Wednesday, September 07, 2005

Compromising Trade

WSJ, Opinion
September 6, 2005

European officials struck a textile deal with China yesterday, agreeing to share the "burden" of a massive accumulation of Chinese-made garments in European warehouses.

It is difficult to see just what it is that European leaders see as burdensome in allowing their own retailers to receive shipments that they ordered months ago for the fall and winter collections. But Chinese and Europeans alike will pay for both the problem and solution that the European Union has created here. The garments will be freed, at a steep price: The amount of certain Chinese-made goods allowed into the EU next year will be reduced significantly.

This "compromise" amounts to a double victory for the European manufacturers -- and their protectionist national governments -- who bullied the EU into re-imposing quotas this June. They were highly unlikely in the first place to receive contracts to replace the goods that had been blocked. Now that some quotas for Chinese production in 2006 have been partially met, they will have a better shot at getting other work next year that otherwise might have gone offshore. One can only hope that European producers will accept this gift for what it is and not as another excuse to avoid making their businesses more competitive, however painful that might be.

For their part, retailers are saying publicly that this deal is satisfactory insofar as it unblocks goods that they already paid for in many cases, and gives them sufficient lead time to plan for next year. Of course, that's what they thought when the global system of quotas on Chinese-made textiles expired on Jan. 1 in line with an agreement signed a decade earlier. Yesterday's deal ultimately will be judged on whether it is actually honored by the EU.

For all its shortcomings, this might be the only politically feasible compromise available. The textile-producing EU member states -- notably the Czech Republic, France, Italy, Poland, Slovakia and Spain -- have wielded a great deal of clout with Brussels. Just last week they scuppered another deal.

This case provides a good insight into how the European Union runs trade policy, and the picture isn't pretty. EU Trade Commissioner Peter Mandelson worked frenetically to reach a compromise before a summit later yesterday between Chinese President Hu Jintao and Mr. Mandelson's compatriot and close personal friend, British Prime Minister Tony Blair. But the commissioner will be hard-pressed to make any negotiations worthwhile if he cannot first convince all member states of the benefits of free trade.

And there is perhaps no greater testament to how much industrialized countries hurt their own interests when they refuse to engage in free trade with China than the more than 75 million pieces of Chinese-made clothing items sitting in European ports and warehouses. The retailers that ordered these goods -- and their employees -- are just as European as the manufacturing workers whose interests the EU is ostensibly trying to protect.

Of course, Europe has not been the only large textile market playing this game with China. Even yesterday's bittersweet compromise is better than what the United States has achieved so far. When U.S. and Chinese negotiators couldn't come up with a compromise last week, Washington slapped China with fresh import quotas on Chinese-made textiles. In doing so U.S. officials were ignoring the interests of millions of American families who could use less costly shopping, especially with the Christmas rush looming in three months.

It's nice to see that David Ricardo's theory that nations have comparative advantages is alive and well, and has taken hold inside a free market such as the EU. Imagine what the benefits would be if the playing field were enlarged and countries such as China and India -- indeed the whole world -- were allowed to take advantage of this division of labor as well.


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