Are China's clothing and textile exports demand of supply constrained?

Abstract

By being a relative latecomer to the exports of clothing and textiles, China initially benefited from the Multifibre Arrangement (MFA). It was able to supply markets that had artificially high prices but in which its competitors were restricted. By the 1980s industrial country clothing and textile markets were growing slowly because market saturation was high. As the MFA (and other) restrictions were increasingly applied to China's clothing and textile exports the benefits of the MF A were replaced by costs, though these were modest until the mid-1980s. The cost that the MF A imposes on the world clothing and textile market has been increasing at more than 10 per cent a year during the past decade. Because China was a latecomer its quotas are relatively small, the costs of the MF A to China have been growing at some 18 per cent a year. China has increased its sales to the non-MFA, unrestricted markets, but here prices are depressed by the inflated prices in MF A markets. Because of its supply constraints, China is less able than other developing countries to avoid MFA restrictions by improving the quality of its exports. There is little doubt that China could benefit more than most developing country clothing and textile exporters from the abolition of the MFA. But if the MFA is abolished, the need for reform will paradoxically become more urgent. Competition will be intensified in a slowly growing world market with an increasing number of low-cost competitors. China's trade strategy with regard to the MFA and trade generally is therefore of considerable importance. China needs to become a GA TT member as quickly as possible. Economic reforms in the last decade have improved the supply conditions for China's exports. Clothing and textiles have received priority in the modernization program in contrast to the emphasis on heavy industry in the pre-reform era. The burgeoning of township enterprises and foreign investment reflect this favourable environment. Mandatory export plans led to a low growth of expons until the 1970s. The increased use of economic levers as reforms took hold in the 1980s led to the sustained growth of clothing and textile exports. Foreign exchange retention, exchange rate devaluations, tariff exemptions and drawbacks for exports have been among the most important policy instruments in the expansion of exports. But fundamental problems in the economy remain. They include the highly regulated foreign trade system (including physical planning of trade); unstable macroeconomic policies; an over-valued exchange rate; and severe price distortions in both commodity and factor markets. If sustained export growth with high economic efficiency is to be achieved, funher reforms will be necessary. Show more