Garment trade catastrophe?

The prob­lem with the elim­i­na­tion of tex­tile and gar­ment quo­tas under the pro­vi­sions of the WTO’s Agree­ment on Tex­tiles and Cloth­ing (ATC) is the process by which it was done. Almost 90% of the restric­tions were elim­i­nat­ed at the end of the 10 year phase-out peri­od, wast­ing the decade set aside for grad­ual adjust­ment in both the restrict­ing (import­ing) and export­ing coun­tries. Lib­er­al­iza­tion of the glob­al tex­tile and gar­ment mar­kets is unam­bigu­ous­ly a good thing. The quo­tas rep­re­sent­ed implic­it tax­es of 40% or more on the exports of some of the world’s poor­est coun­tries. The IMF esti­mat­ed that the lib­er­al­iza­tion of tex­tile quo­tas would boost cot­ton exports by 9 African coun­tries by $US132 mil­lion in 1997. They cal­cu­lat­ed that every tex­tile or gar­ment indus­try job saved by the quo­ta restric­tions in a rich coun­try cost 35 jobs in a poor export­ing coun­try. But the way it was done was a bad deal that devel­op­ing coun­tries should prob­a­bly not have accept­ed. The ATC based the elim­i­na­tion of the quo­ta restric­tions on tex­tile and gar­ment ‘cat­e­gories’ that reflect­ed con­sump­tion in the rich coun­tries, not pro­duc­tion in the export­ing coun­tries. The lat­ter range of cat­e­gories is only a small frac­tion of the for­mer (most­ly price-sen­si­tive cat­e­gories such as under-gar­ments, bed sheets and low-cost cloth­ing). It was pre­dictable from the out­set (in 1994) that the restrict­ing coun­tries would open up their mar­kets by in a way that left the lib­er­al­iza­tion of this frac­tion of prod­uct categories—representing most of the low-cost import competition—until the last moment. Why did the devel­op­ing coun­tries agree to open­ing mar­kets in this way? Per­haps the Min­is­ter’s did­n’t have good advice from their own gar­ment indus­tries and were mis­led by the rich coun­try nego­tia­tors. Or, per­haps, indus­tries in devel­op­ing coun­tries were well aware of what would hap­pen but failed the ‘moral chal­lenge’. Per­haps they accept­ed a deal that allowed them to hold-on to secure, quo­ta con­trolled shares of the rich coun­tries’ mar­kets for as long as pos­si­ble against the threat of com­pe­ti­tion. Cer­tain­ly the last minute attempts of a group of export­ing coun­tries to “extend the quotas”: lends some cred­i­bil­i­ty to this assess­ment. The removal of the quo­tas at the last moment seems to threat­en ‘big bang’ con­se­quences for firms in the pro­tect­ed mar­kets of the restrict­ing coun­tries that retain quo­tas: the EU, Nor­way, Cana­da and the USA. Some of them will prob­a­bly “face extinction”: under the new freer trade rules. But the harsh­est con­se­quences of this cat­a­stroph­ic adjust­ment fall on indus­tries in some of the world’s poor­est and least ‘flex­i­ble’ economies that depend­ed on their ‘share’ of the quo­ta to pro­vide a mar­ket for their pro­duc­tion. With the elim­i­na­tion of quo­ta restric­tions, the import mar­ket in the restrict­ing coun­tries will open up to any sup­pli­er and China—followed by India—is like­ly to seize most of the mar­ket for ‘price sen­si­tive’ gar­ments. WTO staff esti­mate, for exam­ple, that if price were the only con­sid­er­a­tion, Chi­na could cap­ture 50% of US gar­ment imports.

Chi­na pro­ject­ed to win 50%
of U.S. gar­ment imports [click]

Cam­bo­dia, for exam­ple, which depends on the gar­ment indus­try for 88% of its mer­chan­dise exports is fac­ing a dra­mat­ic loss of sales. Bangladesh where the pro­por­tion of gar­ments in exports is 80% or Sri Lan­ka where it’s over 70% could also face dra­mat­ic loss­es. Last month, I par­tic­i­pat­ed in a work­shop in Colom­bo (Sri Lan­ka) includ­ing par­tic­i­pants from gar­ment and tex­tile indus­try asso­ci­a­tions and offi­cials from around south and east Asia. There was lit­tle doubt about the lev­el of con­cern: the Cam­bo­di­an industry—the coun­try’s biggest employer—reported that they had no con­tracts for sup­ply to the US mar­ket after March 2005. What have gov­ern­ments in the region been doing to pre­pare for this week’s end to the quo­tas? I formed the view that, regret­tably, few of the gov­ern­ments of the coun­tries who par­tic­i­pat­ed in Sri Lan­ka have tak­en any pos­i­tive adjust­ment steps in the past 10 years although some (as in Cam­bo­dia) have had very lit­tle oppor­tu­ni­ty to do so (there has­n’t been a gov­ern­ment for most of that time). Most have left adjust­ment plan­ning to the indus­tries them­selves. For­tu­nate­ly, the out­look at a com­mer­cial lev­el is not as bleak as the eco­nom­ic models—including that used by WTO—project. The mod­els show what might hap­pen if prices alone deter­mined the loca­tion of export sup­ply. They can­not capu­ture the full com­plex­i­ty of the glob­al gar­ment indus­try where ver­ti­cal sup­ply (inte­gra­tion of pro­duc­tion chains) means that the final sup­pli­ers to e.g. the US mar­ket will prob­a­bly be draw­ing on sup­ply from a range of sources to ful­fill their orders. As the own­er of “this factory”: in Chit­tagong, in Bangladesh, told me last year: “The Chi­nese can’t make every­thing …” Man­u­fac­tur­ing wages are like­ly to rise in Chi­na as a con­se­quence of their eco­nom­ic suc­cess (not only in tex­tiles and gar­ments). Chi­nese gar­ment exporters are like­ly to seek sup­ply from low­er-wage coun­tries such as Bangladesh or Viet­nam or Cam­bo­dia to ful­fill their orders. I have pre­vi­ous­ly report­ed Also, as the huge North Amer­i­can and Euro­pean mar­kets lib­er­al­ize, glob­al gar­ment sup­ply will switch to those out­lets, reduc­ing sup­ply to oth­er mar­kets around the world that are already open. This re-direc­tion of exports from east and south Asia will see mar­ket prices in coun­tries such as Japan rise while prices in the US and the EU fall. So the sales oppor­tu­ni­ties for pro­duc­ers who are unable to match Chi­na’s prices will not dis­ap­pear with the end of quo­tas. It does, how­ev­er, mean a change of strat­e­gy and mar­ket focus for those export firms that have been pro­tect­ed from com­pet­i­tive pres­sures by the quo­ta sys­tem. These man-made dis­rup­tions are not like­ly to be the biggest chal­lenge of 2005 for economies that are strug­gling with the con­se­quences of unprece­dent­ed nat­ur­al dis­as­ters. Nor will they have whol­ly neg­a­tive con­se­quences for Asia. But it would be fool­ish not to learn from the mis­takes of the ATC.

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