Can rupee appreciation encash on "CAPS" on Chinese imports in EU, US?

The European Union has faithfully and religiously removedthe temporary quotas they had placed on imports of Chinese apparels in Januarythis year, following inundation of their markets by cheaper and massivequantities of apparel products with dismantling of MFA in 2005. Even the US is likely to follow uit. There was a visible relief for China, whose exports had beenchoked due to cap on their quantities to be exported to the EU. The US is also likely to follow suit by end of 2008.

But the moot point is how long will this relief continue? Thiswill depend upon a number of factors, some of which are different in intensitytoday than these were at the time of imposition of the cap on imports ofChinese apparel into the EU and the US. However, the Chinese edge in worldapparel trade continues, even if somewhat blunted. More on this later.

Another important ramification of the aftermath of demise oftemporary quotas on Chinese apparel products would need to be seen on theEuropean Union retailers, who are heaving a sign of relief on this development,but are, however, still uncertain on their smooth outsourcing operations in thelong run. They are aware that the present calmness on import front is too goodto be credible for even a foreseeable future.

Some of the international trade experts have reasons tobelieve that it is only a temporary truce. And why not?

It is understood that behind the scenes, the EuropeanCommission is monitoring shipments of eight product categories i.e. T-shirt,pullovers, mens trousers, blouses, dresses, bras, bed linen and flax yarn intoEuropean Union, which is proposed to be carried on for full year to provide abase for examining if any measures are called for, for regulating the inflow ofChinese apparels in to the EU. In fact, this monitoring measure was agreed toensure a smooth transition to quota-free trade.

The monitoring is also being carried by China to ensure that the slip-ups do not show up again; leading to some tough anddistasteful measures by the European Commission.

One, however, does not need any evidence to aver that thereare huge, pent-up supplies at the Chinese factories and wharfs, waiting to beshipped to the European ports, now that the temporary cap on their exports haslived through its lifespan. It is because a lot of merchandise had been heldback by Chinese exporters for shipment in January, so as not to be countedtowards last years export limitations. The Chinese authorities would ratherlike to regulate it to avoid measures like anti-dumping or countervailingduties, which can always be resorted to by an importing country on validgrounds.

Is Imposition of Anti-dumping Duties Easy?

Not exactly. The filing of an anti-dumping complaintrequires evidence of both dumping (which means that the goods exported by onecountry are at prices lower than in its domestic market) and also to meet theother requirement of damage to the EU industry, before an investigation canbe officially launched. It is also important to note that once an investigationis set up on certain products, this cannot be any country-specific, because thesame or similar products from other countries would also come within its range.In this case, the European Commission would be obliged and happy to considercomplaints about imports from other countries, too.

However, there would be greater problems to make suchinvestigations in case of China, as it is a State trading economy and not amarket trading economy, where both the export prices and the domestic pricesare administered and may not, therefore, offer any clue of any element ofdumping just on that basis. However, the European Commission might have toresort to analogue or another reference country, as had been done in case ofanti-dumping charges against China exporting footwear in the EU. In that case,the reference country was Brazil, which was not an exact or favourablesituation from Chinas point of view. But that is the way.

Injury to EU Industry

Another point to be proved by the European Commission would be the injury caused to European industry because of cheaper Chinese imports. This is, however, lesser ticklish issue; and rather a simpler one. Here, the injury to the European industry can be demonstrated by assessing the level of damage by juxta-positioning of information like import penetration, export prices versus EU domestic prices and the consequent slowing down of domestic production and loss of employment.

However, the fulfillment of requirements of dumping and injury to EU Industry would take quite sometime; may be, the complaint could be filed earlier, but the provisional duties could be imposed sometime later in April, 2009 or more precisely by the time the EU retailers would like to outsource for Autumn/Winter 2009.

However, it may be pertinent to point out that the European Commission like any other country can exercise its right of imposing a provisional duty, pending the decision of WTO, on the product categories, suspected to be dumped in EU.

Chinese Edge Blunting

In the meanwhile, one need not lose sight of the fact that China has, of late, been undergoing hardships in terms of appreciating Yuan, soaring labour costs, costlier raw materials, shortage of power and withdrawal of incentives to Chinese exporters, each and all of which have somewhat blunted the unassailable edge that China had developed in world apparel market. Chinese apparels, today, are in direct competition with other Least Developed Countries (LDCs), who are not suffering from all those ailments from which Chinese economy is suffering today. In addition, these countries enjoy a lot of concessions, including on Customs duties and in terms of quantities to be exported under GSP and otherwise.

Maybe, the time when the European Commission decides to impose any restrictions on Chinese imports, the domestic production in China could have undergone further changes for better or worse; perhaps more of the latter.

Impact on EU Retailers

All these uncertainties should given EU retailers enough reasons to feel seriously concerned about what is in store for them not in the immediate future but in near future, in so far as their outsourcing operations are concerned. The longevity of long-awaited and hard-earned freedom to import from China is today a subject matter of speculations and uncertainties.

The retailers need to be aware of not only what product categories from China are vulnerable to any restrictive measures by the European Commission, but also how severe would be the restrictions imposed on Chinese imports. Recent research conducted by Emma Ormond, PricewaterhouseCoopers and her colleagues in the Customs and International Trade Team at PwC studied the trade volumes and values of Chinese imports into the EU since beginning of 2005, revealed that both dumping and damage in the six clothing categories are still subject to surveillance. This is one reason why Ormond says she is convinced that anti-dumping measures will come into play.

However, there has been to be enough data for a reasonable period of say 4 to 6 months to justify a complaint of dumping. The domestic industry precisely seems to be waiting for the same. Once the data is available, they would like to go in for a complaint.

Another point of serious concern for retailers is how to anticipate which product categories would be more prone to complaints, since the clothing categories which were subjected to quota earlier are also the subject to surveillance.

What will be the Duty Rates?

It would be even more difficult to anticipate as to what would be rates at which duties would be imposed on each of different product categories? Ormond feels that it is virtually impossible to predict. She says, Definitive duty is very often not at the same rate as the provisional duty, and so suddenly you have his huge uncertainty that just hangs over all your sourcing decisions.

Notwithstanding that there are various mechanisms to calculate the rates, but generally, if it is fairly straightforward anti-dumping duty case, then it is usually based on the lower of the dumping margin and the injury margin. But then, what is the dumping margin? It is the difference between the export price and the domestic price of the exporting country. Injury margin is reflected that a country perceives that its industry has been damaged by differences in prices and volumes etc. of the imported goods. However, the final duties do not actually bear any relationship to either the dumping margin or the injury margin.

Retailers in a Fix

The situation is somewhat perplexing and evokes uncertainties and even fear. The retailers and the wholesale importers are really concerned over the uncertainties that have gripped the outsourcing. However, one thing is certain that outsourcing from China will have to be discounted and the retailers and importers would do well to shift and/or supplement outsourcing to other countries like Vietnam, Bangladesh and some sub-Saharan countries, with low costs and where big players have set up their factories to take advantage of cheaper labour and concessions in duties. India could be another destination, though its strength in terms of prices and adherence to scheduling vis--vis China and even other countries is rather doubtful.

One conclusion that can be drawn from the likely scenario is that it is not that safe to continue to outsource from China alone, which, however, by and large, continues to be cheaper than most of other competing economies, save a few. Since China has already created massive production facilities that cannot be allowed to stand still and has set up ambitious employment target of 10 million jobs a year, it can hardly afford to stop producing and losing foreign markets, notwithstanding appreciating Yuan, rising labour costs, costlier raw materials and slow but steady withdrawal of incentives for export, earlier available from Chinese Government and above, the menacing rate of inflation.

The US CAP

The position is somewhat similar in so far as the US is concerned, which is likely to let the safeguard quotas lapse by the end of 2008. This has been confirmed by no less than two senior trade leaders. Scott Quesenberry Special Textile Negotiator in the office of the US Trade Representative confirmed, saying We are at the end of the quota system. At the end of this year, the US will end its quota systems with China. We do not see a follow-on programme as the rules are set by the World Trade Organisation and cant be changed. However, he added, The bad news is the rules nowadays include anti-dumping and countervailing duties. Rufus Yerxa, Deputy Director General of WTO, confirms, There are still certain provisions where a country can still impose temporary safeguard measures. He added, The creativity of Governments to find new mechanisms is always there. The WTO cannot guarantee what Governments will or wont do, but when Governments take action, the rules are there.

However, the US has certain options like monitoring apparel imports from China to see, if an anti-dumping investigation can be initiated or a request for safeguard measures made under the general safeguard mechanism available until 10 December, 2013. Yet another alternative could be imposition of countervailing duties if the US can demonstrate import prices are artificially low because of subsidies.

Can India Take Advantage of Chinese Exports Slowdown?

The year 2007 has not been a good year, in so far Indian textiles and garment exports are concerned. For the first time, even an ever-optimistic Kamal Nath agreed that the exports have slowed down. And remember, this is the year, when the temporary caps or safeguard quotas were fully on on Chinese imports, both for the US and the EU markets, which did offer India a chance to occupy the space vacated by the Chinas problems, both internal and external. Unfortunately, that has not happened, partly because of unexpected and continued appreciation of Indian Rupee, which edged out Indian exports by the competing economies.

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