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New Era Opens in Global Textile & Apparel Trade |
| Published On: 05-30-2005 |
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During the Uruguay Round of trade talks (1986-1993), members of the World Trade Organization (WTO) from both rich and poor countries agreed that high tariffs and quotas (quantitative restrictions) on global textiles and apparel trade deprived poor countries of an opportunity to develop their labor intensive textile and apparel industries.
The subsequent Agreement on Textiles and Clothing (ATC), which came into force on January 1, 1995, set out a process to remove quotas on textiles and apparel trade in the following ten years. Four WTO members—the U.S., Canada, the EU, and Norway—which maintained quantitative restrictions, committed themselves to progressively eliminating remaining quotas until they were completely removed on January 1, 2005.
While the ATC has been implemented in form, the US, Canada, and the EU postponed the bulk of their liberalization to the final year of the 10-year phase-out, i.e. 2004. This foreshadowed the substantial reorganization in global production and trade that would occur upon termination of the ATC.
In 2004, as the end of the ATC neared, anti-liberalization pressures from textile and apparel industries threatened by imports and competition in both developed and developing countries intensified, especially in the face of an increasingly stronger China. Despite coordinated efforts to postpone liberalization, including that of the Global Alliance for Fair Textile Trade representing organizations from 55 countries (both developed and developing), which fear a loss of market share and power to China,1 the ATC terminated on January 1, 2005, leading to full elimination of quotas but not tariffs.
Some poor countries such as former colonial possessions in Africa had benefited from the allotment of specific quotas of imports into the rich countries that previously colonized them. But now, countries are faced with surging imports or increased competition under the liberalized regime.
Reshuffling of Global Textile and Apparel Production
Under freer trade, following the termination of ATC, textile and apparel production is expected shift to countries with a comparative advantage over others. Because of the labor intensity of production, developing countries, mostly in Asia, with an abundant labor force are expected to capture a higher proportion of production. This is expected to lead to a parallel production decline and an increase in imports in developed countries that do not have a comparative advantage in textiles and apparel.2
At the same time, increasing regional and/or free trade agreements, such as the North American Free Trade Agreement, and the European Union’s Everything But Arms (EBA) initiative, which grants unrestricted access to least developing country exports except for arms munitions,3 will continue to allow less competitive developing countries to maintain some production through preferential access to developed country markets.
Overall, China has been the major beneficiary of the liberalized system.4 For example, according to the International Monetary Fund (IMF), Chinese textile and apparel exports to the US in newly liberalized product lines increased by 180 percent in the first quarter of 2005 compared to the first quarter of 2004. India has also been a major beneficiary with its exports growing rapidly.
Developing countries most vulnerable to liberalization are those that are highly dependent on textile and apparel exports, but that only cut, sew and assemble clothing from cotton produced elsewhere or textiles made in mills elsewhere.5 In the face of increased global competition, countries not using their own inputs at all stages production have a lower comparative advantage. Such countries include Bangladesh, Cambodia, Sri Lanka and Vietnam, among others. With an already 12 percent drop in prices of Chinese exports to the US, IMF cautions that low-income Asian countries could see their textile exports fall by 8 percent to 18 percent.
However, buyers in the U.S. and EU are diversifying their purchases to other low cost suppliers besides China in an effort to minimize the risk of a protectionist measure against China, therefore reducing the impact of liberalization on some developing countries.
While the Chinese threat to developing countries is real, there is also potential for developing countries to cooperate with developed countries, or with China, to improve their industries, and get access to cheaper inputs.
For example, in a recent memorandum of understanding (MOU) China and Bangladesh agreed to cooperate in investment and possible technology transfer. “The two countries could strengthen the cooperation by bringing in full play their own advantages, and jointly face the challenges and avail the opportunities brought by the [textile and apparel] quota-phase-out,6” according to the MOU.
Regional free trade agreements with developed countries, such as the pending Central American Free Trade Agreement (CAFTA) among Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic and the United States, would give these developing countries preferential access to the US market—including textiles and apparel— offsetting some of the cost advantages enjoyed by China. Such arrangements could become useful tools for developing countries to retain domestic textile and apparel production and employment, while benefiting from preferential access to large developed country markets.
Reactions to the New Trading Environment: Blaming China
When China joined the WTO in 2001, it agreed to a product-specific safeguard mechanism that allows WTO members to restrict temporarily growth in specific textile and apparel imports from China through 2008. This is a specially negotiated exception to the WTO rule requiring safeguards to be applied to all countries on a non-discriminatory basis. This measure can only be taken when imports are impeding or threatening to impede “the orderly development of trade” in textiles and apparels.7 It allows WTO members importing Chinese textiles and apparel to limit annual import growth to 7.5 percent.
In mid-May 2005, the United States responded to political pressure from domestic manufacturers, with a decision to use the special safeguard and re-impose quotas on seven categories of Chinese exports – including cotton knit shirts, blouses, trousers, and underwear.8 These safeguards will limit to 7.5 percent annual growth of imports from China in each restricted category. The EU initially took a cautious position, preferring bilateral negotiations with China to unilateral safeguards until recently. But, in late May, the EU also announced that it would seek safeguards on cotton t-shirts and flax yarns.
China’s growing textile exports and the increasing US trade deficit with China, now over $160 billion per year, have cast a shadow over trade liberalization in the US, adding to broader concerns over China’s currency peg to the US dollar and the piracy of US intellectual property.9 Pressure is also rising on China to revalue its currency.10
Thus, while freer trade results in 1) production moving to the most competitive firms,
2) reduced prices, and 3) an increase in consumer welfare, the short-term adjustment costs in both developed and developing countries in the post ATC environment are high, feeding into political pressures for protectionism.
The IMF has indicated that it would aid the adjustment process through its Trade Integration Mechanism, which provides easier access to IMF funding for countries that face a loss of preferential access for their exports because of trade liberalization.11 However, as of March, only Bangladesh and the Dominican Republic have requested and been granted such IMF support. On the whole, it now appears that protectionist political pressures in textiles, apparel and other sectors will increase in the future. Indeed, the fate of Congressional approval of CAFTA is now bound up with how strongly the Bush administration is dealing with the Chinese trade deficit.
1For more information please see
http://www.fairtextiletrade.org
2OECD. “Liberalizing Trade in Textiles and Clothing: A Survey of Quantitative Studies.” May 2003.
3For more information on the EBA Initiative please see http://europa.eu.int/comm/trade/issues/global/gsp/eba/index_en.htm
4IMF. “IMF Survey.” May 23, 2005, V: 34, No: 9.
5OECD. “A New World Map in Textiles and Clothing, Policy Brief.” October 2004.
6Asia Pulse. “China Designates Bangladesh as Investment Destination.” May 23, 2005.
7Government Accountability Office (GAO). “U.S.-China Trade: Textile Safeguard Procedures Should be Improved.” April 2005.
8Rugaber, Christopher S. “US Acts Quickly to Curb Apparel Goods From China Under Textile Safeguard Regime.” Bureau of National Affairs, May 16, 2005.
9Hitt, Greg, Wonacot P., and Miller S. “China’s Textile Move Could Aid Wider Strategy – Exports Curb May Improve Nation’s Garment Industry and Yuan Changes.” The Wall Street Journal, May 23, 2005.
10State Department Press Releases and Documents. “China Must Change Currency System, US Treasury Report Says – Bush Administration Seeks Intermediate Steps, Snow Explains.” May 17, 2005.
11For more information please see http://www.imf.org/external/np/exr/facts/tim.htm |
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