Bra Wars: Europe Strikes Back

As someone who has spent the best part of 20 years covering global trade talks, I know from bitter experience that it takes a lot to elevate tariffs, quotas and subsidies on to the front page. A riot in Seattle does the trick but, for the most part, trade anoraks get their fix inside the paper.

This week, however, reports that there are shiploads of ladies underwear lurking in the English Channel due to a decision to limit imports from China, have elevated trade to the lead item on the BBC news. And, while it is tempting to dismiss "bra wars" as a typical silly season story - especially since there are actually no boat loads of D cups at anchor off Dover - there is more to it than that.

The outcry over higher prices and restricted stock this autumn is being hailed as both a policy and public relations disaster for Peter Mandelson, and the EU's trade commissioner has had better weeks. Yesterday's talks in Beijing were an attempt to cobble together a face-saving deal that would allow European countries to exceed their Chinese quotas by bringing forward imports earmarked for next year.

That said, Mandelson's approach was a decent effort to balance the interests of Europe's consumers with those of textile producers faced with a deluge of cheap Chinese imports.

A global textile free-for-all began on January 1 this year after the scrapping of the Multi-Fiber Agreement, which had given countries a fixed quota for clothing exports. The Chinese cleaned up, but the surge in goods from the far east gave European producers little or no time to adapt.

Mandelson, despite all the criticism, was not trying to put up fresh barricades around a fortress Europe; the idea was to put in place transitional arrangements to give companies a breathing space, even though the real benefits will go to other low-cost producers such as Vietnam. But on some estimates, China will be the second biggest economy in the world behind the US within a decade - and it is diversifying fast.

China's electronic exports to Europe used to be cheap consumer goods, but recent years have seen a big increase in sales of computer and office equipment. Almost 20% of China's exports are now classified as high-tech and, with 2 million graduates a year, there's every reason to believe that the percentage will grow.

China has also sucked in resources from the rest of the world to enable its rapid growth. As a result, everything that China buys has gone up in price - notably oil, but also basic industrial goods such as steel - at the same time as everything it sells has been going down in price. For rivals in the west, this has been a double whammy - higher costs for fuel and raw materials, and lower selling prices to remain competitive. Hence the howls of pain from textile companies in Spain and Italy.

But western producers are only half the story. For retailers, the China effect means lower prices, lower costs and happier shoppers, and they are all for it. This is the age of the emancipated consumer, and retailers have kicked up a right old stink over fears that customers will object strongly to higher prices and restricted choice.

Governments in Britain and the US also have reason for concern, since strong consumer spending, fuelled by cheap imports, has compensated for the weakness of manufacturing and helped sustain growth.

The economic textbooks say there's nothing really to worry about. Countries specialize in what they are good at, so there should be a ready (and growing) market in China for high-tech western goods and services. The richer China gets, in other words, the better. There are those, though, who see textiles as merely the thin edge of a very large wedge. What will happen, they say, when China can flood the world with everything from pharmaceuticals to financial services? Western consumers are western producers too - and if they are not producing anything, how can they carry on consuming at anything like the current rate?

From this perspective, the whole of western manufacturing and much of its service sector will be hollowed out unless there are more vigorous measures to meet the threat of China. That would mean turning Mandelson's stop-gap measures into full-blown protectionism, putting up trade barriers regardless of the higher prices for consumers.

Western politicians are certainly not ready for that, so they are backing the alternative solution: braining up. Gordon Brown is urging a concentration on knowledge-based industries, everything from biotechnology to accountancy, to meet China's challenge. In the UK, knowledge-intensive services have grown at more than 8% a year since 1997, even though high-tech manufacturing has been in decline. The choice, it seems, is protectionism or to roll with the punches. Even if they hurt.