Jeremy Warner's Outlook: Incompetence marks Europe's attempt to save its clothing industry from China

The curiosity is that as a free trader by instinct, the new Trade Commissioner would have been against the quotas, or at least have had grave doubts about them.

Yet he described them at the time as a "win, win" for everyone, even though it was obvious that the practicalities of implementation hadn't been thought through, nor had there been any proper analysis of whether the quotas would have the desired effect of protecting what remains of the European clothing industry.

On both counts, the EU has been found wanting. The quotas were imposed without a thought for the flood of goods already ordered and on the high seas, while as to future orders, far from switching to the beleaguered garment manufacturers of Italy, France and Portugal, importers have predictably gone to other low cost producers instead. The spectacle of millions of pairs of trousers, blouses and bras stacking up at customs points across Europe might have looked justifiable, to some at least, had it succeeded in saving a few jobs. As it is, it won't do even that.

In response Mr Mandelson has been wriggling like a fish on a hook. First he admitted to glitches, then he dismissed warnings of clothing shortages as just scaremongering, while yesterday, having promised he would unblock the log jam of Chinese sweaters and bras, he warned that the consequences of not doing so might be severe for many small businesses and could mean shortages and higher prices in the autumn. Who's scaremongering now?

We must give Mr Mandelson the benefit of the doubt and assume that these contradictions of position are just part of the price thought necessary to persuade Italy and others to agree concessions. All the same, it's not a pretty sight and for many will just confirm Mr Mandelson's pedigree as another New Labour weather-cock, constantly turning according to which way the wind is blowing.

Yet even in the labyrinthine politics of Brussels there's much to be said for consistency, and there is even something to be said for trade quotas. No country can afford to have entire industries wiped out overnight by the sudden removal of trade barriers, even when, as Sir Digby Jones, director general of the CBI, points out, Europe has had nine years to prepare for the advent of free trade in textiles with China. It has to be done gently.

This is in any case a complex issue, because other developing nations are being just as badly affected by China's assault as Italy, France and Portugal. None the less, the EU has made a right old horlicks of this one. If this were Britain, Mr Mandelson might find himself being booted out of the Government for the third time in a row.

Can Japan grasp the nettle of change?

After decades of tedious predictability, Japanese politics has suddenly become interesting. The immediate cause is Prime Minister Junichiro Koizumi failure to gain legislative support for privatisation of the postal savings system. As a consequence, he's called a snap election, scheduled for 11 September.

For Mr Koizumi, leader of the ruling Liberal Democratic Party (LDP), Post Office reform is a badge of honour, a symbol of his determination to introduce a wider reform agenda into Japan's mired economy. The issue is now to be tested at the polls, and although it still seems rather unlikely that the LDP will lose, there is that possibility, promising the biggest upheaval in Japanese politics in more than 50 years.

Alternatively, Mr Koizumi may succeed in fundamentally altering the make up of his party in the legislature, rooting out the old guard and establishing a new generation of political representatives more in tune with his reforming agenda. Either way, the winds of change may at last be blowing through the Japanese body politic, and if that's the case, then we can expect the impasse in Japan's economic affairs to be broken too.

For some years now, Japan has been getting macroeconomic policy broadly right. By adopting and sticking to a zero interest rate regime, the Bank of Japan has eased though not yet solved the problem of price deflation. At the same time, the Government has resisted pressure to address the public finances by either raising taxes or cutting expenditure, which would have further undermined economic activity.

Meanwhile, the banking crisis which lay at the heart of Japan's economic malaise has been addressed and largely resolved. Massive currency intervention has kept the yen relatively low, allowing exports to boom.

Yet despite this potent mix of reflationary policies, overall growth has remained low to non-existent. As in Germany, lack of domestic demand has kept the economy becalmed. True, Japan is growing again right now and unemployment is falling, encouraging Mr Koizumi to believe he can win an election, yet there's little reason to suppose this is anything more than just another cyclical blip of the type we've seen so often before in Japan's 15 years of economic stagnation.

To make further progress, Japan needs to dig deeper into structural reform. For Mr Koizumi, the postal savings system is the obvious starting point. By Western standards, Japan's postal savings system is an anachronism of baffling proportions. Originally initiated as a way of rebuilding infrastructure in the post war period, the post office is the largest repository of private savings in the country, with more than $3 trillion of deposits. Nor does this government-guaranteed grip on the nation's savings show any sign of waning. To the contrary, with zero interest rates and an unpredictable stock market, it's still growing.

Much of the money is lent to Japan's Fiscal Investment and Loan Program, which in turn lends to government agencies for investment in highways, dams and other public works deemed by bureaucrats to be beneficial to the Japanese economy.

The result is a predictably massive misallocation of capital in uneconomic investment, an immovable rock of vested interest, and an open door to pork barrel politics. One of the reasons the LDP finds reform so difficult is that it directly represents so many of the special interest groups that benefit from the system. Indeed, by Western standards, the LDP is not really a political party at all, but a coalition of the self interested.

Postal reform won't of itself solve Japan's economic problems, but it would be a start. The outcome of this election is therefore of more than usual importance for financial markets. A vote for the voices of conservatism in the LDP risks condemning Japan to another decade of economic stagnation. Victory for Mr Koizumi, or even the opposition Democratic Party of Japan, would be a partial vindication of those foreign investors who have stuck patiently with the Japanese story all these disappointment-laden years in the hope that the sun may yet rise again on this one time dynamo of the Far East.

Mooted Rentokil bid is falling apart

Sir Gerry Robinson's mooted bid for Rentokil Initial is turning out to be a bad joke. First his bid vehicle was forced to admit it was in no position to bid, then it was reported to be looking for an American investment bank to lead the assault (somehow I doubt they will be queuing at the door), now he says it is essential to have discussions with the trustees of the pension fund to determine whether it is possible to bid. What on earth for? We know the size of the deficit, the assumptions on which it is based can be easily ascertained, and Sir Gerry knows the regulator will force him to plug the gap if he launches a highly leveraged offer. Sir Gerry insists he still wants to bid, but to me it looks like he's preparing the ground for retreat.

j.warner@independent.co.uk