Don't throw in the towel on free trade

Japan’s towel makers have made a formal request to the government to curb rising textile exports from China and other developing countries. Emergency import restrictions, known as safeguards, are internationally recognized as an exception to the free-trade rules of the World Trade Organization. So far, Japan, a declared free trader, has not taken this measure of last resort, although the government is now weighing whether or not to invoke it against imports of farm products such as vegetables.

Safeguards can be imposed temporarily when sharp increases in imports of a particular type of product have caused, or threaten to cause, serious damage to the domestic producers involved. Towel imports, about 80 percent of them from China, have increased 50 percent over the past four years. As a result, domestic production has dropped 25 percent. Imported towels now account for nearly two-thirds of the domestic demand.

The primary reason for this is that imported products are cheap. In China, the cost of production is said to be just a tenth of that in Japan. Domestic products cannot match the prices of Chinese brands. That is why the Japan Towel Industrial Association has filed a petition for safeguards. Given the plight of domestic makers, particularly small ones, the move is understandable.

It should be noted, however, that the surge of imports — not only of towels but of Chinese textiles generally — stems in part from Japanese investment in the Chinese textile industry. Over the years, Japanese trading and textile companies have expanded into China to export low-cost products to Japan. Those Japanese firms have offered technical guidance, and production-management and marketing-research knowhow to local people. A typical example is textiles distributed by the Uniqlo retail chain. These products are very popular with Japanese consumers, particularly young people, because they are tailored to their needs in terms of quality, dyeing and design.

The Uniqlo phenomenon, along with similar developments, suggests that Japan’s textile industry stands at a crossroads. There is indeed an eerie sense that history may be repeating itself. The parallel is Britain’s textile industry, which flourished in Lancashire, the center of cotton manufacturing, during the Industrial Revolution. But British textile manufactures went into decline as Japanese procedures made inroads into the world market.

Now Japanese textile makers face growing competition from low-cost rivals in developing countries in Asia and elsewhere. Indeed, they seem to be following essentially the same path that manufacturers in Lancashire trod. The historical lesson is that industrialized countries are destined to make way for developing countries in certain old-line sectors.

The government needs to be extremely cautious about using safeguards. There are strong reasons why Japan should avoid this escape route. The huge trade surplus is one. But the fundamental reason is that import restrictions, however temporary, run counter to the principle of free trade. The Japanese market is still seen by many countries as not open. It also goes against the consumer’s interest to limit access to inexpensive quality goods. Not least, import curbs will keep inefficient producers afloat and delay structural reform.

But it is also a fact that towel makers, most of them concentrated in southern Osaka and Ehime Prefecture’s Imabari City, are small businesses. The difficulties they face cannot be ignored. This is not to say the government should protect them from import competition. Japan is committed to free and open trade and its industry urgently needs structural change.

That said, safeguards can be invoked as a way to expedite reform, not delay it. A three-year grace period can give depressed producers time to decide whether to stay in business or leave. Those who decide to stay on can develop new products of higher value, such as moisture-absorbing or germ-resistant clothing. In short, safeguards can be used to encourage self-help efforts.

But in other cases, the government may have to step in to facilitate transition to other business lines. What it should do is work out a comprehensive program of public support, including retraining or re-employment of displaced workers. Such a program need not be tied in to safeguards; it can be implemented as part of broader efforts for industrial restructuring.

With an Upper House election coming up this summer, the ruling parties may want to use import restrictions as a means of getting votes from people in troubled sectors. The government must fight such political temptations. Otherwise, structural reform will be further delayed, with dire long-term consequences for Japanese industry.