiles sector saw its ratio of exports to shipments rise from 24.9% to 52.3% in the same
period. There are therefore some fundamental strengths at work in these industries at
large.
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Though the textile and clothing industries nationally have been incorporating technology
in the production process, and investing in technology at rates higher than the average for
the manufacturing sector as a whole, there are areas that remain weak.
According to a study published in 1996 by HRDC, the Canadian textile industry has a
concentration of middle-aged persons with 55% of the labour force between 35 and 44
years of age. Among those employed as production workers, 40% have no high school
diploma. Clearly, any prospective job losses would have a profound affect on these
individuals.
The HRDC study also noted that the textile industry often represents a key, and
occasionally the sole source of employment and economic activity in small communities.
As a result the study identified, among other things, the need for management training
related to export markets and competitive behaviour.
CONCLUSION
Though the threat is not immediate, enough is known of future developments to warrant a
closer examination of the issue, and to ensure that the sector continues to contribute to
economic development in Atlantic Canada.
A closer examination could identify specific regional industry competitive advantages
that may help to mitigate the ultimate challenge of quota free Chinese entry to the US and
the Canadian markets. In other words, a more complete SWOT analysis can be used to
develop a specific industry level plan for addressing the challenges likely to emerge in
the next few years in Atlantic Canada.
More generally, industries in which China has world export leadership or significant
growth potential, should be examined more closely. Atlantic Canada exports to the US in
competitively vulnerable industries – textiles and clothing, leather goods, footwear, toys
and electronic equipment – were worth more than $135 million in 1998.
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