Some observers predict that by 2005-06, major textile and clothing buyers will reduce by half the number of countries they source from. The challenge for countries and companies is to remain an important source for these buyers. This article explores the coming changes in the market and highlights steps governments and exporters can take now to avoid adverse impacts.
On 31 December 2004, the Agreement on Textiles and Clothing (ATC) will end, and with it the quota system for international trade in textiles and clothing. As a result, trade in these sectors will undergo a fundamental change. By 2005 the sector will have been fully integrated into the WTO General Agreement on Tariffs and Trade (GATT), and all quotas will have disappeared.
Only tariffs should remain as a market entry mechanism. Moreover, WTO members will discuss tariff reductions and ways to reduce tariff peaks, high tariffs and tariff escalations under the Doha Development Agenda. A market currently characterized by artificial comparative advantages and managed trade will realign as market forces become the dominant determinant in the sector. A shift in market fundamentals will considerably affect exports from many developing countries and economies in transition, where national incomes depend to a large extent on exporting garments.
Countries such as Cambodia, Bangladesh and Nepal, with a share of garment exports in total merchandise exports of 85%, 75% and 40% respectively, need to attempt to keep at least part of their present markets or face higher unemployment and deeper poverty. In fact, developing countries risk losing heavily from the final liberalization of trade in textiles and clothing if they are not well prepared for the expected business and market changes. Instead of winning new export markets as they had expected following the Uruguay Round negotiations, many countries risk losing existing markets. These losses, in turn, could undermine commitment to the Doha Development Agenda. Countries and firms must prepare for a new reality in the textiles and clothing trade.
Winners and losers
While nobody can give a precise picture of the global textiles and clothing market after 2004, there are some indicators of the potential winners and losers of the quota phase-out. Three important indicators are highlighted below:
Challenges of the new trading reality
As the textiles and clothing sector is fully integrated into the WTO/GATT, those countries and companies which adapt first to the challenges of the new market will be better placed to secure their market position. Pure economic performance and well-managed competitive advantages will count more than ever before. The possible shape, drivers and disciplines of the new market are highlighted below:
Trade will no longer be regulated by quantitative restrictions and, as a result, there will be a large and growing market waiting to be conquered. While competition will intensify and growth rates might slow down in Europe, North America and Japan, new markets are emerging in higher-income South-East Asian countries as well as in the high- and middle-income groups in the larger developing countries. These emerging markets will become important targets for future apparel producers.
In the short to mid-term, Europe and North America will remain the most important garment markets, attracting two-thirds of all world clothing imports. With the quota phase-out, however, many smaller countries will lose guaranteed markets. Studies by the US Department of Commerce in its report to the Congressional Textile Caucus, showed that major buyers will reduce the number of countries they source from by half in 2005-06 and by another third by 2010. The challenge is to remain an important source for garment buyers.
US textile and clothing import prices have fallen continuously since 1996, as is the case in Europe, Japan and many other markets. In an oversupplied, liberalized market, this trend is likely to continue, potentially bringing about a deterioration in developing countries' terms of trade.
Patchwork of agreements
In response to the ATC, major buying countries have granted specific concessions that provide selected countries with comparative advantages. This tendency has resulted in a regionalization of trade in textiles and clothing and a complex patchwork of international trade agreements. This makes it very difficult for clothing-exporting small and medium-sized enterprises (SMEs) from developing countries to determine their competitiveness vis-à-vis that of major competitors. As quotas are phased out, there may be more concessions granted than before, rendering trade even more complicated.
Antidumping and countervailing duties
There is likely to be a rise in antidumping and countervailing duty cases, which will pose a real threat to successful developing country exporters. The use of antidumping measures could sharply reduce the benefits of liberalization as they are non-transparent and unpredictable. Just the announcement of possible antidumping investigations can make buyers hesitant to place future export orders because of uncertainty over whether antidumping duties will be imposed in the future, an effect known as 'trade chilling'.
While developing countries and academics are expressing this fear, US and EU industry lobbyists are calling for their explicit use as, they feel, many products are simply dumped on the market. For case studies on how antidumping cases have affected developing countries' textiles and garment exports, visit the web site of the International Textiles and Clothing Bureau (http://www.itcb.org).
More customs checks
Textile and clothing manufacturers are subject to random checks by customs officials, to ensure that trans-shipment activities are not taking place. If a company cannot provide the required information, customs will automatically ban this company from exporting to the US or EU. It is expected that until 2005 'product verification visits' will increase. In addition, increased security requirements for imports after 11 September 2001 may have a negative effect on exports from developing countries.
Ethical standards emerge
There is widespread concern about child labour in the marketplace. Western non-governmental organizations, the media and labour unions advocate for 'sweatshop-free' sourcing of clothing, by creating awareness among the major consuming groups. They are putting pressure on international buyers to source 'ethically correct'. Major buyers and retail groups have reacted to these pressures by introducing corporate codes of conduct. Such ethical sourcing standards are applied to all their developing country manufacturers, and even subcontractors. Large international buyers apply these rules strictly, as they cannot afford negative publicity.
Eco-labels a new barrier?
Textile and garment manufacturers from developing countries are increasingly confronted with the need to adapt to eco-labelling requirements. Eco-labelling schemes currently serve primarily as a marketing tool, and products with eco-labels tend to target niche markets. However, there is concern that access to developed markets will be significantly reduced due to consumer boycotts of non-labelled goods and aggressive advertising by protectionist domestic industries. Overall, more transparency is needed to ensure that eco-labels do not become a new market access barrier.
Preparing for the new market
It seems possible that the changes in the textile and clothing sectors will bring more risks and challenges than new opportunities, particularly for smaller exporters in developing countries and economies in transition. Comprehensive preparation is a must to manage these risks and take action to secure existing or additional markets.
How ITC can help
Responding to the new challenges, ITC has redesigned its technical assistance approach in the textiles and clothing sector. During an expert group meeting at the ITC Executive Forum 2002, industrialists and government officials from a range of textile and clothing producing developing countries, agreed that the challenges of this sector needed to be addressed urgently to sustain future exports, especially from least developed countries and smaller developing countries. They elaborated on possible solutions, as outlined in this article, forming ITC's new comprehensive textiles and clothing approach. ITC, therefore, is following a holistic sector approach as required by developing country textile and garment manufacturers who want to stay in business after 2005.
The new approach will include industry-level briefings on the phasing-out of the quota system and the competitiveness challenges ahead, combined with a broader programme of advisory and training services targeting sectoral competitiveness. ITC will assist with developing country-specific action plans, following the value chain approach. Countries can implement the action plans by themselves or within the framework of technical assistance projects. The action plans will contain market-oriented performance benchmarking, sourcing and supply chain solutions, market development measures and actions to increase productivity, develop design talent and fashion orientation, as well as tailored e-applications.
To help SMEs in the garment sector to compare their competitive performance with that of other companies, ITC has developed an online benchmarking tool, THE FIT. This tool compares a firm's performance against a group of national and international firms, on a confidential basis. By identifying their relative strengths and weaknesses, THE FIT helps participating enterprises prioritize areas of action to improve their competitiveness.
In 2002, ITC assisted Cambodia, Lesotho, Malawi and Nepal in elaborating country action plans. These were developed in partnership with all relevant national stakeholders from the public and private sector. The actions plans are ready to be implemented and the countries are presently looking for development partners interested in financing activities.
In 2003, ITC will help Cuba, El Salvador, Kenya, Madagascar and Mozambique to elaborate their respective country action plans.
The China Factor
Since December 2001 China has been a member of the WTO and enjoys a range of benefits. These benefits include the 2005 quota phase-out; automatic quota increases as stipulated in the ATC; and the growth-on-growth provision whereby, under the ATC and as a new WTO member, the country receives benefits accorded to other member countries during the past seven years.
These changes have had a tremendous impact on China's performance in the major importing markets. For example, US textiles and clothing imports from China increased by 125% in 2002, a trend confirmed in the first three months of 2003. In the same period, apparel exports increased by 60%. Chinese exporters reduced their prices in order to gain a greater share in the market. They were able to do so, among other reasons, because quota rents were reduced and Chinese enterprises increased their productivity by investing heavily in new machinery and technology.
The impact of the vast increase in Chinese exports can already be seen in the quota-free Japanese market. In 2001, Japan imported more than two-thirds of its total garment requirements from China, an increase of 66% over ten years. If the Japanese example is repeated in other markets it would create deep concerns for many exporting countries, especially the smaller ones.
Many developing country garment manufacturers speculate that the United States and the EU might reintroduce quotas on China's textile and clothing exports, a move that is possible under China's WTO accession protocol. WTO members can introduce transitional safeguard measures specifically against Chinese textile and clothing imports until 31 December 2008 if Chinese imports "threaten to impede the orderly development of trade in these products". No notification to WTO is needed in this case. On top of that, members can introduce product-specific safeguards against any products (including textile and clothing products) until December 2013 in case of market disruption. In this case, however, they need to notify the WTO Committee on Safeguards and reach an agreement with China. Such speculation, however, is dangerous for two principal reasons. First, major importing countries will use such safeguards only to protect their national industries, rather than to protect any other developing country producer. Second, China could also consider retaliation if the EU and the United States re-impose quotas. Countries will think twice before risking their export opportunities to the large Chinese market.
For more information on ITC's work in textiles and clothing contact Matthias Knappe, ITC Senior Market Development Officer, at firstname.lastname@example.org