For years, Chinese textile workers have worked their fingers to the bone, three shifts a day, seven days a week. With average labor costs as low as US 60 cents an hour, and unskilled labor costs at close to zero plus living expenses, the price of the humble T-shirt, and many cotton products, has never been lower.

Thanks to China’s prodigious output and low costs, consumers have enjoyed the lowest textile prices in history and, for the past decade, have responded with unbridled consumption.

Now, the already high US and EU import tariffs have been hiked by another 200% making a Chinese T-shirt roughly the same price as the Western equivalent. The effect on consumer spending has been dramatic and immediate. Retailers are closing stores and laying off staff.

Tens of millions of consumers are being punished to protect the remaining shreds of the West’s textile industry – representing less than 0,5% of the workforce.

Over the past six years China has responded by moving much of its final production off-shore. Pressure is building to apply the same prohibitive tariffs to China’s goods not carrying the ‘Made in China’ label.

Now, China has changed the rules of the game again. Emerging ‘textile cities’ now cover the complete value chain and are moving ahead of the West in the field of high-value smart fibers.

(This is part of our new focus on the future of China and SE Asia. Read the full story in the detailed Analysis/Synthesis section and join in the debate – for subscribers only)

ANALYSIS >> SYNTHESIS: How this scenario came to be

Background:

Cotton is at the heart of the current textile war between China and the West. In the beginning was the plant —Gossypium malavaceae. From this common variety of swamp mallow came the fiber that brought success and hardship in equal measure to the humans who domesticated it. In much of living memory the US has been the dominant cotton producer, manufacturer and exporter on the planet.
Whatever you think of China’s economic dominance now, remember that it still has a very long way to go. Chinese per capita GDP is still only 5-10% of the US or Australia, and 20-50% of South Africa’s (depending on which nation’s figures you believe).
China is still largely a third-world country in which it is estimated less than 300 million people participate in the economic boom so far. More than one billion are still involved in rural agriculture at a local level. China’s growth is generating massive energy internally and fear amongst its neighbors. It has a long way to go and no one quite understands what the Chinese future holds.
Here, in our series of perspectives on China’s and SE Asia’s future, is one possible future for the textile industry.

2005: Moves to curb Chinese textile boom
The Chinese share of the US market for cotton T-shirts, trousers and undergarments grew from just 2% to almost 15%, in just the first six months of 2005. Western clothing manufacturers and governments start throwing more and more barbs at Chinese exports – but mostly focusing on cotton and textile products – to protect what are the world’s largest textile markets.
The US and EU claim ‘lack of preparation’ for this rate of imports. This is strange considering the current treaty had been in operation for ten years, and protectionist rules have been in place for more than 40 years. Newly-announced US rules restrict year-on-year growth of imports to just 7.5%, compared with a going rate of more than 1000% p.a. in selected categories over the past few years.
In May, China tries to appease international markets by slapping a 400% increase in export taxes on some clothing categories. No one is fooled – these categories represent only 3% of China’s total textile exports. “We simply don’t understand how they can produce at these prices” says a French textile industry spokesman. A FutureWorld International executive survey calls them “insanely low prices” and rates competition from China and Asia as the biggest concern keeping executives awake at night.
Although the EU and US textile industries are shrinking (and the US textile industry has lost one million jobs since the 1980s), the EU is still the world’s leading exporter of textiles and the second largest exporter of clothing. The US is still the world’s largest producer and exporter of raw cotton. Asia has now become the world’s largest exporter of clothing, representing more than 50% of the world market.
China’s textile companies spent almost US$15 billion in 2004 building capacity but this has now, due to lack of information provided by government, left them with massive overcapacity. The Chinese government is considering policies to curb capacity-building.

2006: Retailers kick back against restrictions
Stopping Chinese manufacturers using US cotton seems a little like cutting off your nose to spite your face.
As China curtail purchases of raw cotton and bolsters its own capacity, US cotton producers complain of shrinking markets. US retailers complain that, at the higher prices due to compounding import and export tariffs, sales volumes have slumped, outlets are closing and jobs are being lost.
It is becoming apparent who the real losers are in the decades old protectionist war against China – the European and American producers, consumers and the retailers who cater to them.
Here’s the irony: the US textile and apparel industries employ less than 0,5% of working Americans (Fortune 16 May 2005) but new restrictions hurt millions of American consumers and tens of thousands of retailers. In the US 32 million households, comprising more than 80 million people, get by on less than US$ 25,000 per annum. For them, any saving on life’s necessities, such as clothing, is precious. Most of America is being hurt by restrictions to protect a few.
In other countries, such as South Africa, similar scenarios are being played out. The unions representing the remaining shreds of the textile industry demand ever more restrictions, signaling the imminent extinction of the complete textile and clothing industries in those countries.

2007: SE Asia quivers as China goes for added value
China actively looks for strategies that will broaden its impact across the entire textile value chain. The first ‘supply chain city’ goes operational in Liaoning Province.
China will capitalize on its already huge domestic fiber and fabric production by in-sourcing business traditionally dominated by the US and Europe. Traditionally export-led SE Asian countries fear that China’s dominance will threaten their economies.
The West has every reason to fear China’s increasing dominance in smart fibers – genetically modified natural fibers that can be programmed for fashion and convenience – to change color on demand or to ‘remember’ the shape that they were before being creased.

2008: China escalates investment in SE Asian resource-rich countries
Restrictive import duties on Chinese textiles have prompted many entrepreneurial Chinese to open up production lines in countries such as Vietnam, Laos and Cambodia. Although average labor costs in these countries are up to 30% lower than in China, these figures are misleading. These countries are not able to compete with China on quality, work ethic, scale, speed and reliability. Their figures do not include the top end of the labor market that gives China the edge.
However, the real reason for these private initiatives and moves to third world Asian countries has been to bypass import/export quotas set by Chinese, US and EU governments. Chinese business in Cambodia and Vietnam is now said to represent 30% of these economies. Everything from zippers to T-shirts is being manufactured there.

Almost as an afterthought Chinese businesses are also controlling the natural resources of this region – oil, copper, palm oil, coal and timber and wood products – feeding China’s insatiable appetite for resources. Billion dollar projects range from gas projects in Indonesia to mines in Vietnam.

2009: China escapes the ‘Made in China’ tag
China’s exports are now shipped with ‘Made in Vietnam’ and ‘Made in Cambodia’ tags. Markets such as the US and EU in fact give trade preferences to these ‘disadvantaged’ communities.
Almost 40% of China’s textile production is now based offshore and China is the biggest investor in most of these countries. Chinese investors are financing what will be the world’s tallest building in Phnom Penh.

2010: China wins political capital
With the USA still involved in wars against terrorism and for democracy, SE Asian countries have been largely ignored by the first world for years. Meanwhile, Chinese political impact in the region has been on the rise and is suddenly seen as a benefactor rather than a threat. At the same time, the US and Europe are still fine-tuning restrictive trade practices.

2011: China becomes the ultimate ‘one-stop textile marketplace’
China dominates production in ten SE Asian countries and has established exchange agreements that give China access to resources at ever lower prices in return for creating local jobs and economic activity in the textile industries. The resource bubble starts to let out steam and there is a new global fear of a crash in resource prices.
The first major product lines using smart fibers start hitting US and European markets. Clothes with a ’shape memory’ that don’t need ironing and variable color ‘mood fibers’ become hot fashion items in stores such as Gap. The IP is American but the design and production is Chinese. And China still refuses to participate in international IP agreements.
China, and Chinese companies based outside of China, are now thought to make up almost 80% of the world textile market. The textile war appears to be over, for now.