The Rupp Report: Beware Of Protectionism

After denying the crisis for a while, the results are quite clear: The world is in trouble.
Everything in the modern economy is now questioned. After a long period of negotiations, the world
finally agreed to the new World Trade Organization treaty, which was implemented this year.
However, this agreement was made under the presumption of an ever-so-flourishing economy, in which
hard-working people were often sacked for the benefit of a company’s financial performance and
shareholder value, and finance jugglers became the richest men in the world. Who shouted Madoff?
Those days are gone now, probably forever.

China’s Dropped Exports …

In the last 10 years, China became the textile powerhouse of the world. Exports soared by
double digits every year. This is history, too. Like many other countries, China is planning
multibillion-dollar packages for its petrochemical and textile sectors as part of efforts to help
key sectors through the global economic crisis.

China wants to spend 100 billion renmimbi (US$14.6 billion) by the end of 2010 to upgrade
refineries for cleaner fuels – a very good idea. It will invest a further 400 billion renmimbi on
20 new projects related to the fuel-upgrading initiative, as well as on the overseas acquisition of
oil and some fertilizer assets.

… Provoke A Stimulus Package

The Chinese government also is drafting a stimulus package for the textile industry,
including preferential loans, to boost sales and create new jobs. The plan already has been
submitted to the State Council, and it is expected to be issued soon. As with many other countries
in Asia, China’s textile industry had a tough year in 2008, with profits in the first 11 months
falling by 1.8 percent. This is considered to be the first decline in a decade.

To fight these Eastern stimulus packages, some countries are talking again about
establishing new quota systems for textile products, despite the years it took to abolish them. In
the United States, the new Obama administration said China’s trade surplus is unacceptable, and it
wants Beijing to help balance flows. But China opposes any return to the quotas that shortened its
textile exports to the United States and Europe. China, so a senior Chinese official said, is
seeking steady growth in those exports despite weak prospects for 2009.

The Same Old Story

Washington and the European Union set quotas to restrict Chinese-made textiles and garments
in 2005, claiming the lapse of previous global restrictions was giving way to a surge of cheap
products from China that threatened Western manufacturers. Those agreements with China lapsed at
the end of 2008. And now, in these rough times caused by the global economic slowdown, some US and
EU industry groups have called for new limits or quotas.

The Chinese are not very amused. A senior Chinese Ministry of Commerce official told an
official Chinese newspaper that China’s textile companies are having enough trouble already but
would exercise voluntary discipline to avoid any export surge. “We believe that after 2008, textile
trade should stand by the principles of free trade and importing countries should not erect more
trade barriers,” the official said.

A Dull 2009

In 2008, China’s textile and garment exports were worth US$185 billion. Year-on-year, this
was 8.2-percent more than in 2007, but the rate of growth fell 10.7 percent for 2008. According to
Xinhua, the official news agency, in November 2008, China’s textile exports fell 3.8 percent
year-on-year to less than US$5 billion. Higher labor costs, the rising value of China’s currency
and weakened export demand are the major reasons for a more pessimistic future for the Chinese
textile industry. But with some 20 million jobs in the textile sector, China wants and needs growth
in textile exports.

It seems the textile industry is back to protectionism and economic war. This was meant to
be gone a long time ago, but it seems the governments are lacking better ideas to stimulate the
industry than to put up new barriers. And I wonder how the big retailers in the West want to fill
up their shelves if the Chinese textile industry is in trouble. Who will pay the higher price? The
Western consumer is not ready anymore to pay a decent price for a decent piece of work. And
finally, why weren’t barriers erected for the financial industry before the system collapsed?

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February 17, 2009