European Union and China Bilateral Trade Relations: An Analysis Sung Man Choi, Matthew Conger, Roberto Custodio, and Jennifer Liu European Union Trade Group December 7, 2004

Objective Our objective was to evaluate the impact of the European Union’s January 1, 2005 removal of tariff barriers. We set out to develop alternative approaches to dealing with the fears of the EU textile and clothing industry, identify potential issues surrounding any alternative approaches and to develop proposals for fair and equitable competition in the marketplace for textile and clothing products

MFA (Multifiber Arrangement) What is MFA? MFA is the arrangement regarding international trade in textiles negotiated by about 50 governments under GATT in 1973. Why MFA? * To impose quota on imports from developing countries * Typically, developing countries have comparative advantage in the textiles and clothing industry. The effect of the MFA * The imposition of trade restriction * It is estimated that some developing countries have lost billions of dollars of foreign exchange due to the imposition of trade restriction.

Uruguay Round and WTO What is the Uruguay Round? The Uruguay Round is the last and largest GATT round which was lasted from 1986 to 1994 and led to the WTO’s creation. Why WTO? * GATT – mainly covered trade in goods * WTO - To cover trade in services, and in traded inventions, creations and designs (intellectual property) Textiles and clothing under the Uruguay Round During the Uruguay Round negotiations, the WTO was established, and an agreement was reached to phase out the MFA through the implementation of Agreement on Textiles and Clothing (ATC)

ATC (Agreement on Textiles and Clothing) What is ATC? This was created by the negotiations of the Uruguay Round to put an end MFA. The objective The objective of the ATC was to secure the eventual integration of the textiles and clothing sector into the GATT rules by January 1st, 2005.

ATC (Agreement on Textiles and Clothing) The process a. The integration of products into the world trading system b. The progressive raising of quotas - Stage 1: 16 percent higher than the growth rate established for the previous MFA restriction. - Stage 2: 25 percent higher than the stage 1 - Stage 3: 27 percent higher than the stage 2

Quota Removal in the Footwear Industry China’s Ascension into the WTO Quotas were lifted Lift was an incentive for China to join WTO Footwear imports from China exploded From 1999 to 2003 there was a 71.7% in capital growth of Chinese footwear imports There was a 83.9% rise in the pairs of shoes imported from China

Concerns of The European Union Loss of Market Share Unemployment Lack of Transparency Regulations on FDI Customs Duties and Additional Import Taxes Human Rights Abuses Environmental Issues EU Loss of markets and market share An increase in the amount textiles into the world market is believed to decrease the EU market share, due to lower prices and availability…this means less earnings for EU member nations and leads to the next concern Unemployment The EU is concerned that the introduction of unrestricted trade with countries such as China will inevitably lead to closures of manufacturing facilities, thus increasing unemployment Lack of transparency The EU is concerned that the lack of transparency in the Chinese market, domestic subsidies, counterfeiting and the artificially low rate of the yuan…There is concern about such issues because China’s continuing changes to the rules regarding imports do not allow the EU to plan ahead Regulation on FDI The EU is concerned about Chinese state regulation on foreign direct investment limiting the types and size of businesses allowed to enter China…if there was more openness, or transparency, these concerns may be alleviated Customs Duties and other Taxes Currently, China imposes customs duties and additional taxes on the imports from the EU. This is common for countries as a type of protectionist measure. However, Chinese lack of transparency concerns the EU as to how the duties and taxes are calculated and what they are collected for. Human Rights Abuse and Environmental Human Rights and environmental abuses concern the EU as well. The EU believes that the opening of the market to China will perpetuate the abuses perpetrated by the manufacturers within China…The EU is also concerned with environmental issues such as certain chemicals used in the processing of textiles

Concerns of The Peoples Republic of China Non-Tariff Barriers Anti-dumping Regulations Anti-subsidy Regulations Safeguard Measures by the EU Social Clause Most Favored Nations Status within the EU China Non-tariff barriers Anti-dumping Laws China has concerns that they will be unable to compete due to anti-dumping provisions that may be put in place by the EU. These procedures would limit the amount of products imported to the EU because of claimed artificially low prices, similar to the current subsidy dispute between the EU and the US Anti-subsidy Regulations The Chinese are also concerned that their low prices will be construed as subsidized and not allow the goods to enter the EU. This is a sticky subject because the Chinese market is a state planned economy and subsidies are intertwined within the make up of China to a certain extent Safeguard procedures amounting to implementation of tariffs Social Clause Implementation of a social clause concerns China as well. A social clause is about ensuring that working people have their fundamental human rights honored everywhere. The Chinese believe the EU will impose such restrictions to limit imports under the guise of human rights. Also, China is concerned that the EU’s technical barriers concerning environmental issues will amount to a barrier against trade. Most favored nation status China is concerned that measures currently being taken as well as those that may be taken, amount to discrimination against Chinese textiles which affects the Most Favored Nation Status

Current Measures Being Taken to Ease Concerns Social Clause “Made In” Labeling Requirements Intellectual Property Regulations Textiles Trade Dialogue between EU & China Generalized System of Preferences Social Clause To alleviate the concerns against human rights and environmental abuses, the EU is proposing a social clause which would require China to abide by the WHO and environmental restrictions “made in” Labeling EU labeling regulations and standards need to be carefully monitored. Imports fail to meet marking and labeling requirement will be refused for entry and much of the Intellectual Property rights Currently the EU is requiring imports to adhere to copyright, trademark, and patents, disallowing any goods that violate or infringe on such intellectual property rights Textiles Trade Dialogue between EU & China Currently the EU and China are conducting talks regarding trade concerns to try to alleviate such concerns GSP

Generalized System Tariff of Preferences (GSP) 1968 created by UNCTAD Non-reciprocal tariff reductions to developing nations Goal- help developing world industrialize Exception from GATT Art. I to MSN principle GATT/WTO members cannot discriminate b/w imports from different sources

GSP and the E.U. 1971- E.U. first to implement GSP One GSP regulation for all products and arrangements for a period at least 3 yrs GSP is implemented following 10-yr cycle 2001 GSP package was the most generous yet- will end in 2005

GSP/EU continued… The GSP Regulation has the following features: Restores preferential margins Enhances effectiveness of GSP as a tool for sustainable development and Simplifies the scheme’s management, harmonizes procedures, makes rules clearer, and improves predictability More simple- sensitive and non-sensitive product categories

Proposed GSP for 2006-2008 Doesn’t apply to countries w/ More than 15% EU market share or “ “ 12.5% in textiles Purpose- benefit the most needy countries more benefits for sustainable development Will expand product coverage China (30% EU market share) no longer benefits Tariff rate will inc. -- 9% to 12% Hit to China outweighed by protection of countries like Bangladesh and Sri Lanka

Recommendations Better Surveillance of the Textile Market Anti-Dumping Measures Require More Transparency Shift Focus to Markets with Comparative Advantage Maintain Import Quotas from Non-WTO Countries Require China to Abide by WHO and Environmental Requirements Better surveillance system of the Textile Market GSP use escalating alert system to monitor most sensitive goods Anti-dumping Restrictions If dumping occurs, can impose quotas Get other countries involved in anti-dumping campaign Require more Transparency Maintain relations with China; establish more communication Shift Markets to those with a Comparative Advantage Concentrate on luxury goods and maintaining competitive advantage of trademarks Maintain import quotas from non-WTO members If necessary, can impose quantitative restrictions on imports b/c of China’s late entry to WTO Require China to Abide by WHO Requirements for Human Rights

Recommendations Continued… Transitional Review Mechanism Continue good relations w/ IMF and World Bank and ask for support if necessary Maintain legitimacy by abiding strictly by WTO/GATT rules Transitional Review Mechanism Continue good relations w/ IMF and World Bank and ask for support if necessary Maintain legitimacy by abiding strictly by WTO/GATT rules