Mills Soko

19 October 2006

Business Day, South Africa

 

SA CAN draw useful lessons from China's experience of managing the reform of its textile and clothing industries. Amid the furore over increasing Chinese imports into SA's market, it has been forgotten that China's textile and garment sectors also underwent a painful period of structural adjustment in the 1990s. Chinese textile production has a very long history; it became a relatively significant industry as early as mid-1300s and the textile and clothing sectors played a crucial role in China's industrialisation. By 1950, China was a major textile and garment exporter.

 

However, inward-looking economic policies and the neglect of these sectors by a regime fixated on heavy industry steadily eroded the country's market share and hamstrung its efforts to specialise in labour-intensive exports. In 1970, China accounted for less than 14% and 5% of textile and clothing exports, respectively, from developing economies.

 

The advent of economic reforms in the late 1970s, and their intensification in the 1980s, laid the foundations for a sustained expansion of exports. Export growth was the consequence of exploiting China's comparative advantage in labour-intensive manufactured exports. This coincided with the onset of important changes in global textile and clothing markets, which saw Japan losing its comparative advantage and east Asia's ascendant "economic tigers" - Hong Kong, Singapore, Taiwan and Korea - moving away from textile and garment products. By 1988, China's share of textile exports from developing countries had risen to 22%.

 

Reform of the rural economy transformed the structure of textile and clothing production, with favourable outcomes. The expanded role of township and village enterprises in these industries - which had been dominated by loss-making state-owned companies - brought certain competitive strengths, including cost advantages, better governance structures, relatively hospitable work environments, and adaptability to market conditions.

 

Moreover, many businesses benefited from massive infusions of export-oriented investment, mainly from Hong Kong, Macau, Taiwan, the US, Korea and Japan. This enabled them to import advanced technology and equipment, which in turn contributed to their improved productive capacity and efficiency.

 

Faced with growing competition from township and village enterprises, and beset with financial difficulties and operational deficiencies, state-owned companies were forced to undertake structural adjustment.

 

Restructuring was made even more urgent by the anticipated termination of the textile and garment quota regime under the rules of the World Trade Organisation (WTO), and by China's imminent entry into that organisation.

 

It had always been an explicit foreign economic policy goal of Beijing's political leadership to use China's WTO obligations to consolidate domestic economic reform and transform inefficient state firms.

 

China made wise use of the 10-year grace period given by the WTO to member countries to upgrade their industries in anticipation of the liberalisation of world trade in textiles and clothing.

 

It recast its industrial policy and carried out extensive recapitalisation to make sure that financial resources went to the most productive enterprises. It introduced sophisticated foreign technologies and technical knowledge. It reorganised management and operational systems and optimised the industrial structure. And it brought in foreign brands, while also improving the blend of its high-value-added export products.

 

Combined with China's advantages in labour and material resources, these reforms shored up the international competitiveness of China's industry. This success could not have been accomplished without close co-operation between the government and business in tackling the challenges that faced these sectors.

 

But industrial restructuring was not painless. To be sure, it resulted in the closure of many factories and a loss of about 1,16-million jobs. This represented a significant adjustment for China, given the country's huge problem of urban unemployment and its desire to grow labour-intensive industries in order to soak up an enormous labour surplus in the countryside.

 

China's extensive reforms made it possible for the country to become the world's biggest and most competitive textile and clothing manufacturer. According to China's influential economic agency, the National Development Research Council, Chinese textile and clothing exports now account for 24% of world exports.

 

There is no room for complacency, however. As the momentum of globalisation progresses and, in particular, as China's market-opening commitments under the WTO take effect, China's market predominance will be challenged by other competitive producers such as Vietnam, India and Indonesia. The imposition of safeguard quotas on Chinese textiles and garments by the US and the European Union (EU), under China's WTO accession protocol, has benefited the country's competitors.

 

Besides buoying the shares of China's rivals in the US and EU markets, the safeguard measures have reduced the profits of Chinese enterprises reliant on these markets. Also, the appreciation of the renminbi as well as hikes in labour costs, raw materials and energy have exerted considerable pressure on China's industries.

 

Moreover, the Chinese textile sector still has some weaknesses, including weak innovation, insufficient investment in research and development, a lack of internationally recognised Chinese brands (products are frequently made and sold under foreign brands), inadequate technical and financial support, a shortage of raw materials such as cotton and chemical fibres, not enough labour regulations, and unfair competition in the Chinese domestic market.

 

There is also the problem of industry overcapacity, induced by excessive investment: the rapid rise of textile and garment exporters (between 2001 and 2005, the number of exporters increased from 21099 to more than 65000) has led to a slump in export prices. Also, the Chinese government and private sector have had to contend with the social costs of industrial reform. This has necessitated adjustment of labour market policies to ensure that retrenched workers are retrained and helped to find new jobs in other industries.

China's experience of restructuring textile and clothing sectors provides an example worth emulating by countries faced with similar challenges. However, if the country is to sustain its competitive edge in the face of changing global economic circumstances, it must address the lingering problems that threaten to erode the efficiency of its industry.

 

‖Dr Soko is director of Mthente Research and Consulting Services.