Is China the Villain? Silk ‘dumping’ and the plight of Indian silk reeler

In spite of its key role in the process of silk production and it’s high and growing potential to employ poor workers particularly women, the reeling activity is a relatively neglected area from the research point of view. The post WTO developments especially the relaxation of import restrictions in the post liberalization regime also has apparently taken its toll on the silk reeling sector. Not many studies were conducted on this issue. The objective of this paper is two fold 1. To throw up a few important issues faced by the silk reeling sector in India and 2. To suggest a broad direction of research in the Indian silk sector in the wake of globalization.

Silk reeling sector in India

There are around 24 thousand reelers (as per the registered number of reeling units up to March 97) in the state (Vasumathi, 2000). They all own small reeling units and the maximum size of a reeling unit does not exceed 20 basins. Manual silk reeling provides employment to around 50,000 persons in semi-urban locations; most of these live in conditions of absolute poverty and exist on subsistence incomes. Yet the economic and working conditions of reelers and the reeling activity have received little research attention when compared with other aspects of sericulture (Economic development associates, 1990)

Liberalisation and Rawsilk imports

Since liberalization of imports in 2001, import of raw silk has been steadily increasing with low prices. Raw silk imports have increased from 4713MT in 2000-01 to 9258 MT in 2003-04 (Ministry of Textiles, Government of India, 2005). Increase in imports from 2001-02 to 2002-03 reportedly impacted the domestic price of raw silk. Price of imported silk in India fell drastically from US $ 24.50 per kg in May 2001 to US $ 13.50 per kg. in June 2003. This apparently disrupted the domestic silk market and prices of cocoons and raw silk fell by about 40% due to large volume of import at relatively low prices. As a consequence farmers and the reelers, who were the most affected segment, approached the Directorate General of Anti Dumping and Allied Duties (DGAD) requesting to impose levy of anti-dumping duty against China. As dumping of raw silk by China was established, the GOI imposed antidumping duty against the import of mulberry raw silk (not thrown) of international grade 2A and below, originated in or exported from People’s Republic of China (DGAD, 2003). According to government sources, in spite of antidumping duty on all imports of mulberry raw silk of grade 2A and below from China, the imports of raw silk were on the increase and the antidumping duty was being evaded by China by exporting to India raw silk of Grade-2A and above and twisted silk yarn which is beyond the purview of the antidumping notification (Ministry of Textiles, GOI, 2005).

The case concerns the silkworm rearers and silk reelers on the one side and handloom weavers and power loom weavers on the other side. The rearers and reelers are adversely affected by (cheap) imports of rawsilk by experiencing fall in price of rawsilk and cocoon. Though the weavers are supposed to be benefited by the cheap imports of rawsilk, it can’t be expected that the imports will continue to be cheap for ever. There are reports of closure of many reeling units (Vasumathi, 2000), the exact figures of which are not available. This indicates that the reeling industry is incapable of buffering against the shocks of price fall, presumably due to the small firm size. The farm sector is also reportedly affected by the downward price shifts of cocoon which is reflected on the down fall in acreage over the years (CSB, 2006). The area under mulberry plantation had increased from 170000 hectare during 1980-81to 343000 hectare during 1992-93. Since then it had fallen gradually to 172000 hectare during 2004-05. (CSB, 2006)

The phenomenal decline in mulberry area did not result in drastic downfall in cocoon production only because of productivity gains, thanks to the huge R&D expenditure borne by the government in the farm sector. The cocoon production during 1997-98 was 127495 tons. During 2004-05 it fell to 120027 tons. Raw silk production statistics also reveal the stagnation of the industry over the period, save a slight increase from 14048 tons to 14620 tons (Ministry of textiles, 2005). Thus sericulture farmers and silk reelers organized against cheap rawsilk imports to the country and demanded anti dumping sanctions.

Cheap imports benefit weaving sector

The silk weaving sector favored cheap imports of Chinese rawsilk. The organized power loom weavers represented to the DGAD in favour of Chinese rawsilk imports. To quote from their representation: ‘The indigenous prices have come down on account of increase in production and quality as a result of R & D. As against a total of 16000 tons of silk produced in the country, the current domestic demand is 23000 tons leaving a huge gap in demand and supply to the extent of 7000 metric tons. The demand-supply gap in mulberry raw silk exists basically for warp-grade silk for power looms. Warp-grade silk preferred by powerlooms can usually be had only from bivoltine races and is being met by imported Chinese bivoltine silk. There are more than 30000 powerlooms and 180000 handlooms in the country using pure silk yarn for manufacturing fabrics. In the production of pure silk fabrics, 6 handlooms are equal to 1 powerloom. Thus the production of both the sectors is almost equal. Both the sectors employ more than one million workers. If Chinese imports are restricted the powerlooms will stop production and the workers will be thrown out of employment’ (DGAD, 2003). Thus there started a hot debate between parties in favour and against cheap imports of Chinese silk.

Who purchase Chinese silk and why?

The argument that ‘the imported Chinese silk is consumed only by the power loom sector’ is to be taken with a pinch of salt. As per the official statistics over the six year period from 1999-2000 to 2004-05, the number of powerlooms in the country remained stagnant at 29340 where as the number of handlooms increased from 227701 to 258000, which is a 13% increase (Ministry of Textiles, 2006). During this period the domestic demand-supply gap of rawsilk increased from 5852 tons to 10180 tons which is 74% increase (COMTRADE, 2007). It takes only logic to understand that the excess demand has been being created by the handloom sector and that the imported Chinese silk were being absorbed by the handloom sector as well. Because of the price differential the natural choice of the hand looms would be imported Chinese silk. It is also important to note that during this period the number of reeling units (filature, charka and multi end) in the country has fallen from 60838 to 54846 (Ministry of Textiles, 2006). This means that 10% of the reeling units have closed down, as an after effect of the fall in price of rawsilk. It is clear that the increase in number of hand looms has not helped the domestic reeling industry by creating matching demand for domestic rawsilk. Thus the answer to the question ‘why Chinese silk?’ doesn’t seem to be ‘material quality’ but ‘price’ instead.

Argument of the (organized) power loom weavers that ‘the indigenous prices have come down on account of increase in production’ (DGAD, 2003) is not true. During the above said period the increase in domestic rawsilk production was from 15214 ton to 15445 ton, the percentage increase being only 1.5% (COMTRADE, 2007). This meager increase in production is incapable of creating a fall in rawsilk price, given the 74% increase in demand-supply gap over the same period. When the imported quantity is taken as percentage of domestic production it can be seen that over the six years period from 1999-00 to 2004-05 it has increased from 39% to 68%. The absolute quantity of ‘cheap imports’ has increased by 75% during this period (ibid). Thus the role played by the imported silk on the price fall of domestic raw silk is evident.

It is reported that the cocoon cost constitute about 80% of the silk yarn price (DGAD, 2006). Other studies show that the cocoon price constitutes nearly 90% of the yarn price (Vasumathi, 2000). Owing to this very little value addition takes place. The pricing of cocoons in turn is guided by government norms and the marketing of cocoons is done through regulated markets. Thus Reelers do not enjoy sufficient economic profits to purchase sophisticated reeling machinery and to adopt advanced processing technology or to establish more number of reeling units. Official sources report closure of 5992 reeling basins during the six year period from 1999-00 to 2004-05 (Ministry of Textiles, 2006).

Thus it is evidenced that the Indian reeling industry operates with wafer thin margins and might easily get whiffed-off in adverse situations. The sector is financially weak and has no bargaining power. Credit flow into the sector being extremely poor, purchase of cocoons and selling of raw silk in opportune situations is not possible. The government regulated cocoon market on the one hand is offering a tough competition for the reelers due to supply side domination. On the other hand, failure of the Silk Exchange in facilitating raw silk sale has placed them at the receiving end in the environs of a buyers market. The reeler is thus sandwiched between the domination of supply side on the one side and weaver or trader on the other. On top of this, the after effects of trade liberalization have added to the suffering of the reeling sector.

What is Dumping?

The term ‘dumping’ is used to denote ‘export of commodities at prices below the cost of production’. The most common definition of dumping at the WTO is ‘the sale of exports at prices below the prevailing prices in the domestic market’. Dumping is formally prohibited by Article VI of the GATT. Trade officials presume dumping as a good thing for the importing country (they are getting cheap merchandise) unless the country complains (usually because the cheap imports are threatening domestic producers). [For a theoretical explanation of ‘dumping’ please read the previous story in this blog].

So it is up to countries to put in place the national legislation they need to protect themselves from dumping, and the onus is on the country receiving the dumped production to prove harm to its domestic producers before anti-dumping duties can be imposed (Institute for Agriculture and Trade Policy, 2004). ‘Contingent protection (CTP)’ may be used by the governments to protect their domestic producers from unfair competition. Contingent protection measures fall under three categories – antidumping, countervailing and safeguard measures. Of these antidumping remains the most commonly used contingent protection measure. It proliferated in the 1990s and is now used extensively by developed and developing countries alike (Agarwal, 2003). The use of CTP implies a violation of one of the GATT fundamental principle, namely the reciprocity principle codified by article 28. There are theoretical explanations justifying the presence of CTP within WTO trade liberalizing agreements which show that the use of CTP is a necessary condition for optimal trade liberalization (Kohler, 2001). At the same time a growing body of literature criticizes the dramatic increase of anti dumping measures over the last two decades (Miranda, Torres and Ruiz, 1998; Prusa, 2001), the proponents of which believe that the rise in anti dumping (AD) activity can’t be solely explained by an increase in unfair trade. According to a recent study by Aggarwal (2002), the surge in the use of anti dumping measures by India cannot be justified on economic grounds.

Is China dumping silk in India?

Indian silk industry is a bundle of contradictions. Second largest producer of silk, the largest silk consumer and the largest importer of rawsilk. Unable to exploit export potential by equipping processing industry to value add cheap imported rawsilk. In spite of huge R&D investments and extension efforts for 15 years the (desired) technology diffusion in the farm sector is below 5%. The legislations and regulations favoring the farming sector have nearly suffocated the reeling industry. The processing industry is marked by low end technology use, lack of investment, poor quality produce and high cost of production.

Statistical evidence indicates that the agro industry has received blows due to cheap imports of rawsilk. However whether these cheap imports could be designated ‘dumping’ and whether anti dumping measures can save the situation are questions not easy to find answer but important enough to be probed in greater depths. In the mainstream economic theory, ‘predatory dumping’ requires fulfillment of a number of stringent conditions. For example the firm who has the predatory motive should have a dominant position in home as well as in the global market. Again, predator must be in a position to check entry of other firms to that market. Thus one possibility of the exporter using predatory power is when it has higher share in the total import of the product as well as in the total domestic consumption of the product. The share of the named country in total domestic consumption of the product or the ‘import penetration ratio’ (Dumped Imports as a Percentage of Domestic Consumption) should be calculated to verify whether there is predatory dumping.

There are not many well directed and theoretically sound economic studies in this area. The fact that such an interesting and important issue escaped scholastic attention is surprising. Considering the efforts made by the Government of India to modernize its silk industry vis-à-vis its dismal performance over the years raises the question whether any anti dumping and countervailing measures could save it from cheap imports and for how long such measures can prevail in a fast globalizing world? The situation demands a realistic and impartial investigation to arrive at a broad direction of policy in order to utilize the strengths of the domestic industry as well as to exploit the cheap raw material imports from China constructively for modernizing the domestic silk weaving industry in an export oriented perspective. The following fundamental studies are suggested as a ground work for better understanding the dynamics of the silk imports from China.

1. Assess and quantify the material injury suffered by the Indian reeling industry due to cheap imports of rawsilk.
2. Study the impact of cheap rawsilk imports on cocoon price and its consequent farm level implications.
3. Study how China is able to produce silk at relatively low cost
4. Establish whether the anti dumping measures adopted by India against Chinese rawsilk import are justifiable on economic grounds.
5. Study the extent of absorption of imported rawsilk by hand looms in the country over the years and to analyze the dynamics of imported silk.
6. Analyze the performance of sericulture farm sector and reeling sector before and after the imposition of anti dumping duties on Chinese silk.
7. Understand and document the factors responsible for the reportedly low end technology use by the reeling sector.
8. Evaluate whether the country is prepared for producing sufficient quantities of high quality silk with in the time span offered by AD and CV measures against silk imports from China by analyzing a) the extent of diffusion of the bivoltine hybrid, b) the price differential enjoyed by the bivoltine hybrid rearers and bivoltine silk reelers over those subscribing to traditional and cross breed silk worm/ silk c) whether the domestic reeling sector is prepared absorb the high quality cocoons produced by the farm sector and process it to produce high quality of silk usable in power looms

Reference:

Aggarwal A (2002): ‘‘Anti Dumping Law and Practice: An Indian Perspective’’, Indian Council Research on International Economic Relations (ICRIER) Working Paper, No. 85

Aggarwal A (2003): The WTO Antidumping Code: Issues for Review in Post-Doha Negotiations, ICRIER working paper No. 99

Baruah Nandana (2005): Anti Dumping Duty As A Measure Of Contingent Protection: An Analysis Of Indian Experience. Center for Development Studies Working paper No. 377

COMTRADE (2007): United Nations, Comtrade Data Base (New York: United Nations Statistical Office, 2007).

CSB (2006): annual report of Central Silk Board 2005.

Curry Ronald (1997): Global silk industry: today and tomorrow. Indian silk vol 35., No. 12, 1997

Czako J, Human J and J Mirinda (2003): A Handbook of Anti dumping Investigations, Cambridge University Press, UK

DGAD (2003): Notification No: 14/28/2002-DGAD DATE: 03/07/2003 Anti dumping Investigations Concerning Imports of Mulberry Raw Silk (not thrown) originating in or Exported from China PR.-Final Findings.

Economic development associates (1990): Manual silk reeling in south India, a preliminary study of technology transfer. Report by Economic Development associates

Feinberg R M. and B T Hirsch (1989): “Industry Rent Seeking and the Filing of ‘Unfair Trade’ complaints,” International Journal of Industrial Organization, 7 (3) 325-340

Institute for Agriculture and Trade Policy (2004): Glossary for the WTO agreement on agriculture

Kohler Philippe (2001): The role of contingent protection in WTO agreements. Working version, GEM, Institut d’Etudes Politiques de Paris – 2, square de Luynes – 75007 Paris.

Ministry of Textiles, GOI (2005): Sericulture Industry a report.

Miranda, Jorge, Raul A. Torres and Mario Ruiz. (1998): “The International Use of Antidumping: 1987 – 1997.” Journal of World Trade 32(5), pp. 5-71.

Naik Gopal and Babu KH, (1993): Demand and Supply Prospects for High Quality Silk, Oxford & IBH Publishing Co. Pvt. Ltd, New Delhi.

Prusa T (2001): ‘‘On the spread and Impact of Anti dumping’’ Canadian Journal of Economics 34 (3) 591-611.

Prusa T and S Skeath (2001): ‘‘The Economic and Strategic Motives for Antidumping Filings’’, NBER Working Paper, No. 8424.

Prusa, Thomas J. (2001): “On the Spread and Impact of Antidumping.” Canadian Journal

Tikku .MK. (1999): Tangled threads: Silk growers and imports EPW, March 6-13., 1999

Vasumathi. B. V (2000): An Analytical Study of the Silk Reeling Operations in Karnataka, PhD thesis, Department Of Management Studies Indian Institute Of Science, Bangalore, India.