Evolution of the trade regime

(Second of a series)

(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 and the potential reverberation of such action on global trade. The report was written by Ira Kalish, the Global Director of Consumer Business at Deloitte Research. The Saipan Tribune is re-printing the study in a series of articles, with permission from Deloitte Touche Tohmatsu.)

Multi-Fiber Arrangement

The quota regime came about as a way to offset the impact on developed countries of rising apparel and textile imports from emerging countries. The Multi-Fiber Arrangement (MFA) was codified in 1974. It provided that importing rich countries could impose specific quotas on imports of textiles and apparel from exporting developing countries. As a result, importing companies embarked on a process of quota chasing. That is, they sought to take advantage of the low labor costs in many emerging nations by utilizing the quota rights of those countries. Consequently, many small emerging nations developed significant apparel and textile exporting industries. Often, one country would engage in one process, export to another country for the next stage of production, and so on. Many countries developed these industries with no other comparative advantage than quota rights and low wages. The result was a highly inefficient system by which countries imported most raw materials and components, added labor value, and re-exported to the next country. For many of these countries, this industry became a significant economic force, accounting for a large share of manufacturing employment and exports.

Consider, for example, the extreme case of Bangladesh. During the past thirty years, this poor country developed a significant apparel exporting industry, accounting for 77 percent of merchandise exports in 2002. Yet although Bangladesh has very low wages, it is not considered well situated to compete absent quotas. That is because its workers are not very productive, the result of minimal capital investment, poor transportation and utility infrastructure, and the necessity of importing most raw materials. Other countries with large quota-induced apparel and textile industries include Cambodia, Sri Lanka, Tunisia, Morocco, Egypt, and Jamaica—to name a few.

Agreement on Textiles and Clothing

Under the WTO’s Agreement on Textiles and Clothing (ATC) implemented in 1995, MFA quotas were to be gradually phased out over a 10 year period ending in January 2005. It was expected that political opposition to the ATC would principally come from rich importing countries. That is because their remaining textile and apparel industries would be threatened by a flood of cheaper imports once quotas were eliminated. Indeed, such opposition has emerged. Yet great opposition also came from many of the countries that have benefited from the quota system. Their concern was that China would take market share from them resulting in huge losses of employment. In Bangladesh, for example, it has been estimated that between 10 million and 15 million jobs are directly or indirectly affected by the apparel exporting industry. Consequently, in 2004 50 apparel exporting countries petitioned the WTO to postpone the elimination of the quota regime. This request was denied.

What happens next?

The quotas have been eliminated. The WTO has made estimates of the likely impact on flows of trade (see Figure 5). Its estimates are solely based on the sensitivity of demand to changes in prices. The WTO assumes no other changes in the trading regime or in exchange rates. The results indicate that the ATC could have a profound effect.

First, the WTO predicts that imports will rise as a share of demand in both the US and Europe. In the case of the US, imports are expected to increase from 33.8 percent of demand to 45 percent. In Europe, the impact is smaller, with an increase from 48.5 percent to 51 percent. The smaller increase in Europe reflects the fact that the EU gradually eliminated quotas while the US waited until the end to eliminate most of the quotas.

Second, the WTO expects that China will gain substantially at the expense of most other countries. In the case of the EU, China’s share of apparel imports will rise from 18 percent to 29 percent. India’s share is also expected to increase while those of Turkey, Central Europe, and Morocco are expected to decline. For the US, the WTO expects a similar pattern. China’s share of imports will rise from 16 percent to 50 percent while Mexico’s share will drop from 10 percent to 3 percent. (See Figure 5)

Again, it is important to note that these estimates, while reasonably robust, assume no new protectionist measures or exchange rate changes. Either assumption could very well be incorrect. Therefore, predicting the true impact of ATC is fraught with risk.

One thing that is reasonable to expect is that apparel purchasers will end the process of quota chasing. That is, they will now make sourcing decisions on the basis of true costs and supply chain efficiency. This fact alone should lead to an overall reduction in costs and, therefore, prices.