Relaxing of Chinese safeguards to endanger Indian textile exports

From KHALID BUTT, Lahore
Dec 12 - 18, 2005

Removal of safeguards on the exports of Chinese textile products to different countries would land the Indian exports of textile and clothing in deep trouble.

The Indian exports of textile and clothing would continue to flourish as long as safeguards on Chinese products remain intact.

According to a working paper titled "The Impact on India of Trade Liberalisation in the Textiles & Clothing Sector" prepared by IMF staffers Prasad Ananthakrishnan and Sonali Jain-Chandra.

Some major textile importing countries have imposed restrictions on the imports of textile and clothing and India appears major beneficiary of this development.

The Working Paper analyses the impact of the elimination of textile and clothing (T&C) quotas in 2005 on India. The paper claims that Indian exports of T&C will continue to expand in the presence of the safeguards on China, but they will be affected adversely once these safeguards are lifted.

The paper further said that India could emerge much stronger and expand its trade in T&C at a much faster pace, if some of the key domestic structural weaknesses are overcome.

The IMF paper further said the textile and clothing items have been significant in India's export basket, accounting for nearly 20 percent of total exports during the 1990s.

In 2003, T&C exports were the largest export group, accounting for 23 percent of Indian exports (or $13 billion), said the report, adding this sector is the second largest generator of employment (35 million or around 10 per cent of the workforce), a significant earner of foreign exchange, and contributes 4 percent and 14 percent to GDP and value added in manufacturing, respectively.

The removal of quotas on textiles and clothing in 2005, under the Agreement on Textiles and Clothing (ATC) is expected to have a substantial impact on major exporting countries.

A quota free regime represents an opportunity-as India has been constrained by quotas-as well as a challenge as there will be increased competition and no guaranteed markets. India has a competitive advantage stemming from its large and relatively low-cost labour force, a large domestic supply of fabrics, and the industry's ability to manufacture a wide range of products.

India has a very strong and diverse raw material base for manufacturing natural and artificial fibres.

Furthermore, India also has capacity-based advantage in textile and spinning, and India's textile industry covers the entire supply chain, it said.

According to the working paper, despite these advantages, whether India can benefit from the quota elimination will depend on the degree to which the existing constraints are removed.

These constraints include stringent labour market regulation, inadequate investment, and unfavourable government policy in the past.

The implementation of the ATC, meant as a transition period to full integration of the T&C sector, occurred in a back-loaded fashion. Before the ATC took effect, a significant portion of textile and clothing exports from developing countries to the industrial countries was subject to quotas under a special regime outside normal rules of the General Agreement on Tariffs and Trade (GATT).

These former Multi-Fiber Agreement (MFA) quotas, when carried over into the ATC on January 1, 1995, represented the starting point for an automatic liberalisation process. Liberalisation was to be in four stages, with half of the integration to take place in the first three stages (from 1995-2005) and the second half to take place in the final phase in 2005.

However, importing countries have had a great deal of flexibility over the elimination of quotas and items for which quotas were not binding which were liberalised earlier.

The Indian National Textile Policy targets textile and apparel exports of $50 billion by 2010. With comprehensive reforms, India expects to increase its exports by 15-18 percent annually and win 5 percent of the global apparel export market by 2008 and to earn $25-$30 billion.

The removal of quotas on the most restrictive categories was back loaded by importing countries until the end of the transition period. Only 20 percent of the products subject to quotas were integrated in the first three phases of the ATC. This implies that the removal of quotas on the remaining 80 percent in 2005 has the potential to lead to sharp shocks including job and income losses in some developing countries.

Report said that the mass retailers in developed countries, especially the United States, require flexibility and a fast turnaround. This implies that some developing countries are better poised to gain than others.

It further said, India's market share increased only marginally in both sectors between 1995 and 2003 whereas China's share increased significantly. India has gained larger access to the United States and Canada since 1995, but has lost market share in the European market. India's market share in Japan is negligible.

While India is an important player in T&C imports into the United States, China remains the dominant source of imports.

Furthermore, China increased its share in the US market of T&C to 20 percent and 17 percent, respectively, in 2003.

The final stage, beginning on January 1, 2005, witnessed the removal of 701 quotas by the United States, 167 quotas by the European Union (EU) and 239 quotas by Canada.

The paper estimates that developing countries as a whole would have income gains of about $24 billion a year, export revenue gains of about $40 billion, and generation of $27 million jobs.

A study by the U.S. International Trade Commission predicts that China is expected to become the "supplier of choice" for most U.S. importers (the large apparel companies and retailers) because of its ability to make almost any type of textile and apparel product at any quality level at a competitive price.

However, the extent to which China continues to expand its shipments following quota elimination in 2005 will be tempered by the use of textile-specific safeguard provisions contained in China's protocol of accession to the World Trade Organisation (WTO).