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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