The impact of China’s clothing exports on South Asian countries

With the remarkable efforts of the government and reform of economy since the open door policy, China has rapidly emerged as a preferred exporter in the global clothing products. In 2007, China’s clothing exports to the world amounted to US$115 billion, which represented 44 % of the world total clothing exports. Since 1995, it has become the world’s largest clothing exporter. China’s highly elastic supply of low cost labour and the on-going trade liberalization has increased trade adjustments in both developed and developing countries. The dramatic increase of China’s clothing export has particularly triggered fears of increased competition for among the developing economies. Its accession to the WTO in 2001 further exuberate such fears. Although spillovers from China’s rise have gradually stretched to almost all regions of the world, neighbouring South Asian countries have been more manifested given their close geographical proximity. These are especially true for those at the similar stage of development with relative factor of endowments and production costs. China’s abundance of low-cost labour has underscored its comparative advantage in labour intensive clothing products. Hence, low-income South Asian countries in the region feel at risk of being displaced in global market. This paper uses the gravity modeling to explore whether China’s clothing exports is displacing exports of other Asian countries over the period 1990-2006. Aggregate analysis is conducted and the endogeneity of China’s clothing exports are described by using instrumental variables with fixed effects. Results indicated that the displacement effect is more pronounced in low-income South Asian economies than the middle-low counterparts. Therefore, the clothing exports for China’s neighbouring countries are being eroded; in particular, the less developed South Asian suppliers are more seriously affected