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China and the European Union last weekend worked out a deal that limits Chinese exports of textiles and heads off a dangerous trade confrontation between them. Both sides, as well as Beijing’s other trade partners, are hailing the arrangement as a “win-win” solution to trade disputes. Ultimately, however, eliminating trade friction depends on developed economies preparing better for the inevitable surge in Chinese exports across a range of traditional industries. That is a question of political will that most governments have proven slow to exert amid the moves toward more and freer trade.

Chinese exports have exploded in the first five months of 2005, expanding 33 percent and yielding a $30 billion surplus for China, a sharp contrast to the $9.2 billion deficit recorded in 2004. The EU was China’s largest trade partner during that time, with trade volume rising just under 25 percent to reach $81.8 billion.

Textiles play an increasing role in that trade. China is the world’s largest clothing exporter, shipping more than $97 billion worth of textiles and apparel last year. Yet Chinese textile exports have surged since Jan. 1, when the existing system of global quotas was abolished. According to the Chinese Customs Bureau, China’s clothing exports climbed 17.2 percent in the first five months of 2005, to reach $24.4 billion. Shipments of yarn and knitted items leaped nearly 25 percent to $15.5 billion.

Developed nations had earlier demanded and won the right to limit the increase in Chinese textile imports to 7.5 percent as part of the terms for China’s accession to the World Trade Organization in 2001. When exports surged as anticipated and the EU and the U.S. threatened unilateral measures to hold down imports, China complained, arguing that they would harm its textile industry, which employs about 19 million people and is a key component of its export-oriented economy. Beijing demanded mutually agreed upon solutions.

Negotiations with the EU yielded such an agreement last weekend. Sensitive to the damage that could be done to Europe’s 2.5-million-strong textile industry and to China’s, the deal limits the increase in Chinese exports in 10 types of textile products, including T-shirts, cotton cloth, bed sheets and flax yarn, to between 8 and 12.5 percent until the end of 2008. The deal heads off more restrictive trade measures that EU officials were considering imposing on China’s textile trade with the Union.

Officials in both governments applauded the agreement as an example of a constructive solution to trade disputes, consistent with global trade principles. That consistency may be doubted, but negotiated solutions are always preferable to internecine trade disputes that follow tit-for-tat unilateral moves. That is a real danger in China’s relations with the United States.

U.S. politicians are increasingly sensitive to their country’s billowing trade imbalance and rising unemployment, and China looms especially large in the American mind. The U.S recorded an $80 billion trade deficit with China in 2004, twice that of the EU, as it accounts for about one-quarter of world textile imports. Washington has not hesitated to impose the 7.5 percent limit on China’s textile imports, putting quotas on seven types of imports affecting some $2 billion in trade. Beijing has countered that the restrictions threaten 400,000 jobs in China. Retaliation is an option.

Free traders will object that such agreements do great damage to the system of global free trade. That is true in principle, but such measures are not unprecedented. Japan imposed voluntary export restraints on trade with the U.S. in the 1980s. The goal of any deal should be to remove barriers to trade and move ever closer to freer trade. Political reality dictates that half-measures are inevitable; the key is to make sure they distort as little trade as possible and do not become institutionalized.

The real question is whether older industries are ready to make the adjustments required by new competition. The textile quota system did not collapse without warning. It phased out as scheduled. Unfortunately — and all too typically — developing country producers did not adjust to the changing market. They did not move to more value-added products or find niches that would insulate them from new competition from China. Having failed to prepare, older producers are now demanding protection. Politicians are ready to grant it.

The global order is not self-sustaining. It depends on mutual respect and mutually agreed upon solutions. The EU-China deal is likely to become the standard for future arrangements, but this time producers in developed countries must use this interval to prepare for a tougher, more competitive market.

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