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Textiles
and Clothing: What Happens After 2005?
By Matthias Knappe
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:
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Use
of quotas. Countries which are
fully using their quotas in the years
preceding 2005 will probably increase
their exports after that date. Countries
which are not able to fill their present
quotas are unlikely to benefit from a
market opening. Quota performance
monitoring, therefore, is essential. As
only Canada, the European Union (EU) and
the United States continue to impose
quotas — 1,007 between them — this is
a feasible task for countries to
undertake.
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Exploiting
liberalized categories. The
changes stemming from the liberalization
of product categories, which followed the
third stage of the ATC in January 2002,
give a clue to possible developments. At
that time, the United States integrated
seven product categories into WTO, thereby
abolishing quotas and causing trade flows
to change tremendously. In all liberalized
quota categories, China greatly increased
its exports to the US market, in some
cases up to several hundred per cent.
While other countries increased exports in
some categories, only China did so across
the board, mainly to the detriment of
Central American and Caribbean countries,
and of some other small producers which
lost market share.
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Critical export mass.
Developing countries that are not under
quota constraints will face intense
competition which they have not
experienced before. For developing
countries that do not currently have
meaningful export quantities, it will
become even more difficult to enter or
to remain in world markets, and critical
mass will become an important issue.
Major international buyers are unlikely
to source from a country where only a
few companies serve the world market.
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:
Growing
markets
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.
Vanishing
markets
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.
Declining
prices
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.
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Develop
an action plan. Countries need to
develop a strategic approach on how to
tackle the challenges highlighted. A
partnership between private and public
sector players is critical to develop
effective responses. While the government
needs to set up an enabling environment,
the business sector needs to develop the
supply response to market requirements.
Together, they need to develop a
monitoring system for trade in textiles
and clothing that is attuned to the
changing economy. To continue as an
interesting source for international
buyers, a ‘critical country mass’ is
necessary. No one company in any country
can play this role.
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Use
business advocacy. The textile and
clothing quota phase-out needs to be
viewed in light of the Doha Development
Agenda. WTO members are due to conclude
the round at the same time as quotas are
due to disappear. As such, the Doha
deliberations will impact on trade in
textiles and clothing. The Uruguay Round
and the implementation of the ATC
demonstrated that the textile and clothing
business needs to take an active part in
channelling its views and concerns to
governments, so that negotiations serve
the interests of the business community.
While quotas will disappear, countries
need to ensure that one set of trade
barriers is not replaced with another.
Moreover, developing countries and WTO
newcomers from transition economies need
to ensure that a public-private
partnership is in place for the Doha
Development Agenda if they are to avoid
the disappointment they experienced with
the ATC.
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Reinforce
sector associations. As 2005
approaches, middle-level support will
become increasingly important. Despite the
disappearance of quotas, textile and
clothing trade will become both complex
and cumbersome. To ensure practical
responses, textile and garment
manufacturers’ associations, in
agreement with the government, will be
required to assume more responsibilities
such as fulfilling labour standards;
taking over quota administration; and
operation of bonded warehouses.
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Understand
the competition. Enterprises need
to develop a mechanism to compare
performance with competitors in other
countries. One of the difficulties of the
quota regime is that many manufacturers
have no comparison with competitors. Many
companies — especially SMEs in
developing countries — lack a clear
understanding of their ability to compete
successfully in a quota-free world.
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Develop
sourcing strategies. Improved
value chain management can reduce costs
and increase flexibility. A wide sourcing
base can increase flexibility when it
comes to securing fabrics from the
cheapest source with the quality and
design the buyer expects. Such flexibility
will be a critical competitive factor in
the future. By optimizing the supply
chain, lead time will also be reduced.
While sourcing decisions are micro in
nature, governments can facilitate
sourcing by supporting regional trade
initiatives. Regional cooperation to
strengthen supply chains create two
distinct advantages: firstly, regional
sourcing allows shorter delivery times;
and, secondly, such cooperation enables
countries to take maximum advantage of
preferential market access schemes which
now prioritize regional and country
groupings. Some developing countries have
sought to develop their own fabric
industry through backward integration
rather than improve value chain
management, an aspiration that seems
unrealistic at a time when investment for
new domestic fabric industries is rarely
forthcoming.
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Increase
productivity. Investment in human
capital and machinery can increase
productivity and lead to reduced costs and
prices. Training institutions and schemes,
which exist in many textile and clothing
producing developing countries, need to
enhance their training capacities to
improve craftsmanship.
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Develop
new products and markets. Avoid
mass markets and target niche markets with
value-added products. Everybody wants to
sell T-shirts to the United States as it
is a large and ‘easy’ market. However,
competition in such ‘easy’ markets is
high and prices are low. To avoid this,
design and fashion skills need to be
developed to target niche markets with
value-added products.
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Develop ‘e-applications’.
E-applications can be employed not only to
sell, but also to exchange information
across electronic networks at any stage of
the supply chain. E-applications
facilitate sourcing and supply chain
management; production planning; design
and forward integration, including
Internet sales. The main goal of
e-applications is to increase flexibility
and to shorten the overall value chain,
thus reducing lead-time. A shift to
e-applications also highlights that a
company is both competitive and willing to
adjust to the demands of the market.
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,
Email
Related
link
 US
Textiles Importers Eye 2005 Nervously
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