THE FUTURE OF TEXTILES AND CLOTHING AFTER 2005
A report on some of the issues discussed at a European Commission sponsored conference
Sep 22 - 28 , 2003
This conference drew 800 people from 70 nations a pretty good indication of the importance of 2005 in the textile trade agenda. Delegates and speakers were drawn from trade and development organizations, governments, NGOs, textile producers, suppliers and customers. Hosting what was effectively a collective brainstorming opportunity was the European Trade Commissioner, Pascal Lamy. Summing up, he said that participants had "exchanged dreams and sometimes nightmares." Nightmares were very much to the fore. Lamy added that "the objective was not to draw conclusions but to share questions, ideas, problems and solutions for future consideration," something that was certainly achieved in two days of full and frank exchanges of views. There were few answers. Central to the theme was the impact of the 2005 textile quota elimination. According to speaker, Parks Shackleford of the American Textile Manufacturers Institute "This is an area that suffers from the elephant in the living room syndrome. There's this huge thing there but no-one wants to discuss it." Well not any more. The elephant in the living room is China. Since its entry to the WTO and participation in the last round of trade negotiations China's share of the textiles market in Europe and the US has risen sharply, partly at the expense of domestic production but mainly at the expense of smaller, poorer and less competitive countries. The final phase-out of quotas at the end of 2005 bodes ill for almost everyone, but China. As Parks told the conference, if nothing is done "China wins." The final phase out of textile quotas, which restricted access for textile products from the developing world to major consumer markets in North American and Europe, is scheduled for 31 December 2004. There will be no quotas for WTO members in 2005, although countries like Vietnam, which are not members, will remain quota limited. The quota system was agreed under the Multifibre Arrangement almost forty years ago and abolished under the Agreement on Textiles and Clothing, ATC, part of the Uruguay Trade Round. However, to facilitate adjustment to free market economics for the textile producers in North America, Canada and Europe a ten-year phase-out was allowed.
Textile producers in Europe and the US appear to believe there was an element of conditionality in the agreement and expected a payback in terms of improved market access for their own textile goods in the markets of the developing world. However, governments and the industry in the developing world perceived no such conditionality and this was reiterated very strongly and frequently throughout the two days of the conference. "ATC and the quota phase out is not up for discussion," said Supachi Panitchpakdi of the WTO and Rubens Ricupero, Secretary General of UNCTAD affirmed this stance. "It is a done deal for which the developing countries paid the price in the last round of negotiations (the Uruguay Round)." He added that, λHowever hard the developed world argues that conditions have to be attached to the phase out, there's no international legal obligation for the quota bound countries to pay any attention. Whatever happens market forces regain their sway in the textile sector (in 2005)." Pascal Lamy also appeared to accept this position.
By back-loading the withdrawal of quotas, the US, Canadian and European industries may have ensured that 2005 is indeed 'Big Bang for Textiles' when it might have been an orderly, gradual withdrawal over the ten-year phase out period.
If the developing world believes North America and Europe have been dragging their feet, the textile industry in Europe or North America have a similar view of the actions of their competitors in the developing world. They believe they were promised improved market access in return for quota elimination and that the removal of tariff and non-tariff barriers is just not happening. Filiep Libeert, president Euratex told delegates that Euratex, the European Textiles Trade Organization, did not agree that ATC is on track. "All players must obey all the rules." We can't have cherry-picking. Free Trade implies low or no tariff barriers. The countries most expected to benefit from quota removals had not lived up to this side of the deal."
"Why will they respect Doha if they have not respected the provisions of ATC." Of course the phase out of quota limits will hurt the developed economies. In spite of the 10-year phase out and the steady growth of imports textiles is not, as some would suggest, a negligible part of the EU economy. The EU is still the world's largest textile exporter and the second largest exporter of clothing.
EU Textiles and Clothing Some Facts 2002
EU total textiles trade Euro113 billion
EU textiles exports Euro43.8 billion
EU textile imports Euro72.4 billion (60% above 1995)
EU textiles employs 2.1 million people. (2.9 million after enlargement)
Agreement on Textiles & Clothing Some Facts 2002
Round 1, 1995-1997 16.2% of 1990 imports placed under GATT quota free umbrella
Round 2, 1998-2002 17.1%
Round 3, 2002-2004 18.0%
Round 4, 2005-onwards the rest
QUOTAS APPLY TO THE FOLLOWING WTO MEMBERS:
Argentina, Hong Kong, China, Macao, South Korea, Singapore, India, Pakistan, Thailand, Indonesia, Peru and the Philippines.
The Lesser Developed Countries, LDCs believe governments and industry in the US, Canada and Europe have been dragging their feet for too long. They point out that 18 months before the final round of quota elimination:
49% of textile and clothing trade is still governed by quotas.
80% of quotas are still in place.
There is therefore a huge degree of apprehension and mistrust attached to the 2005 quota withdrawal. The European and US textile manufacturers feel they are pawns in a vast political chess game. Their governments want both improved access to trade with the LDCs and need to offer something in exchange. Access to lucrative textile markets in the developed world is a powerful bargaining tool. In addition both the European and US administration are powerful advocates of free trade and are the major backers of a new round of trade talks. It makes it extremely difficult to argue for quota restrictions for any sector of their industrial base, however hard the consequences.
Equally the major textile powers of the developing world, China and India, feel access to European and North American textile markets has been unjustly denied for years. The 2005 quota phase-out date has been known for ten years. The huge increase in concern that has surfaced over the past year is not just because the date for total quota withdrawal is only 18 months away. Two major additional factors look likely to enormously increase the impact of quota elimination. These are China's entry to the WTO; the last year demonstrated just how rapidly China would win market share in the US and Europe at the expense of virtually all other market participants. If this is repeated following the final round of quota withdrawal, the damage to the domestic industry and to its weaker competitors amongst the LDC's will be devastating.
The second factor is the Doha Trade Round where proposals by the US and EU for reduced tariff barriers on all industrialized products could compound the impact of quota withdrawal.
The current timing for completion of the Doha Trade Round is end 2004. Textile producers in North America and Europe could face the final elimination of quotas at exactly the same time they also are hit by a first round of tariff reductions under Doha. However, the timing and the final outcome of the Doha Trade Round are unknowns.
The Uruguay Round overran by years and this round could be even more tricky with recent suggestions that the rising US trade deficit could encourage the US administration to reconsider their Doha stance. The elimination of tariffs and China's WTO membership are known and as such delegates attention tended to focus on the anticipated impact of these two factors on global markets in 2005.
WINNERS FROM QUOTA ELIMINATION
One of the major beneficiaries is likely to be consumers in the developed world, the main market for all textiles.
Rubens Ricupero of UNCTAD says studies estimate that each European family loses Euro250/year because of quota restrictions on trade. However, delegates at the conference were virtually unanimous in their belief that by virtue of its WTO entry, China would be the major beneficiary of the final round of tariff elimination and India would be next in line. China already has a well-developed textile industry. It has 20% of the global apparel market and a huge low cost labour force. It has the financial and banking expertise of Hong Kong. Some believe China will win 50% of the global apparel market after tariff phase out.
The evolution of imports into the EU after China's accession at the beginning of 2002, just in time to benefit from the third round of quota withdrawals, is evidence of this capability. In these product categories imports from China increased 53% by value and 164% by volume while average unit prices decreased 42%.
EU total imports of these products from all origins increased 10% by volume and 1% by value, suggesting substitution of imports from other countries. With only one exception there were drops in imports from other countries. China's market share in EU textile imports increased in one year to 35% in value from 23% in 2001 and to 30% in volume from 12% in 2001. The US marketplace tells an even more extreme story, partly, perhaps because the US has been back-loading tariff elimination, to a greater extent than Europe. Parks Shackleford offered compelling evidence of China's huge increase in market position in the US textiles market, particularly in the textile categories where quotas were eliminated at the start of 2002. US imports of cloth in these categories rose by 412 million square meters while the average price per square meter of imported cloth of Chinese origin fell 44%. Imports from the rest of the world declined by 201 meters.
US Cloth Imports Pre & Post Quota Removal.
(Average Price/Square Meter)
US Cloth Imports Pre & Post Quota Removal.
(Million Square Meters)
Imports from China in categories where quotas were removed January 2002 have gone up on average by 600% in the past year, Shackleford asserted and this is in spite of tariff barriers of between 8-20%.
A tariff barrier of 20% has been no defence against China, which has increased its exports of luggage to the US by 536%. At the same time Mexico, with tariff free access has seen exports of luggage to the US drop 52%.
Thailand, the Philippines and the Dominican Republic all lost market share. China's market share of the US market has risen from 10% to 70%. In the dressing gown category where there is an 8-16% tariff, China's market share has risen from 5% to 28% in one year. The major losers are Mexico, Bangladesh, the Philippines and Thailand.
For brassieres, with a 17% tariff China's market share has risen from 5% to 27%. Once again Mexico is a major loser. China's market share in gloves has risen from 10% to 36%. Here the major losers are Sri Lanka, Bangladesh, Guatemala and Taiwan. Following China's WTO entry at the beginning of 2002.
China's exports to the US market have increased by 2.8 billion square meters and 96% of this increase was in quota decontrolled categories. China's production is extremely competitive. China is expected to win at least 25% of the increased market available as quotas disappear. Some put the figure closer to 50%. This statement and all the above indications of increased market share in the US and Europe do not include any value judgement on the situation. However, it does inevitably raise concerns as to the impact on the textile industry, its employees and their dependants, and their suppliers in North America and Europe as well as its impact on textile producers in the LDCs. Chinese delegates pointed out that the surge was a response to artificial restrictions on textile trade that had held back market forces for too long. They countered ATMI's requests for quotas to be re-imposed on Chinese exports under the safeguard provisions allowed under the agreement for China's accession to the WTO by pointing out that it is not US producers who have lost business but weaker competitors in the developing world. China's huge gain in market share in the US and European markets in the categories freed of quotas were largely at the expense of weaker competitors in the developing world, competitors who can least afford to lose export income. In one year China has overtaken Mexico as the main exporter of textile goods to the US marketplace. In 2002 clothing exports are up 45% and textiles are 145% higher.
This is partly at the expense of Mexico and the Caribbean where product contains a large amount of US produced yarn and fabric. However, the export gains are also at the expense of less competitive LDCs. China is expected to win at least 25% of the increased market available as quotas disappear. Some put the figure closer to 50%.
LOSERS FROM 2005 QUOTA ELIMINATION
It is clear that the textile industry in the developed world will have a difficult period adjusting to quota withdrawal. However, "Financial assistance to facilitate adjustment should be considered. There is a need for adjustment all round. Policy makers must support it, not panic at difficulties," Supachai Panichpakdi, the Director General of the WTO told the conference. The most difficult and worrying impact will be on textile producers in the LDCs who have had a guaranteed market share in Europe and North America as a result of the quotas. This did not mean that quotas should be retained for these countries. They had distorted trade flows for too long and worked against the economic doctrine of comparative advantage. However, "We need to find a compromise between competitiveness and solidarity with the weak, the LDCs," suggested UNCTAD's Ricupero. The agreed slower phase out may have protected the position of smaller producers and some LDCs. They may have a small industry and weak infrastructure that makes it virtually impossible to compete on level terms.
Some do not fully utilize their quotas even now, and have been the subject of "quota hopping," where production has been established there purely to utilize the free quotas. The elimination of quotas could lead not just to competitive pressures but also the repatriation of businesses that no longer have any requirement to trade from that location. There were suggestions finance, training, retention of preference, but few compelling answers to the possibility that major social problems could emerge in these non-competitive LDCs in 2005. For some of the least developed countries, textiles are a major employer and an important source of foreign currency earnings. Losing their quota-moderated share of the developed market could be devastating, not just to the textile business but to society and the whole economy.
Textiles and clothing represents 84% of Bangladesh's merchandise exports. Bangladesh has 1.8 million people working in the sector 80% of them women. 10 million people are dependent on the income from this sector. To absorb the shock of quota withdrawal and the free-for-all that will ensue they need concessions.
Piero Coin, of Coin Spa said he believed the biggest losers would be countries like Vietnam, Laos, Myanmar etc, where many of the textile companies are led by Chinese entrepreneurs trying to get round quotas. Zero quotas and they will repatriate their production. Vietnam's recently agreed $2 billion quota's for the US market may have angered ATMI, but will continue to restrict Vietnam's imports when other textile producers like China, India and Pakistan have quota free access. For developed countries, textiles and clothing overall amount to only 5% of exports and less than 5% of manufacturing value-added. For countries like Bangladesh and Pakistan, textiles and clothing account for 84% and 72% respectively of export earnings.
Other major losers are the US and Europe's bilateral trade partners, some of whom are also relatively poor countries.
Over the past years the US has agreed several regional trade arrangements and unilateral preference agreements like NAFTA, the Caribbean Basin Initiative, the Andean Trade Preference Pact, the Africa Growth and Opportunity Act. Europe has the Euro-Mediterranean Association Agreements, the ACP/EU Trade Arrangement, the Everything but Arms Initiative, and EU enlargement. These agreements offer preferential or tariff-free access and additional or quota-free access to selected trading partners in return for improved access for US or European textiles or other industrial goods and/or use of American or European cloth or yarns. These partners are already losing share as a result of existing quota withdrawal and stand to lose more in 2005. Even with tariff-free access Mexico has not been able to withstand China's growing US textile exports.
Non-tariff barriers were seen as a major obstacle to trade by delegates from both sides of the quota divide. "The WTO must address non-tariff barriers for the first time" Fileep Libeert, President Euratex. "We need item by item research to remove all barriers set up on spurious grounds. We need bound tariffs no higher than 15%. We face customs valuations, and administrative procedures, solely calculated to keep imports out."
The LDC's are equally concerned about non-tariff barriers. They perceive buyers imposing labour and environmental standards as effectively barriers to trade.
Pascal Lamy asserted that Europe accepted that "low salary is part of comparative advantage but child labour should not be." He also added that "Labour laws are not part of the Doha Round, we couldn't achieve that but if we cannot get it multilaterally we must try to get it bilaterally. It can be part of bilateral trade talks." Retailers from the US and Europe have increasingly socially responsible shareholders and cannot risk low standards. This was borne out by buyers from Marks & Spencer, Levis and the Spanish chain COIN. Standards are fast becoming global. For retailers, low cost is an issue but it is not the only one. They all talked of a whole list of requirements quality/cost, social responsibility, reduced lead times, and responsiveness to fashion trends to name a few. In the same way as there are "horses for courses" as we say in the UK, there are textile suppliers for different product ranges. For instance Marks & Spencer pointed to fashion conscious ranges tending to be made in East Europe and the Middle East because of short lead times. Where the main factor is low cost but good quality then India comes high on the agenda. However, he added that Asia scores well on a lot of fronts.
Use of anti-dumping investigations and duties was also seen as a highly contentious issue. In particular, there was disquiet, particularly amongst the LDCs over the way it was sometimes invoked and disrupted trade, only for there eventually to be a finding, after due investigation, that no dumping had taken place. Many felt it would be heavily abused post-2005. "Once you lose your place in the market you can't get it back," said Humayun Akhtar Khan, the Trade Minister for Pakistan. "It is being used as a trade cooling measure.
It tends to freeze imports." Pascal Lamy said "we take the point that investigations are disruptive."