You know it's the silly season when British head-line writers are having this much fun. RETAILERS GO BRALESS FOR AUTUMN, BRA BAN LEAVES SHOPS SHORT OF SUPPORT or, simply, WE'RE RUNNING OUT OF CLOTHES. But behind the naked imagery lie plus-size problems. By suddenly reimposing quotas on textile imports from China only seven months after the Jan. 1 "big bang" that was supposed to blow up the quota regime for good, the European Union has resuscitated the absurdities of the old system in new forms.

The problem with quotas is, of course, that they distort world trade. Under the old system, each nation could produce no more than its allotted number of pieces in any one of more than 2,000 different categories of apparel each year. The result was that buyers could not go to the best manufacturer, but only to the best manufacturer who had the quota. Big buyers had to create unwieldy networks with hundreds of factories in dozens of countries in order to get enough product. Many experts predicted that when quotas fell, buyers would flock to the most efficient manufacturers, and nine times out of 10 that would mean a factory in China.

That's what happened: in the first quarter of this year Chinese exports to Europe and the United States jumped by as much 534 percent (in the case of sweater exports to the EU). Just as predictably, perhaps, America and Europe responded by exercising their WTO right to protect domestic textile makers against a threatening surge in imports by slapping "safeguard sanctions" on China. The result is that the multiple distortions of the international quota system have been replaced by the new absurdity of piecemeal bans against China alone.

The United States slapped new quotas on products like trousers, cotton yarn and shirts, and is now negotiating with Beijing to replace those safeguards with a single tariff. When the new EU quotas went into effect on July 12, some categories of Chinese imports had already filled or overfilled their quotas, and shipments of pants and sweaters were seized by customs on docks from Marseilles to Hamburg. That produced the warnings of shortages, including an estimated shortfall of 50 million sweaters on order from China. Because it takes up to eight months to design and produce a sweater, some European Trade ministers warned that there was no way to replace these orders in time for winter.

Yet big business had hedged its bets on China. In an April 21 comment on the "post-quota world," Gap Inc. chief supply-chain officer Nick Cullen said the new system would finally allow the biggest buyers to realize economies of scale by consolidating production. Smaller players, he said, would not be able to compete for orders from the best textile factories. Already, Cullen said, Gap Inc. had pared its list of 700 contractors by 100, and shifted spending to the top 50. Soon after, however, Gap executives also said they had anticipated and prepared for the backlash against China, and would not be hurt at all by safeguard sanctions.

The clear implication is that some of the world's biggest apparel retailers are not concentrating as much production in China as pure market considerations in a "post-quota world" would dictate. "We had a feeling" that a big shift to China would be unwise in light of the threat of new sanctions, says Par Darj, head of investor relations at H&M, the Swedish apparel giant. Instead, H&M has "redirected our production to other countries in the Far East," many of which are working hard to get more efficient. Although H&M has had about eight days' worth of sweater imports seized by EU Customs, the company has the option of selling these shipments outside the EU--in Switzerland or Canada, for instance. A spokesman for German retailer C&A says it, too, avoided increasing shipments from China, which the firm sees as an interesting market "in the future," when the safeguard battles blow over.

Small business was less politically farsighted. Already threatened with extinction from big-box retailers, many smaller players rushed to move production to low-cost factories in China. During the past five years, Gelco of Germany has shifted production to China in anticipation of the end of quotas. "We trusted that this would really happen," says Gelco CEO Jurgen Richter. When the EU sanctions came down, Gelco was stuck with 38,000 Chinese sweaters worth 1 million euro, for which it's already paid. The new sanctions "could be lethal for small distributors. There is a big risk of bankruptcy and job losses," says Ralph Kamphoner, an analyst at EuroCommerce, a Brussels retail and wholesale trade group.

The Trade ministers of the Netherlands, Belgium, Sweden and Finland complained last week that the EU doesn't seem to understand that in modern supply chains, Chinese factories work as the manufacturing arm of U.S. and European companies--and get paid upfront. To enforce the sanctions against orders that are already paid for is "economic suicide," they said.

The battle has split Europe. The southern textile-producing countries--France, Italy, Spain and Portugal--had demanded quick protection for their textile makers. French Industry Minister Francois Loos said worried retailers "had only themselves to blame" for not switching to "Euro-Mediterranean" suppliers. The problem is that sanctions will save few jobs compared with what they will cost consumers, says analyst Roger Josefsson of Danske Bank, who figures the rough cost at about 25 million euro per job. Jacques Royer, president of the French wholesalers' and importers' federation, says that since French sweater makers long ago outsourced manufacturing abroad, there is no reason that Paris should defend, say, Morocco more than China. An EU official in Brussels disagrees, noting that the boom in Chinese textile exports has been accompanied by a drop in exports from nations like Pakistan.

"It's not the Chinese who are guilty here, it's the Europeans," says Royer, who also buys shoes from China for his company, Groupe Royer. "They aren't respecting the rhythm of enterprise." But a European Union official in Brussels says its compromise (the new quotas were negotiated with China) was the best it could do given the divergent interests of its member states. And quotas, he says, are never designed or timed to meet consumer demand.

Exactly. That's one reason they inevitably distort the market. China has called the new sanctions "unfair" but acquiesced because the deal that allowed Beijing to join the World Trade Organization in 2001 said members could impose safeguard quotas if they could prove a surge in Chinese imports was disrupting their markets. But the safeguards can last only three years. "Forget quotas after the end of 2007," says Xiaotong Zhang, trade attache at the Chinese Mission to the EU. "No way." Yet last week the United States urged China to agree to restraints through 2008, and the talks ended with China's citing "fundamental differences." Put another way, either the sanctions end in 2007, or expect big trouble.

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