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The End of Quotas and Rise of China

Apr 27, 2005

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Georgetown University economist Pietra Rivoli spent five years studying what T-shirts can teach us about the global economy and how it impacts our everyday lives, an effort culminating in the book The Travels of a T-Shirt in the Global Economy. The excerpt below, from chapter 9 of her book, discusses how the lifting of textile and clothing quotas is expected to lead to greater Chinese dominance — to the detriment of exports from other developing countries:

When the third tranche of products was lifted from quota in 2002, some of the poorest countries in the world got a frightening glimpse of the future. China had been admitted to the WTO in 2001 and for the first time would be eligible to have its apparel exports removed from quota. Not only did it appear that the Philippines or Sri Lanka or Mauritius would not get a bigger piece of the pie when the quotas were lifted, it appeared instead that China would get everybody's pie. Throughout the regime's history, observers had become used to the gushes that followed when holes had been poked in the dike, but no one had been prepared for the gushes from China.

In most of the categories that were released from quota in 2002, China's exports to the United States surged by more than 100 percent, with commensurate declines in the exports of the countries that had held the quota. For a number of textile and apparel categories, the gushes from China were more forceful than anything that had been observed in the postwar era. Chinese exports of baby clothes surged by more than 2,000 percent, robes by more than 1,500 percent, and knit fabrics by an astonishing 21,000 percent. Overall, China increased its U.S. import market share of the apparel released from quota from 24 to 86 percent. At the same time, Chinese suppliers were slashing their prices, with wholesales prices often falling by more than half. Of course, the price declines were partly the result of the quota regime itself, as exporters no longer needed to purchase quota in order to sell to the United States. The gains for China meant losses for virtually everybody else.

Retailers were giddy at the prospect of unrestrained sourcing from China. China was the gazelle of the global apparel industry: the fastest, the cheapest, the best. Firms ranging from JCPenney to Liz Claiborne announced plans to shift most of their sourcing to China. Estimates vary on the degree to which China will dominate the global trade in the post-MFA world, but there is unanimity on the fact that China will dominate. More conservative estimates suggest that China will triple its market share of U.S. clothing imports, from 16 to 50 percent, while some industry experts predict that China could eventually supply 85 percent of U.S. apparel. In mid-2004, the Esquel Corporation, which had been forced by the quota system to build factories in Mauritius, announced that they were closing up shop on the island and moving back to China.

If the surges from China will hurt South Carolina, the effects will be far worse in a number of developing countries. Textile and apparel exports comprised more than half of manufacturing exports for a dozen countries, including Bangladesh, Mauritius, Honduras, and Sri Lanka, where the industries also provide the largest number of manufacturing jobs. In many of these countries, the majority of the clothing exports were to rich countries that had quota constraints on Chinese apparel. While the U.S. textile and apparel industries have lost approximately 300,000 jobs since 2000, the most dire predictions suggest that the end of the MFA [NPR Editor's note: MFA refers to the Multifibre Arrangement, which governed textile and clothing quotas] could mean the loss of up to 30 million jobs in the developing world. In addition, each job in textiles and apparel may generate two jobs in ancillary services such as transportation or insurance, and these jobs are also at risk.

In North Carolina, the lucky laid-off workers will get jobs at IBM and the less lucky will get jobs at Wal-Mart. The least lucky get unemployment benefits and trade adjustment assistance, and, if worse comes to worst, food stamps. In Bangladesh, however, there is little other industry and no safety net of any kind. Indeed, the closest thing to a safety net that Bangladesh has ever known was the secure market share provided by the MFA... Bangladesh's market share in the goods released from quota fell by nearly 90 percent, while China's share more than tripled. While the global welfare benefits of the removal quotas are likely to be sizeable, these benefits are even more abstract in Dhaka than they are in Kannapolis, North Carolina.

A few countries believe that they can take on China. India and Pakistan are likely to be price and quality competitive with China, and will also serve as suppliers of choice for the retailers who do not wish to put all of their eggs in the China basket. A few Central American countries, especially Honduras, believe that their proximity to the U.S. market — and resulting delivery speeds — may give them a chance against China, especially under the tariff breaks offered by the CBTPA.15 These tariff breaks, of course, require that the Central American countries use U.S. fabric, which handicaps them back in the other direction, but that is a fight for another day.

Interestingly, thanks largely to anti-globalization activists, tiny Cambodia also believes that it stands a chance. Rather than compete in a spiraling race to the bottom, Cambodia believes that there is a way to win on the high road. When the United States first granted apparel market access to Cambodia in 1999, it required in return a wide-ranging commitment on "anti-sweatshop" labor protections, and, in fact, offered Cambodia quota bonuses for meeting targets in improving labor standards. As a result, for companies wishing to avoid the laundry list of sweatshop abuses so commonly heard regarding Chinese factories, Cambodia offers a "socially responsible" choice by which businesses and consumers have the assurance of rigorous monitoring sponsored by the International Labor Organization. Research shows that consumers are willing to pay a premium for assurance that their clothing is not made in sweatshops, while firms such as Nike and GAP are loath to see T-shirt sales hurt by graphic tales of sweatshop abuses. There is a niche, perhaps a large one, for countries able make the credible "sweat-free" assurances that China cannot.

Excerpted from The Travels of a T-Shirt in the Global Economy, by Pietra Rivoli, copyright 2005. This material is used by permission of John Wiley & Sons Inc.

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