European Vanquished: Bra Wars, Italy & PRC Cash

♠ Posted by Emmanuel in ,,, at 9/16/2011 12:40:00 PM
Veni, vidi, vici - I came, saw, and conquered (Julius Caesar)

We've gotten used to variations on the use of the term PIGS to denote troubled Eurozone economies Portugal, Italy (others substitute Ireland), Greece, and Spain. Further, we've gotten used to the notion of China being bandied about as the saviour of any of them during their time of need--though substantial PRC help has not materialized thus far. However, there is a more substantial link between how these economies got into trouble in the first place which does involve China. Better yet, we have previously covered it in much detail on this blog.

I talk about the phasing out of the infamous Multifibre Agreement (MFA) in 2005 when the system of textile quotas imposed on developing countries were removed [1, 2]. It was a short, short time ago in a continent not far away. One of the hardest-hit sectors as the euro was being rolled out in EMU countries was that of light, semi-skilled manufacturing which the Chinese have of course made their own. The removal of MFA quotas initially inundated the EU with Chinese textiles, resulting in the infamous bra wars of 2005. While the EU was able to implement safeguard measures to staunch the "inundation" of Chinese apparel, these were one-time measures that could not be invoked repeatedly. Let us revisit some of the controversy from those days:
The Foreign Trade Association (FTA), which represents many of the chainstores common on the high-streets of Europe's towns and cities, argues that retailers have simply taken advantage of the situation offered by the liberalisation of trade in January.

Stuart Newman, the FTA's legal adviser, said: "The reason why we have a backlog is that the quota levels were set too low [in the Shanghai agreement of temporary safeguards]. Retailers haven't put all their eggs in the Chinese basket, they are still sourcing from other countries. But they have realised that here is a big country that produces high quality goods at competitive prices. It is only logical to place orders with it.

Global Growth, a free-trade group based in London, has named [then EU Trade Commissioner Peter] Mandelson 'Protectionist of the Month' over his handling of the affair. It says that when Mandelson joined the Commission last year, he promised a new era of 'free and fair trade' but that moves to restrict the EU's 450 million people to have access to only 105 million pairs of Chinese trousers jar with that agenda.

Although Mandelson has insisted that the Commission cannot shoulder all the blame for the 'Bra Wars', Europe's clothes-makers see things differently. "The management problem [of the Shanghai agreement] is in the hands of the Commission," said Francesco Marchi from the European Apparel and Textile Organisation (Euratex). "There were 40 days of unmanaged trade and I don't see why the industry should have to pay for this."
The fissures then remain akin to those we have now, with PIGS economies in direct export competition with China calling for protection, while more competitive economies not directly in the Chinese line of fire wishing that cheaper Chinese goods be let in, pronto:
Mandelson is hoping that he will be able to break the impasse that has arisen over this issue within weeks. But the deep divisions between EU national governments could limit his room for manoeuvre. Countries with large clothing industries like France, Spain and Italy want him to resist pressure to dilute the Shanghai agreement. On the other side Sweden, Finland, Denmark and the Netherlands are warning of job losses in the retail sector unless items ordered from China for the Christmas shopping season are released.
You cannot fight fate, and the high street retailers such as H&M, Marks and Spencer, Topshop etc. rapidly took advantage of sourcing cheaper garments from the likes of China and other Asian producers instead of from PIGS countries when the MFA lapsed. Again, today's EU fissures remain largely as they were before--recall Greece recently cutting a side deal with Finland, for instance.

To a certain extent, then, PIGS countries are those which were vanquished--veni, vidi, vici--by China shortly after the MFA went off the boil in 2005. This was roughly the same time when the euro began to appreciate as Greenspan kept ultra-low 1% rates Stateside compared to higher policy rates maintained in the EMU. Given the Bundesbank roots of the ECB, its fundamental bias remains towards appreciation to combat inflation. Unable to do the old tricks of devaluation plus inflation to smoothen things out--adding another zero to the USD/ITL as I used to say--PIGS now find themselves where they are.

Therefore, any of these pleas from PIGS for Chinese aid in buying up their sovereign issues is admission of how they got into this situation in the first place--by being uncompetitive with China in industries they probably should have given up long ago in search of greener pastures. Some co-opted the Chinese steamroller; others didn't and paid the price. Caesar would understand what is happening even if the arena of contest is world trade rather than the battlefield.