5TH REPORT FROM THE COMMISSION on the quantitative quotas and surveillance measures applicable to certain non-textile products originating in the People's Republic of China

5TH REPORT FROM THE COMMISSION

on the quantitative quotas and surveillance measures applicable to certain non-textile products originating in the People's Republic of China

1. INTRODUCTION

A. Historical background

B. Objective of the Commission report

C. Methodology

2. CHAPTER 1 Implementation OF THE QUANTITATIVE RESTRICTIONS

I. Background and evolution since introduction of the measures

II. Management of the quotas

III. Developments in the trade of the products subject to quantitative restrictions

3. CHAPTER 2 SHOULD COMMUNITY QUOTAS BE MAINTAINED-

I. Approach adopted by the Commission

II. Analysis of the sectors concerned

1. Footwear

2. Porcelain or china tableware and ceramic tableware

III. China's trade liberalisation and WTO accession

IV. Overall conclusions

4. CHAPTER 3 IMPLEMENTATION AND MAINTENANCE OF SURVEILLANCE MEASURES

I. Purpose of surveillance measures

II. Implementation

III. Trends in imports of products under surveillance

IV. Should surveillance measures be maintained-

5. CHAPTER 4 CONCLUSIONS AND PROPOSALS OF THE COMMISSION

1. INTRODUCTION

A. Historical background

By Regulation (EC) No 519/94 of 7 March 1994, the Council of the European Union introduced Community-wide quantitative restrictions on 7 categories of products originating in the People's Republic of China, namely gloves, footwear, porcelain tableware, ceramic tableware, glassware, car radios and toys, and certain surveillance measures.

The introduction of such measures had been agreed, in principle, by the Council in December 1993 as part of a global package including acceptance of the Uruguay Round results, reinforcement of the trade policy instruments and completion of the common commercial policy.

The latter aspect of the package involved the unilateral elimination of 6.417 national quantitative restrictions (of which some 4.700 concerning Chinese products) and the introduction of Community-wide quotas on imports from China of a limited number of sensitive products, whose imports were at that time subject to national restrictions.

The introduction of such quotas was based on the following considerations:

a) the sensitivity of the Community industries concerned;

b) the increasing threat posed by imports from China to these industries, made more acute by the particular characteristics of the Chinese economy.

B. Objective of the Commission report

In the course of discussions in the Council on Regulation (EC) No 519/94, the Commission committed to report to the Council every year on the implementation of the surveillance measures and the quantitative restrictions provided for in Annexes II and III, on the need to maintain such measures, and to propose, as the need arises, the appropriate adjustments.

This fifth report is in response to the above-mentioned commitment.

C. Methodology

1. The report first reviews the implementation of the quantitative restrictions, including the problems raised by their administration.

In its second chapter, it addresses the question of the need to maintain the quantitative restrictions introduced by the Council. To this end, the Commission examined whether the conditions which justified the introduction of these measures in 1994 are still present, in particular:

a) the situation of the Community industries concerned,

b) the sensitivity of these industries to Chinese imports and

c) the progress in Chinese trade liberalisation.

This examination was conducted sector by sector.

The implementation of the surveillance measures and the need to maintain them is dealt with in the third chapter.

The fourth chapter presents, on the basis of the above analysis, the Commission conclusions.

2. It should be noted that, as in previous years, the Commission faced considerable difficulties in gathering information on the state of the Community industry, since producers generally produce a wide range of products, not just those subject to quota, and that the sectors concerned are made up of many small and medium-sized enterprises, of which a significant proportion are not even known by the relevant national federations.

On the importers' side, the Commission received information of a general nature from one association and some individual importers.

3. In general, the analysis is based on figures for 1998. However, trends for 1999 have been used, where possible.

2. CHAPTER 1 Implementation OF THE QUANTITATIVE RESTRICTIONS

I. Background and evolution since introduction of the measures

Since their entry into force in March 1994, the quotas have been modified on a number of occasions in order to balance the objective of ensuring an appropriate protection of the Community industry concerned with that of maintaining trade flows with the People's Republic of China:

- In July 1994, the Council decided to increase the 1994 level of the quota on certain toys.

- In March 1995, the quotas were further increased to take account of the accession of Austria, Finland and Sweden.

- In April 1996, following the conclusions contained in the Commission's first annual report on the implementation of the quotas, the Council decided by Regulation (EC) No 752/96 to relax further the quota regime vis-à-vis China:

- the quotas on 3 products (gloves, car radios and combined car radios) were liberalised;

- the 3 toy quotas were merged into one quota, to give more flexibility to traders and allow them to react more rapidly to market changes;

- the remaining quotas were increased (ceramic and porcelain tableware and glassware by 5% and certain footwear by 2%).

- In October 1996, Council Regulation (EC) No 1897/96 excluded glass-fronted clip-frames from the quota applicable to glassware.

- In May 1997, Council Regulation (EC) No 847/97 liberalised imports of toy parts and accessories and removed the quota on glass products tableware as from 1 January 1998.

- In May 1998, as a result of Council Regulation (EC) No 1138/98 of 28 May 1998, which implemented the Commission's proposals included in its 3rd annual report:

- imports of toys were liberalised;

- the quotas on ceramic and porcelain tableware were increased by a further 5%.

Finally, in its 4th Report the Commission concluded that, in view of the different factors to be taken into account, there should be no change in the structure and the level of the remaining quotas.

II. Management of the quotas

a) Legal basis and objectives

1. The management of Community quotas is based on Council Regulation (EC) No 520/94 of 7 March 1994 establishing a Community procedure for administering quantitative quotas and Commission Regulation (EC) No 738/94 of 30 March 1994 laying down certain rules for the implementation of Council Regulation (EC) No 520/94 (mostly concerning procedural aspects, including the common import licence form).

It should be recalled that before the adoption of Regulation (EC) No 520/94, quotas were allocated among Member States, and not directly to importers. Since the reform of March 1994, uniform criteria, determined by the Commission after consultation of the Management Committee, apply to all Community importers, in conformity with the principles of the Single Market and the relevant case law of the European Court of Justice.

2. In the management of the quotas, the Commission has been guided by the following principles:

- that administrative procedures would not add to the intended effect of the quotas on trade and that the available quantities would be fully used; and

- that non-discrimination among all Community importers, no matter where they are established and no matter where they submit a licence application would be ensured.

b) Functioning of the quota management system

1. In conformity with the above-mentioned principles, the Commission felt it appropriate to resort to the first allocation method provided for by Regulation (EC) No 520/94, i.e. the method based on traditional trade flows, which guarantees that "traditional" importers receive at least a part of their previous trade performance realised during a reference period, while ensuring a fair access to the quotas to non-traditional importers.

The method used for the allocation of the part of the quotas set aside for the non-traditional importers is the third method provided for by Regulation (EC) No 520/94, i.e. the method of proportional allocation to the quantities requested. In addition, in order to exclude speculative applications, a maximum quantity which may be applied for by non-traditional importers, is set.

In 1996, 28.204 import licence applications were submitted by non-traditional importers; this figure amounted to 19.708 for the 1997 allocation and 21.439 for the 1998 allocation, while it decreased to 17.416 for the 1999 exercise (a decrease which has to be qualified as the number of products under quota was further reduced in 1998). Finally, for the 2000 quota year 27247 applications were submitted.

This extremely high number of applications results in those non-traditional importers being allocated very limited quantities, a fact which may lead to under-utilisation of the quotas.

In an attempt to improve the situation the portion of the quotas reserved for non-traditional importers was increased by 5 percentage points in 1997 for the 1998 quota year and a similar increase was decided, in 1998, for the 1999 quota year. These limited increases have, at best, allowed non-traditional importers to be granted quantities similar to those, very limited, they were granted in previous years.

In its 4th Report, therefore, the Commission indicated that the allocation system which guaranteed that most of the quotas are set aside for traditional importers, which was appropriate during the first 4 years, should be amended with a view to eliminating or at least reducing the imbalance between the quantities granted to "traditional" and "other importers".

As a result, in 1999 and for the quota year 2000, the portion of the quotas reserved for non-traditional importers was further increased by 5 percentage points, while at the same time the maximum individual quota quantity entitlement was increased from 4,000 pairs to 5,000 pairs of footwear (per each CN quota line code) and from 4t. to 5t. for porcelain and ceramic tableware (per each CN quota line code). Further steps may be appropriate in the future with a view to, on the one hand, improve the overall utilisation of the quotas and, on the other, reduce as far as possible the unused quantities re-distributed the following year.

2. In the management of the quotas, the Commission made every effort to satisfy the wish of importers to receive information as early as possible on their allocation for the following period. To this end, the Commission opened the allocation procedures for the 2000 quotas well before the beginning of the quota year, in June 1999, and allowed importers to introduce their applications during two and half months, until September 1999.

3. The 2000 management rules currently provide for a 12-month validity of the import licences. Moreover, the unused 1999 quotas will be redistributed during 2000. The Commission considers that the quantities redistributed from the previous year should be kept separate from the current annual quota.

4. Concerning the administrative procedures, the Community management system is based on a "single-stop" approach, whereby all Community importers, irrespective of where they are established in the Community, may submit a licence application to the competent authority of the Member State of their choice, and obtain an import licence which is valid throughout the Community.

In addition, the application procedure has been made as simple as possible and the formalities reduced to a strict minimum; the licensing process is totally free of charge for the Community importers.

c) Conclusion

As is unavoidable when trade is subject to restrictions, the management of these quotas raised some problems. Some of them, such as the selection of the reference year for traditional importers and the different duration of the redistribution licences compared to the regular annual quota licences, have been satisfactorily addressed. The quantities allocated to non-traditional importers have again been increased for the 2000 quota year to, at least partially, reduce the imbalance in the allocation of the relative share of the quotas and thus improve their access to them. The Commission considers, however, that the system adopted has on the whole worked well, thanks to the cooperation of Member States. In particular, it is felt that any (legitimate) concerns that the management system should not add to the effect of the quotas, as decided by the Council, have been met.

III. Developments in the trade of the products subject to quantitative restrictions

The following two tables give a factual summary of the developments in the trade of each product subject to quantitative restrictions, both in terms of volume and value.

a) Evolution in volume of the products concerned (imports and quotas)

>TABLE POSITION>

- figures on "hi-tech" shoes subject to Community surveillance are based on surveillance documents issued; As the latter do not necessarily reflect actual levels of imports, figures were adjusted, where appropriate, on the basis of data available from the Taric database. Imports may differ when compared with figures supplied in previous reports due to necessary technical adjustments in the data avaiable from taric database.

- figures on unused quantities based on import licences returned to the Member States

>TABLE POSITION>

Source: - EUROSTAT

(*) figures on unused quantities based on import licences returned to the Member States

b) Import prices of products originating in China

>TABLE POSITION>

Source: EUROSTAT

3. CHAPTER 2 SHOULD COMMUNITY QUOTAS BE MAINTAINED-

I. Approach adopted by the Commission

To reply to this question the Commission sought to find out if the conditions that had provoked the introduction of quantitative restrictions in 1994, namely the sensitivity of the Community industries concerned and the threat posed by Chinese products to them, still prevailed.

It did this by carrying out a sector-by-sector analysis on the basis of the following economic indicators:

1. Structure of the industry

2. Production

3. Employment

4. Import trends

5. Import prices

6. China's export potential

In addition, in section III below, the Commission analyses the implications of Chinas rade liberalisation and WTO's accession for the maintenance of the Community's quotas.

II. Analysis of the sectors concerned

1. Footwear

CN 6402 99; 6403 51 and 59; 6403 91 and 99; 6404 11; 6404 19 10

The following footwear products are subject to quantitative restrictions:

CN Code // Product description

640299 [1] // Footwear, not covering the ankle, with outer soles and uppers of rubber or plastics (other than waterproof footwear covered under heading 6401; and other than sports footwear and other footwear covered under heading 6402)

[1] Excluding footwear involving special technology :

640351 // Footwear, covering the ankle, with outer soles and uppers of leather (other than sports footwear)

640359 // Footwear, not covering the ankle, with outer soles and uppers of leather (other than sports footwear)

640391 1 // Other footwear with outer soles of rubber, plastics, leather or composition leather and uppers of leather, covering the ankle

640399 1 // Other footwear with outer soles of rubber, plastics, leather or composition leather and uppers of leather, not covering the ankle

640411 [2] // Sports footwear, tennis shoes, basketball shoes, gym shoes, training shoes and the like, with outer soles of rubber or plastics and uppers of textile materials

[2] Excluding:

64041910 // Slippers and other indoor footwear with outer soles of rubber or plastics and uppers of textile materials, other than those covered under heading 6404 11

A. Situation in the Community footwear industry

1. Introduction

The industry has been undergoing modernisation and restructuring for a number of years under pressure from increasing international competition and technological change. There has been a shift in EU countries towards more diversified, quality products with higher added value. This, however, does not imply - as is sometimes suggested - that the high end of the Community market is dominated by European-made top-of-the-line products, whereas the low end of the market is 'reserved' for imports from low-wage countries. As a matter of fact, the segment of bottom-of-the-line products has increasingly been replaced by products of medium quality - a segment in which a considerable part of the European industry is still involved and, indeed, highly competitive. Moreover, even firms which have traditionally produced for the high-end of the market are more and more obliged to complement their product range also with less-expensive models.

However, the competitive strengths developed by the industry over the past few years can only be brought to bear if EU exporters enjoy effective access to world markets - both with regard to the procurement of raw materials and the actual sale of their finished products. Although the Community has made the issue of improved market access a priority in its international trade policy, the actual situation still leaves a lot to be desired, with a wide range of tariff as well as non-tariff barriers still preventing EU companies from fully exploiting their export potential. In this context, it should be noted that even industrialised countries like the United States - one of the Community's industry principal export markets - maintain tariff peaks of up to 48%.

2. Structure of the industry

The Community footwear industry consists of a large number of small firms (averaging 20 workers), most of which are located in regions with a low degree of industrial diversification. However, there are certain differences from one Member State to another: German and French companies, for example, employ an average of 100 workers, whereas the average in Spain and Italy is closer to ten. The remaining Member States fit somewhere between those two extremes.

The number of manufacturers in the EU as a whole has been in decline throughout the nineties, falling from 15,897 in 1989 to 14,588 in 1998 (after 14,817 in 1997).

The geographical concentration of the sector, its labour-intensive character, and its considerable degree of price sensitivity with regard to low-priced imports lead to a situation where any fluctuation in the level of economic activity has major regional and social repercussions.

3. Community production, consumption and employment

After a rather moderate decline by 1.46% between 1997 and 1996, production fell by a substantial 4.56% in 1998, thereby reaching its lowest level for years. This fall in output was - as already stated above - mainly due to a sharp decrease in exports as a result of the Asian and other international crises (-9.74% in 1998).

Consumption fell by 1.6%, while total imports remained fairly stable. As a result, the market share of EU manufacturers on the EU market fell from 51% in 1997 to 50% in 1998.

Employment continued to decline in 1998, with the loss of a further 11,784 jobs. This corresponds to a 3.93% drop compared to 1997.

Table 1

>TABLE POSITION>

4. Trends in exports

After a decline of 6.24% in 1997, exports fell by another 9.74% in 1998, with exports to Russia showing by far the worst performance (-24.89% in 1998, after -20.33% in1997). The market shares of the most important export markets of the Community remained fairly stable.

Table 2

>TABLE POSITION>

(Products covered: CN Codes 6401-6405)

Exports to the Community's main suppliers remained marginal, with China accounting for only 0.16% of all Community exports:

Table 3

>TABLE POSITION>

(Products covered: CN Codes 6401-6405)

Community exports that were affected most by the Asian crisis were those to South Korea (-83.2%), Indonesia (-60.5%) and Thailand (-50.7%). Exports to China decreased by 52.5%. India and Brazil showed a positive development in 1998 - after a sharp decline in 1997 - with India reaching again the (low) level that it had already achieved in 1996.

The Community's trade balance with those countries (in terms of pairs), remained extremely negative, as can be illustrated by means of export/import ratios for 1997 and 1998:

Table 4

>TABLE POSITION>

(Products covered: CN Codes 6401-6405)The export/import ratio with China further deteriorated in 1998 - as it did for Vietnam, Indonesia, Taiwan and Thailand. The ratio for South Korea fell dramatically, from 42% in 1997 to 7.2% in 1998.

B. Sensitivity to Chinese imports

1. Trends in imports

In 1998, EC footwear imports from all sources increased by approximately 0.5%, reaching a total of almost 810 million pairs, with China slightly increasing its market share (from 32.9% to 33.4%), followed by Vietnam (18.1%) and Indonesia (8.3%).

With an increase of 1.7% (compared to 1997), China managed to outperform the rest of the world ('all sources') in spite of the quantitative restrictions in place. Among the main suppliers, only Vietnam and Taiwan performed better (up 7.4% and 6.4%, respectively), while, of course, starting from a much lower absolute level. Imports from Brazil and Indonesia, by contrast, fell sharply - by 22.3% and 21% respectively).

Table 5

>TABLE POSITION>

(Products covered: CN Codes 6401-6405)

In 1998, approximately one third of all footwear originating in China were imported under quota:

Table 6

>TABLE POSITION>

(* Products covered: CN Codes 6401-6405)

While imports of footwear under quota remained fairly stable in 1998 (-0.4% as compared to -8.9% between 1997 and 1996), imports of footwear not covered by quantitative restrictions increased by 2.9% (after a considerable decline in the preceding year). This led to a slight decline in the overall quota coverage.

Broken down by CN Codes under quota, the situation is as follows:

Table 7

>TABLE POSITION>

As a matter of fact, total imports of footwear under quota remained stable only because of a significant increase in imports of slippers and other indoor footwear with uppers of textile materials, covered under CN Code 6404 19 10. In 1997, imports of such slippers had fallen dramatically due to the imposition of provisional anti-dumping duties in February 1997 (for a period of 9 months), covering both CN Codes 6404 19 10 (i.e. slippers) and 6404 19 90 (i.e. other than slippers).

The definitive measure, adopted on 29 October 1997 and applying to both China and Indonesia, excluded slippers, resulting in an increase in imports of such slippers by more than 520% in 1998. By contrast, imports from China of products falling under CN Code 6404 19 90 - which are still covered by the anti-dumping measure, but are not under quota - remained at the low 1997 level:

Table 8

>TABLE POSITION>

(in pairs)

Definitive anti-dumping measures were also imposed, on 23 February 1998, on certain footwear with uppers of leather or plastics, originating in China, Indonesia and Thailand. Those measures concerned certain positions of CN Codes 6402 99 (i.e. 6402 99 98) and 6403 99 (i.e. 6403 99 93, 6403 99 96, 6403 99 98), while excluding footwear for use in sporting activities.

As far as CN Code 6402 99 is concerned, both China and Indonesia lost market share in 1997 and 1998, while Thailand was able to increase its exports despite the anti-dumping measures in place. Vietnam became the Community's main supplier of those products:

Table 9

>TABLE POSITION>

(in pairs)

Also with regard to CN Code 6403 99, Vietnam has become the main supplier of the Community, while China succeeded in maintaining its level of exports:

Table 10

>TABLE POSITION>

(in pairs)

2. Import prices

A comparison of the average prices of imported Chinese footwear with those of Community exports ('Extra-15') demonstrates the extent to which Chinese imports are undercutting prices on the Community market:

Table 11

>TABLE POSITION>

In 1998, Chinese prices ranged from 12.1% to 68% of the average prices of Community exports to third countries. Between 1997 and 1998, China's price advantage increased considerably for CN Codes 6403 99 (from 66% to 48.6%) and 6404 11 (from 91.9% to 68%) due to rising prices of Community exports (and in spite of the anti-dumping duties on certain products falling under CN Code 6403 99). The elimination of the provisional anti-dumping duties on slippers (6404 19 10) had no immediate effect on prices, which remained at a level of 1.14 ECU per pair. For CN Code 6403 51, the price differential decreased from 35.5% in 1997 to 47.5% in 1998.

Overall, China - whose average price/unit decreased from 4.82 in 1997 to 4.70 in 1998 - remained the cheapest of the Community's major suppliers of footwear (in ECU/unit):

Table 12

>TABLE POSITION>

(Coverage: CN Chapter 64)

In 1998, average Chinese prices (4.70 ECU/unit) reached only 55% of the prices of Community imports from all sources (8.55 ECU/unit), and 22.2% of the average prices of European products sold on third markets (21.13 ECU/unit).

C. Opinions from Interested Parties

1. Opinion of the Community Industry

According to the European Confederation of the Footwear Industry, in spite of the existence of quantitative restrictions, imports of footwear from China have continued to outperform imports coming from all third countries. Moreover, this association considers that those quantitative restrictions are not even fully utilised, which still leaves sufficient room for increases in imports from China. Furthermore, it is of the opinion that Chinese products continued to undercut European prices by a significant margin, thus putting European industry under severe pressure, which has been faced with falling production, a deteriorated export performance, and increasing job losses. For those reasons, European industry is firmly against the elimination of the Chinese quotas in question, as well as against any increases in their current levels.

2. Opinion of Importers

The Foreign Trade Association (FTA) has stated that job losses in the community footwear industry are a natural phenomenon basically caused by automation and advances in information technology. It does not believe Chinese imports are a threat to the industry.

D. Conclusion

The footwear sector remains acutely vulnerable to Chinese imports because of their sheer volume (33.4% of all Community imports; see table 5), their significant share of the total Community market (17.4%; see table 1), the price gap (4.70 ECU/unit as compared to 21.13 ECU/unit; see table 12), and the enormous export potential of the Chinese industry.

In 1998, the unbalanced situation described above was further deteriorated as a result of the financial crises in Asia, Russia or Brazil, which deprived EU operators of important export markets without the possibility of turning to other markets instead. At the same time, the European Union was the only major region in the world which maintained its level of imports in spite of the economic crises experienced during the past two years, which made it the main outlet for many third-country producers whose domestic markets had fallen apart. As a result, both Community exports and Community production decreased markedly.

In spite of the quantitative restrictions in place, China succeeded in outperforming the average of all Community suppliers (with +1.7% as compared to +0.5% see table 5).

If, at the current stage, the quantitative restrictions vis-à-vis China were removed, the Community would risk inconsistencies in its overall industrial policy: On the one hand, European operators are encouraged to constantly improve their competitiveness by investing in tangible as well as intangible factors. On the other hand, the European institutions have undertaken to provide operators with a general framework which allows them to compete on a level-playing field with their competitors in a global and open market. At present, such a level-playing field does not exist, since many third countries still maintain very high tariffs, as well as numerous non-tariff barriers.

If companies find no markets for their highly competitive products, they have very little incentive to invest - and to innovate - in order to continue with their (often painful) modernisation and restructuring process. Moreover, expanding markets are essential for companies trying to achieve sufficient economies of scale, thus increasing their international competitiveness by producing at lower average cost.

Against this background, and taking account of the fact that the footwear industry remains an essentially labour-intensive sector, any further liberalisation of Community imports will have to go hand in hand with equivalent liberalisation efforts by the Community's trading partners.

As long as many third-country markets remain virtually closed for EU exports, the quantitative restrictions against China should be maintained so as to alleviate a situation which is characterised by a competitive environment which fails to provide a level-playing field for economic operators.

2. Porcelain or china tableware and ceramic tableware

CN 6911.10 and CN 6912.00

Statistics and detailed information on the two positions under quota are difficult to obtain, since most producers produce a wide range of tableware products which, when they are reported, are usually reported as "tableware", that is, CN 6911 + 6912 + 6913 combined, and also because producers are usually reluctant to disclose what they consider to be commercially sensitive information to their federations. Moreover, in the tableware sector, there are many small producers which are not members of any national federation. It has therefore been necessary, as usual, to look to a number of different sources when compiling this report.

A Situation in the Community tableware sector

1. Structure of the EU ceramic tableware sector

Originally, production of ceramic products was built up near to the source of raw materials, and energy, and where transport facilities were good. These are no longer the primary deciding factors, but the sector is still very concentrated geographically, with, for example, big concentrations in Staffordshire in the UK, the Limousin in France, northern Bavaria in Germany, and Maastricht in the Netherlands.

The sector is principally made up of small and medium enterprises although larger ones do exist, such as Villeroy & Boch of Germany, and Royal Doulton and Wedgwood of the United Kingdom, which are probably the three biggest tableware producers in the world. There is a vast range of products, which differ greatly between manufacturers and depend to a large extent on public taste and disposable income.

Whilst output in the tableware sector typically represents about one tenth of total output of the EU ceramics industry in value terms, it has usually accounted for something like a quarter in terms of numbers employed. It is the most labour intensive of the six ceramics sub-sectors, and is therefore particularly susceptible to the effects of unfair competition.

2. Trends in production and apparent consumption

The figures directly below apply to all ceramics sectors.

N.B. Due to the fact that the DEBA database no longer exists, and pending the full recovery of the former work by Eurostat, production figures for 1998 are calculated using the short-term indicators supplied by the Eurostat-European Business Trends database.

Units: million ECU

>TABLE POSITION>

Import and export figures for EUR 15 are taken from COMEXT. Production and employment figures come from the former DEBA database (except * ==> first estimate by Cérame-Unie [3]) and the Eurostat-NewCronos database (1995, 1996, 1997 and 1998 for EUR 15 using NACE Rev. 1, 26.2 + 26.3 + 26.4).

[3] The umbrella organisation which represents the whole of the ceramics industry at EU level. The tableware sectors is represented by the FEPF, the Fédération Européenne des Industries de Porcelaine et de Faïence de Table et d'Ornementation.

In comparison, similar information on tableware

CN 6911 + 6912 + 6913 Units: million ECU

>TABLE POSITION>

Sources: imports/exports from COMEXT

production and employment from Cérame-Unie

* CN 6911.10 + 6912.00

** estimates by Cérame-Unie

*** number of tableware producers which are members of Cérame-Unie

As is evident from the figures above, import penetration for all ceramic products together is not significant. It should be borne in mind, however, that Europe is traditionally a big exporter of ceramic products, and exports form an integral and indispensable part of many European companies' order books.

It should be further noted that the Chinese share of extra-EU imports of all ceramic products has been climbing steadily, and accounted for 20.1% in 1998 (in value terms - against 17.2% in 1996). This is alarming the EU ceramics industry, since there have been imports of only very small quantities of tiles to the EU, but Chinese tile producers have built up production capacity over recent years, and have now overtaken Spain and Brazil to become the world's second biggest producer, after Italy. Imports of Chinese tiles into the EU are therefore expected to increase in the next few years.

In addition, a number of current features of the tableware market environment have been signalled by industry:

( demand for tableware overall continues to grow in line with world population

( however, customers are buying fewer large services which are kept for life, as the trend towards casual dining accelerates. Tableware is therefore becoming a fashion item which is disposed of in relatively short time as fashion changes

( Asian manufacturers are capturing an increasing share of this market segment

( EU manufacturers are seeking cost reductions, including by lowering consumption of high cost - and therefore higher margin - materials, moving production to low labour cost areas (with subsequent damage to traditional employment), production outsourcing

( production in traditional tableware manufacturing regions reduced by $750 millions in the five years to 1997

( $1 000 millions increase in Asian production over the same period

( EU hotelware manufacturing continues to do well, but is being hit by peak tariffs in traditional markets such as the USA - see below - a position being made worse by the fact that Chinese producers seem to be targeting the American market with low-priced imports, and virtually pushing EU producers out in some areas.

3. Employment trends

Numbers employed in the ceramics industry have been decreasing steadily in recent years. Actual figures for 1998 are not all available, and in any case are more accurate for some countries than for others. At its annual meeting on 3/4 June 1999, the FEPF gave the following employment estimates for the last two years for the biggest producing countries:

Number's Employed0

>TABLE POSITION>

Numbers employed in the ceramics industry as a whole went down by an estimated 24.9% between 1992 and 1997 However, the decrease in numbers employed in the tableware sector alone between 1992 and 1996 has been roughly estimated at 33.0%, with a further drop of 25.9% between 1997 and 1998 as can be seen from the above. This appears to have accelerated sharply in 1999, caused by a fall in domestic demand and the effects of the economic problems in Asia, and, to a lesser extent, in South America. The latter had the effect of closing off some of EU producers' traditional markets, whilst producers in these countries were looking to other markets, such as the EU, to off-load their surplus domestic production.

At the same time, the strength of some currencies against the US$, in particular the GBP, has made selling into the USA more difficult, and has also led to large quantities of cheap American hotelware coming into the EU, particularly the UK, for the first time, despite statements made during the EU/US negotiations under the Uruguay Round that US producers did not export hotelware. This Round also left some very high tariff peaks on hotelware in the USA, which is a traditional market for EU producers.

Individual comments by Member State, where available, are shown below:

( United Kingdom

Market share and production both down by approximately 10% in 1998 compared with 1997, with a further 5% drop forecast in 1999. Turnover in the traditional volume tableware and total employment down by 25% between 1996 and 1998, of which 20% came in 1998. Profitability halved over the same period.

Late 1998/early 1999, 1 200 job losses at one of the biggest producers, 140 at another, and a third producer closed down completely with the loss of 300 jobs. N.B. it is important to bear the regional aspects in mind: numbers employed in the ceramics industry in the UK accounts for 1% of total UK employment, but in Stoke-on-Trent, the principal ceramics producing area, 51% of jobs are in the ceramics and related industries.

( Germany

A fall of 4.4% in 1998 over 1997. This may well represent a fall in the rate of job losses, since Germany's largest producer has had an employment reduction programme for the last three year, with probably a further 1 500 to go; unfair competition from low-priced imports cited as a principal factor. 2 other producers each closed down a factory completely. Eurostat figures, available only for Germany, indicate a loss of 25% of jobs in the "Manufacture of ceramic household and ornamental articles" sector from June 1995 to November 1998, with numbers going down from 21 857 in 1995 to 18 326 in 1996.

( France

The French FEPF member thought that the employment situation had remained fairly stable in 1998 overall, although 3 factories closed down completely, with the loss of over 500 jobs, which were obviously compensated for in other areas. An ongoing process of restructuring and rationalisation is underway, with 25% jobs losses since 1990.

( Italy

Numbers employed went down by an estimated 48% between 1997 and 1998.

( Greece

3 factories closed down completely. The only remaining Greek tableware producer is in severe economic difficulties.

( Portugal

Numbers employed went down by an estimated 36% between 1997 and 1998, although this may be slightly exaggerated in that the figure for 1997 may have been too high.

Whilst job losses in the tableware sector can not be attributed solely to imports of low-priced products, there is no doubt that this is a contributing factor, and one which has been mentioned, often in press releases, as a significant factor behind closure or rationalisation decisions.

B Sensitivity to Chinese imports

1. Trends in imports and exports

As mentioned above, exports are very important for EU tableware producers, many of whom regularly export up to 30% of their production, although the quantity of tableware exported is generally well below import levels. The following tables show EU trade in 1998 with its biggest export markets, and its biggest importers.

Extra-EU imports in 1998: EUR 15 Source: COMEXT

>TABLE POSITION>

Extra-EU exports in 1998: EUR 15 Source: COMEXT

>TABLE POSITION>

So whilst imports from China remain high and constitute by far the most important source of imports of porcelain and china and earthenware, EU exports to China remain virtually nil. Imports into China continue to be negligible, principally due to own overcapacity as well as foreign currency considerations. For the same reasons their export potential is very substantial.

Allegations have also been made in relation to the circumvention by Chinese exporters of the Communities quotas. In this respect, it should be noted that the import figures above are those figures which have been reported and relected by COMEXT. However, allegations have been raised that imports from China are being routed through other countries, such as Hong Kong and, more recently, Vietnam. For instance, there is no local production of ceramic tableware in Hong Kong, yet in 1998, Hong Kong exported to the EU the tonnages and values shown below:

>TABLE POSITION>

Source: COMEXT

Furthermore, as the quotas are expressed in tonnes, the true extent of Chinese imports may be unclear. In this regard, it has been alleged that, according to certain laboratory testing on imported Chinese products the average weight per piece has been reduced by as much as two-thirds. That is, whilst import quotas may not have been fully taken up in terms of tonnes, the actual number of pieces of Chinese tableware being imported is alleged to have increased significantly. Unfortunately, it is not possible to verify this in COMEXT, which has no provision for reporting by individual pieces.

Finally, an additional problem which European tableware manufacturers have raised is that of counterfeiting. As in previous years, allegations have been made that certain Chinese producers copy European designs, which are produced in China and sold in Europe at much lower prices than the European products. Examples have been shown in the past of Chinese products being sold in European markets, as virtually exact replicas of European products.

2. Prices

Average prices of Chinese imports have usually been well below European prices both for porcelain and chinaware and for earthenware. Below is a comparison of average prices charged for imported Chinese goods, with the average price of similar products manufactured in the EU (not yet available for 1998).

ECU/kg Source: Cérame-Unie members

>TABLE POSITION>

* France and Portugal only.

** France only.

For the two specific products subject to quota, Chinese prices compared with the average intra-EU levels in 1998 were:

ECU/kg Source: COMEXT

>TABLE POSITION>

As can be seen from the above figures, the existence of quotas may have limited the quantity of Chinese imports, and there are signs of small increases in Chinese selling prices. In general, European prices have, however, come increasingly under pressure, not only because of the presence of low priced imports notably from south east Asia and central and eastern Europe, but also because there is significant production over-capacity in the European Union.

C. Opinions from Interested Parties

1. Opinion of the Community industry

The European ceramic tableware sector is represented at EU level by the "Fédération Européenne des Insdustries de Porcelaine et de Faïence de Table et d'Ornamentation" (FEPF), which in turn is a member of the umbrella EU ceramics federation, Cérame-Unie. Cérame-Unie, which estimated that it represents around 75% of all EU tableware producers (NB there are very many unaffiliated sumall manufacturers), remains very strongly in favour of the continuation of the quotas into 2000, and with no increase on 1999 levels.

2. Opinion of Importers

The Union of Glass and Pottery Wholesalers Associations and the Foreign Trade Association, on the other side, believe that the persistence of the quotas on Tableware is no longer necessary since the overall state of the European Industry has significantly improved as a result of rationalisation, downsizing and relocation of production to East and Central Europe and the Far East where hourly wage rates are 70% to 80% lower than in the Community.

D. Conclusion

It is clear from the above the EU tableware sector remains sensitive because of the high volume of low priced Chinese imports and their substantial disruption potential. The EU ceramic tableware sector is continuing a hard rationalisation process in order to increase its productivity and competitiveness, and during this sensitive period, it is particularly susceptible to the effects of low priced imports, a further reason why quotas should remain, and at levels the same as for 1999.

III. China's trade liberalisation and WTO accession

The Community's overtures to China regarding the removal of this country's 385 remaining quotas have been made within both the bilateral and WTO context. Either way, the Community is not yet able to ascertain a program for the phase-out of China's quotas that comes near to matching the EU's own.

The Commission has indicated repeatedly that it expects their quotas to be removed completely by year 2005 and that the Community would match any earlier removal of them by liberalising our own quotas. The Chinese have acknowledged their intention to abolish the quotas by 2005 and to remove a limited number of them before that date, provided that China's WTO accession happens in the near future. Their negotiators have often questioned the 2005 deadline, arguing that it depends on early WTO membership.

In addition, the management of the Chinese quotas is often arbitrary and untransparent. The Commission has repeatedly asked China to adopt uniform treatment for all importers and exporters when allocating quotas. So far, the existing unsatisfactory management of quotas rules remain in place.

Furthermore, the Commission has clearly indicated to the Chinese side that a substantial improvement in the access to their market could play a key role in considering a resumption of the liberalisation process of the remaining EC quotas. To this date, this has not materialised

IV. Overall conclusions

From the information it has gathered the Commission has drawn the following conclusions:

1. In general terms the sectors covered by the quantitative restrictions have made efforts that have borne fruit in terms of restructuring production and improving the quality of the products under quota. However, while the European producers are continuing in this effort the Footwear and Tableware sectors remain particularly sensitive:

- The overall situation is precarious: both industries are affected in varying degrees by stagnating production, declining sales and exports, closures and job shedding.

- The sectors concerned are labour-intensive, fragmented industries that are particularly vulnerable to competition from low-cost countries and have already lost a large share of the Community market to them.

- The industries are engaged in restructuring exercises which look promising but are costly and difficult to carry out - a waive of low-priced imports during this particularly vulnerable situation would condemn them to failure.

2. Chinese competition, in general, remains a real threat:

- China has enormous - and growing - production and export capacity in the sectors covered by quantitative restrictions and its exporters would, in their absence, soon be in a position to unleash huge quantities on the Community market.

- Imports from China had already seized sizeable market share, or were in the process of doing so, when quantitative restrictions at Community level were introduced.

- The prices of imported Chinese products remain much below those of comparable Community products. They are also well below those of other Community suppliers.

- Frequent occurrences of counterfeiting in the case of some products, namely porcelain and ceramics, further distort competition.

- An additional consideration is the particular nature of the Chinese economy. China has been striving, over the last few years, to liberalise its trade regime and open its economy to the world. These measures represent important steps forward, however, the Chinese authorities still exercise great influence on the operation of the Chinese industry: e.g. artificially low prices that do not reflect the real economic cost of the products concerned and export strategies that are governed by not strictly commercial considerations.

On the import side, China maintains high tariffs on many consumer products, but the more prohibitive restrictions stem from non-tariff barriers such as quotas, licence requirements, restrictions on foreign currency and technical barriers. Products may be imported only by foreign trade corporations that are authorised, and essentially controlled, by the Central Government.

There is thus reason to believe that the abolition of the remaining quantitative restrictions would lead to a renewed upsurge in imports from China and a further dangerous weakening of the market position of the Community industry concerned.

As regards the level of the remaining quotas, an examination of the actual use of import licences by Community importers shows that unused quantities are substantial, ranging from 15 to well over 30% [4] of total quotas. While a part of these unused quantities are likely to result from the allocation of very limited quantities to "non traditional" importers (the latter renouncing to import quantities that they consider as not economically significant), a large portion thereof appears to correspond to traditional importers' decisions not to fully use their import licences. For certain sub-categories of footwear (slippers and certain synthetic and leather shoes), it is true that such decisions may have resulted in 1997 and 1998 from the existence of anti-dumping measures or pending investigations. This is however not true for most of the products under quotas for which unused quantities were found to be substantial.

[4] With the exception of slippers (CN 6404 19 10).

In these circumstances, the Commission considers that it can be assumed that the overall quantities available are not insufficient to cover the importers' needs and do not call for an immediate increase. As explained earlier in this report, a readjustment of the allocation method, to the benefit of non traditional importers, has been implemented with the effect as from 1/1/2000. The Commission believes that such a readjustment, together with the efforts already made with a view to correcting the existing imbalance between traditional and non traditional importers, is likely to improve the overall use of import licences and thus to result in an increase of quantities actually imported.

Accordingly, while keeping in mind the objective of eventual liberalisation of the quotas, in tandem with reciprocal and equivalent efforts on the Chinese side in the context of their efforts to join the WTO at an early stage and their multilateral or bilateral negotiations with the Community to phase out the quotas on both sides over an agreed time-frame, the Commission considers it appropriate to recommend that their level remain unchanged in 2000.

4. CHAPTER 3 IMPLEMENTATION AND MAINTENANCE OF SURVEILLANCE MEASURES

I. Purpose of surveillance measures

The Council introduced these measures to keep imports of a variety of products under closer observation in cases where the trend gave cause for concern but was of no immediate danger to the Community industry.

II. Implementation

Prior Community surveillance is carried out through a system whereby licences are automatically issued free-of-charge for any quantity requested within five days of the lodging of a request by a Community importer.

Regulation (EC) No 519/94, as amended by Regulation (EC) No 139/96, brought in a standard simplified Community surveillance document which reduced to a minimum the formalities to be accomplished by importers and Member States in connection with imports under surveillance.

In May 1997, following the conclusions contained in the Commission's second report, the Council decided by its Regulation (EC) No 847/97:

- to remove a range of products of which the imports in 1995 were lower than in 1994, from the list of products subject to Community surveillance;

- to insert the products in respect of which quotas were abolished (toy parts and accessories and glassware as from 1 January 1998) in the list of products subject to prior Community surveillance.

In May 1998, following the conclusions contained in the Commission's third report, the Council decided by its Regulation (EC) No 1138/98 to insert toys, in respect of which quotas were abolished, in the list of products subject to prior Community surveillance.

III. Trends in imports of products under surveillance

The table below gives import figures, in thousands of ecus, for products under surveillance in 1998, excluding certain "hi-tech" footwear, and sets them against the 1997 figures.

>TABLE POSITION>

Source: EUROSTAT

In the case of certain "hi-tech" sports footwear imports Eurostat figures do not distinguish between those under surveillance and those not, so the Commission can only refer to the surveillance documents issued in 1998:

ex 6402 99 // 2.769.168 pairs

ex 6403 91 et 99 // 12.108.575 pairs

ex 6404 11 // 13.647.636 pairs

Total // 28.525.379 pairs

IV. Should surveillance measures be maintained-

The figures provided here show that the share of imports from China of all but one [5] of these products is still very high. The Commission believes that prior surveillance should be maintained for these products.

[5] Namely "bicycles", a product subject to definitive anti-dumping duties and whose sensitivity cannot therefore be solely assessed in terms of imported volume. On 10 September 1998, an expiry review of the anti-dumping measures in force in respect of Chinese bicycles was initiated. Pending the outcome of the expiry review, it appears reasonable, despite the limited share held by Chinese imports, not to lift the prior surveillance measure in place.

5.CHAPTER 4 CONCLUSIONS AND PROPOSALS OF THE COMMISSION

In view of the above, the Commission believes that the system of quantitative restrictions and surveillance measures set up under Regulation (EC) No 519/94, as last modified by Regulation (EC) No 1138/98, should be maintained: No change in the structure and the level of the remaining quotas appears to be warranted while the product coverage of the surveillance should also remain unchanged.