Industry news

Quota quandary

German footwear imports 2008 (1 000 pairs) from most important countries

 

Despite the introduction of quotas for the importation of footwear from China, more than half the pairs of footwear imported into Germany during 2008 came from China. Therefore there is no sense in retaining the import quotas from China, since they simply do not work, Manferd Junkert, GM of the Federation of German Footwear Industry, told a press conference during the GDS Trade Fair in Düsseldorf earlier this year. Worldwide countries have been debating the retention of quota restrictions against China — and most have decided against it (see WFSGI statement in the box).

Since China joined the World Trade Organisation in 2001 clothing markets all over the world have been swamped by cheap Chinese clothing (see WFSGI supports trade with China box). SA has been no exception, and saw its fair share of consequences as a result of the Chinese imports. These consequences included job losses, as well as a lower contribution of apparel to total manufacturing output.

According to a report entitled Review of the Impact of the China Restraint Agreement on the Clothing and Textile Industry in South Africa by Mike Morris and Lyn Reed of UCT* (hereafter referred to as The Report), the Chinese market share of SA clothing imports rose steadily from 21.58% in 1996 to 78.49% in 2006 — and if Hong Kong is included, then its share in 2006 was 81.23%.

With the clothing industry on the verge of collapsing, the SA Government (like many others worldwide) in 2006 reached an agreement with China to restrain imports of certain textile and apparel products originating in China. The Memorandum of Understanding was signed between South Africa and China in September 2006, and was effective until 31 December 2008.

It became apparent earlier this year that China had actually been approached by the SA Government to extend the quotas, and that China had given the matter serious consideration. But, it came as no surprise (after their role in the refusal of a visa to the Dalai Lama) that China’s request not to extend the quotas, was granted.

Outcry from retail & manufacturers

SA footwear imports
2004-2008 R-bn

 

While the value of footwear imports into SA grew between 2004-2007, there was a dramatic drop from 2007-2008

The controversial quotas introduced in 2006 were not universally popular, though. The main bone of contention was the lack of consultation with industry players. Other points of dispute included differences over the scope, design, implementation mechanism and quota allocation.

The Report states that the Department of Trade and Industry (DTI) claimed the quotas were instituted on behalf of the Clothing Trade Council of SA (Clotrade) and the clothing and textile workers’ trade union SACTWU, who had been requesting safeguards since world markets opened to China in 2004. Yet, Clotrade vigorously objected to the quota proposal when the decision was sprung on the industry in mid-2006.

Manufacturers against quotas

In a joint statement Clotrade and some of the main clothing retailers said that they believed the gazetted plan with respect to quotas from China will result in chaos and enormous disruption for the industry.

With their initial requests for safeguards against the low Chinese clothing prices ignored, The Report points out that the Clotrade clothing manufacturers had instead began successfully to build a business alliance with the domestic retailers and created value chain alignment in the sector as the most effective way of laying the foundation for a sustainable clothing sector in South Africa.

The China quota policy, and the way it was implemented and operated, were seen as a direct attack on the retailers, and hence ran counter to these initiatives. In effect, the China quota policy became an initiative of SACTWU under the support of the DTI.

The quotas created the expectation that by reducing cheap Chinese imports, locally produced goods would thrive and the SA industry could become internationally competitive.

The competitiveness aspect has, however, become more complicated in the last few years. The Report notes that whilst price is still the primary determinant of competitiveness, it is no longer the sole determinant. China’s large competitive advantage stems from a combination of low wages and high productivity and the production of high-quality and low cost inputs.

Yet, many other countries are quickly rising to the challenge by creating similar advantages arising from cheap labour and the availability of cheap high-quality fabric.

“All that the quotas did was to alert importers of new sources of cheap supply and this led to import diversion,” Morris told Sports Trader (see chart). Vietnam, Bangladesh and even Mauritius are just some of the other countries where it is now favourable to do business!

If one looks at the SA clothing manufacturing industry itself, it can be seen to be uncompetitive and lacking in both the necessary skills and technology while at the same time having very high labour costs, he says. But, as The Report points out, the future is not all doom and gloom.

In fact, the emergence of lean manufacturing, which requires a quick turn-around and short lead time, has given SA firms the speed and flexibility advantage that their Chinese counterparts are incapable of.

Thus, fast production and proximity to local markets, rather than price and volume, are recognised as the basis on which local firms can compete.

“Quotas are not the way to go,” says Michael Lawrence, Executive Director of the National Clothing Retailers Federation. “Vertically integrated supply chains work much better. Where the retailer works well with a supplier, there is then sustainability. Efficiency is important and is better than price competitiveness. This ultimately has a better effect on the consumer.”

The Report stipulates that getting cooperation along the value chain from retailer to manufacturer is fundamental and great strides have been made at the industry level — with the exclusion of national government — towards achieving this goal.

Impact on Branding

Sports brands that manufacture their team and performance gear locally were not affected by the quotas, but it did discourage distributors from taking on new international brands that were manufactured in China. The brands did, however, feel the quota effect on popular international styles that were capped.

The fact that initial confusion in some cases resulted in incorrect quota allocations, further harmed brand sales, without achieving the desired result of assisting local manufacturers — mainly because sourcing of affected countries moved to other countries.

A Tunnelled Vision

According to The Report, a combination of increasingly challenging economic conditions and the renewed exposure to China’s formidable competitive forces is likely to see the SA clothing industry in a worse position in the future than from which it started prior to quotas. The Report reiterates that the government has demonstrated a tunnelled vision perspective on the clothing sector crisis, and has bowed to the narrow political agendas of sectoral interest groups.

“This is despite considerable international evidence that import restrictions would not be the silver bullet that would boost employment and revive output,” says The Report. “The belief that low cost Chinese imports are the cause of the crisis reflects a simplistic and shallow understanding of the complexity of the problems which engulf the sector.” (See graph on footwear imports into Germany)

The empirical evidence presented in the various sections in The Report suggests that quotas have had little impact on employment and output but instead may have simply encouraged retailers and international brands to prematurely identify alternative supply bases.

“Given the rising production costs in China and increasing pressure to conform with environmental and human rights standards, this may have robbed local manufacturers of a window of opportunity in which they could win supply contracts before alternative foreign suppliers were established,” The Report states.

The Report also points out that if suppliers are secured in even lower cost locations than China, this could exert additional downward pressure on local supplier prices and further erode their bargaining position relative to their customers, swinging the balance of power more towards retailers. In particular, The Report maintains that the quotas on fabric are counterproductive, especially where fabric unavailability had created an incentive to import already made-up garments.

So, taking all the above into account, the quotas were a failure to say the least. None of the envisaged jobs were created and it seems that the quotas were flawed in principle and were having a negative impact on manufacturers.

At the end of the day the quotas were just an extra hassle for importers, and it is hoped that lessons have now been learnt and that the quotas are now a thing of the past.