Preparation of Manufacturing Sectors for SACU-India and SACU-China trade negotiations

China: Textiles, Clothing, Footwear and Leather
FRIDGE Study

Executive Summary
Policy

• 10th five year plan
• 2000 - 2005
• Focus of TC
• Technological upgrading
• Industry consolidation

Strategy for 2006 to 2010
11th Five Year Plan

• Innovation
• Independent (domestic) brand development
• Product upgrading (quality and fashion)
• Establishment of research centres
• Patented products and exclusive technologies
• Simple quantitative growth NOT major objective

Government Support

• Government provides supporting environment
• Funds for consolidation; restructured SOEs
• Screening of investment projects (desirable; allowed; restricted)
• Support granting of loans
• Approval of investment
• Brand development
• Special economic zones / industrial parks

Termination of ATC

• Future impact on TC trade / production
• China increased exports to US:
• 6.1% of total US clothing imports in 2001
• 27.9% January - August 2005
• Such fast increase was not expected
• China the big winner; India also to benefit. Most other countries will lose market share
• SS African countries 2nd highest risk rating

Market

• 1.3 billion people
• GDP grown 8% plus
• Fast growth in incomes / consumption
• Retail sales in 2005 = $831 billion
• TC focus more on domestic market
• Survey: TC highly oversupplied in 2006
• Government stimulates domestic consumption as basis for future economic growth

Features of Industry

• China is world's No. 1 producer of TC
• China 2003 production:
• Spun yarn - 14.4 million tons
• Fabric - 47 billion meters
• Garments - 36 billion pieces
• China produces
• 166 x SA's spun yarn production
• 130 x SA's fabric production
• China: 35 000 TC manufacturers
• Employment = 19 milllion workers
• Highly price competitive in TC sector goods
• Large supply low-cost labour pool
• Effective middle management
• Strong in all segment of supply chain
• 24% of world fibre consumption in 2000
• Escalated to 38% of world consumption in 2004 = 4 x that of India (in second place)

China's textiles industry up to early 2000s:

• Fabric weaving:
• Low fabric quality
• Limited variety, design
• Dyeing & printing:
• Old equipment
• Focus on low-end products for domestic market

Since then:

• Massive investment in new equipment and technology. Large improvement

Leather

• China is largest manufacturer of
• Shoes
• Leather garments
• Bags
• 16 000 + Enterprises
• 7 200 footwear manufacturers
• 1 500 leather handbag producers
• 2 million employees

Leather and Footwear
Production and Productivity

• TC - broad range of products
• Simple knitted T-shirts, to
• Complex blouses, jackets with fashion designs, intricate needlework
• Leather industry evolve
• Low-cost, quantity focused, to
• High quality, greater variety
• Wages rates $0.68 / hour
• Higher than some other Asian countries
• Productivity higher - overall labour cost less

Traditional Factors of Competitiveness

• Large, cheap labour force
• Skilled labour
• Abundant material inputs
• Low cost other inputs
• Favourable tariff / customs conditions
• Subsidies
• Scale of production
• Undervalued currency

International Competitiveness

• Traditional factors
• China's low cost producers deeply embedded in sophisticated, highly internationalised marketing, management, design and distribution networks of locally rooted Hong Kong, Taiwanese and South Korean "Triangle Manufacturers"
• China creates favourable conditions to draw in global entrepreneurs

Special Industrial Zones

• Clothing manufacturer in Guangzhou SIZ:
  • Factories in same park:
  • Cotton fabric producer
  • Industrial chemicals
  • Zip making
  • Producer of synthetic fabric
• Just outside park:
  • Petrochemical plant producing polymers
• Park has own customs services & an efficient rail service to international port

Tariff Rates
NTBs

• China has gone long way in reducing tariffs/NTBs
• Concerns
  • Infringement of IPR
  • Lack of transparency
  • Unsustainable business models
  • Loans that are never repaid
• Has failed to submit obligatory notification for WTO on  subsidies since 2003
• Currency 20% plus undervalued = subsidy

Trade: China vs. RSA

China

• China's imports are low
• Imports by China: Textiles 79% of total, leather 13%, clothing 5.8%, footwear 1.9%
• China supplied 24% of SA imports in 2000, 46% in 2004
• Chinese content in clothing imports 75% in 2004
• China export TCFL products US$ 112.7 bil in 2004
  • 74.8% increase on 2000
• China: Positive trade balance of US$ 88.1 billion

South Africa

• High import penetration
• TCFL imports: Clothing 44%, footwear 31%
• SA's exports of TCFL were 0.7% of China's in 2004
• SA imports 8.5% of China's imports in 2004
• Import of textiles increased  59% between 2000 & 2004
• Imports of clothing from China increased by 337%
• SA footwear imports from China up 255% from 2000 to 2004
• SA: Negative balance of US$ 1.3 billion

Conclusions

• China overwhelmly competitive in TCFL
• Enjoy traditional factors of competitiveness + international 'triangle manufacturers'
• Sheer size & strong in all segments of pipelines
• State support & undervalued currency
• NTBs & possible subsidies
• China has low import propensity in TCFL
• SA has high import penetration & very limited range of products with comparative advantages
• SA vulnerable to imports from China & has very limited scope for increased exports to China

Recommendation: Offensive

Accept that in view of China's

• Size & competitiveness in TCFL
• Low import propensity
• Oversupply situation in the domestic market
• Undervaluated currency
• NTBs

not much scope for increased TCFL exports.

Identify products with export potential based on lists in Tables 7.4 and 7.7 in the Report & consultations with the industry

Recommendation: Defensive

SACU should not grant preferences on TCFL to China under a trade agreement, in view of:

• China TCFL industries' extreme competitiveness; size; state support; 'blind' investment leading to overcapacity; aggressive exports
• The undervaluation of the Yuan
• The very high penetration already achieved by China in the SA market & problems experienced by  the SA/SACU industries

China is aware of the problems and would probably not press for preferences i.r.o. TCFL products. If it does, TCFL sector should be excluded from both sides.