Safeguarding South Africa’s clothing, textile and footwear industries

by

Gustav Brink∗

∗ Tralac Associate; Member Brindis Remedies.

1. Introduction This article focuses on the predicament in which the clothing, textile and footwear

industry currently finds itself and the relief that is available. The textile safeguard action

recently taken by both the European Union and the United States is also considered to

determine whether those actions may assist the South African industry in its quest for

protection.

The article considers the different remedies that are available, i.e. ‘normal’ and

‘Protocol’ safeguards both in terms of the WTO and South African law, and investigates

whether the South African Government has the political will to apply the necessary

measures to safeguard the South African industry. The article considers the

requirements and procedures under both the ‘normal’ and ‘Protocol’ safeguards and

presents a view on which of the two instruments is likely to provide the Southern African

Customs Union (SACU)1 industry with the better remedy.

2. Basic overview 2.1 Introduction One of the cornerstones of the World Trade Organization (WTO) is Article I of the

General Agreement on Tariffs and Trade (GATT), which provides for most favoured

nation (MFN) treatment. In terms of MFN treatment, once a country extends ‘any

advantage, favour, privilege or immunity … to any product originating in or destined for

any other country’, it has to extend the same advantage immediately and

unconditionally to the like product originating in or destined to all other WTO Members.2

In terms of Article II of GATT, WTO Members undertake ‘to accord to the commerce of

other contracting parties treatment no less favourable than that provided for in the

appropriate Part of the appropriate Schedule annexed to’ GATT.3

1 SACU consists of Botswana, Lesotho, Namibia, South Africa and Swaziland. 2 Art I.1 of GATT. 3 Art II.1(a) of GATT.

2

Safeguards are an exception to these GATT rules as safeguards remove the obligations

a member has incurred under Article II of GATT and may, under certain circumstances,

also discriminate between WTO Members. Article XIX of GATT, entitled ‘Emergency

Action on Imports of Particular Goods’, provides for ‘normal’ safeguards, while the

Protocol of Accession of the People’s Republic of China4 provides for ‘Protocol’

safeguards, i.e. safeguards conducted in terms of that country’s Protocol of Accession

to the WTO and aimed exclusively against imports from that country.

2.2 Normal safeguards Normal safeguards are conducted in terms of the provisions of Article XIX of GATT and

the WTO Agreement on Safeguards. In terms of Article XIX, safeguard action may only

be taken in cases where

If, as a result of unforeseen developments and of the effect of the obligations

incurred by a contracting party under this Agreement, including tariff

concessions, any product is being imported into the territory of that contracting

party in such increased quantities and under such conditions as to cause or

threaten serious injury to domestic producers in that territory of like or directly

competitive products, the contracting party shall be free, in respect of such

product, and to the extent and for such time as may be necessary to prevent or

remedy such injury, to suspend the obligation in whole or in part or to withdraw or

modify the concession.5

The Agreement on Safeguards contains a similar provision, although it does not make

reference to unforeseen developments and the obligations of a Member under the

GATT.6 There is not clarity as to what ‘unforeseen developments’ would relate to,

although it may be argued that at the time the WTO Agreement was concluded, it was

4 WTO. 2001. Accession of the People’s Republic of China (WT/L/432), 23 November 2001. 5 Art XIX.1(a) of GATT. 6 Art 2.1 of the Agreement on Safeguards. S1.2 of the Safeguard Regulations contains a similar provision.

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unforeseen that China would become a member of the WTO as quickly as it did.

Additionally, in the case of South Africa, it could be argued that the rapid movement of

the local currency (the rand) against the major currencies, especially the strengthening

of the rand since 2002, was an unforeseen development that has had a major impact on

the price of imported products.

The Agreement on Safeguards requires Members to publicly make available the

procedures that will be followed in safeguard investigations prior to the conduct of such

investigations.7 Since the Safeguard Regulations were only promulgated on 27 August

2004, and since the procedures were only established in these regulations, no South

African industry could apply for any safeguard measures prior to this date. The

Agreement on Safeguards also requires the industry to establish serious injury or threat

thereof as a result of a sudden and significant increase in imports. Serious injury is

defined as the ‘significant overall impairment in the position of the industry’.8 Although

the Agreement provides that the investigating authority shall evaluate all relevant injury

factors in its determination of serious injury,9 the Agreement lists fewer injury factors

than those listed in the WTO Anti-Dumping Agreement. In terms of the ‘non-attribution’

principle, injury caused by factors other than the increased imports may not be

attributed to the increased imports and it must be clearly demonstrated, on the basis of

objective evidence, that there is a causal link between the serious injury and the

increased imports.10

Once an investigation has been initiated reasonable public notice must be given to all

interested parties and they must have the opportunity to submit their views and to

7 Art 3.1 of the Agreement on Safeguards. 8 Art 4.1(a) of the Agreement on Safeguards. 9 Art 4.2(a) of the Agreement on Safeguards. See also WTO. Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products WT/DS98//R (adopted 12/01/2000) par. 7.55; WTO. Argentina – Safeguard Measures on Imports of Footwear WT/DS121/AB/R (adopted 12/01/2000) par. 136; WTO. Argentina – Definitive Safeguard Measure on Imports of Preserved Peaches Panel Report WT/DS238/R (adopted 15/04/2003) par. 7.96. 10 Art 4.2(b) of the Agreement on Safeguards. See also WTO. United States – Definitive Safeguard Measure on Imports of Wheat Gluten from the European Communities WT/DS166/AB/R (adopted 19/01/2001) par. 451; WTO United States – Definitive Safeguard Measures on Imports of Certain Steel ProductsWT/DS248/AB/R (adopted 10/12/2003) WTO. United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea WT/DS202/AB/R (adopted 08/03/2002) par. 217.

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respond to the presentations of other parties.11 Once the investigation has been

finalised, the authorities must publish a report setting out all relevant issues of law and

fact taken into consideration.12

The Agreement on Safeguards provides that provisional safeguard measures, in the

form of an additional duty, may be imposed for a period not exceeding 200 days. This

may only be done in critical circumstances where it can be shown that any delay in

imposing such measures would result in further damage that would be difficult to

repair.13 Safeguard measures may be imposed for a period not exceeding four years,14

but may be extended by up to another six years in the case of developing countries

taking such action.15 Unlike anti-dumping and countervailing measures, the period for

which provisional measures were in place is counted as part of the application period

for the definitive measure.

Other considerations play a significant role in the determination of the imposition of

safeguard measures. These include the problem of compensation, the requirement of

continual liberalisation of a measure during its life, the various forms that safeguard

measures can take and the fact that a safeguard measure cannot be reapplied for a

specified period of time once it has lapsed. The following paragraphs briefly consider

these issues.

The Agreement on Safeguards requires that Members ‘shall endeavour to maintain a

substantially equivalent level of concessions and other obligations to that existing under

GATT 1994 between it and the exporting Members which would be affected by such a

measure’.16 To attain this, the Members ‘may agree on any adequate means of trade

compensation for the adverse effects of the measure on their trade’.17 If the Members

cannot reach agreement, the Member affected by the measure may unilaterally 11 Art 3.1 of the Agreement on Safeguards. 12 Idem. 13 Art 6 of the Agreement on Safeguards. 14 Art 7.1 of the Agreement on Safeguards. 15 Art 9.2 of the Agreement on Safeguards. 16 Art 8.1 of the Agreement on Safeguards. 17 Idem.

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‘suspend … the application of substantially equivalent concessions or other obligations

under GATT 1994, to the trade of the Member applying the safeguard measure’.18 If the

safeguard measure was imposed following an absolute increase in the volume of

imports, such right of suspension may not be applied for a period of three years from

the imposition of the measure.19 It follows that once a measure is imposed for a period

exceeding three years, the Member affected by such measure may suspend

concessions to the same effect of trade. Accordingly, most safeguard measures will

only be imposed for a period of three years.

A safeguard measure shall be progressively liberalised over its lifetime.20 Thus, if an

additional duty of 100% was imposed as a safeguard measure, the level of duty has to

be decreased periodically. There are no guidelines indicating how often or the extent to

which the measure must be liberalised. The duty could therefore be decreased to 90%

after one year and to 80% after two years. If the safeguard measure is extended, it has

to be continually liberalised over the full period that it remains in effect. Therefore, if the

duty was liberalised to 80% at the end of the period for which the safeguard measure

was originally imposed, the duty would have to decrease further, e.g. to 70%, 60% and

50% over the next three years. Another factor that affects the period for which a

safeguard measure will be imposed is the requirement to conduct a half-term review in

cases where a measure is imposed for more than three years.21 In the United States

safeguard measures are typically imposed for a period of three years and one day,

which forces the United States to conduct a half-term review to determine whether the

measure cannot be withdrawn or whether the pace of liberalisation cannot be

increased.

Safeguard measures can take the form of an additional duty in any form,22 a quota or a

combination thereof. Safeguards are therefore an exception to the rule in Article XI of

GATT that quantitative measures should be eliminated. This makes safeguard

18 Art 8.2 of the Agreement on Safeguards. 19 Art 8.3 of the Agreement on Safeguards. 20 Art 7.4 of the Agreement on Safeguards. 21 Idem. 22 Duties can take the form of ad valorem duties, specific duties or formula duties.

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measures more attractive than other trade remedies, as the actual volume of imports

from all countries can be controlled. The Agreement on Safeguards contains provisions

detailing how the volume of quotas should be determined and distributed between the

different Members.23

The last important issue regarding normal safeguards is the provision that a safeguard

measure may not be applied to a product again for a period equal to that for which a

safeguard measure was in place, but with a minimum waiting period of two years.24 In

the case of developing countries the waiting period is half the duration of the previous

measure, but still with a minimum period of two years.25

2.3 Protocol safeguards The Accession of the People’s Republic of China to the WTO26 (the Protocol) contains a

specific Article on China-specific safeguard measures.27 In the first paragraph thereof it

is provided that ‘where products of Chinese origin are being imported into the territory of

any WTO Member in such increased quantities or under such conditions as to cause or

threaten to cause market disruption’, that Member ‘may request consultations with

China with a view to seeking a mutually satisfactory solution’.28 ‘Market disruption’ is

defined as taking place where ‘imports of an article … are increasing rapidly … so as to

be a significant cause of material injury … to the domestic industry.’29 In its

determination of market disruption and material injury the authority must ‘consider

objective factors, including the volume of imports, the effect of imports on prices for like

or directly competitive articles, and the effect of such imports on the domestic industry

producing like or directly competitive products.’30 No further guidance is given in regard

to what such objective factors would entail.

23 Art 5.2(a) of the Agreement on Safeguards. 24 Art 7.5 of the Agreement on Safeguards. 25 Art 9.2 of the Agreement on Safeguards. 26 WTO Accession of the People’s Republic of China (WT/L/432)(23 November 2001). 27 Art 16 of the Protocol. 28 Art 16.1 of the Protocol. 29 Art 16.4 of the Protocol. 30 Idem.

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If the parties agree that the imports from China are causing market disruption and that

action is necessary, ‘China shall take such action as to prevent or remedy the market

disruption’.31 If the consultations do not lead to an agreement within 60 days, the

importing Member may withdraw concessions or otherwise limit imports to the extent

necessary to prevent such market disruption.32

Other than to provide that unilateral action can be taken by the importing country where

no agreement can be reached within 60 days, that a provisional Protocol safeguard

measure may not remain in place for more than 200 days33 and that China can retaliate

if such measure is in place for more than three years,34 there are no guidelines on the

time frames involved in Protocol safeguards. All Protocol safeguard measures must

lapse no later than 12 years after China’s accession to the WTO, regardless of when

they were imposed.

There is no restriction on reapplying the measure, nor of applying it immediately after a

normal safeguard measure has lapsed, nor on applying a normal safeguard measure

after a Protocol measure has lapsed.

2.4 The International Trade Administration Act The International Trade Administration Act35 (ITA Act) provides in section 16 thereof

that the Commission

must investigate and evaluate… applications in terms of section 26 with regard to

safeguards measures… [and] matters with regard to safeguard measures … that

the Minister directs the Commission to consider; or [the] Commission considers

on its own initiative.

31 Art 16.2 of the Protocol. 32 Art 16.3 of the Protocol. 33 Art 16.7 of the Protocol. 34 Art 16.6 of the Protocol. In cases where imports only increase in relative terms, but not in absolute terms, this period will be two years only. 35 The International Trade Administration Act, 71 of 2002.

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Section 26(1) of the ITA Act further provides that a ‘person may, in the prescribed

manner and form, apply to the Commission for safeguard duties or the imposition of

safeguard measures other than a customs duty amendment’, while subsection 3

provides that the Commission must allow interested parties ‘the prescribed time’ to

make written representations concerning the application.

The ITA Act also provides that the Minister of Trade and Industry may, following

consultations with the Commission, issue regulations regarding the proceedings and

functions of the Commission,36 and that the Commission may issue guidelines in the

Government Gazette ‘on the Commission’s policy approach to any matter within its

jurisdiction.’37 These guidelines, however, are not binding on the Commission or a

court.38 Other than general procedures, e.g. that the Commission must notify the SACU

Secretariat ‘upon receipt of an application in terms of section 26(1)(c) or (d)’,39 the ITA

Act does not contain any other provisions on safeguards and does not distinguish

between different types of safeguards.

2.5 The Safeguard Regulations The Safeguard Regulations do not address the issue of Protocol safeguards other than

providing that:

Nothing in these regulations shall preclude the Commission from taking special

safeguard action in terms of any country’s Protocol of Accession to the World Trade

Organization. Any safeguard action so taken shall be taken in line with the terms

and conditions stated in the Protocol of Accession.40

It follows that there are currently no regulatory guidelines regarding the conduct of

Protocol safeguard investigations.

36 S59(a) of the ITA Act. 37 S60(1) of the ITA Act. 38 S60(2)(b) of the ITA Act. 39 S30(1)(a) of the ITA Act. 40 Safeguard Regulations (SGR) 1.9.

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As regards normal safeguards, the Safeguard Regulations provide that ‘a safeguard

investigation shall only be initiated upon acceptance of a written application by or on

behalf of the SACU industry’.41 The SACU industry is defined as all producers in SACU

that produce the like or directly competitive product or those whose output constitutes ‘a

major proportion’ of such product, with the limitation that where a producer is also an

importer or is related to an exporter or an importer, such producer may be disregarded

for the purposes of establishing the SACU industry.42 Industry is required to submit

proof that the industry is suffering ‘serious injury’ as a result of significantly increased

imports. ‘Serious injury’ is defined as the significant overall impairment of the industry43

and the industry is required to submit information relating to its sales volume, profit and

loss, output, market share, productivity, capacity utilisation and employment44 in

addition to proving that the product is being imported, either in absolute terms or relative

to production and demand in SACU, in such increased quantities and under such

conditions as to cause the serious injury.45

The application must contain a complete description of the imported product, as well as

of the SACU like and directly competitive product, industry standing, the factors on

which the allegation of serious injury is based, the unforeseen developments that led to

the increased imports, the efforts taken or planned to compete with the imports and the

relief sought.46 In addition to WTO requirements, the industry is also required to submit

a ‘plan indicating how it will adjust to increase its competitiveness’ within 60 days after

initiation of the investigation.

2.6 The Clothing, Textile and Footwear Industry Following the concern of several countries at the imminent lapse of the Multifibre

Arrangement (MFA) at the end of 2004, which would result in the termination of all

41 SGR 4.1. 42 SGR 2. 43 SGR 8.1. 44 SGR 8.3(b). 45 SGR Preamble par. (a), s1.2, s8.3(a). 46 SGR 11.3.

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quotas on textiles and clothing worldwide, these countries47 joined hands and issued

the Istanbul Declaration in March 2004. The primary objective of the Istanbul

Declaration was to petition the WTO ‘to extend the deadline for implementation of the

final integration stage [of the MFA] to December 31, 2007’.48

The clothing, textile and footwear industry is one of the largest employers in South

Africa and in SACU, currently employing an estimated 185 000 workers in South Africa

alone.49 It has benefited significantly from the Africa Growth and Opportunity Act

(AGOA) legislated by the USA to provide preferential access to products originating

from African countries.50 However, the industry is now in dire straits and many

companies have closed down as a result of the increase in imports, especially from

China, at very low prices.

Other countries face the same problem. In January 2005, Turkey imposed provisional

safeguard measures against China in the form of quotas on 42 textile and clothing

product categories. Both the European Union (EU) and the United States of America

(US) have negotiated agreements with China outside the scope of the WTO, i.e. limiting

imports from China through negotiation, rather than applying a normal or Protocol

safeguard. The EU and US negotiations followed the inability of their industries to

collate the necessary information in the format required by their authorities to enable

them to initiate normal or Protocol safeguard investigations. In both instances, the

industries indicated that the information required was of such a detailed nature that the

industries would not be able to complete the relevant questionnaires. This followed as a

result of changes within the industry, including shifts in production as a result of fashion

47 These countries are Argentina, Austria, Bangladesh, Belgium, Bolivia, Botswana, Bulgaria, Chile, Columbia, Costa Rica, Czech Republic, Dominican Republic, Denmark, Ecuador, El Salvador, France, Germany, Ghana, Greece, Honduras, Indonesia, Israel, Italy, Ivory Coast, Jordan, Kenya, Latvia, Lesotho, Lithuania, Madagascar, Mauritius, Mexico, Namibia, Nepal, the Netherlands, Norway, Paraguay, Peru, Philippines, Poland, Portugal, Senegal, Slovenia, South Africa, Spain, Sri Lanka, Swaziland, Switzerland, Tanzania, Tunisia, Turkey, United Kingdom, United States of America, Uruguay, Venezuela and Zambia. See www.fairtextiletrade.org/istanbul/ ids.html (8 November 2005). 48 See par. 1 of the Istanbul Declaration. The text of the Istanbul Declaration is available at www.fairtextiletrade.org/istanbul/declaration.html (8 November 2005). 49 Statistics South Africa CTFL employment time series. In 1996, this figure stood at 261 000 which indicates that the industry shed 76 000 jobs in 10 years, 50 For more information on AGOA, see www.agoa.info.

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changes, employees manufacturing different products rather than being dedicated to

specific products only, and the variety of products manufactured making it impossible to

properly allocate costs, investment and profit.51

3. Industry’s dire straits 3.1 Introduction The South African clothing, textile and footwear industry is experiencing serious injury in

the form of retrenchments, decreased production and sales, declining profit and the

closure of manufacturing operations, including factories that have been operating for

several decades. The next paragraphs consider the reasons why South African industry

cannot compete with the prices of the Chinese imports.

3.2 Lapse of the MFA The MFA lapsed with effect from 1 January 2005. This had the effect of removing the

remaining trade quotas on textiles and clothing and provided China with the opportunity

to export any volume of products it desired.

While territories and countries such as the EU and the US experienced a surge of

imports in 2005 and immediately responded, South Africa has experienced a surge of

imports since 2003, yet no action has been taken. At least two safeguard applications

have been filed, one by Clotrade and one by the South African Clothing and Textile

Workers union (SACTWU), but Government has not initiated either of the investigations.

3.3 Strengthening of the South African currency The following table shows the evolution of the South African rand against the US$:

51 This information was obtained during an interview with Mr. Jack Kipling of Clotrade.

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Table 1: exchange rates52

Year Average As at 31/12 2001 8.62 12.11 2002 10.53 8.66 2003 7.57 6.65 2004 6.44 5.67 2005 6.38 6.35

The information in Table 1 clearly indicates that the South African currency

strengthened by more than 50% between the end of 2001 and the end of 2004. This

means that imports, priced in US dollars, cost half as much as four years earlier. This

has resulted in a flood of imports and decreased exports. The decrease in exports

resulted in lower capacity utilisation, thus resulting in higher per unit overheads and

decreasing competitiveness. When the cheap imports are added, it makes for a very

difficult situation for SACU producers.

3.4 Unfair competition from China

The Chinese currency is pegged to the US dollar (although there was a 2% devaluation

in 2005) at a rate that could be compared to having the South African rand pegged at

ten or more to the US dollar. This deliberate undervaluation of the Chinese yuan results

in increased competitiveness, thus decreasing imports into and increasing exports from

China, which leads to a very significant trade surplus for China. Chinese producers are

also eligible for government loans in preferred industries, of which the textile, clothing

and footwear industries all form part. The terms of these loans are extremely

favourable: not only need the loans not be repaid, but the interest rate is bound at

between 1% and 1.5% per annum.53 Additionally, Chinese exporters receive a 13%

export subsidy. Such subsidy is a prohibited subsidy in terms of Art 3.1(a) of the WTO

Agreement on Subsidies and Countervailing Measures.

52 Source: www.oanda.com (18 February 2006). 53 This information was obtained during an interview with Mr Jack Kipling, President of the Clotrade in South Africa.

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If all of these advantages were removed, the Chinese would lose a significant part of

their competitive advantage. On the other hand, if the South African textile, clothing and

footwear industries received the same incentives, they would become internationally

competitive, including against Chinese products.

3.5 Surge of imports especially from China Table 2 indicates the evolution of a number of clothing, textile and footwear products

from China from 2001 to 2004. It shows that there has been sustained and significant

growth at least since 2001. Not shown in Table 2 is the fact that unit prices (in US$)

decreased markedly during the period, i.e. the volume of products increased

significantly faster than the value thereof.

Table 2: Total value of and growth in imports from China54

(US$ 000) 2000 2001 2002 2003 2004 2001-2002

2002-2003

2003-2004

Clothing 95,434 85,713 95,978 202,448 417,115 12% 111% 106% Textiles 48,939 54,115 77,779 120,618 189,933 44% 55% 57% Footwear 82,227 114,370 120,266 188,469 292,229 5% 57% 55% Table 3 indicates the extent to which imports from China have displaced imports from

other countries. Although Table 3 indicates a relatively low import market penetration of

only 19% as regards textiles, it has already increased this share to more than 80% as

regards selected products.55 The increase in textile imports (by value) from China

contributes 49% to the overall increase in the value of textile imports between 2001 and

2004.

Table 3: Chinese imports as percentage of imports from all countries (by value)56

2000 2001 2002 2003 2004 Clothing 49% 51% 54% 66% 74% Textiles 7% 9% 12% 16% 19% Footwear 41% 59% 63% 70% 73%

54 Source: TIPS EasyData (www.tips.org.za). 55 Information obtained from an interview with Mr Brian Brink, CEO of the Textile Federation of South Africa (Texfed). 56 Calculated from TIPS Easydata (www.tips.org.za).

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Table 4: Volume of imports of selected products57

2000 2001 2002 2003 2004

6203.4: Men and boys' woven trousers

Volume - China 10,777,519 9,049,483 11,180,626 22,032,391 36,908,080Volume - rest of world 4,674,040 4,546,417 4,669,061 4,151,835 3,132,591Volume - world 15,451,559 13,595,900 15,849,687 26,184,226 40,040,6716204.6: Women's and girls woven trousers

Volume - China 3,203,703 3,382,799 6,108,535 20,086,839 26,932,001Volume - rest of world 1,353,627 1,722,192 2,199,360 2,621,184 2,363,011Volume - world 4,557,330 5,104,991 8,307,895 22,708,023 29,295,01262.05: Men and Boys’ woven shirts

Volume - China 5,956,659 4,492,236 6,486,770 12,092,264 14,284,420Volume - rest of world 8,544,851 6,516,676 5,575,799 6,706,850 5,386,119Volume - world 14,501,510 11,008,912 12,062,569 18,799,114 19,670,53962.06: Women's blouses

Volume - China 1,908,491 1,968,930 3,346,495 8,880,990 11,697,590Volume - rest of world 4,774,194 3,633,268 3,311,967 4,470,102 4,168,070Volume - world 6,682,685 5,602,198 6,658,462 13,351,092 15,865,6606204.5: Women's skirts

Volume - China 729,045 1,008,099 2,394,986 7,542,573 14,315,017Volume - rest of world 1,463,204 1,139,420 1,121,665 1,273,218 1,597,277Volume - world 2,192,249 2,147,519 3,516,651 8,815,791 15,912,2946108.2: Women's panties

Volume - China 14,299,788 11,542,057 15,358,471 28,175,651 46,320,388Volume - rest of world 2,333,076 2,408,528 8,983,373 2,274,344 550,642Volume - world 16,632,864 13,950,585 24,341,844 30,449,995 46,871,03061.10: Jerseys Volume - China 1,265,326 2,417,541 4,359,465 4,827,925 10,846,981Volume - rest of world 722,108 1,034,556 938,847 834,533 1,706,237Volume - world 1,987,434 3,452,097 5,298,312 5,662,458 12,553,2186104.6: Women's knitted trousers

Volume - China 631,398 1,182,113 2,722,185 4,742,802 10,485,509Volume - rest of world 364,345 725,520 761,735 650,963 848,901Volume - world 995,743 1,907,633 3,483,920 5,393,765 11,334,41061.05: Men's knitted shirts

57 Source: Official SARS customs data compiled by Clotrade, SAFLlA and Texfed.

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Volume - China 3,230,590 2,552,108 3,237,097 4,504,576 8,079,827Volume - rest of world 3,833,238 3,074,117 2,375,595 2,930,915 2,867,079Volume - world 7,063,828 5,626,225 5,612,692 7,435,491 10,946,9066104.5: Women's knitted skirts

Volume - China 198,324 229,035 1,333,780 2,868,353 8,168,005Volume - rest of world 82,093 154,080 388,396 328,731 487,442Volume - world 280,417 383,115 1,722,176 3,197,084 8,655,4476107.1: Men's underpants and briefs

Volume - China 5,529,627 4,801,006 8,401,229 8,414,090 18,964,632Volume - rest of world 1,374,309 699,730 1,797,830 1,748,306 950,544Volume - world 6,903,936 5,500,736 10,199,059 10,162,396 19,915,1766403.99: Footwear with uppers of leather

Volume - China 2,673,623 4,112,255 4,746,689 8,829,443 22,666,302Volume - rest of world 5,409,890 2,877,401 3,049,501 3,495,670 3,567,879Volume - world 8,083,513 6,989,656 7,796,190 12,325,113 26,234,18152.088: Woven cotton fabric

Volume - China 808,689 2,659,207 1,653,079 2,312,157 3,506,374Volume - rest of world 2,804,412 25,071,982 4,002,978 3,957,177 4,765,542Volume - world 3,613,101 27,731,189 5,656,057 6,269,334 8,271,91663.02: Bed and kitchen linen

Volume - China 424,249 872,792 1,061,575 2,683,637 4,283,311Volume - rest of world 3,002,813 2,233,716 2,377,919 5,816,385 6,148,219Volume - world 3,427,062 3,106,508 3,439,494 8,500,022 10,431,53055.14: Woven fabrics of polycotton

Volume - China 330,296 309,687 552,869 1,118,567 1,795,490Volume - rest of world 1,487,316 2,470,349 2,145,180 2,696,609 2,243,461Volume - world 1,817,612 2,780,036 2,698,049 3,815,176 4,038,95163.03: Curtains Volume - China 345,881 514,265 1,070,544 4,111,019 5,357,216Volume - rest of world 285,812 274,539 234,080 351,461 490,333Volume - world 631,693 788,804 1,304,624 4,462,480 5,847,549Total for categories Volume - China 52,313,208 51,093,613 74,014,395 143,223,277 244,611,143Volume - rest of world 42,509,328 58,582,491 43,933,286 44,308,283 41,273,347Volume - world 94,822,536 109,676,104 117,947,681 187,531,560 285,884,490China's % of imports 55.17% 46.59% 62.75% 76.37% 85.56%

The information in Table 4 clearly indicates the very significant growth in import

volumes, especially from China. It also shows that imports from China have grown as a

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percentage of total imports and that Chinese imports have replaced other imports in

several cases. The Chinese imports’ share of the South African and SACU market grew

significantly in each instance. For all clothing products included in Table 4, total Chinese

imports grew from 52 313 208 units in 2000 to 244 6211 143 units in 2004, showing

growth of 368% over the period. During the same period the total volume of imports for

the same products from the rest of the world decreased from 42.5 million units to 41.3

million units, a decrease of 3%. For the products listed in Table 4, Chinese imports as a

percentage of total imports grew from 55.2% in 2000 to 85.6% in 2004.

3.6 Injury already experienced 3.6.1 Introduction The textile, clothing and footwear industry experiences a number of peculiar and

interesting problems in compiling a safeguard application. These relate to the fact that

fashion changes may make it virtually impossible to submit information in the format

requested by the Commission. The following paragraphs consider the influence of

fashion on the industry and the effect this has on compiling information on the various

injury factors in the required format, as well as the injury already experienced by the

industry.

3.6.2 Fashion changes In the GATT Panel report on Fur hats,58 the Panel was asked to determine whether the

US had correctly determined that there were unforeseen circumstances leading to the

increased importation of fur hats, as required by Article XIX of GATT. The parties

argued that it was common knowledge that fashion changes over time. The Panel,

however, found that what could not have been foreseen was the speed at which the

fashion changed. This serves to indicate the volatility of the fashion (and therefore to a

large extent the clothing) industry. This is another reason for the industry’s inability to 58 GATT. 1951. Report on the Withdrawal by the United States of a Tariff Concession under Article XIX of the General Agreement on Tariffs and Trade, October 1951.

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provide accurate comparative data over a period of three or more years. As a result of

fashion changes, companies may not manufacture the same products in each of the

years and even if they do, the style, and thereby the costs, of the products may differ

significantly. Strict compliance with the safeguards application questionnaires therefore

makes it virtually impossible to properly lodge a safeguard application in the clothing,

textile and footwear industry.

3.6.3 Injury factors (a) Domestic sales

Domestic sales volumes have decreased as factories had to scale down, with several

factories closing down. As of the beginning of November 2005, four more companies

have filed for liquidation,59 while one of the oldest established manufacturers, Rex

Trueform, with an annual turnover of nearly R400 million and a staff of nearly 1 000,

indicated in 2005 that it would close its doors as a direct result of the Chinese imports.

(b) Output and capacity utilisation

As indicated in the previous paragraph, several companies were liquidated and others

downsized. This resulted in lower total output, while the industry currently has

significant spare capacity.

(c) Prices

Not shown in paragraph 3.5 owing to space constraints are the unit prices of products

from China, which are, in each instance, significantly lower than the average unit prices

for the same products from the rest of the world. In several instances, the import price

(Free on Board – FOB) from China for the final garments is lower than the cost of the

material for the South African industry. Thus, men’s suits (not included in Table 4) were

imported at an average of R10.76 per suit in 2004 (and only R5.60 per suit in 2003),

women’s jackets at R11.04 per unit, knitted men’s trousers at R4.87 per unit, women’s

skirts at R7.44 per unit, men’s shirts R6.33 per unit, women’s blouses at R7.25 per unit,

59 Information obtained from an interview with Mr Jack Kipling of Clotrade.

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men’s underwear and briefs at R0.71 per unit and ladies panties at R0.80 per unit.

Considering that China itself has to import at least part of its raw material requirements,

inter alia cotton, it is not clear how the Chinese can export at less than their own cost

without significant government intervention. These low prices have forced South African

producers’ prices down to the extent that several producers became unprofitable and

had to close down.

(d) Profit

While South African producers have been closing down, downsizing or simply struggling

to survive by cutting prices to meet the Chinese products’ prices, often selling at a loss,

the major retailers selling the Chinese products have recorded record profits. Table 5

indicates the profit recorded by five of the largest retailers trading in the Chinese

products. These profits indicate that the low prices referred to in the previous paragraph

are not passed on to the consumer.

Table 5: Retailer profits before tax60

(R million) 2002 2003 2004 Woolworths 599 778 937Truworths 452 549 761Foschini 283 513 753Edcon 263 565 1027Mr Price 193 256 296

(e) Employment

The industry has shed approximately 76 000 jobs (30% of the total workforce) since

1996. This excludes positions of non-unionised workers that have been lost, as well as

vacancies arising through retirement or resignations that were not filled. Accordingly,

the actual figure will be significantly higher. It is estimated that a total of 26 000 jobs

were shed in 2003 and 2004 alone, with another more than 15 000 in 2005.61

60 Sources: Annual Reports 2002, 2003 and 2004 of Woolworths, Truworths, Foschini Group, Edcon and Mr Price Group. 61 SALRI job loss database, April 2005

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4. Normal or Protocol route: is it either or? 4.1 Introduction The procedures under the normal and Protocol safeguard mechanisms, respectively,

have been described above. It has been indicated that the Commission has not

published any regulations or guidelines relating to Protocol safeguards. However, there

is no reason why industry cannot apply for a Protocol safeguard, and it would be up to

the Commission to then determine the procedures to be followed. In the absence of

regulations and guidelines, these procedures should be based on the provisions

contained in China’s Protocol of Accession. The next paragraphs consider the

advantages of each of the different safeguards and investigate which of the two would

be the better instrument or whether both could be applied.

4.2 Advantages of Protocol safeguard route The Protocol safeguard does not contain a condition that a safeguard measure, whether

normal or Protocol, may not be applied again within a certain period after it had been

imposed, if market conditions so require. Although this will not be taken lightly by the

Chinese Government, there is no reason why the Commission cannot impose a

Protocol safeguard for a period of three year and immediately start afresh with a new

Protocol safeguard investigation. The Commission will also be able to undertake a

normal safeguard immediately after the Protocol safeguard has lapsed, or even some

time prior to the lapse of such Protocol safeguard measure.

The second advantage of the Protocol safeguard is that it only requires proof of

material, rather than serious, injury to the domestic industry. Alternatively, the industry

can point to trade diversion as a result of Protocol safeguard action taken by other

countries. Thus, if the safeguard action taken by the EU and the US had been in terms

of the Protocol, the South African industry would have been able to use this to argue

that there would be significant trade diversion from these countries.

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Another advantage relates to the fact that the action is taken against imports originating

in China only.62 This would allow South African clothing manufacturers to still source

textiles from countries other than China, e.g. from India and Pakistan, without being

limited by the safeguard measures. The last advantage relates to the fact that Protocol

safeguard measures are a negotiated position, which are not bound by the specific

provisions of the Agreement on Safeguards or the Safeguard Regulations. This may

provide a more effective remedy to the industry.

4.3 Advantages of normal safeguard route While it has been indicated that there are several advantages for following the Protocol

safeguard route, this does not mean that the normal safeguard route is without its own

advantages. The first advantage is of political nature, as it does not send out the

message that South Africa is taking unilateral action against China. This would be of

importance in any possible free-trade agreement negotiations with China. The second

advantage is that it provides safeguard action against all textile, clothing and footwear

products, and not only against those being imported from China. Accordingly, it also

addresses problems with imports from countries such as India and Pakistan, and

provides protection against any possible circumvention of safeguard measures imposed

strictly against China. The third, and possibly the biggest, advantage of normal

safeguards is the fact that the Safeguard Regulations clearly indicate the requirements

and the procedures to be followed. This may significantly decrease any possible delays

in the finalisation of any safeguard action.

4.4 Either or? As Article XIX of GATT and the Agreement on Safeguards predate China’s Protocol of

Accession they contain no reference to the latter document. However, China’s Protocol

of Accession also contains no reference to either of these Agreements. It is submitted

that this indicates that the Protocol is a legally distinct document from Article XIX of 62 Note that the rules of origin apply in such a case. Thus, if goods originating in China were imported from Hong Kong, these imports would still be subject to the safeguard measures.

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GATT and the Agreement on Safeguards and that they are not mutually exclusive.

Thus, there is nothing that prevents an authority from imposing Protocol safeguards

against increased imports from China and subsequently replacing it with a normal

safeguard in reaction to an increase in imports from other countries. Likewise, although

the Agreement on Safeguards provides that no safeguard action may be taken again in

respect of the same product for the same duration that safeguard measures were in

place, or for half that period in the case of developing countries, with a minimum of two

years between such actions, there is no provision that an authority may not impose a

normal safeguard immediately following the lapse of a Protocol safeguard, and vice

versa.

This means that industry can consider following one route for a particular period of time

and thereafter the other. However, considering that Protocol safeguards must lapse no

later than 12 years after China’s accession to the WTO, i.e. in 2013, it is submitted that

it would be better to follow the Protocol route first, if an industry contemplates using

both routes.

4.5 Political implications The South African government has embarked on a programme of negotiating free-trade

agreements with several countries or trade blocs, including the US, Mercosur and the

European Free Trade Association (EFTA). It has also indicated its intention to conduct

free trade negotiations with several other countries, including China. It may therefore

not have the political will to take safeguard action aimed exclusively against China, i.e.

to use the Protocol safeguard, as that might jeopardise future negotiations.

Government in February 2006 confirmed in an interview with the author that it had

reached an ‘in principle agreement’ with the Chinese government in terms of which the

Chinese government would be willing to consider voluntary export restraints subject to

‘a myriad of conditions’. These conditions have not yet been agreed upon, nor has any

agreement been reached as to the level of the restraints or the products to which such

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restraints will apply. However, the negotiations appear to be on the same basis as

measures taken by the EU and the US outside the scope of the WTO. It is submitted

that although any agreement reached with the Chinese government on this basis will be

to the benefit of the SACU industry, this will jeopardise any possibility of successfully

lodging a Protocol safeguard application.

5. Conclusion At first glance it seems that there would be distinctive advantages for the industry to first

follow the route of the Protocol safeguards and to apply for normal safeguards once the

Protocol safeguard measures lapse. However, considering that there are currently no

regulations or guidelines in place indicating the procedures to be followed in Protocol

investigations, there may be significant delays in obtaining the necessary protection

using this avenue. Additionally, it has been indicated that South Africa wishes to enter

into free-trade negotiations with China, and from this perspective, Government might

not have the necessary political will to challenge or to be seen to challenge China’s

exports to South Africa. Accordingly, it is submitted that the only viable route for industry

would be to apply for normal safeguards.

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