Has China burst its own trading bubble?

After years of misconceived forecasts it will soon collapse, China’s domination of global apparel exports faces a serious threat – from the Chinese government.

Since about 2010, China’s apparel makers have retained their dominance of the world’s apparel manufacture in spite of widespread predictions it would disappear.

How China conquered the apparel world

China’s began dominating global trade when it joined the World Trade Organisation (WTO) at the end of 2001 – when it supplied just 5.8% of America’s imported clothes, and America still had its own garment factories.

WTO members agreed that China wasn’t a market economy and played by different rules from everyone else. So China got a specially restrictive membership, known in WTO jargon as “non-market economy” (NME) status. This made it easier for countries worried about damage to their economy from unfairly subsidised Chinese exports to penalise them.

These restrictions have hardly held China back, with its 2015 exports almost 9 times higher than in 2001. Indeed, by 2015 it was exporting $600 billion more than it imported. Almost half of that surplus came from its trade with America.

But that’s not enough

China believes its WTO membership deal meant the NME status would finish on December 11, 2016,  fifteen years after it became a WTO member. That’s not how the US, EU and Japan read the deal and I can’t find a single one of the WTO’s other 134 members publicly agreeing with China’s interpretation. Not even China’s fiercest propagandists claim the Chinese government has changed its policies on subsidies to its exporters since 2001.

With China’s dependence on exports and growing hostility, especially in the US, to China’s mounting trade surplus, you might expect China to manage this disagreement with its three major trading partners diplomatically.

But within minutes of its fifteenth WTO membership anniversary, China filed a formal complaint about America’s treatment of Chinese plywood exports and started lecturing the WTO’s entire membership that they “need to honour the international duty.”

Hearing that Japan was siding with the US and EU, China Daily, the official journal of the Chinese Communist Party, accused Tokyo of “poisoning the recovery of the global economy.” It said President-Elect Trump  “bears no sense of how to lead a superpower”, while  the China Government-run Global Times described him as being “as ignorant as a child”.

So China’s copying Trump?

In loutish sloganeering, yes. But not in its arguments.

Trump claims China’s not following the WTO’s trading rules – and at least some of his allegations are probably correct. China’s saying its WTO membership deal gives it the right since December 12 to run its economy how it wants: Obama – not Trump –  insists otherwise.

Only the WTO’s 164 members can decide who’s right. Insulting and bullying those members is a truly stupid way of persuading them.

Is that how you treat your customers?

China’s insisting on something few other countries accept. Just as its biggest customer is going frantic about the unbalanced result of letting China into the WTO.

All of us – manufacturers, consultants, brands, retailers – occasionally find our customers don’t think we’re dealing with them properly. No-one’s ever converted a complaining customer by publicly insulting him.

Of course, Trump gives as unpleasantly as he gets. But as far as trade’s concerned, I’d say China and its rulers have far more to lose than Trump:

  • Exports matter more to China. The EU, US and  Japan  account for two-thirds of the $600 billion net annual income China makes from exports. “To deal with Trump’s threats, China has a full toolbox” claims its Global Times.

 

What’s in that toolbox? China’s exports to the US account for six times the share of China’s economy that America’s exports to China make up of the US economy. Chinese barriers against American iPhones or soya beans will hurt the US far less than American barriers against Chinese clothing will hurt China

 

  • China’s social contract needs export growth. Most of China’s exports are labour-intensive: vital to the Chinese government’s guarantee of full employment and continuous real wage increases for all.

 

  • China’s got little record of painless failure. If the plans of Trump and the Brexiteers go wrong, there’ll be new British and American governments in 2020 – as has happened, peacefully, every 6-8 years in both countries for the past 200 years.  The rejected politicians will simply spend more time on their private affairs.

 

In the past 3,000 years, China’s rarely seen peaceful policy changes.  In the late 1960s, for example, Mao’s Cultural Revolution saw the current president, Xi Jinping, paraded in public as an enemy of the people, his father jailed and exiled and his sister killed. Western sources estimate between 3 and 5 million Chinese were violently killed.

China is showing no sign of learning from history – or of understanding how to deal with the political revolution transforming Western governments.

So will China continue its current trade agenda?

Who knows? Most of the world’s bigger countries mistrust China about as much as they mistrust Trump or Europe. I suspect wise diplomacy might give China a 50:50 chance of getting its WTO status changed eventually. Behaving like a Trump with chopsticks almost guarantees its won’t

What does this mean for apparel?

Trump, and the Congressional Republican Party, want to reduce imports – especially from  China. China’s aggressive behaviour over WTO rights few countries think it’s entitled to isn’t going to soften whatever measures the US eventually takes to reduce the flow of US cash and jobs to China.

Indeed, it may well harden attitudes to China in the EU and Japan, which seem inclined to handle China more delicately than America’s Republicans.

There will be four big political influences on global trade policy over the next three years:

  • Brexit probably won’t affect apparel sourcing until Britain leaves the EU – no earlier than spring 2019.
  • US Republicans’ recent conversion to the anti-trade cause will probably start causing havoc almost from Trump’s January 20 inauguration.
  • China’s self-assertion is already complicating things.
  • EU reaction to America’s new anti-trade policies and China’s petulance? Elections due this year in France, Germany and the Netherlands will probably increase support for anti-globalisation parties – but EU breakup predictions are probably just wishful thinking by opponents of the EU.

It’s far too soon to try predicting the detailed outcome of all this.

What I think IS predictable is that for the rest of this decade government policies in each major trading country – after astonishing stability since 2000 – will change frequently. And differently in each country.

We’ll all have to pay very close attention to the details of those policies. Which won’t turn out to be what’s being predicted right now.