The current dispute over Chinese clothing imports provides material for plenty of (largely justified) EU-bashing and some truly awful puns. However, the significance of the reported surge in Chinese imports at the start of the year is widely misunderstood. It follows that the wider impact of the present disruption can easily be exaggerated - including the impact on inflation in the West.
The dispute is often attributed to the ending of a (non-existent) Multi-Fibre Agreement'. In fact, the Multi-Fibre Arrangement (MFA) was a system of quotas on imports of textiles and clothing from developing countries which was replaced in 1995 by the WTO Agreement on Textiles and Clothing (ATC). This set out a transitional process for the ultimate removal of these quotas, which was finally completed on 1st January 2005.
One result was a surge in Chinese exports to the EU and US. The EU responded by introducing a new set of temporary quotas, a move permitted under the terms of China's entry to the WTO in 2001. However, many of these quotas have now been filled. This has raised concerns that retailers will be left short of stock and that the downward trend in clothing prices will come to an abrupt halt.
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Storm in a C' cup?
Our view is more sanguine. In part this is because much of the earlier surge in imports from China was simply due to changes in the reported country of origin. For many years, China has exported vast quantities of textiles and clothing to the West. Prior to the dismantling of the ATC quotas at the start of this year, much of that trade had to be redirected via other developing countries or territories like Hong Kong. Now that these quotas have been lifted, countries in the West are freer to import directly from China.
The upshot is that the growth rate of China's exports to all countries has been relatively stable, with the surge to the EU and the US largely offset by falling exports to third countries.
Correspondingly, there has not been a surge in the overall volume of clothing imported by the West. In the UK, for example, the growth in imports of clothing from all countries is actually slower than it was a few years ago. The volume of imports was a relatively modest 6% higher in June than a year earlier, compared to double-digit growth rates reached in 2002 and 2004. The UK's imports of clothing are now growing no faster than imports of other goods.
What's more, China is only one of many developing countries who can supply cheap clothing to the West. Indeed, this is one reason why attempts to limit imports from China are so futile. This also helps to explain why the prices of clothing in the West have been falling for many years, well before the surge in imports from China. Again the UK provides a good example: here, clothing prices have been falling since the early 1990s.
A thong for Europe
Admittedly, it is not clear how the current dispute will play out. There may well be some further short-term disruption and it is not always easy to switch supplier from one country to another at little notice. However there are plenty of reports that many companies have been able to do just that.
Moreover, in most cases the volume of goods held up at customs is much less than the volume that has already been passed. For example, the 3.5 million Chinese bras currently held in limbo amount to less than 2% of the total of 205 million that can be imported in 2005 as a whole. (An estimated 109 million bras were imported between 1st January and the implementation of quotas on 11th June. The quota was then set at a further 96 million for the remainder of the year, which was filled by mid-August). Finally, the EU quota system does allow for a 10% year-on-year increase in the number of bras that can be imported. This is relative to a high base that included the first three months of 2005.
The impact on overall inflation should therefore be limited. For example, clothing accounts for around 5% of the UK consumer price index. But of course, not all clothing comes from (or competes with) China, and not all imports from China are subject to these new quotas. If UK clothing prices were to rise by an average of 2% as a result of the current dispute (an upper estimate), overall consumer price inflation would be just 0.1 percentage points higher. That would be pretty skimpy.
By Keith Gyles and Julian Jessop, international economists at Capital Economic
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