Textile quota, how protectionism backfires and a proposed solution

From The Economist: "Europe’s textile war with China—and itself" described a situation when protectionism backfired, "Chinese-made bras, blouses and T-shirts are piling up at customs checkpoints across Europe, having already bumped up against import limits set earlier this year. The European Union has sent a team of officials to Beijing to negotiate a way out of the crisis. But European retailers are just as annoyed at the quotas as the Chinese...Barely a month after the deal was agreed, China exceeded its quotas for pullovers. Less than a month after that, men’s trousers hit their import quota, followed rapidly by blouses, then bras, T-shirts and flax yarn. Tens of millions of garments are piling up in warehouses and customs checkpoints, while the prospect of shortages has consumers and shop-owners up in arms."
This is how productivity at home is destroyed by these bureaucrats. Not exactly due to protectionism, but myopic planning and bad implementation, as I would discuss later, after quoting the reasoning from The Economist:

• "At best, the quotas are only delaying the inevitable. It is hard to see how rich-world workers can compete with the low wages that their counterparts in poor countries are willing to accept
• Nor is it clear how much the quotas on Chinese goods will help domestic producers, when there are so many willing firms in low-wage countries like Bangladesh and Costa Rica waiting to take up any Chinese slack
• It’s not clear why it is better to provide jobs in Tunisia, where per-capita GDP is $7,100 a year, than in China, where income per head is 20% lower. (note, in PP terms, China's nominal GDP/cap is $1200)
• While large retailers will probably be able to find new sources for their autumn and winter lines, many are warning that smaller stores may be driven into bankruptcy
• Government ministers from the Netherlands, Denmark, Sweden, Finland and Germany have all spoken out against the quotas, and one German businessman has filed suit in Germany’s Constitutional Court"

It said, "The European Commission, the EU’s Brussels-based executive, is frantically trying to hammer out a deal that will please manufacturers, retailers and the Chinese. It has floated the idea of “borrowing” quotas either from next year or from categories that have not yet hit their import ceilings. But this has reportedly met with a distinctly cool reception from the Chinese..." It seems that now China wants to teach EU a lesson. But I tend to think otherwise. China has learned to compromise, and the Chinese very good in doing that. But they are trying to leverage the retailers to speak up for them, and playing the Northern European who do not rely on low tech jobs against the Southern European protectionist lobbyists.

Why China can be "cool" at this, because the proposal does not work. It is wishful thinking at best. Borrowing quota is only going to delay the problem into the following year, and make it much more serious then. The problem EU encountered today is a direct result of lacking a clear and longer term plan, of a fickle rule. How can you impose quota all at a sudden, leaving no time for merchants to plan? They need to at least waive quota for all those who have already signed the contract prior the quota implementation. I thought this is common sense for any policy setter, apparently not for the EU bureaucrats. Prior this year exporters need to "buy" quota before they could ship out the merchandise, and the buyers are clearly aware of and prepared for that. Now all of a sudden the quota is set at the EU border and no one knows when it is filled. Importers just continue with their orders. Perhaps the Chinese negotiators already saw through this a couple months ago but they just kept quiet.

More likely, the effective total quota for 2005-2007 would be somewhat increased. e.g. a potential solution will be

• For all retailers who have signed the contracts before a certain date (e.g. before the previous round of negotiation 2 months ago) quota should be exempted, irrespective of the duration of these contracts.
• Therefore 2005 quota has to be adjusted, hence also 2006/07 because the growth has been agreed upon, though very likely the growth percentage figures would be adjust down accordingly
• In return, EU negotiator might need a couple minor categories to add to the quota list, so as to pacify Italy and Spain
• In the quota categories, there still needs to be a clear set of rule. Messy problems now arise, who is going to get these quota? How to make sure it is fair? "First come first served" basis will only lead to chaos, and further pressure to increase the quota. But there are better solutions, e.g., China could set up a bidding system at the beginning of the year, and any unused quota will be taken back around Oct/Nov and go to auction again

This is happening while US and China are negotiating for a similar deal. I hope US is learning the lesson and I also hope California speaks up (as Tyler Rooker spelled out the reasoning in his fantasy of CCFTA). Nonetheless, they would probably wait and learn from the results the new negotiation between EU and China, or read the Economist, or try the alternative proposed here :).

Updates: see also Mandelson and EU taking the clothes off our backs via Asiapundit.