52001DC0084

6TH 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

I. Historical background

II. Objective of the Commission report

III. 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 W.T.O. accession

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

I. 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 concerned 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.

II. Objective of the Commission report

(a) 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 sixth report is in response to the above-mentioned commitment.

(b) However, in view of the bilateral Agreement reached with P.R. China on 19th May 1999 in Beijing, (and pending finalisation of China's Accession Protocol to the W.T.O.), and the progressive phase-out of quantitative restrictions by year 2005, no further reports will be necessary.

Any problems regarding the administration of the quotas until the end of 2004, will be dealt with in the context of the Committee established by Council Regulation (EC) N° 520/94 of March 1994 (Community procedure for administering quantitative quotas).

III. Methodology

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

In chapter 2, it addresses 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.

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.

The Commission also received information of a general nature from importers and from one association.

3. In general, the analysis is based on figures for 1999. However, trends for 2000 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 and 5th Reports the Commission concluded that, 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 should not add to the intended effect of the quotas on trade and that the available quantities should 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). For the 2000 quota year 27247 applications were submitted, while for 2001 quota year the applications reached 58524. This large increase in 2001 was due to a threefold increase of applicants from one Member State

This extremely high number of applications results in each individual non-traditional importer 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, at best, only allowed non-traditional importers to be granted quantities similar to those, 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).

However, as already agreed with Member States in an effort to encourage optimum use of quotas from genuine importers, minimise speculative applications and distribute economically significant quantities, with the view to reduce unused quantities, only those non-traditional importers who participated and made use of at least 80% of their import licences under the annual quota year allocation can have access to these unused quotas and with effect as from the re-distribution in 2001 of the unused 2000 quotas.

Further steps may also become appropriate in order to discourage speculative recent applications, a matter currently investigated (i.e. choice of reference year(s), Bank guarantee at an appropriate level, etc.).

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 2001 quotas well before the beginning of the quota year, and importers were invited to introduce their applications from June to September.

3. The 2001 management rules currently provide for a 12-month validity of the import licences. Moreover, the unused 2000 quotas will be redistributed during 2001. 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 free of charge for the Community importers.

c) Conclusion

The management of these quotas has 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 with a view to improving their access to genuine importers. 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 concerns that the management system should not add to the difficulties for importers in relation to these 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.

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

>TABLE POSITION>

- figures on "High-Tech" shoes, not covered by the quotas, are based on data available from the Taric database. - Data for the years 1996-1998 contained in the tables throughout the report, do not always fully correspond to the data contained in previous reports, since Eurostat constantly carries out improvements to its database whenever Member States correct or update their submissions to Eurostat. - 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 State

b) Import prices of products originating in China

>TABLE POSITION>

Sourc:EUROSTAT * Calculated for the first time in this Report from COMEXT data, they refer to average EU 15 prices. In the past figures were provided by industry for a limited number of Member States. Some of the figures, therefore, differ from previous reports and cannot be compared with them.

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 has analysed the implications of China's accession to the W.T.O. and consequent liberalisation of that market, 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 as a result of 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 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 low-end segment 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 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 EU's principal export markets - maintain tariff peaks of up to 48%.

As regards trade relations between the EU and China, the most important recent event was the initialling of a bilateral agreement concerning the terms for China's accession to the WTO (Beijing, 19 May 2000). That agreement provides, inter alia, for the removal of all footwear quotas on 1 January 2005, and lays down annual growth rates of 5 to 15% (from the time of China's accession to the WTO until 31 December 2004). China, which currently maintains customs duties on footwear between 22% and 25%, undertook to gradually reduce those tariffs for about half of the tariff lines concerned to 10% or 15%, while maintaining the current rates for the remaining tariff lines.

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 parameters.

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 decline by -4.6% between 1997 and 1998, EU production dropped by another 6.1% in 1999, thereby falling for the first time below 1 billion pairs. This fall in output was mainly due to a sharp decrease in exports: -13.4% in 1999, after a reduction of -10.2% in 1998.

The increase in apparent consumption (+4%) was mainly absorbed by strongly increasing imports (+11.2%). As a result, the market share of EU manufacturers on the EU market fell from 49% in 1998 to 45% in 1999. China took up 18.3% of that market (after 17.2% in 1998).

Employment continued to decline in 1999 (by about 12,000 jobs), thus falling below 300,000 jobs. This corresponds to a 4% drop compared to 1998.

Table 1 [3]

[3] It should be noted that the data for the years 1996-1998 contained in the tables throughout this section do not always fully correspond to the data contained in previous reports, since Eurostat constantly carries out improvements to its database whenever Member States correct or update their submissions to Eurostat.

>TABLE POSITION>

Products covered: CN Codes 6401-6405 Apparent consumption: production + imports - exports EU sales on internal market: production - exports EU producers' market share: EU sales on internal market divided by apparent consumption Market share of Chinese imports: Imports from China divided by apparent consumption

4. Trends in exports

After a decline by 10.2% in 1998, exports fell by another 13.4% in 1999, with exports to Russia showing by far the worst performance (-64.2% in 1999, after -23.9% in 1998). Exports to Canada and Japan, by contrast, increased moderately. With the exception of Russia, the export shares of the most important export markets of the Community remained fairly stable. The US absorbs more than one third of all EU exports.

Table 2

>TABLE POSITION>

Products covered: CN Codes 6401-6405 Export share: share of individual country in total EU exports

Exports to the Community's main suppliers remained marginal - and even fell from already low levels - with China accounting for only 0.14% of all Community exports:

Table 3

>TABLE POSITION>

Products covered: CN Codes 6401-6405 Export share: share of individual country in total EU exports

As a consequence, 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 the years 1996 to 1999:

Table 4

>TABLE POSITION>

(Products covered: CN Codes 6401-6405)

B. Sensitivity to Chinese imports

1. Trends in imports

In 1999, EU footwear imports from all sources increased by 11.2%, reaching a total of more than 900 million pairs. With imports increasing by 11%, China maintained its high share in total EU imports (at a level of 33.4%). In spite of the surveillance system which was recently introduced for imports originating in Vietnam, Vietnamese imports increased by more than 20%, resulting in an import share of 19.5% (after 18.1% in 1998). Also Taiwan, Romania, India and Hong Kong managed to increase their market shares, while Indonesia and Thailand lost some ground.

Table 5

>TABLE POSITION>

Products covered: CN Codes 6401-6405 Import share: share of individual country in total EU imports

In 1999, as in previous years, approximately one third of all footwear originating in China was imported under quota:

Table 6

>TABLE POSITION>

(* Products covered: CN Codes 6401-6405)

In spite of the quantitative restrictions in place, imports of footwear under quota increased by more than 12% in 1999 - which even exceeded the substantial growth rate of non-quota footwear (10.3% in 1999, after 3.6% in 1998). This led to a slight increase in the overall quota coverage. Broken down by CN Codes under quota - and again neglecting the issue of sports footwear - the situation is as follows:

Table 7

>TABLE POSITION>

While imports of most of the products subjected to quotas showed an upward trend in 1999, the large increase concerned 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 ("slippers") and 6404 19 90 ("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 footwear by more than 536% in 1998. By the end of 1999, those imports had fully recovered from the effects of the provisional anti-dumping measure, and even exceeded the 1996 level.

As regards products falling under CN Code 6404 19 90, which are still covered by the anti-dumping measure, but are not under quota, imports grew by almost 70% in 1999, but are still clearly below the levels prevailing before the adoption of the anti-dumping decision:

Table 8

>TABLE POSITION>

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 (and disregarding the exemption of sports shoes), both Indonesia and Thailand lost market share in 1999, while China was able to increase its exports, by 9% and market share to 24%, despite the anti-dumping measures in place. Vietnam - which is not subject to that anti-dumping measure - further strengthened its position as the Community's main supplier of those products:

Table 9

>TABLE POSITION>

Also with regard to CN Code 6403 99, Vietnam has become the main supplier of the Community, while China succeeded in narrowing the gap with Indonesia (which ranks number 2):

Table 10

>TABLE POSITION>

Table 11 aims at examining the issue of import sensitivity of Chinese imports at the regional level. As far as footwear under quota is concerned, Germany, the United Kingdom, Italy, France and the Netherlands accounted for 80% of EU imports of such products - from all sources - in 1999. The share of imports from China in overall EU imports of such footwear amounted to 20% at EU level, and varied considerably between individual Member States. In Italy, Austria and Portugal, China's import share was relatively low (with 13% in 1999), while it reached 33% in Sweden and even 44% in Finland.

Table 11 also shows Member States' exports of quota footwear, so as to assess the extent to which individual Member States are exposed to direct competition from China, both on the EU market and on world markets. Italy accounted for more than half of all EU exports of the products concerned, followed by Spain (with an export share of 16%).

Table 11

>TABLE POSITION>

Product coverage (in pairs): footwear under quota (compare table 6) Import share: share of individual country in total EU imports from World Share of China: imports from China divided by imports from World Export share: share of individual country in total EU exports to World

2. Import prices

A comparison of the average prices of imported Chinese footwear (under quota) with those of total Community exports ('World') demonstrates the extent to which Chinese imports are undercutting the prices of its competitors:

Table 12

>TABLE POSITION>

(* 'World' includes the countries listed in the above table)

Chinese prices fell to 7.19 EUR/pair in 1999, after 7.56 EUR/pair in 1998, while world prices went up slightly. As a result, Chinese prices went down to 83% of the world price level. Only imports from Taiwan were cheaper than imports from China.

The price situation varies considerably from product to product (see table 13). The most striking price differential occurs with regard to CN 6403 59, where Chinese prices stood at only 30% of the world price level.

Table 13

>TABLE POSITION>

>TABLE POSITION>

As the above analysis of price differentials is limited to a comparison between China and its most important third-country competitors (mainly from Asia), it is hard to assess the impact of Chinese prices on its EU competitors. For this reason, table 14 compares import prices from China - which enjoys a share of 18.3% of the EU market - with intra-EU prices. Intra-EU imports by Germany and the United Kingdom, respectively, have been chosen as examples, given that those two countries are the EU's main importers of footwear under quota (compare table 11):

Table 14

>TABLE POSITION>

Germany from EU: "EU" excludes Germany, but includes the UK UK from EU: "EU" excludes the UK, but includes Germany

As can be seen from the above table, imports from China were, on average, only half as expensive as imports from EU countries. The price differential was most significant for product CN 6403 59, and least significant for CN 6403 99.

Finally, table 15 contrasts prices for quota products imported from China and the World with export prices of EU exports to the World. While such comparison is not of direct relevance to competition on the EU market, it helps to illustrate the competitive situation on world markets. Of course, such comparison does not take account of differences in quality and design.

Table 15

>TABLE POSITION>

EU export prices kept rising in 1999, while prices of imports from China decreased even further. As a result, Chinese prices fell to 35% of the value of EU exports.

C. Opinions from Interested Parties

1. Opinion of the Community Industry

According to the European Confederation of the Footwear Industry (CEC), imports of footwear from China kept growing substantially, in spite of the existence of quantitative restrictions. The CEC consider that there is still sufficient room for increases in imports from China, given that those quantitative restrictions are not even fully utilised.

Furthermore, the CEC state that 1999 was a particularly difficult year for world production of, and trade in, footwear. Responding to falling world demand and the resulting build-up of stocks, China managed to reduce its prices even further, thus creating a very difficult environment for EU operators both on the EU market itself, and on the EU's main export markets. As a result, EU industry faced a sharp decline in production, employment and exports, while imports - in particular from China - kept rising at a fast pace.

With regard to China's imminent accession to the WTO, the CEC feel that EU quotas should not be phased out at a faster pace than envisaged in the EU-Chinese deal on WTO accession. A sudden elimination of all restrictions - without reasonable transitional periods - would severely disrupt trade and put the existence of EU footwear production at great risk.

In any event, the gradual elimination of quotas would have to be accompanied by substantial liberalisation efforts by China, so as to allow for a fair and level playing field for EU and Chinese operators.

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. Furthermore they are of the opinion that either the quotas should be abolished in some of the footwear quota lines immediately or there should be a much more significant increase of their current level as from 2001, with a complete phase-out in 2 years.

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 - and growing - share of the total Community market (18.3%; see table 1), the huge price gap between Chinese and European footwear (see tables 14 and 15), and the enormous export potential of the Chinese industry.

In 1998, the situation described above further deteriorated as a result of the financial crises in Asia, Russia and Brazil, which deprived EU operators of important export markets. 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 contracted. As a result, both Community exports and Community production decreased markedly.

1999 saw a continuation of those negative trends, with world demand falling considerably, with China as well as other suppliers (such as Taiwan) further lowering their export prices. On the EU internal market, this led to a visible substitution of EU-produced footwear by imported footwear, mainly to the advantage of China - in spite of the quantitative restrictions in place.

If at the present time, the quantitative restrictions vis-à-vis China were removed immediately, the European footwear industry in its present form and size would be put at considerable risk. Moreover, the Community would be faced with inconsistencies in its overall industrial policy: One 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 global and open markets. At present, such a level-playing field does not exist, since many third countries - including China - 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 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 a labour-intensive sector - with all its implications on the employment situation within the EU -, any further liberalisation of Community imports will have to go hand in hand with equivalent liberalisation efforts by the Community's trading partners.

In the light of the current competitive environment, which fails to provide a level-playing field, the quantitative restrictions against China should be maintained, and, as from China's accession to the WTO, phased out in strict accordance with the transitional regime agreed between the EU and China. The growth rates foreseen in that regime will give ample opportunity to EU importers to further increase trade with China.

2. Porcelain or china tableware and ceramic tableware

CN 6911.10 and CN 6912.00

As in previous years, statistics and detailed information on these two specific items have been difficult to obtain, for three principal reasons:

- statistical reporting is normally done by producers on their whole range of production, which means that figures are usually expressed as CN 6911+6912+6913 combined

- many producers are reluctant to disclose what they consider to be commercially sensitive information to their federations, especially during the recent and ongoing period of fierce competition which led to a number of businesses failing

- there are many small manufacturers which are not members of any federation, and their share of production has to be estimated.

A number of different information sources have therefore been used in the compilation of this report.

A Situation in the EU ceramic tableware sector

1. Structure of the EU ceramic tableware sector

Production of ceramic products tends to be very concentrated geographically. This was originally because production grew up near to sources of raw materials and energy. Whilst this is no longer the deciding factor for location, there are still big concentrations in Staffordshire, and particularly the city of Stoke-on-Trent, in the UK, Bavaria in Germany, the Limousin in France, and around Maastricht in the Netherlands.

The ceramic tableware sector is dominated by small and medium sized enterprises, most of which have become smaller over recent years. There are, however, some large producers, three of which are probably the largest producers in the world. The range of products they produce is vast; products differ greatly between manufacturers and depend to a large extent on public taste and disposable income.

Output in the tableware sector typically represents about one tenth of total output of the ceramics industry, but it has traditionally employed something like a quarter of the total number of employees. 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 below apply to all ceramics sectors together. Unfortunately, figures for certain categories, which are normally supplied by industry, are not available beyond 1998, so no calculation of EU apparent consumption can be made for 1999.

>TABLE POSITION>

In comparison, similar information on tableware (again, not much information is available from industry):

Units: million EUR

>TABLE POSITION>

3. Employment trends

As mentioned above under A.1., the tableware and ornamentalware sectors traditionally account for about a tenth of the value of total ceramics production, but more than a quarter in terms of numbers employed. Labour costs can equate to up to 60% of total costs in some areas.

Numbers employed in the whole of the ceramics industry fell by 10% between 1995 and 1998, although there had already been significant job losses in the early 1990s. According to the European ceramics producers' federation, the situation in the tableware sector was much worse than the average, and numbers provided suggest that numbers employed went down by 46% between 1997 and 1999 alone. The figures for the last two years, for the Member States where there is tableware production and where figures are available, are shown below.

>TABLE POSITION>

Given that figures are not available for some Member States for both years, and that some figures are estimates, it is not possible to make a straight comparison. Nevertheless, the figures do confirm the trend which was announced in the 5th report which was finalised in May 1999. This report indicated a 25% drop overall in numbers employed in the EU tableware sector, with the trend forecast to continue for the rest of 1999. This trend has been born out by the facts, with further job losses having been reported in a number of countries.

The 5th report also contained a detailed account of job losses in a number of Member States. For a variety of reasons, such detail is not available for the 6th report, but some details are available for Germany and the United Kingdom, the two biggest European players in the ceramic tableware industry.

Germany

Numbers employed in the German ceramics industry as a whole have been decreasing steadily for a number of years, and went down by 13%, from 43 000 to 37 400 from 1995 to 1999. According to information supplied by a German trades union, turnover in the German ceramic tableware industry is falling, and the overall situation would be much worse if not for the good export performance of German producers. Between 1995 and 1999, numbers employed fell by 22%, from 20 985 to 16 448.

Imports of all ceramic products into Germany account for 40% of consumption, but for the lower and middle segements, imports account for over 50%.

United Kingdom

Numbers employed in the British ceramics industry as a whole have also been decreasing steadily for a number of years. Currently, over half are in the county of Staffordshire, "the Potteries", and 43% are in the city of Stoke-on-Trent alone. 46% of all manufacturing jobs in Stoke-on-Trent are in the ceramics industry (down from 53% in 1996). Overall, the total number of jobs in the ceramics industry in the city went down from 45 300 in 1975 to just 16 700 in 1998. With such a heavy concentration in one industry in one city, the effects of any unfair competition are quickly felt.

Since the 5th report which showed significant job losses in the UK in the year and a half up to May 1999, there were 37 redundancies announced in the tableware sector in Staffordshire in the summer of 1999, 270 at Christmas 1999, and 135 just before the 2000 summer holidays.

Whilst job losses can not be attributed solely to the effects of low-priced imports, these have certainly contributed significantly. The presence of large volumes of low-priced imports, particularly from China, has often been cited as a reason for job losses by many companies, verbally and in press statements.

B Sensitivity to Chinese imports

1. Trends in imports and exports

The figures below show 1999 imports of the two products subject to quota, that is tableware and kitchenware of porcelain or china, falling under CN 6911 10 and ceramic tableware, kitchenware, other household articles and toilet articles, other than of porcelain and china falling under CN 6912 00. The data cover imports from the most traditional sources, including China, with a number of other south east Asian countries being shown for comparison purposes.

Total imports from these countries went up by between 15% and 20% from 1998 levels. Total imports from China went up by slightly less - by between 11% and 18% - but still represent the principal source of imports of these two products into the European Union.

At the time the quotas were introduced, imports from China were concentrated on a limited number of Member States, but this situation has changed recently. 1999 saw sales of products under CN 6911.10 in all Member States except Luxembourg, and CN products under CN 6912.00 in all Member States, although some of the quantities were very low. Nevertheless, there are still big concentrations: 45% of sales of CN 6911.10 were reported by the Netherlands and Germany in 1999. However, in the past, it has often been suggested that sales into the Netherlands are often delivered onwards to the UK. Of imports of CN 6912.00, 60% were concentrated on Germany and the UK.

Extra-EU imports in 1999: EUR 15 Source: COMEXT

>TABLE POSITION>

Although these are the official figures on imports from China as available in COMEXT, it is not known if this reflects true developments in imports, and this is for two distinct reasons:

- it is thought that Chinese producers divert their exports to Europe via other countries. For example, there were 2302 tonnes of CN 6911.10 and 840 tonnes of CN 6912.00 reported as having been imported from Hong Kong in 1999, a significant increase on the previous year, but there is no tableware production there. Imports from Hong Kong have been coming into the EU at prices similar to, or even below, those from China (see below for more detail). There has also been evidence in the past, notably from trade fairs, that some Chinese producers have been selling whiteware decorated in Indonesia, and it then comes into Europe as Indonesian. This may also be true of imports from India;

- the fact that the quotas are expressed in tonnes detracts from the fact that there appears to have been considerable "lightweighting" of products over recent years. Regular laboratory testing of Chinese imports by a Danish manufacturer suggests that the average weight per piece has been reduced significantly, sometimes by up to two-thirds. So, whilst import quotas may not have been fully taken up in the past in terms of tonnes, the actual number of pieces of Chinese product imported is likely to have gone up significantly. Unfortunately, it is not possible to verify this in COMEXT, where there is no provision for reporting by individual pieces for this product.

As far as exports of these two products by European producers are concerned, the figures below show deliveries to their principal traditional markets, with China shown for comparison. As before, EU sales on the Chinese market are minimal, as the Chinese market is virtually self-sufficient. In addition, the market is protected by high import tariffs - currently 30% on the products subject to quota, compared with EU tariffs of between 5% and 12%. In the latest tariff offer made in the context of the negotiations for Chinese accession to the World Trade Organisation, the Chinese tariff on CN 6911.10.10 will reach its final level - 12%, the same level as the current EU tariff -only in 2005. CN 6912 will not go below 15%, and this will not be achieved until 2004. Imports into China will therefore still benefit from considerable protection for a few years yet.

Extra-EU exports in 1999: EUR 15 Source: COMEXT

>TABLE POSITION>

As can be seen from the above figures, the USA is a major market for European tableware producers. Hotelware producers continue to do particularly well on American markets despite the very high tariff peaks which continue to be applied (not only in the USA but also in other markets). The GATT Uruguay Round negotiations only achieved reductions over 10 years from 35% to 25% on porcelain and china hotelware, and to 28% on other grades. These levels are at least twice as high as corresponding EU tariffs.

Signs have been seen over recent years that Chinese exporters are also targeting US markets with low priced imports, making the situation worse for EU exporters to that market, which are virtually being pushed out in some areas.

2. Prices

Selling prices for imported Chinese tableware have always been well below European prices, both for porcelain and china and for earthenware, and 1999 was no exception, as the table below clearly shows.

EUR/kg Source: COMEXT

>TABLE POSITION>

It should be noted that the above average European selling prices have been calculated, for the first time in this report, from COMEXT data. They therefore refer to average EU 15 prices, whereas in the past, figures were provided by industry for a limited number of Member States. Some of the figures are therefore different from those in previous reports, and can not be compared with them.

On the two items subject to quota, average selling prices for 1999 were as follows:

EUR/kg Source: COMEXT

>TABLE POSITION>

For comparison, average selling prices of imports reported from Hong Kong for these two items were:

CN 6911.10 EUR 1.77 per kg

CN 6912.00 EUR 1.24 per kg

3. Counterfeiting problem

One of the problems that EU tableware producers have had to face over the years is that many of the Chinese imports which are coming on to the market at prices well below European products are direct copies of models produced by EU companies. The consumer can therefore find himself faced with two almost identical products at very different prices, and produced under very different environmental rules.

4. Opinion of the Community industry

The ceramics tableware sector is represented at European level by the FEPF, the Fédération Européenne des Industries de Porcelaine et de Faïence de Table et d'Ornementation, which is in turn a member of Cérame-Unie, the umbrella ceramic products manufacturers' association of the European Union. The FEPF held its annual general meeting in June 2000, and came to the following common position: it feels that there is sufficient reason to continue the existing tableware quotas, and at the same time effecting better control at the borders, because:

- unfair trading practices such as the very low prices of Chinese imports, frequent counterfeiting, and diverting products through other countries, continue to put a burden on the EU tableware industry, which is suffering the consequences

- it feels that the EU-China agreement on WTO membership does not guarantee the end of the Chinese state trading system, and the tariff reduction for imports into China are insufficient for EU producers to be able to export to China to compensate for their losses caused by low-priced Chinese exports to the EU and other countries

- it considers that the import of Chinese tableware into the EU constitutes as much a sensitive issue as imports of Chinese textiles into the USA, for which it understands that there maybe a safeguard clause. If the USA succeeds in achieving a ten-year safeguard clause on imports of Chinese textiles, for example, then Cérame-Unie would seek the same treatment for imports of Chinese tableware into the EU

- it is of the opinion that products imported from China and other third countries should be subject to the same relevant legislation as EU producers, which is currently not the case, and which discriminates against domestic producers. In the case of ceramic tableware, this means especially Directive 84/500/EC on the approximation of the laws of the Member States related to ceramic articles intended to come into contact with foodstuffs (which provides limits on the release of lead and cadmium), and Directive 89/109/EC on the approximation of the laws of the Member States relating to materials and articles intended to come into contact with foodstuffs.

This latter Directive, provides, inter alia, for such materials and articles to be accompanied by the trade name or registered trade mark of the manufacturer or processor, or by the importer. Since such information is usually missing on Chinese imports, Cérame-Unie feels that EU producers are again being discriminated against.

5. 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.

6. Conclusion

The presence of low-priced imports of tableware originating in China remains a very sensitive issue for the EU ceramic tableware industry, and clearly has substantial disruption potential. Rationalisation in the EU tableware industry is continuing, with consequent continuing job losses, and in such a sensitive period, the sector continues to be susceptible to the effects of low-priced imports. Quotas on imports from China should therefore continue into 2001.

However, the Commission has given the Chinese authorities a proposed phasing-out timetable of the quantitative restriction being applied to industrial (non-textile) products from China, which means, for the two ceramic tableware products, a 15% increase each year from 2001 to 2004, with complete removal of the quotas in 2005. In line with this, quotas for CN 6911.10 and CN 6912.00 for 2001 should be set at 15% higher than the level applied in 2000. Quotas should not be abolished before 2005, in accordance with this proposed timetable.

III. China's trade liberalisation and W.T.O. accession

(1) The negotiation of an agreement on China's accession to the WTO has been at the top of the EU's trade agenda for the past two years. The bilateral Sino-EU agreement reached on 19 May 2000 therefore marks a major step forward in our trade relations. Coming in the wake of the Sino-US Agreement of November 1999, the Agreement with the EU virtually ensures that China will join the WTO early in 2001. The Commission and the Chinese authorities have agreed to step-by-step market opening in many areas, with implementation typically taking place within a three to five year period.

The EU-China Agreement will secure vastly improved access for EU (and other WTO member countries') firms to the Chinese market. Import tariffs and other non-tariff restrictions will be sharply and permanently reduced. WTO membership will consolidate and accelerate China's own efforts to promote transparency, fairness and openness across the board in China's own trade regime. And the WTO's independent and legally binding dispute settlement system will enable both sides to resolve trade problems quickly and effectively. In short, this Agreement greatly enhances the climate for European companies to export to, do business with, and invest in, China. As a result, the EU and China can look forward positively to a reverse of the recently declining levels of Foreign Direct Investment (FDI) in China

But in addition to the commercial opportunities it will offer, WTO accession will have a substantial impact on economic reform and development in China. The EU is committed to working in partnership with China, in order to make this transition process as smooth as possible. The Commission will share its experience in the WTO with China, including offering to help China adapt its economy to meet WTO obligations, through the EU-China co-operation programme.

WTO accession will bring another anchor for structural reform. Entering the world trading system will be a catalyst for Chinese firms to become more efficient, to show that they can compete on fair terms with the rest of the world. The Agreement will therefore also be good for Chinese companies and workers, as they draw the benefits of increasing foreign investment, and take on the most modern management practices and legal structures.

(2) The EU accounted for a significant and growing share of China's global trade surplus in 1998 and 1999. The Asian financial crisis affected Chinese exports in the region, and led to a diversion of Chinese exports from East and South East Asia towards Europe. The EU-China trade deficit increased from 24,4 billion in 1998 to more than 30 billion in 1999.

(3) On 19 May 2000, the EU and China signed a Bilateral Agreement, paving the way for China's accession to the World Trading Organisation (WTO). Once China joins the WTO, a key challenge for the EU will be to develop mutually acceptable methods to monitor and assist with China's compliance with its WTO commitments. The EU will also continue to address remaining market access barriers.

(4) In anticipation of China's imminent accession to the WTO, the EU needs to look ahead to see how this will affect our trade relations. China will require assistance to meet its WTO commitments. The Commission will continue to develop new channels of communication with the Chinese authorities, to monitor the implementation of China's WTO commitments, and to identify instances where China faces difficulties in adhering to these obligations.

(5) The EC quantitative restrictions regime towards China was partially liberalised for the last time in 1998. No EU quotas were removed in 1999 and 2000 in view of the situation of EU industries in the sectors concerned and the lack of progress in the liberalisation of the Chinese quota regime. The progressive removal of quantitative restrictions on both sides is now to be part of China's WTO accession package, with quotas from both sides to be removed by 2005.

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 1999 excluding certain "hi-tech" footwear, and sets them against the 1998 figures.

Source: EUROSTAT

>TABLE POSITION>

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 1999:

ex 6402 99 // 2.668.643 pairs

ex 6403 91 et 99 // 12.708.325 pairs

ex 6404 11 // 10.388.169 pairs

total // 25.765.137 pairs

IV. Should surveillance measures be maintained-

The figures provided here show that the share of imports from China of all but one [4] of these products is still very high. The Commission believes that prior surveillance should be liberalised for these products, as from 1 January 2001, in the context of the bilateral Agreement with P.R. China and pending finalisation of its Accession Protocol to the W.T.O.

[4] 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. By Council Regulation (EC) N°1524/2000 of 10 July 2000 (OJ L. 175, p.39 of 14/07/00) current measures are maintained (i.e. 30.6% AD duties to the net, free at frontier, price).

5. CHAPTER 4 CONCLUSIONS AND PROPOSALS OF THE COMMISSION

In view of the above and pending finalisation of the Accession Protcol for P.R. China, 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 amended as follows:

(1) Surveillance measures should be abolished as from 1 January 2001 (Annex III of Council Regulation (EC) No. 519/94 as last amended by Annex II of Council Regulation (EC) No. 1138/98 abolished).

(2) The level of our remaining quotas should be adjusted each year, as from 1 January 2001 to 31 December 2004 as per attached Annex (phase-out table). Their complete removal should take effect as from 1 January 2005 (Annex II of Council Regulation (EC) No. 519/94 as last amended by Annex I of Council Regulation (EC) No. 1138/98).

(3) a) On this basis the Commission will submit the appropriate proposals for a Council Regulation to cover the whole period (year 2001 to year 2004 inclusive).

b) Regarding quota year 2001, as the relevant Commission Regulation allocating the quotas has already been published based on their previous level, it will become necessary to publish an additional Commission Regulation allocating the increase foreseen, immediately after publication of the Council Regulation indicated above in paragraph 3a.

Note: Appropriate proposals will also be submitted to amend Annex I of Council Regulation (EC) No.519/94 in order to remove from the list of the third countries listed those that have, in the meantime, become members of the World Trade Organisation (W.T.O.).

Footwear: In pairs ANNEX Porcelain/Ceramics: In tonnes

PHASING-OUT TIMETABLE OF INDUSTRIAL (non-textile) QUOTAS

>TABLE POSITION>