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Smaller Asian Nations Find Their Factories Survive WTO Deal Ending Textile Quotas

Nearly a year after an international quota system on the textile trade ended, the business in Asia has adjusted to new competitive challenges. China's soaring exports have created tensions with Western countries, but the apparel industries of several small Asian countries continue to thrive despite expectations they would be hit hard by Chinese competition.

At the start of the year, there were wide expectations that cheap Chinese textiles and garments would squeeze products from smaller countries out of the world's markets. There were fears that hundreds of factories in South and Southeast Asia would be forced to shut down.

The end of a global quota system on textiles in January did indeed set off a flood of Chinese goods into Western markets. But fears that textile factories elsewhere in Asia would be out of business have not panned out.

That in large part is because the surge in Chinese exports to the West early in the year triggered protests by Western garment manufacturers. Both the European Union and the United States negotiated with Beijing to impose new restrictions on its exports, which last until 2008.

In China, the spat dented the optimism in an industry that had been gearing up to reap the benefits of a quota-free world.

Gordon Yen is executive director of the Fountain Set Group, a Hong Kong company that makes knit fabrics - almost all produced in mainland China. He says U.S. and EU restrictions have made manufacturers in China cautious.

"The attitude is very different overall at the moment," said Mr. Yen. "Most of the manufacturers do not believe we will actually see free trade in the next few years, so most of them, including ourselves, are making more realistic expansion plans or development plans for our business going forward."

The new quotas imposed on China are allowed under World Trade Organization rules, as long as they are temporary. Analysts say the restrictions can only slow China's march to the head of the textile trade - not halt it permanently. China already holds more than 20 percent of the global market.

Raghav Gupta, a partner with consulting firm K.S.A. Technopak in India, says in the long run, more textile business will move to developing Asian countries from developed Western nations.

"The U.S. in the first six months of the year has imported 11 percent more textile and apparel as compared to what it did in 2004, which means that domestic production has gone down and shifted into Asia, and the same applies to Europe," he said. "Of course China and South Asia are the largest gainers in terms of this shift happening from the Western markets into Asia."

Smaller Asian countries such as Bangladesh, Cambodia and Sri Lanka have welcomed the new restrictions on Chinese garments.

The textile trade in those countries had grown up under the 30-year-old quota system, which required Western buyers to limit purchases from any one country. The business is crucial to many Asian economies, providing millions of jobs and vital foreign exchange earnings.

Even before the new quotas, the smaller manufacturers were holding their own in the world market but for some business has increased this year.

In part, Mr. Gupta of K.S.A. Technopak says, that is because of early expectations new quotas would be imposed on China. He says another factor is that India - the other country expected to snatch business - has not geared up to take full advantage of a quota-free world.

"We have had international customers come to India with a long shopping list and found they can only fulfill 35 percent of that shopping list," added Mr. Gupta. "So they have had no other option but to continue working in Vietnam or Cambodia."

The smaller countries, however, realize that China will present a strong challenge once all restrictions are lifted, and are developing strategies to keep their industries alive.

For instance, factory owners and analysts say Bangladesh, where labor costs are very low, is maintaining its price advantage. On the other hand, the International Labor Organization says Cambodia is building a reputation for strict labor standards that might appeal to Western companies wanting to stay away from what some call "sweat-shop products."

In Sri Lanka - the tiny Indian Ocean country - the vital garment industry is doing all it can to stay in business. A. Sukumaran heads Sri Lanka's Apparel Export Association.

"Our strategy is different. I don't think we will be able to compete with China, because China is going to be a giant…. But we do believe any customer will not want to put all their eggs in one basket," he said. "So we are only positioning ourselves as an alternative to China."

Negotiators at the WTO conference in Hong Kong in December are expected to look at the textile industry as they discuss ways to expand trade in other manufactured goods.

In Asia, what they will find is that the end of quotas has not produced immediate winners and losers. Experts say that means the textile and garment factories in most of the countries in the region will be humming for a long time.