The European Union and China have settled the trade dispute that has blocked millions of garments at Europe’s ports and borders. The row had threatened to overshadow a visit to Beijing by Tony Blair.

The Chinese Prime Minister, Wen Jiabao, this morning let slip during a press conference with Mr Blair that they had agreed a deal, after all-night negotiations between Peter Mandelson, the EU Trade Commissioner, and China's Commerce Minister, Bo Xilai.

The deal is understood to involve a compromise in which the EU and China will split the goods stockpiled in European warehouses. Half of the goods will be allowed into Europe immediately, while the other half will be allowed in but set against China's 2006 export quota to the EU.

The deal is subject, however, to agreement from all EU member states. This is done through the EU's Textiles Committee but there is general optimism in Beijing that it will be approved.

Mr Wen called it a "fair and equitable deal" and was anxious to play down the row in the context of wider trade with the EU.

Mr Blair, at the press conference with Mr Wen in the Great Hall of the People overlooking Tiananmen Square, shrugged off normal protocol and said that they did not expect that would be a problem.

Agreement was reached after what Premier Wen said had been a "sleepless" night of talks between Mr Mandelson and his Chinese counterpart.

Mr Blair, who holds the presidency of the EU, said he was sure that the deal would go through.

He said: "There are bound to be disagreements over trade, partly because of the strength of the Chinese economic performance and where there are disagreements we have got to resolve them as we have fortunately been able to do in respect of textiles.

"But the big picture is one of increasing trade between China and the EU. Whenever disagreements occur, the key thing is the direction is one way and that’s always greater economic trade and that’s good for our people and good for our countries."

Mr Wen said: "Recently, the trade friction between the EU and China on textiles was mainly about seven Chinese exports in textiles to the EU. In that case, a lot of goods in the seven categories have been piled at European ports. We both have adopted a positive attitude in seeking a solution to share the burden instead of letting the commodities pile up in these ports."

Earlier, Mr Blair had defended Mr Mandelson’s handling of the dispute, saying criticism of him had been "as predictable as it is unjustified".

The Prime Minister was not involved in the detailed talks, over which the Commission has "sole competence". But Mr Blair admitted that the trade dispute had been discussed in general terms during his meeting with Mr Wen.

The deal could mean the impounded clothes reach European shops in a matter of weeks. British retailers had warned of shortages of clothes this autumn if a breakthrough was not made quickly.

However, the CBI was luke-warm in welcoming the deal. The Director General of the employers' body, Sir Digby Jones, who is in Beijing with Mr Blair, said: "While this agreement means the blocked goods will reach consumers, by 'borrowing' from next year's quota it is only delaying the problem.

"The real answer is to allow access to the EU for goods produced in China and for EU producers to adapt to the competitive challenge this presents. Quotas, agreed or otherwise, are not the way for the developed world to deal with globalisation."

The dispute has threatened to become deeply embarrassing for Mr Mandelson, whose handling of the affair has been widely criticised. Downing Street would not say yesterday whether Mr Blair was due to meet Mr Mandelson during his two days in China.

The British Retail Consortium has estimated that £550 million-worth of goods are being held throughout Europe, at least £50 million-worth of which were destined for British stores. Among the blocked garments are at least 16 million pairs of trousers and some 59 million sweaters.

Volumes of imports increased sharply after a global textile quota system was abolished in line with World Trade Organisation guidelines on January 1. China has since shipped more than 300 million pullovers to Europe so far this year, compared to just 40 million last year.

The agreement on ten categories of products came into effect on July 12 after textile producing nations in the EU called for measures to protect their industries. Italy, Spain, France, Greece and Portugal were reported to be opposing a proposal by Mr Mandelson to let products ordered before July 12 in to the EU.

The European Commission President, Jose Manuel Barroso, said it was important to show the world that the two sides can resolve the row.

"It is important for the world to understand that the European Union and China are able to solve the problem in a constructive and positive way," Mr Barroso, who is also in Beijing, said.

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