The US-China trade relationship brings risk factors to China’s exports.
The US-China trade relationship brings risk factors to China’s exports.

Thanks to the accelerated recovery of the global economy and the increased domestic demand, Chinese textile industry recorded a strong growth in the first half of this year. However, the US-China relationship is bringing challenges to the industry.

According to the latest statistics of the General Administration of Customs of China, China’s textile and apparel exports in the first half of this year amounted to US$127.524 billion, representing a year-on-year (YOY) increase of 3.24%.

In particular, the export of textile yarns, fabrics, and end products amounted to US$58.332 billion, representing an increase of 10.28% YOY, while the export of garments and accessories recorded a decrease of 2.03% YOY, showing the trend of “strong textile exports” and “weak apparel exports”.

Apart from the sound performance of export, the domestic market has been positive. Due to the growth of the overall textile market, the demand from downstream is increasing, which supports yarn prices to rise.

Fast domestic market growth

The Chinese domestic textile and apparel market continues to maintain a relatively fast growth rate, with both physical stores and e-commerce channels showing a high level of sales.

According to the statistics of the National Bureau of Statistics of China, the sales of clothing, shoes, hats and knitting products from January to May this year increased by 9.1% YOY. The growth rate was higher when compared with the same period of the previous year.

Meanwhile, the e-commerce channels continued to maintain rapid growth. The sales of clothing from January to May were increased by 24.9% YOY, representing a higher growth rate when compared with the same period of the previous year.

Chinese textile machinery more competitive

It is worth noting that the overall productivity growth rate of Chinese textile industry is actually slowing down. From May to January this year, the YOY industrial added value of textile companies over the designated size increased by 3.1%, showing a lower growth rate when compared with the same period of the previous year.

In addition, the industry’s production capacity and supply structure are in the adjustment period. The analysis of the industry supply chain shows that the growth rate of cotton weaving, cotton printing and dyeing production has been slowing down. However, the industrial added value of chemical fibers increased by 5.4% YOY.

Compared to the upstream of the industry supply chain, the overall production growth of the downstream was relatively stable. From January to May, the industrial added values of home textiles and technical textiles increased by 6.1% and 8.2% YOY respectively, while the apparel increased by 5.3% YOY.

The industrial added value of textile machinery increased by 15.5% YOY, and the growth rate was higher than that of the overall industry, reflecting the steady improvement in competitiveness of Chinese textile machinery.

US-China trade relationship posing key challenges

Nevertheless, the Chinese textile industry is still under pressure and facing the key challenges of US-China trade relationship. Apart from potential extra tariff on products exporting to the US, the industry will need to deal with the structural change of imported raw materials as some textile raw materials were on the latest list of extra tariff imposed on US imports.

The China National Textile and Apparel Council (CNTAC) said it is a challenge faced by the Chinese textile industry in external trade since the cancellation of textile and apparel quota in Europe and the US.

According to the latest statistics of the Office of Textiles and Apparel of the US, China’s textile and apparel exported to the US totaled US$38.74 billion in 2017, of which the apparel exports amounted to US$27.03 billion and textiles and finished product exports amounted to US$11.71 billion.

On 6 July this year, the US launched the first wave of actions on Chinese imported products that worth US$36 billion, levying an extra 25% tariff on these products. In return, China immediately took counter measures accordingly.

The Office of the United States Trade Representative (USTR) further announced another list of Chinese imported products that worth US$16 billion on 7 August, and began to impose extra 25% tariff on these products. The Customs Tariff Commission of the State Council of China responded on the same day by imposing extra 25% tariff on US imported products that also worth US$16 billion.

Fortunately, among the products on the list of extra tariff announced by the US, only machinery use to extrude, stretch, deform, or cut artificial textile materials and a few types of textile machinery are included.

Extra tariff on raw materials

The US excludes apparel products in their current trade war scope at the moment. However, an extra 10% tariff levy on US$200 billion worth Chinese imported products was announced by the USTR recently.

Among the more than 5,000 products on the list, some are textile related products, such as textile raw materials, yarns, fabrics, carpets, technical textiles, leather, etc. Apparel products, such as knitwear, woven clothing, shoes, etc., are not included. According to estimates by CNTAC, the value of annual export to the US amounts to about US$4 billion. 

Mr Zhang Jun, dean of the School of Economics of Fudan University pinpointed in an interview with the media that the US is targeting the upstream of Chinese textile industry supply chain, aiming to damage the industry’s long term development and upgrade.

He said that China is a huge market itself and is actively expanding export destinations such as Asia, Europe, and countries along the Belt and Road Initiative. He suggested the Chinese textile industry to intensify their effort in this area. He also believed that the country’s responsible departments would launch some supporting policies, such as export tax rebates, to help the industry getting through this adjustment period.

Global industry supply chain may reshuffle

If the US-China trade tariffs escalate to involve more clothing tariffs, not only will this affect the Chinese and US industries, but also the global industry supply chain. It is also expected that the impact will be greater on the low-tech products of the Chinese textile industry.

As tariffs increase, orders of these products may shift from China to Southeast Asian countries, and Chinese textile enterprises may lose the US market. The gaps in market share of some apparel categories have been narrowing between China and other Southeast Asian countries such as Vietnam and Bangladesh. After some potential shift of orders, these countries may surpass China to become the main force in the US market.

Indeed, Bloomberg reported that some global fashion companies may consider to restructure some of their productions in China to deal with the potential extra US tariffs on Chinese imports.

Besides, nearly 70% of fashion industry executives said they consider to restructure sourcing from China over the next two years and name US trade protectionism as the big challenge facing the industry, according to a recent survey by the US Fashion Industry Association.

At the same time, China’s latest tariff imposition on US imports has affected the operations of Chinese textile enterprises.

In the latest list of tariff imposed on US goods exported to China, there are two categories of products related to textile industry production, namely, cotton linters and uncombed cotton. After tariffs increased, the tax rate on imported US cotton within the quota rose from 1% to 26%. Many of Chinese textile enterprises and traders thus shifted their sourcing to other countries.

According to media reports, Indian cotton exports are on the “fast track”, and Indian cotton exporters said that they have received more inquiries from China recently.

According to the report of the China Chamber of Commerce for Textile Importers and Exporters, the textile raw materials imported from the US amounted to US$1.08 billion in last year, accounting for 15.24% of China’s total textile raw material imports. 

Conclusion

The Chinese textile industry continues to achieve steady growth in 2018. The foundation for industry development and upgrade remains strong.

For the domestic market, benefiting from supporting government policies and increasing domestic demand, growth is expected to accelerate. However, the industry has to overcome the challenges of rising production costs, increasingly stringent environmental regulations, supply chain structural reforms, and so on.

As for exports, Chinese textile industry is currently facing keen competition from other Southeast Asian countries with lower production costs. More importantly, the industry has to encounter the challenges brought by the US trade protectionism.

All in all, the Chinese textile industry has to continue upgrading production technologies and product quality, grasp the opportunities of the Belt and Road Initiative, and transform into the world’s true textile industry leader.