When is fair competition unfair?

On February 23, 2006, the European Commission announced that it had found compelling evidence of serious state intervention in the leather footwear sector which is contrary to WTO rules. By selling shoes at less than production costs (dumping) the two countries had hugely increased their shares of European markets leading to a fall of 30% in EU production, a slump in prices of 30% and the loss of 40,000 European jobs. Investigations at thirteen leather shoe factories in China were initiated by a proposal by the European Union (EU) trade commissioner Peter Mandelson to impose provisional anti-dumping duties of 19.4% on imported leather shoes from China and 16.8% on those from Vietnam. The plan is for the duties to be phased in over five months, beginning at about 4%, but the proposal has first to be approved by the EU's council of ministers which will vote on it on March 21. There are bound to be demands from EU shoe manufacturing countries like Italy, Spain and Portugal to make the duties higher though other member states may argue against any action at all given the effect that higher duties could have on inflation. As the proposal stands, children's shoes and high-tech sports shoes would be exempted from the duties, because the Commission's investigation 'suggests that there is not sufficient European production of these shoes' to make this industry worth protecting. In a statement issued after making its proposal, the Commission said investigations had revealed 'compelling evidence of serious state intervention in the leather footwear sector in China and Vietnam - cheap finance, tax holidays, non-market land rents, improper asset valuation. This state intervention is leading to dumping which is unacceptable under World Trade Organisation rules. Significant comparative advantage in China and Vietnam is being topped up with uncompetitive behaviour. This balanced solution corrects injury, but allows maximum predictability for importers.' Brussels said that none of the companies in China and Vietnam it had investigated were operating in market economy conditions and it had, therefore, selected Brazil in order to make a comparison in its anti-dumping calculations. The CLIA said this was 'not justified'. Su Chaoying, vice-director of the CLIA, said that to take a country like Brazil as a substitute country 'could be a vital blow to Chinese companies as China has cheaper labour, material resources and a mature industrial chain.' In Brussels, the European Branded Footwear Coalition (EBFC) warned that the move risked a repeat of last summer's 'bra wars' over textile imports. Unlike that case, however, there will be no quantitative limit on the number of shoes that can be imported into the EU. It said the proposed duties would put higher prices on shoes, as much of the value was generated once the shoes arrived in Europe. 'We are concerned that setting the duty at a rate that cannot be absorbed by manufacturers and retailers [the cost] will ultimately be borne by European consumers', it said. Leading shoe brands like Clarks and Timberland are members of the EBFC. Gustavo Gonzalez-Quijano, secretary general of the European Leather Association (Cotance), said the duties 'don't seem very high to me'. Emphasising that he was giving a personal view and not expressing the position of the association, which was neutral, he told Leather International that: 'in terms of the percentage change, they are reasonable'. He noted that in Mexico and Brazil, for example, duties had been raised by 200 or even 300%. 'Also, the unit price of shoes from China is very low', he said. A pair of shoes could cost as little as e2-3 but even a price of e10 would rise by only e2 'and for the consumers that would certainly not be much change.' For the trade, Gonzalez-Quijano said there would be an impact on profit margins, making it less profitable for distributors importing from China though it would remain so much cheaper to import from China 'that it may not have an important impact on trade.' He said Cotance did not take a position because China was 'a good trade partner, probably one of our top markets for finished leather.' He continued: 'We have no complaint about trade with China. We don't know whether they practice dumping or not but the footwear industry is free to defend their interests. Dumping is an unfair trade practice and if it is found then the Commission has to act', he said. Gonzalez-Quijano said he did not believe that action to protect against Chinese imports 'is likely to be of a temporary nature.' It was his view that it would not help provide the footwear industry with the assistence it would need in order to adjust structurally to the new realities of global trade. 'The elimination of quotas was foreseen a long time ahead and companies have been working hard to adjust and have changed structures and improved productivity to become competitive - they have a right to have the benefits of that', he said. But what the Commission was proposing was 'not really a mechanism that will provide lasting protection for European footwear manufacturers.' Neil Campbell, chief executive of the British Footwear Association (BFA) said that officially the association was sitting on the fence on the issue because of the mixture of interests that it represented. 'But I'll certainly observe that last year the volume of leather footwear from China and Vietnam - not taking into account children's footwear which has been excluded from the duties - was 95 million pairs and that's an awful lot of footwear', he said. It was a good move to phase in the duty increase over six months, Campbell told Leather International. He said the 19.4% rate selected for China was basically a compromise 'between those who said there was evidence of dumping that would justify a much bigger margin and the retailers and importers who say that any duties are unfair and unjust and will be a tax on consumers.' But what effect would the chosen rate have? 'It's certainly the case that the average price (of Chinese shoes) is just a few pounds a pair, so 17% or whatever the average is on that isn't going to be a lot of money. But it isn't nothing', he said. Last year the average price into the UK of Chinese shoes at wholesale was almost six pounds a pair 'so it's another pound on that.' The total value of leather footwear from China and Vietnam was £600 million 'so if nothing else changes somebody's going to have to find another £100 million and that isn't insignificant.' According to Campbell the total spend by UK consumers on footwear was £5-£5.5 billion annually and £100 million was about 2%. 'Not a lot but if the average price of all footwear does go up by 2% that's not going to be terribly popular', he said. Campbell said that a lot of firms had switched their manufacturing to China or Vietnam in recent years and this move 'is going to be quite disruptive for them.' As far as UK manufacturers were concerned, he said: 'Small footwear retailers will probably find life a bit harder but it's not going to dramatically transform the fortunes of anyone.' He said it was hard to imagine that any European manufacturer who had switched production to China or Vietnam would now think of coming back to Europe. 'Once you've gone offshore it's so easy to go to another offshore place. Maybe they'll move from China to Taiwan or India or even Brazil but it will not be done quickly. If it [the duty] lasts for a few years I'd have thought it will make a difference. China will have that extra 20% and it will be less attractive so some production will move. Taiwan, Hong Kong and Macao will see a great surge in apparent production', he said. Campbell believes there will now be 'some uncertainty for the leather industry.' China had been an extraordinary growth market and it would now slow down. But production was already so great there that 'it won't be the case that suddenly there's a lot of footwear leather available.' Any imposition of provisional duties will be followed up by another round of consultations and investigations that could lead to permanent 'definitive' anti-dumping duties being imposed. So far we have only looked at the issue from the European perspective. Obviously China and Vietnam take a different view, but let us not forget some of the poorer nations in Asia and Africa who are also finding their own footwear sectors under threat from cheap imports and low priced competition for exports. According to EU statistics, shoes imported from China rose by 581% in volume and 433% by value between January and April, 2005, with the price of each unit down by 28%, although official Chinese export statistics disagree with this. In June and July, two anti-dumping actions relating to footwear were initiated by the European Footwear Manufacturers' Association with regard to 'footwear with protective toe caps' from China and India and 'footwear with uppers of leather' from China and Vietnam. In January 2006, the EU rejected a request by Chinese shoemakers for market economy status. An official from the China Chamber of Commerce's Division for the Import and Export of Light Industrial Products and Handicrafts said that the result had been expected since the Europe was under great pressure from Italy and Spain, backed by France and Portugal, to reduce imports from Asia. But the official believes it is still shocking that not a single one of the Chinese companies was given the market economy treatment and that the EU ignored the fact that the industry in China is operating free of government control or support. Opponents of the EU initiative argue that EU consumers will ultimately pay more for their shoes and that the types of shoes being imported to the EU are from a price point that does not compete with EU based manufacturers. Denying China's shoe-making industry the status of a fair competitor was wrong, industry officials said, adding that the European Commission's decision runs against the interest of the EU economy. Some of the world's largest footwear companies such as Nike, Reebok, Adidas and Puma have banded together to urge EU authorities not to impose limits on China's shoe exports to Europe. Nike said if the anti-dumping measures are imposed on footwear, the impact will be much larger than that felt in the textile industry. Currently, 70% of sports shoes sold in Europe come from China and Asia. However, no matter what measures the EU may take, they are unlikely to create new jobs in Europe as a result. On the other hand, European shoe companies, as well as Asian factories, are likely to end up paying a heavy price. Representatives of shoe brands such as Timberland and Wolverine have met with EU Commission officials to express concern that anti-dumping duties would help local manufacturers at the expense of consumers and retailers. 'What would happen is that European industries that have adapted to the new world would be penalised', said Gerd Rahbek-Clemmensen, vice-president of Danish ECCO. 'The fact is that if the EU rules in favour of the anti-dumping charge, many will be hurt', said Chen Guorong, president of Wenzhou-based Dongyi Shoes Co Ltd, which imports shoemaking machinery and materials from Europe. China imports US$300 million worth of leather and US$50 million worth of shoemaking machinery from Europe annually. The EU's decision to deny Chinese companies market economy treatment came after efforts by Chinese trade officials to stop the high duty rate. Gao Hucheng, vice-minister of commerce, had a series of meetings with EU officials and industry representatives in January. He warned that raised duties on shoes could set a dangerous precedent that could damage Sino-European relations. Europe dropped quotas on Chinese shoes at the start of 2005, and since then imports have surged. Under its rules, the EU has until early April to impose temporary sanctions and until mid-October to set tariff increases that could stay in place until 2011. Imported shoes currently carry a tariff of less than 10%. Retail lobby groups said the decision would add up to e10 (US$12.05) to the price of a pair of shoes. Europe is Vietnam's biggest customer and the anti-dumping case by the EU compounded the difficulties of the country's footwear industry last year and resulted in export revenues of only $3 billion against a targeted turnover of $3.3 billion. According to the Vietnam Leather and Shoe Association, the country's shoe export earnings this year will depend on the EU's final determination in the on-going anti-dumping case. Vietnam is well placed in the global footwear market and sees the USA as one solution to their current problems. Footwear exports to the US rose to US$620 million in 2005, an increase of 15% compared with 2004. However, the anti-dumping law suit also serves as a reminder to Vietnamese footwear manufacturers that they need to find smaller, alternative markets. Meanwhile, in the Philippines, still reeling from the effects of globalization, local shoemakers have asked their government to impose more safeguards to protect them from the influx of cheap imported shoes. At present, 80% of the Philippine market involves imported shoes and leather products from China, leaving only 20% for Filipino shoemakers in competition with imports from all other countries. At one time the country had a thriving footwear industry largely based in Marikina. It is now reported that the once-flourishing shoe business has fallen on hard times. Since the 1990s, footwear groups in Marikina and other areas have been warning against the influx of cheap goods from China, Korea, Taiwan and other countries due to liberalisation which intensified when the country became a member in 1995 of the WTO. Annual shoe imports have been arriving in increasing volumes, importing some 38.5 million pairs from 1997 to 1999. By 2001 to 2003, the volume had reached 56-60.2 million legally imported pairs. Smuggling has also reportedly become rampant. Of the 513 registered manufacturers in 1994, there are only 145 remaining in the country's shoe capital. More than 600,000 shoe workers lose their jobs every year and average production has dwindled from 105,000 pairs of shoes a year in 1994 to 42,000 pairs in 2003. Cheap shoes from China are also said to have nearly crippled Kenya's shoe manufacturing industry. Shoemakers there blame the government for failing to protect local jobs. But as with most developing countries, the reality of free trade means finding a balace between cheap imports and a chance to export more. Industrialised countries are said to be putting pressure on African governments to drop import tariffs and open their markets to manufactured products from industrialised countries. In Kenya this could mean that more shoes would flood the market, destroying local businesses without bringing any economic benefits to the country. At the sixth ministerial meeting of the WTO in Hong Kong recently, one of the debates centred on how to cut tariffs and increase non-agricultural market access (NAMA). The stakes are high, because African governments say they are being enticed to make concessions on non-agricultural goods in order to gain leverage in crucial negotiations on agriculture. Anti-poverty campaigners, however, argue that developed countries such as the United States and the European Union historically used high tariffs to protect their own manufacturing sectors during industrialisation, but are now denying poor nations the same opportunity. Kenya, like many other poorer countries, has suffered massive de-industrialisation and employment problems as a result of national debts and the high costs of repaying loans. There are now fears that the negative aspects of the NAMA proposals would remove the option of using tariffs flexibly, and prevent the building of a strong local manufacturing capacity. Another issue is that tariff revenues in Kenya currently account for around 20% of total government revenue. A drastic reduction or removal of tariffs on manufactured goods coming into the country would mean a serious financial loss.