Quotas end, uncertainty continues

Editor’s Note: The following is a Deloitte Research study that looks at the changing landscape of the worldwide garment industry in the face of the lifting of trade restrictions in January this year, the potential reverberation of such action on global trade, the pivotal role that China will play, the steps that the U.S. government could take to protect its domestic textile industry, and possible strategies that garment industry players can take to survive amidst the stiffer global competition.

The report was written by Ira Kalish, the Global Director of Consumer Business at Deloitte Research. He is an expert on global economic issues as well as the effects of economic, demographic, and social trends on the global retailing and consumer products industries. Kalish conducts research on global economic issues and has authored in-depth reports on economic and consumer issues in many of the world’s major countries. His remarks have been published by The Wall Street Journal, Business Week, The Economist, The Financial Times, and USA Today.

The Saipan Tribune is re-printing the entire study in a series of articles beginning today, with permission from Deloitte Touche Tohmatsu.

INTRODUCTORY REMARKS

This year, global trade in apparel and textiles is changing. In January, the regime of quotas that governed such trade for the past 30 years was eliminated. In its place will be freer trade, but not completely free trade. How free depends on decisions yet to be made by importing country governments. And there lies a problem. Apparel producers and distributors would like to be able to plan on the basis of precise knowledge of the future trading regime. Yet that is not possible. Importing governments may or may not act to limit apparel and textile imports depending on the future flow of goods, the political consequences, and the political power of competing interests. Consequently, risk exists and market participants must plan accordingly.

In this brief paper, we will examine global trade in apparel and textiles, the evolution of the trading regime, some likely scenarios for the future of global trade and protection, the impact of ending quotas on China and other emerging countries, and the strategic choices that market participants must make in the coming years.

Although risk exists and future patterns of trade and protection cannot be accurately predicted, there are a few conclusions that can reasonably be made:

• There will be consolidation of apparel and textile exports. A small group of countries will account for a much larger share of trade. That means that some countries will experience a significant loss of market share with potentially serious economic consequences.

• There will be more vertical integration of apparel production within countries. Those countries that gain share of exports will offer multiple processes such as cotton production, textile production, dying, knitting, and distribution.

• There will be consolidation among apparel and textile importers, with a smaller number of large retailers and branded apparel suppliers dictating the flow of imports into developed countries. These companies will play a big role in determining the structure of global trade in apparel.

• Even if importing countries impose new forms of protection (and they may), average apparel and textile prices will fall resulting in stronger volume demand. The fall in prices will, in part, stem from the efficiency gains of consolidation.

• Apparel and textile producers will seek to diversify risk. As such, they will not put all their eggs in the China basket.

GLOBAL TRADE IN APPAREL AND TEXTILES

China has become the world’s largest single exporter of textile and apparel products. In 2002, China accounted for 20.6% of global apparel exports, up from just 9% in 1990. China also accounted for 13.5% of global textile exports, up from 6.9% in 1990. No other single country accounted for more than 5% of such trade in 2002.

Figure 1. Leading Exporters of Textiles and Apparel
(% Share of Total World Exports)
Textiles – Apparel
– 1990 – 2002 – 1990 – 2002
EU15 – 48.7 – 34.2 – 37.7 – 25.1
EU15 (extra EU) – 14.5 – 15.2 – 10.5 – 8.3
China – 6.9 – 13.5 – 9.0 – 20.6
Hong Kong – 2.1 – 0.6 – 8.5 – 4.1
Turkey – 1.4 – 2.8 – 3.1 – 4.0
Mexico – 0.7 – 1.5 – 0.6 – 3.9
US – 4.8 – 7.0 – 2.4 – 3.0
India – 2.1 – 3.7 – 2.3 – 2.8
Bangladesh – NA – NA – 0.6 – 2.1
Indonesia – 1.2 – 1.9 – 1.6 – 2.0
Korea – 5.8 – 7.0 – 7.2 – 1.8
Thailand – 0.9 – 1.3 – 2.6 – 1.7
Pakistan – 2.6 – 3.1 – NA – NA
Taiwan – 5.9 – 6.3 – NA – NA
Other – 16.9 – 17.1 – 24.4 – 28.9
Source: OECD

China’s growing strength in this industry was the result of massive investment in capacity, relatively low labor costs, and very high labor productivity leading to very low unit labor costs. In 2002, China’s imports of apparel and textile machinery accounted for 15.2% of global imports of such capital goods. This was up from 4.5% in 1998. As a result of capital intensity, China’s apparel workers are highly productive. For example, although India’s apparel wage rates are roughly 10% lower than in China, unit labor costs are 40% higher than in China due to much lower productivity. India’s lower efficiency is the result of less capital intensity, poorer transportation and utility infrastructure, fewer economies of scale, and distorting government regulations (such as tariffs on imported textiles, restrictions on foreign investment, and restrictions on the ability to dismiss workers).

Figure 2. Textile and Clothing Machinery Imports
(US Millions of Dollars)
Turkey – Mexico – China – World – China share of world
1994 – 586 – 506 – 1,887 – 21,514 – 8.8%
1995 – 1,503 – 349 – 2,146 – 24,240 – 8.9%
1996 – 2,240 – 522 – 2,042 – 23,335 – 8.8%
1997 – 1,823 – 778 – 1,645 – 22,888 – 7.2%
1998 – 1,226 – 791 – 906 – 20,163 – 4.5%
1999 – 498 – 782 – 958 – 17,399 – 5.5%
2000 – 869 – 835 – 1,444 – 19,242 – 7.5%
2001 594 508 2,051 17,948 11.4%
2002 – 1,361 – 414 – 2,693 – 17,671 – 15.2%
Source: UNCTAD

Interestingly, China’s employment in textile and apparel manufacturing has been stagnant. From 1995 to 2001, textile employment declined by nearly two million while apparel employment rose a modest 277,000. This represented a smaller percentage gain in apparel employment than took place in India and Mexico. Yet despite these employment numbers China’s output increased rapidly, the result of sizable gains in productivity. That, in turn, was due to the massive investment in capital goods.

Figure 3. Employment in Textiles and Clothing
(thousands workers)
Textiles
Country – 1995 – 2001 – Chg – % Chg
China – 6,730 – 4,775 – (1,955) – 29.0%
Mexico – 187 – 317 – 130 – 69.5%
India – 1,579 – 1,289* – (290) – 18.4%
Apparel
Country – 1995 – 2001 – Chg – % Chg
China – 1,750 – 2,027 – 277 – 15.8%
Mexico – 476 – 681 – 205 – 43.1%
India – 264 – 331* – 67 – 25.4%
*Note: India data is for 2000, not 2001
Source: OECD

Despite China’s strength in this industry, its exports have been limited by the existence of quotas. For example, China’s share of US apparel imports has been steady for the past decade. Indeed the quota system, by limiting China’s exports and creating a relatively inefficient system of apparel trade, has increased the prices global consumers pay for apparel and textile products. The WTO has estimated the amount by which the prices of apparel and textile exports are elevated due to the existence of quotas. It found that, in the case of China’s apparel exports to the US, the quotas were equivalent to an export tax of 33%. In the case of Bangladesh, on the other hand, its quotas were equivalent to a tax of just 8.1%. Therefore, eliminating the quotas should result in a sizable reduction in China’s export prices relative to those of Bangladesh and other countries as well. This assumes, of course, that no other forms of protection are implemented. Given that consumers face a drop in apparel prices, it is reasonable to expect an increase in overall apparel volume.

Figure 4. Export Tax Equivalent of Quotas
(Percent)
US/Canada – EU
Textiles – Clothing – Textiles – Clothing
Bangladesh – 15.3 – 8.1 – 8.4 – 7.3
China – 20.0 – 33.0 – 12.0 – 15.0
Hong Kong – 1.0 – 10.0 – 1.0 – 5.0
Hungary – 6.9 – 5.0 – 0.0 – 0.0
India – 9.8 – 34.2 – 12.0 – 15.2
Indonesia – 8.1 – 7.8 – 6.3 – 6.0
Philippines – 6.5 – 7.8 – 5.7 – 6.0
Poland – 6.9 – 5.0 – 0.0 – 0.0
Sri Lanka – 15.3 – 8.3 – 5.5 – 6.6
Thailand – 8.3 – 13.2 – 6.4 – 7.8
Turkey – 7.0 – 4.9 – 1.5 – 0.0
Vietnam – 6.9 – 7.1 – 7.5 – 7.2
Note: This shows the tax that would have to be imposed on exports in order to have the same pricing effect as the existing quotas.
Source: IMF Estimates

Although China’s share of the US apparel market has remained steady, its share of other important markets has grown. For example, from 1995 to 2002, China’s share of Japan’s apparel imports rose from 59.1% to 77.5%. This partly reflected the greater willingness of Japanese retailers to source their apparel from China. In addition, China’s share of European Union (EU) apparel imports rose from 14% in 1995 to 20% in 2002.

Although China casts a giant shadow of the global apparel and textile trade, there are other countries that play a significant role. For example, Mexico accounted for 12% of US apparel imports in 2002, up from 7% in 1995. For the EU, Turkey, Morocco, and Central Europe jointly accounted for over one quarter of apparel imports in 2002. It is expected that the end of quotas will create turmoil for each of these countries.

To be continued.