Newsletter: December 2001
Introduction
The
Doha meeting was successfully marked by a historical event, i.e. the
approval of China’s accession to the WTO on 10 November. It was a historic
event, not only for China but also for the world. There is no doubt that
China’s full integration into the global trading system, with all its
inherent rights and obligations, will alter the global economic landscape.
Domestically,
this will result in two irrevocable changes: first, the further
opening up of the Mainland market and secondly, the progressive
transformation of China into a transparent and rule-based market economy.
Foreign companies may import most products into any part of China three
years after accession.
The
opening up of markets will speed up the institutional reform of the Mainland
economy. The WTO system based
on rules allows trade disputes among members to be solved fairly and
objectively. Operating under this framework, China has to comprehensively
improve its investment environment.
China
is now the world’s fifth largest trading entity. According to a World Bank
estimate, following its accession to the WTO, China’s share in world
exports will almost double in five years: from 3.9% in 2000 to 6.3% by 2005.
Economic reform and liberalisation will no doubt benefit the Mainland
economy profoundly.
China
: Cut
Textile Tariffs
Upon becoming a
member of WTO , China will cut import tariffs on industrial products
to an average 12 % in
2002 from the current 15.3 % as it fulfils its World Trade Organisation
commitments.
China would cut import tariffs on farm products to 16%, starting from January 1, 2002. Tariffs on textiles would fall to 18 %, on electronics to 11%, on machinery products to 10%, on cosmetics to 8 % and marine products to 14 %
Quotas
on Chinese textile imports will formally end in 2005 as mandated under a
WTO-wide accord, although a special import “safeguard” system will be in place until the end
of 2008. China's textile and apparel sector is one of the few that should
see a clear benefit from WTO entry with the lifting of import quotas abroad.
Chinese textile firms focused on exports will be best positioned to
capitalise on the agreement.
China, now a member of the World Trade
Organisation, also plans to become an ITA member, which means it would have
to remove tariffs on all IT products by 2005. The average
tariff on industrial products would be slashed to 9-10% by 2005.
US
:
Cutting off China Textile Quotas
According to a spokeswoman for the Ministry of Foreign Trade
and Economic Cooperation (MOFTEC), the US government's unilateral quota deduction on textile imports from
China seriously violates the Sino-US bilateral textile agreement. She said that the US government, which recently
decided to slash quotas on Chinese textile imports, had so far
"provided no clear evidence" of the need to make the quota
deduction which is estimated to be worth about $28 million.
She
claimed the Chinese government has consistently implemented the Sino-US
bilateral agreement, had developed bilateral trade relations on the basis of
equality and mutual benefit and solved trade disputes with a practical and
cooperative attitude. She added that
MOFTEC was most unhappy with the situation and called on the US government
to consider the overall Sino-US trade relations and correct its decision in
order to ensure the smooth development of bilateral textile trade.
China vs India
China
eyes 40% of world textile market by 2004 while India trying hard to manage
its current 3% share.
If
it is a race between the giants —India and China—for the global textiles
market, the entry of China in the WTO will mean that India will have to
think for a new strategy to compete or lose the race even before it has
begun. Despite having similar resources and being clubbed in the same
category for the race, one contender is capturing international market share
while the other is losing ground.
With
the growth of the world economy, it is expected that world textile trade
would grow at 3-5 %
every year. China which presently has a 19 % share in the world textile trade aims
high and has set itself a target of achieving 40 % of
global clothing market by the year 2004 dominating the scene completely.
India on the other hand currently has 3 % share
and nothing that it is doing can prevent the declining trends.
China - Advantage
of Labour cost and
Policy
According
to Sudhanshu Bhushan, economist, Indian Cotton Mills Federation (ICMF):
“the competitive advantage of Chinese textile industry arises from the low
labour costs and economies of scale”.
Though
India also has its own set of advantages as perceived supplier of fashion
garments and rich designs, China is way ahead in terms of certain economic
parameters like power tariff, interest rate and labour policy. China’s economic performance over the past two decades has
been astounding with 6%
GDP growth in the year 2001. Its entry into WTO has stimulated an upsurge in
FDI and China may turn out to be world’s factory. Its stock of foreign
direct investment is growing by over $40 billion a year and bulk of this has
gone into export industries.
The
Chinese textile industry employs more than 13 billion people making a
contribution of 13 % of
the total manufacturing employment. The production capacity of garment,
cotton, wool, silk and chemical fibres in China take the first place in the
world with 5.7 million tonnes of cotton yarn and 6.02 million tonnes of
chemical fibres making up 30 %
The
biggest advantage with China lies in its abundant labour pool with a clear
hire and fire policy. Attached to this is exit policy when a unit can be
closed down at any time if it is not economically viable. Besides this China
also has the advantage of capital available at most competitive rates. Rate of interest varies between
6.13 % and 6.5 % depending upon the duration of the
loan. Power rates in China are a fourth of those in India.
China - Strong Domestic Market
The
developing domestic market is a strong support to textile industry in China
and nearly 66 % of
the total output of garment industry is sold in the domestic market.
Further, to accept the challenge presented by the China's WTO entry,
reformation in this industry has taken place through high tech modernisation. China has already
quickened the pace of industrial upgrading of the textile industry and
become a textile powerhouse with an intention of having 45% share by 2005-06.
India – Lacking Consensus
In
China, half of the exports are generated by textile industry whereas Indian
textile industry contributes 30 % of
India's foreign exchange earnings. The biggest problem with India is its
fragmented textile industry lacking consensus. There are excise duty
exemptions and concessions which prevent innovation and technical
upgradation with illogical reservations for the small scale industries.
Moreover, Indian industry has to face utterly rigid and archaic labour laws.
Indian industry is very resilient to pressures and downturn provided its backed up with correct duty structure and to make it competitive, the fiscal regime has to be re-focused and be in consonance with thrust on exports. Concessions and exemptions at various levels need to be reviewed to complete the chain.
India- Mass Closures
In
India there are already reports of rampant closures. Between March 2000 and
August 2001, 54 cotton textile mills have been closed in the country.
Mentioning that the escalation in running cost and decline in profit have
affected the liquidity of the mills leading to wide spread sickness and
closure. 403 textile mills remained closed as of August, 2001. The
crisis that has engulfed the textile industry has serious consequence for
the economy as a whole and if corrective steps are not taken well on time,
it will lose its premium status.
Strategic
Business Responses
v
Market discipline spares nobody. Only the best can survive.
Maintaining competitiveness requires strategic planning and swift response
to market changes. To tap into the Mainland market, businessmen should
develop an up-to-date understanding of the fast-evolving market environment.
Choice of location, market research and strategic business planning are
always important. Local businesses must identify specific opportunities and
challenges for their own business, and keep abreast of changes in the market
rules.
v Take a long-term view in business strategy. Although we have traditionally been very successful in processing trade, more and more are now moving towards ODM (Original Design Manufacturing) and OBM (Original Brand Manufacturing). There is great need to upgrade products, develop brand names and eventually increase the value added to goods and services to meet the ever-changing demands of consumers. To take advantage of the large domestic market in the Mainland and worldwide market, companies should improve management of their distribution channels, and get ready to sell direct to distributors and end users. They should identify and develop strategic partnerships and alliances with service providers that have the potential to broaden and deepen their business activities.
v What make business successful is people. Companies need to invest in human capital in order to meet the new challenges ahead. Knowledge is the new currency in today’s world. We need multi-skilled people who can transform new ideas into products and services. Only human talents can sustain companies advantages in the global competition.
