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Regional Seminar on Weaving the Fabric of Regional Cooperation for a Competitive Garment SectorBeijing, 1-2 June 2005

Session 2: Economics of trade in textiles and clothing and

options for regional responses

Dr. Mia MikicTrade Policy Section

UNESCAP

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2005 started with two colossal shifts:

• One, caused by mother Nature, a tectonic shift of earth crust which caused Tsunami and killed more than 300 000 people

• Not predictable and no warning system in place

• Another, man-made, replacing QR system with WTO-consistent measures and being blamed by some of endangering livelihood of more than 30mil people (Istanbul Petition)*

• Was fully predicted, had a warning system (ATC), and still not much was done to “save” those people

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Structure of this presentation

• What did ATC deliver in terms of trading environment?

• What can be expected after the demise of quotas in terms of trade, production and welfare effects?

• Battle for market shares?

• What can be done to exit in a win-win mode?

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What did ATC deliver in terms of trading environment?

• All the usual and expected effects of the QR:– Reduction of quantity, increase of the price of imports into

the restricting markets– Generation of quota rents-- given to exporting

governments, then to exporting firms (still a strong vested interests there calling for a reimposition of QR); for China’s exports of textile and clothing products to the United States are set equal to 20 to 30 per cent of export values (pre-quota rent values); for exports to the European Union, at 12 to 15 per cent

– Cause misallocation of resources– Too little employment in poor country textiles/clothing– Inefficient processing reduces demand for textiles and

fibresCf. Will at al, 2004

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US import protection 1992-2001

Francois and Spinanger, 2004

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EU import protection 1992-2001

Francois and Spinanger, 2004

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Sweden's Clothing Imports from Selected Regions in Percent ofTotal Non-OECD Imports plus Portugal, Spain and Greece (1980-

2001)

Francois and Spinanger, 2004

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Issues with the ATC implementation

• 10-year gradualism to ease the pain of adjustment but opportunity not taken up* and sharp adjustment shocks arise

• Both in US and EU lobby groups influential• Is “voluntary” export tax equivalent to VER? If so,

is it in compliance with the WTO commitments?• Poor countries were “nudged” into “reciprocal”

agreements - giving concession on labour standards, the environment, IP, and an ability to use capital control in crisis in exchange for access to T&C markets

• ATC used as “trade not aid” vehicle• Pitching DC vs DC {EU arguments}; GSP+

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At the level of an exporting firm

• When exporting, have to consider the cost of using up the quotas– Opportunity cost if have been allocated quota– Direct cost if need to buy a quota

• Effect is just like an export tax, except that quota prices vary a great deal– Also a dynamic problem-restrict expansion of

goods where countries raise productivity

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Special treatment of China – accession package

• In spirit of an “orderly opening of restricted markets” to avoid (for importing countries) detrimental market disruptions

• Definition of "market disruption" adopted by the Contracting Parties in 1960 entailed the possibility of singling out imports of particular products from particular countries as the disrupting source

• Disruptive surge in imports used to build-in insurance in T&C against China’s expansion

• They cover special antisurge clauses for T&C products (4 years), general anti-surge clauses (12 years) and treatment of China as “a non-market economy” in antidumping cases (15 years)

• As early as autumn 2004 petition was filed against EXPECTED surge in imports

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What were expectations in the post-MFA world?

• Many studies in the 1990s, not two single results identical (reliability of modeling?); summary provided in 2004 CUTS study

• One wonders however if national governments – and / or producers/exporters - did take notice of any of these studies?

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OECD, 2004 - part IV

• Results consistently indicate considerable shifts in T&C production and trade with ATC implementation

• Pressure for a large-scale reallocation of resources, with production of T&C expanding in Asian and other DC countries, and contracting in IC

• Increases in global welfare with large variations in both total and distributional estimates

• Opportunity to seize comparative advantage based activities

• Large adjustment cost in IC but long term gain

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Francois, et al (2005)• Incomplete liberalization of T&C sector as “either China,

or its partners, will take actions to avoid full liberalization” (p.365)

• China (and India) experience a doubling (approx) of their T&C exports (p.370)…preferences [for AGOA and CIB countries] are eroded…and other DCs exporters are crowded out…

• As China shifts into T&C, it pulls back from other exports markets (like metal and electronic equipment), opening them for other DCs (p. 371)

• Same effects on production• Terms of trade effect negative for China due to T&C (and

for other Asia Pacific in consumer electronics)• However, shift of resources into T&C, reduces efficiency

and income effect is negative

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IMF, 2005

• Abolition of MFA holds out the promise that export orders will finally go to the most competitive firms

• China – the major beneficiary in export growth…but ..

• Protectionist response– US – re-imposition of QR on 7 categories – EU – emergency safeguards on 2 categories– China – increase of export tax for 74 products

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And Lessons from the real world: APEC-Tariffs down, ADMs up!!

Francois and Spinanger, 2004

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Battle for market shares

• Trade flows:– With respect to trade flows between US, EU

and Asian countries – session 4 (paper by William James)

• Various lobbies in action in IC markets:– US: Unions representing (textile) clothing

manufacturers vs. unions representing apparel importers and retailers (and US T&C consumers?)

– EU: France, Italy, (and Turkey) vs. Sweden

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• Battle for the market share among developing countries– Brazil: plans to issue two set of rules- one for Chinese T&C,

another for all other Chinese goods– Example: drop in Hong Kong, China exports – due to ROO -

HKC was large QR holder but with relatively expensive labour; now when it does not matter where the product is “made in”, production and origin of exports move back to a location which is more competitive (i.e. lower labour cost location for garments)

– Calls for re-imposition of QRs

• Increase in China’s share is one-off adjustment (which may take up to two years to settle) and not even likely to be sustained ?

• Product-mix, degree of integration of the industry (link between raw material and processing?), financial support, distribution/supply chain

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Dealing with repositioning

• Scale of production• Cost of production/ cost of transport / location• Labour productivity and job quality• On-time delivery• Production/ supply chains• Diversification:

– High-tech fabrics – capital-and technology-intensive– Brands– Local/ ethnic values and skills

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China restructuring so far:

According to Mr. Cao Xinyu (CCCIET):• 32000 garment & textiles companies in export;

1/2 private, 2/5 with foreign investor• Cut 1mil jobs 1997-1999 when the government

cut credit to unprofitable companies• Remaining companies invested about $25bil in

tech improvements (streamlining and retooling)• Wholesale prices dropped in some items up to

60%, but retails prices are not following in step – saving enjoyed by retailers and importers (why don’t they pass them on to consumers?

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Is exit in a win-win mode possible?

• Trade policy measures have a significant influence on investment and production decision (OECD new map) but increasing role of technology, innovation and business facilitation

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Ranking of Factors Influencing InvestmentDecisions: 2000

Francois and Spinanger, 2004

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Ranking of Factors Influencing InvestmentDecisions: 2003

Francois and Spinanger, 2004

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Average Ranking of Factors Influencing InvestmentDecisions from 2000 and 2003

Francois and Spinanger, 2004

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According to Francois and Spinanger, 2004 these are the 7 KEY FACTORS to improve competitive advantage:

1. Politics and stability;

3. Quality of transport infrastructure;

5. Policies affecting trade and investment;

4. Quality of telecom infrastructure;

6. Labor costs;

8 Policies re. labor, health & environment;

10.Lack of capital/profit transaction restrictions.

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In conclusion:The message is clear:• Trading environment in this sector not as transparent as one

would hope and members’ handling T&C situation is a testing ground for the MTS spirit

• Trade remains positive sum game at a global level but this implies winners and losers within each economy and within a specific sector

• DC must act on:– Enabling firms to increase competitiveness in a fair and sustainable

way– Enhancing South-South market opening for trade but also to

facilitate de-fragmentation of production (improve mobility of labour, capital, technology, mutual recognition of standards)

• International organizations must help in providing adjustment financing (IMF and the WB) and technical assistance

• UNESCAP special role for LDCs

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References• Audet, D. (2004) “Structural Adjustment in textiles and Clothing in the Post-

ATC Trading Environment” OECD Trade Policy Working paper, No. 4

• Das, R.U. (2004) “Industrial Restructuring and Export Competitiveness of the Textiles and Clothing Sector in SAARC in the Context of MFA Phase-out” RIS Discussion paper No. 85

• Francois, J.F. and D. Spinanger (2004) “Liberalizing Quotas on Textiles and Clothing: Has the ATC Actually Worked?” 7th Annual GTAP Conference, Washington, DC.

• Iyer, H. (2005)”Thinking Ahead – Asia’s Textiles and Clothing Trade in the Post-Quota Era” Policy Brief, Asia-Pacific Trade and Investment Review, Vol.1, No.1, April, pp. 151-55.

• Robbani, G. (2004) “Enhancing Collective Export Competitiveness on textiles and Clothing: A Study of select South Asian Countries” CUTS, Centre for International Trade, Economics and Environment, research report No. 0428

• Will, M. et al (2004) “Dealing with Diversity: Analyzing the Consequences of textile Quota Abolition”, 7th Annual GTAP Conference, Washington, DC.