TRADING INSULTS The dream was that the world was about to enter a golden era of global free trade. But are we about to enter a cycle of damaging trade wars instead?

But Mandelson was perhaps less than diplomatic in his summing up of the issue to a journalist: "My philosophy is that when you see trade irritations arising, you should always engage in dialogue, which could have been attempted in relation to Boeing-Airbus."

But Mandelson's China agreement has not been universally well-received.

In a leading article last week the Financial Times accused the former MP for Hartlepool of "pandering to narrow interests" over trade.

Mandelson's eagerness to erect fresh barriers to protect "mollycoddled" European industries was portrayed as a a "travesty of free trade, " which would only mean that poorer consumers in the EU would end up paying more for basic items such as clothing.

His approach would also precipitate a string of further calls for protection from other sectors such as bicycle and shoe makers, said the FT, even though such measures would only serve to further undermine Europe's competitiveness.

Whether it is right or wrong in the longer term, Mandelson's deal will protect thousands of European jobs - at least until it expires in 2008.

Under the deal the EU and China agreed to limit increases in 10 categories of Chinese textile exports including T-shirts and flax yarn to between 8.5-per cent and 12-per cent a year until 2007, avoiding the need for official sanctions.

Xilai, the Chinese commerce minister, described it as a triumph for European diplomacy, in sharp contrast to the more strident approach adopted by the US. America has resorted to sanctions by re-imposing import quotas on several categories of Chinese clothing imports, including syntheticfibre trousers, cotton yarn and two categories of shirts and blouses.

In a letter published by the FT last Wednesday, Mandelson defended his actions: "This deal . . . is a transitional arrangement to deal with the economic shock and social consequences of the unwinding of protectionism.

"Much better in my view to allow for this managed transition, than impose autonomous safeguard measures that would have soured relations with the Chinese and gravely inhibited my ability to press Europe's other, and just as important, interests in China."

But Mandelson could not resist rushing to the defence of another narrow interest group later in the week.

On Wednesday he recommended there should be a European Commission investigation into whether Chinese shoes are being dumped on the European market at below production cost.

Dependent on the probe, the EU could impose additional duties on Beijing's shoe imports, which have soared by nearly 700-per cent since a 40-year-old system of quotas was scrapped on January 1.

The European footwear industry warns that employment in the sector could halve in two years, from 290,000 jobs at the end of 2004, with countries such as Italy, Spain and Portugal worst effected.

But Mandelson's most recent rhetoric suggests that he is no prisoner of protectionism. Last week he warned European companies that unless they respond rapidly to China's growing manufacturing clout, they could go out of business. He said they should speed up their restructuring efforts and "move up the value chain" to counter cheaper imports.

Other aspects of global trade were freed up long ago, but western textile producers were shielded from the full brunt of global competition from the 1960s until January 1, 2005.

The Multi-Fibre Arrangement (MFA), which ran from 1974 to 1995, meant textiles and clothing were treated as a special case and exempted from GATT disciplines. This permitted the developed countries to shelter domestic industries behind a web of bilateral quotas. The MFA was superseded in 1995 by the World Trade Organisation's Agreement on Textiles and Clothing (ATC). This saw the gradual winding down of quotas with the aim of gradually bringing the rag trade into GATT by January 1. Under a separate WTO agreement made in 2001, China's trading partners reserved the right to slap a 7.5-per cent "safeguard" cap on textile exports following any disruption to markets once global quotas came off.

The Chinese had been salivating at the prospect of a free market in textiles, and in exchange they had been prepared to open up parts of their own agricultural and services market to Western companies. These talks formed part of their WTO accession discussions in the 1990s.

The People's Republic had massively geared up its textiles production ahead of the January date, with an estimated dollars-21bn invested in textiles production in the past three years alone. The country's exports of clothing and textiles, which were worth dollars-42bn in the first half of 2004, soared by 29-per cent in the first quarter of 2005.

This put the fear of God into European and US textile manufacturers and fuelled allegations of "dumping" and "market distortion", which the Chinese regard as most unfair.

Euratex, the lobby group for European textile producers, accuses Chinese clothing companies of unfairly benefiting from an artificially low currency, lax labour laws and state-supported banks.

The surge in Chinese exports is costing up to 1000 European jobs a day, claims Euratex.

One industry source echoes these allegations of a playing field that is far from level. "I have some experience of the Chinese textiles industry and some of what you see there is actually quite frightening. Not all the textiles factories would meet normal Western rules of economic return."

The American Manufacturing Trade Action Coalition fears US imports of Chinese-produced pants (trousers, in English) will rise from 2.1 million dozen pairs in 2004 to 15 million dozen this year - about one for every US citizen.

But the backlash is not just about self interest. It is also about protecting jobs in other emerging markets, some of whose economies are largely dependent on the textiles trade.

US manufacturers are concerned that production facilities which they helped build up during 40 years of quotas in places such as Honduras, the Dominican Republic and Mexico may struggle to compete in a market freefor-all. Producers in Bangladesh, Pakistan, Sri Lanka and Turkey - whose textiles industries also thrived during quota protection - are also anxious.

Neil Kearney, general secretary of the Brussels-based International Textile, Cloth and Leather Workers Association, believes that the surge in Chinese production has been "like a massive earthquake, " threatening to wipe out 30 million textile jobs elsewhere in the world.

Kearney says: "Lesotho relies on the sector for 99.14-per cent of its export earnings.

Bangladesh for 94-per cent; Haiti for 88-per cent;

Cambodia for 86-per cent; Pakistan for 75-per cent;

Honduras for 75-per cent and Sri Lanka for 63-per cent. In all of these countries the textile and clothing industry is the only source of manufacturing employment."

The figures may be exaggerated but since the start of the year, job losses have risen sharply. In Sri Lanka, 36 factories have closed with the loss of 26,000 jobs, while in Cambodia, 20 factories have shut.

Mike Hartley, chairman of the Scottish textiles group Dawson International, is in two minds about the merits of free trade. In principle he is in favour of it believing that to choose where to base production facilities on the strength of quotas alone is almost invariably bad management.

But he concedes that the scrapping of quotas six months ago has ultimately made his company's Todd & Duncan plant in Kinross-shire more vulnerable.

"I am a free marketeer, " says Hartley, who took over Dawson's reins in 2003 after 10 years with Coats Viyella. "But free trade is, ultimately and in the long term, a threat. On balance it's going to be harder for us. But some businesses [within the group] will lose a little bit and some will gain a little bit."

The wrangling over textiles mirrors a separate dispute over the Chinese currency. The yuan has been pegged at about 8.27 to the US dollar since 1995. But US politicians and commentators believe this gives Chinese exporters an unfair advantage in world markets and has fuelled the US trade deficit with China (which soared to dollars-162bn in 2004). The US has warned Beijing that unless it bites the bullet and revalues the yuan by upwards of 10-per cent within six months, the communist republic will risk protectionist measures including a 27.5-per cent tariff on all Chinese imports.

But Andy Xie, an economist at Morgan Stanley, does not believe that China will respond to such arm twisting. He says: "Don't hold your breath. China does not possess the conditions for a strong currency and will not succumb to foreign pressure and take a decision that may cause economic chaos at home."

But does the sabre-rattling, together with the more focused dispute between the US and the EU over levels of subsidies paid to the aircraft manufacturers Boeing and Airbus, mean that we could be on the cusp of a trade war?

The American government says that the EU's subsidising of the Airbus project violates trade laws. But the Europeans argue in turn that there are a lot of hidden US subsidies for Boeing via billions-strong arms contracts.

These arguments have resulted in both submitting complaints to the WTO setting out their positions.

It is going to be interesting to see what the WTO makes of these complaints which it began poring over last week.

Mandelson says it will be "the biggest, trickiest and most expensive legal dispute in the history of the WTO".

Under president George Bush it certainly looks as if the US is becoming more and more isolationist. The world's most powerful country has already withdrawn from the Kyoto protocol on climate change, opposes the International Criminal Court and ultimately bypassed the United Nations Securities Council in order to invade Iraq.

But, despite the sabre-rattling over Airbus and Chinese textiles, few trade experts believe that the US has any intention of turning its back on the WTO any time soon.

Dr Lorand Bartels, lecturer in international economic law at the University of Edinburgh, says the WTO has shown it has what it takes to bring disputatious parties back from the brink.

"It's true that America is losing the taste for free trade and that, inevitably, will have some knock-on effects. But it would be overblown to say that [we're entering a new era of protectionism]."

The Australian-born academic, a specialist in the links between human rights abuses and trade, adds: "It's issues of great political sensitivity - such as bananas, Boeing/Airbus and GM food - that always grab the headlines. It often seems that such disputes will bring down the entire system.

"In reality, however, the vast majority of disputes come and go and are generally settled [by the WTO] without ever making the headlines."

"The WTO is very robust and is resolving at least 80-per cent of cases satisfactorily. Another positive indicator is that the use of anti-dumping measures has come down quite dramatically in recent years."

Indeed, the runes for the Doha round of world trade talks - which are supposed to ensure developing nations in Africa and elsewhere are better integrated into the global trading system - are said by some experts to be looking more positive than negative.

Supachai Panitchpakdi, the WTO director general, last week said that the disputes over textiles would not disrupt the talks.

However Ketan Patel, former chief futurologist at Goldman Sachs, whose book The Master Strategist was published last month, warns we may be entering a more protectionist era.

He says the terror attacks of September 11 engendered a new bilateralism between the UK and US that has affected the way we view most things.

"Bin Laden might have thought he was just attacking somebody that he didn't like. But the ripple effect in terms of our mentality has been much, much wider.

"There used to be a belief that we were all moving towards a much freer trade environment. But that attitude has given way to one in which people - in the absence of any alternative ideologies or 'isms' - think we might as well protect what we've got. That mentality is going to shape the next decade.

"The threat we feel from Chinese exports, Indian services and Southeast Asia's presence in consumer electronics will be seen as reasons to be more protectionist."

However Patel does detect a bright side. In the event of a damaging SinoAmerican trade war, he says Europe could have much to gain. "If there's a trade war between America and China and there is protectionism on, let's say, the transfer of intellectual property, pharmaceuticals, semiconductors and computing technologies, then Europe has a fantastic role to play.

"Utilising the low-cost strengths of China and India, Europe would have a great opportunity to supply both countries with the things they need to grow their economies."

In such a scenario, Mandelson's more emollient China-style diplomacy, as opposed to the more gung-ho style of the Americans, might turn out to be more of a help than a hindrance.