BACKGROUND NOTE ON THE IMPACT OF QUOTA PHASING OUT ON TEXTILES AND CLOTHING PRODUCTION AND TRADE

Transcription

1 BACKGROUND NOTE ON THE IMPACT OF QUOTA PHASING OUT ON TEXTILES AND CLOTHING PRODUCTION AND TRADE Thitapha Wattanapruttipaisan* (January 2005) * Ms. Thitapha Wattanapruttipaisan is Head of the Studies Unit, Bureau for Economic Integration (BEI), ASEAN Secretariat, Jakarta, Indonesia. The views expressed in this paper are the author s and do not necessarily reflect those of the ASEAN Secretariat. Mention of any firm or licensed process does not imply endorsement from the ASEAN Secretariat. The author is thankful to Mr. Noordin Azhari, Director of BEI, and Dr N. V. Lam, Adviser, FIHRD, Bangkok, Thailand, for some useful comments on an earlier draft. The usual disclaimer applies, however.

2 2 BACKGROUND NOTE ON THE IMPACT OF QUOTA PHASING OUT ON TEXTILES AND CLOTHING PRODUCTION AND TRADE Introduction For several decades, international trade in textiles and clothing (T&C) has been subject to significant constraints such as quota restrictions and other tariff and non-tariffs barriers. A series of Multi Fiber Arrangement (MFA), for example, governed T&C trade under the General Agreement on Tariffs and Trade (GATT) between 1974 and Subsequently, the Agreement on Textiles and Clothing (ATC) came in force and was administered by the successor of GATT, the World Trade Organization (WTO), between 1995 and its expiration on 31 December In most cases, therefore, T&C trade will be freed from quota restrictions from the beginning of This background note first looks at some of the main features of the ACT and structure of world trade in T&C. It then examines some of the implications, both negative and positive, and policy options with special reference to ASEAN countries. Some of the regional countries (including Indonesia, the Philippines and Thailand) are among the top ten exporters of T&C products on a global scale. In Cambodia, the Lao PDR, Myanmar and Viet Nam, T&C account for the large bulk of their export earnings and domestic employment. However, the T&C sectors are of modest and/or declining importance in a few of the regional economies (e.g., Brunei Darussalam, Malaysia and Singapore) I. The Agreement on Textiles and Clothing Like the MFA it replaced, the ATC was supposed to be a transition regime. The full integration of T&C into the multilateral trading system is to take place over a ten-year period. This is to provide the necessary lead-time for structural and other economic adjustments among all concerned. The integration process requires, firstly, that all T&C products subject to quota restrictions (including those under MFA) be progressively incorporated, in four steps, into quota-free trade. In particular, the total volume of T&C integration was to be 16 per cent at the beginning of 1995, 33% at the beginning of 1998, 51% at the beginning of 2002, and 100% at the beginning of Secondly, T&C import quotas are to be progressively increased. Thus, the mandated growth in quota imports is expected to render all ATC quotas non-binding on a de facto basis for most of the restricted items by the end of the 10-year transition period. Normally specified at the 6-digit Harmonized System (HS) level, quotas are applied to a very large number of products, some 800 categories in the case of the US. They are also negotiated on a country-by-country basis. As such, quota allocations

3 3 are non-transparent, and are often portrayed as a form of cashless ODA (Bhagwati and Panarariya, 2004, p. A9; and Wehrfritz and Seno, 2005, p. 37). MFA and ATC quotas were imposed mostly on T&C imports from developing countries by notably Canada, the EU (including Austria and Finland), Norway, and the US. Japan has exceptionally not imposed ATC quotas or utilized any transitional safeguards under the ATC, contributing thus to the dominance of China in this major market for T&C (more below). As regards implementation, many constraints on T&C trade remain to be removed by developed countries at the fourth stage of integration. In particular, products which are more sensitive or have higher value added are left to this stage. All these imply extensive back-loading, and hence a more sudden impact (or harder shock) on T&C trading at the beginning of 2005 (WTO 2001 and Nordas, 2004). In addition, ATC safeguard measures have been frequently utilized by many developed and, to a much lesser extent, developing countries. This shows a lack of will to liberalize T&C trade. With few exceptions, moreover, the T&C sectors in most developed and developing countries have not been well prepared for the quota phasing out, and the consequent dislocations and increases in competition. Meanwhile, MFN import tariffs averaged 9.4 per cent for textiles and 16.1 per cent for clothing among OECD countries. Those rates are considerably higher than the average tariff of 6.2 per cent on all manufactured products (UNCTAD, 2002). Additionally, the current tariff peaks can be punitive, ranging from 30 to 40 per cent of the value of the imported T&C items. T&C import tariffs are higher among developing countries, too, averaging 18.1 per cent for textiles and 23 per cent on clothing; the rate on all manufactured goods was 13.5 per cent in the early 2000s. There are also steeper tariff peaks in developing countries, including among the large T&C exporting countries in ASEAN and South Asia (OECD, 2004, pp ). II. Patterns of Production and Trade in T&C A. Demand- and Supply-side Parameters Generally, less than one-half of global production of textiles is used in the clothing sector. Non-clothing textiles (or technical textiles) are utilized in diverse industries including household furnishings, residential and office furniture, automotive, health and hygiene, transportation, construction and environment. As a whole, the value of world trade in clothing had exceeded that of textiles from the late 1980s. It has risen twice faster (at 6 per cent on annual average) than the amount of global trade in textiles (3 per cent) between 1990 and In absolute terms, world trade in clothing reached US$ 200 billion, and that in textiles US$ 152 billion in The combined shares of Canada, the EU (excluding intra-eu trade) and the US in world textiles import were 35 to 43.5 per cent between 1995 and 2002, with respectively 14 and 21 percentage points belonging to the US.

4 4 As regards clothing, the combined shares of these countries went up from 62 to 67 per cent in the same period. However, the EU s share in global imports of clothing fell from 32 to 30 per cent while that of the US went up from 30 to 35 per cent between 1995 and Thus, the US is not only a faster growing market, with textiles imports rising by 9 per cent, and imported clothing by 5.5 per cent a year between 1995 and The US has also remained by far the largest single destination for textiles, worth US$ 17.2 billion in 2003, and clothing, worth US$ 68.1 billion (US International Trade Commission (or USITC), 2004 and OECD, 2004, p. 56). Several ASEAN countries are among the top exporters of clothing to the US (Table 1). None is among the top suppliers of the US textiles market which, in 2003, was dominated by the China (19.5 per cent share), Canada (11.2 per cent), Mexico (9.5 per cent), India (8.2 per cent) and Pakistan (6.8 per cent). III. Some Estimates of the Impact of T&C Trade Liberalization A large number of research studies have been carried out on the global and regional impact of trade liberalization, generally and in the T&C sectors. The results, however, show significant variations (Nordas, 2004 and OECD, 2004). Thus, they are useful as an approximate indication of the order of magnitude only, and have to be interpreted with care. A. Overall Import Shares Virtually all of the studies show substantial gains in real income by both developed and developing countries as a result of multilateral trade liberalization. Income gains by developing countries in quota-free trade in T&C, for example, are estimated at US$ 24 billion a year while their exports earnings will rise by US$ 40 billion annually (Asian Wall Street Journal, 2004, p. A7). Generally, the estimated share of imported textiles in North America (Canada and the US) is 20.9 per cent before and 21.5 per cent after the expiry of the ATC. For clothing, the corresponding percentages are 33.8 before and 45 per cent (an increase of almost 50 per cent) after. The EU has a less restrictive stance on T&C trade, and hence the increases in imports are more modest. The import shares in domestic demand before and after ATC are 52.5 and 53 per cent respectively in the case of textiles, and 48.5 to 51 per cent in clothing (Nordas, 2004, pp ). B. Sources of Imports There are, however, dramatic changes concerning the relative importance of T&C suppliers in the post-atc trading environment. This applies especially to the clothing sector as well as in the North American market (Charts 1 and 2).

5 5 Firstly, China s share rises from 16 to 50 per cent of import demand for garments in North America, and from 18 to 29 per cent in the EU. The market shares in imported clothing gained by India are more modest from 4 to 15 per cent in North America, and from 6 to 9 per cent in the EU. Secondly, Indonesia, the Philippines and Thailand are among the top ten exporters of clothing to North America. Indonesia, also among the top ten T&C exporters to the EU, is expected to maintain its market shares in EU s import demand for T&C, and in North American demand for imported textiles only. However, the shares of Indonesia and the Philippines in North America s clothing imports are expected to decline from 4 to 2 per cent in each case, due partly to stiffer competition from China. Thailand is likely to retain its 3 per cent share in North American imported clothing, a market foothold achieved since the early 2000s. Thirdly, the shares of clothing exported by the rest of the world will also contract sharply, from 30 to 24 per cent in the EU but by as much as 28 to just 10 per cent in North America. This is a matter for concern because these two markets are very important to the smaller or relatively newer exporters from ASEAN such as Cambodia, the Lao PDR, and Viet Nam. Fourthly, most of the top-ten exporters, which are the main beneficiaries of various trading preferential programs from the US and EU, are expected to lose out to other competitors in the post-atc environment. This is another matter for concern as several exporters in ASEAN are heavily dependent on such preferences. In the EU clothing market, for example, Turkey s share is to decline from 9 to 6 per cent after The combined share from Eastern and Central European countries will go down from 14 to 10 per cent, and that of North African countries, from 11 to 9 per cent. Similarly in the clothing sector in North America, Mexico s market share is expected to fall from 10 to just 3 per cent post-atc, and that of the rest of the Americas, from 16 to 5 per cent. The market share of Bangladesh is halved from 4 to 2 per cent. IV. Policy Options and Implications A. The Challenges and Opportunities for Regional LDCs and Non-WTO Members Firstly, the ATC is not applicable to non-wto members, including the Lao PDR and Viet Nam. Thus, T&C exports from these two regional countries can still be subject to quota restrictions from the beginning of This is yet another decided disadvantage for them, given the quota-free status gained by other competing T&C exporters. Preparations for WTO accession by Viet Nam have been underway for several years. Given the complex agenda still outstanding, negotiations are unlikely to be completed during A Working Party on WTO accession for Lao PRD had been

6 6 set up in February 1998 and a Memorandum on the foreign trade regime, circulated in March Negotiations on accession started on 28 October Secondly, another important commercial disadvantage is that exports from non-wto members are subject to very high import tariffs. Without a normalized trade relationship with the US, for example, the non-mfn tariffs are in the range of per cent on cotton shirts and sweaters, the most common categories of exported garments, compared to per cent for the corresponding MFN tariff rates. A trade agreement between Viet Nam and the US came into force in December 2001 and T&C exports from Viet Nam went up from US$ 49 million in 2001 to US$ 952 in A bilateral T&C accord with quota provisions has subsequently operated from May 2003, with automatic yearly renewal from 2005 until renegotiation or WTO accession by Viet Nam. This contributed to another jump, to US$ 2.4 billion in 2003, in garment exports to the US (USITC, 2004). The Lao PDR had completed a bilateral trade agreement with the US, although a separate T&C accord has yet to be negotiated. T&C exports from this country to the US remain comparatively very small, in the range of only US$ million during the early 2000s. Thirdly, the expansion in Cambodia s T&C exports from May 2000 is due largely to favourable quota allocations and MFN tariffs from the US. Exported garments to this market, for example, went up from US$ 0.6 billion in 1998 to US$ 0.9 billion in However, they have since grown more slowly to reach US$ 1.2 billion in T&C exports account for some 76 per cent of Cambodian export earnings, with the US market absorbing 54 per cent of exported garments in In the post-atc environment, the margins on tariff preferences will be of great importance for LDCs such as Cambodia, Lao PDR and Myanmar. However, the magnitude of tariff preferences for LDCs is unknown currently as the collapse in Cancun has delayed negotiations under the Doha Development Agenda (DDA). Fourthly, preferential tariff margins are helpful to the beneficiaries but they are not a substitute for on-going improvements in efficiency, quality, flexibility and delivery timeliness in production and trade. In fact, the top exporting countries which have relied heavily on preferential tariffs from the EU and the US are expected to lose a significant share of their markets after 2005 (Section III and Charts 1 and 2). Additionally, such margins will be (relatively) eroded through further reductions in MFN tariffs and non-tariff barriers achieved under the same Doha Round. This will create another adverse impact on the beneficiary countries ability to attract part of the increased relocation offshore of developed countries T&C production facilities post-atc. Fifthly, Canada imported US$ 3.8 and US$ 4.1 billion of textiles and clothing respectively in Its market access initiative for quota- and duty-free exports from LDCs presents an attractive option for both Cambodia and Lao PDR. From 2003, the ROO requirements are much more flexible: a minimum of 25 per cent of import content can come from Canada, from other LDCs, or from developing

7 7 countries eligible for Canada s General Preferential Tariff scheme (OECD, 2004, p. 15). Those developing countries include all economies in ASEAN (except Myanmar) and East Asia (except Chinese Taipei). This raises the attractiveness of an integrated T&C supply chain in ASEAN, or in both East and Southeast Asia. The regional chain provides a means for sustained competitiveness and diversification, and for closer linkages in trade and investment among the economies concerned, too. B. The Challenges and Opportunities for Other ASEAN Exporters Firstly, a shift of exports to the EU is another attractive option for some regional LDCs. The EU took in 87 per cent of the exported garments from the Lao PDR. Notably, a lower proportion of Cambodian garments (27.4 per cent or million euros in 2001) entered duty free in the EU, compared to 57.6 per cent (equivalent to 73.5 million euros) in the case of the Lao PDR. That is because many inputs for Laotian garments are linked to sources from Thailand, thus qualifying for the regional cumulation (ASEAN less Myanmar) in ROO requirements by the EU. Cambodia tends to rely more heavily on imported inputs from East Asian economies which do not qualify for such regional cumulation or for regional derogation (Mekong Capital, 2004, p. 14). Thus, there is much scope for greater regional cumulation and greater use of EU-textiles in high-end garments for duty- and quota-free exports by ASEAN economies, including the regional LDCs. In fact, utilization of preferential tariffs on T&C exports under the EU s Everything But Arms (EBA) program was almost 10 percentage points higher (to 54 per cent in total) in This increase was due largely to Bangladesh and Cambodia, presumably in preparation for post-atc competition (OECD, 2004, p.54). Secondly, through suitable procurement and production mixes, the EU market also has much to offer other ASEAN economies which are in a regionally integrated supply chain, noted earlier. Among other groupings, imports from members of ASEAN (less Myanmar) and the South Asian Association for Regional Cooperation (SAARC) are qualified for regional cumulation. Supply integration is necessary because the regional LDCs and several other regional economies cannot meet the ROO requirements from the EU. In particular, preferential tariffs will be given to T&C imports with double transformations (or double jump) from yarns to fabrics and from fabrics to garments. Single transformation is acceptable under certain circumstances. However, the import contents (e.g., imported yarns or imported woven fabrics for knitted or woven garments respectively) must be less than or equal to 40 per cent of the exfactory prices of the products concerned (Mekong Capital, 2004, p. 11). Thirdly, India is expected to be a strong competitor of ASEAN and other South Asian suppliers in many research studies, as indicated earlier. However, there

8 8 is also evidence that the larger ASEAN economies can meet the potential challenge from India post-atc (Mekong Capital, 2004; Nordas, 2004; and OECD, 2004). In 2000, for example, labour productivity in textiles (indexed at 107) and clothing (107) in India was much lower than that in Indonesia (158 and 148 respectively), Malaysia (209 and 151) and the Philippines (140 and 145). In addition, labour efficiency has risen at a generally slower pace in India than in ASEAN (UNCTAD, 2003, p. 104). Lower labour productivity accounts in part for different patterns of specialization. Textiles provide almost 50 per cent of India s T&C global export value (and 40 per cent of T&C exports to the US), compared to 8 per cent or less in the case of ASEAN (Table 1). Comparatively, thus, ASEAN specializes mostly in garment production which is much more labour intensive. By and large, substantial investment and on-going policy reforms are needed in India to better meet international quality standards, to shorten turn-around and lead times through leaner manufacturing and distribution, and to modernize T&C machinery and transport infrastructure. In addition, it is essential to encourage more domestic competition and entrepreneurship, to upgrade and widen the skills base, and to promote high-value services such as design, packaging and marketing in India (OECD, 2004). C. The Challenges and Opportunities from China But the same observations above are also applicable to most ASEAN economies in the post-atc environment. China, currently the world s largest clothing supplier and second largest textiles producer, has been an actual competitor of the region. Japan is a major non-quota market with textiles and garment imports valued at US$ 4.5 billion and US$ 17.6 billion respectively in China managed to account for 41.1 and 66.5 per cent of Japan s textiles imports between 1995 and The corresponding figures for clothing are even more striking at 59.1 and 77.5 per cent in these two respective years. Furthermore, as a WTO member, China has also become dominant in other T&C markets within a short time. For example, China supplied 19.3 and 5.9 per cent of textiles imports into Australia and South Africa respectively in The corresponding market shares had expanded to 35.2 and 18.5 per cent in China is even more dominant in the clothing sector -- with a respective market share of 54.3 in Australia and 29 per cent South Africa in 1995, and as much as 70.4 and 56.3 per cent in 2002 (Nordas, 2004). 1. The competitive edge of China Firstly, labour is more productive in China, with an index of 182 in textiles and 224 in clothing, despite much higher wages. Such earnings are significantly larger than those in Bangladesh, Cambodia, India, Indonesia and Viet Nam, for example. Notably, China is also a major supplier of capital-intensive textiles.

9 9 Secondly, higher productivity levels are also due to heavy investment in stateof-the-art machinery, to clusters of huge factories, and to a high degree of vertical integration. Imported textiles and clothing, for example, account for less than 10 and 5 per cent of final export values, a proportion comparable to those of the more advanced industrial countries (Nordas, 2004, p. 9). As a result, there are massive economies of scale and scope. Garment assembly time is as much as 30 per cent lower in many Chinese firms, compared to those on other countries (Wehrfritz and Seno, 2005, p. 39). Significantly, these firms can make almost any type of T&C products at any quality level and at a competitive price for Wal-Mart and K-Mart, and for up-scale Burberry, Giorgio Armani, Hugo Boss, Nike and Polo etc. Thirdly, modern infrastructure permits fast transport and quick turn-around of ships in ports in China and Hong Kong SARC. This is another important advantage according to Hong Kong-based sourcing giant Li and Fung. In fact, survey results indicate that China is expected to be the supplier of choice for major retail groups and brand-name marketers (USITC, 2004). Most of these groups and marketers are located in developed countries. They are now a major force in T&C production and trade: the five largest retailers (including Wal-Mart and K-Mart) in the US, for example, account for 68 per cent of all clothing sales in public outlets. They invest heavily in integrated, lean retailing systems, and in sustaining brand-name recognition. In protecting their distinctive corporate names, furthermore, large retail groups and brand-name marketers exert great pressure on their suppliers and subcontractors on strict compliance to both price and non-price parameters. The latter include especially working conditions, and various social, ethical and environmental matters. 2. Potential opportunities for ASEAN Despite these significant commercial advantages, China is facing a number of potential supply problems. These problems provide thus several latent opportunities for ASEAN in T&C production and trade. Two sets of issues deserve some attention. a. Integrated chain of regional supplies As noted earlier, an integrated network of T&C production within ASEAN is an option for ASEAN economies to supply the EU market. It is, too, a means for the regional LDCs (except Myanmar at present) to export duty-free to Canada and to the EU under the EBA program. However, a regional supply chain can also be an alternative T&C source for large retail groups and brand-name marketers. It reduces the excessive dependence of them on only one source of supply, thus sustaining the bargaining power of these groups and marketers, which is already considerable.

10 10 Equally important, T&C are among the 11 priority sectors chosen for accelerated integration in ASEAN. This process could give rise to a regional supply network largely for extra-regional trade, given the faster removal and elimination of tariff and non-tariff barriers planned for the region. Comparatively, however, intra-asean trade in both T&C has been very modest. Besides, the relative importance of such trade has changed little, for example, since Most member countries, in fact, have been competitive producers of labour-intensive garments for extra-regional export. Intra-ASEAN exports of T&C in 2001, for example, was in the range of 1 to 5.4 per cent of intra-regional exports, with an average of 2.2 per cent. Such exports were worth US$ 1.8 billion, which was equivalent to about 8.4 per cent of global exports of T&C by ASEAN, and to 2.2 per cent of total intra-regional exports. Similarly, intra-asean imports of T&C in 2001 ranged from 1.5 to 3.6 per cent of intra-regional imports by ASEAN-5 (except Brunei Darussalam), and from 4 to 9 per cent in the case of ASEAN-4 (except Cambodia) and Brunei Darussalam. Such imports were worth US$ 1.8 billion, or about 2.6 per cent of total intra-regional imports. Moreover, ASEAN depends heavily on imported cotton, yarns and fabrics. These up-stream activities and products may thus provide feasible opportunities for an integrated regional division of labour. However, cotton spinning (and other preparations of yarns), and fabric weaving, knitting and finishing (including dying) are highly capital intensive. In this connection, the expected increase in T&C relocation from the developed countries can provide much of the needed investment resources and expertise for an integrated regional supply chain. Other matters for consideration include location and time-to-market. These are an important competitive advantage in lean manufacturing and just-in-time delivery to extra-regional customers. Thus, among the additional prerequisites are affordable and adequate power and water supplies, an efficient transport and communications infrastructure, and speedy trans-border clearance within the region. The third issue concerns China s imports which stood at US$ 13.1 billion for textiles and US$ 1.4 billion for clothing in An integrated ASEAN or ASEAN- China supply chain could possibly enable ASEAN to meet some of China s demand for imported textiles. However, textiles production is highly capital intensive and has limited local contents in ASEAN. Meanwhile, the high and rising degree of vertical integration in China would limit the prospects of such supplies in the long run. An alternative option for some regional countries is to make direct investment in the T&C sectors in China. For example, Lu Thai Textile Company (a Chinese-Thai joint venture) has a substantial share of 13 per cent in the global market for highquality, yarn-dyed weave cloth for undergarments (Lee, 2004, p. M3). The Republic of Korea, among several others, has relocated textiles production facilities with China

11 11 being the host country for one third of the offshore investment of US$ 2.6 billion (Thomas, 2005, p. 42). b. Supply problems from China Production flexibility, and speedy and timely delivery are an important element of competitiveness. They are needed to cater for limited production runs, mass customization, and fast changing consumer tastes and preferences. For several reasons, however, there is much uncertainty concerning a steady, orderly and uninterrupted flow of T&C exports from China in the coming decade. Firstly, power shortages have disrupted considerably T&C production in China, in 2003 for example. There are also emerging bottlenecks in the transport and distribution infrastructure for locally produced and imported coal and oil. All these problems will require remedies of a medium- to long-term nature. The second element of uncertainty is China s non-market economy status at the WTO for 15 years (or to 2016); this status does not apply in the case of ASEAN and several other developing countries, however. Thus, anti-dumping duties on T&C products from China can be higher than those from other market-economy members of WTO. Indeed, there is currently a planned challenge of the illegal subsidies in China by a consortium of developing countries at the WTO. State-owned enterprises (SOEs) account for 35.7 per cent of textiles output, 6.7 per cent of garment production, and 32.8 per cent of manufactured T&C equipment and machinery. However, SOE losses are equivalent to per cent of the outputs in those three sectors (OECD, 2004, p.41). The third source of uncertainty relates to the textiles safeguard provision and the transitional product-specific safeguard mechanism associated with China s WTO accession. The former, effective until the end of 2008, enables WTO members to restrict T&C imports from China if such imports threaten to disrupt the orderly development of trade in the concerned products. The transitional mechanism, valid until December 2013, is to prevent severe disruptions to domestic markets and T&C producers in WTO members as a result of excessive T&C imports from China. The US, for example, removed from ATC quota restrictions seven categories of garments from China at the beginning of However, it invoked on 19 November 2003 the textiles safeguard provision to limit for a 12-month period the growth of imports into the US of knitted fabrics, brasseries, and dressing gowns from China. How often these two safeguards are be utilized by WTO members is an open question, however. To minimize such possibilities and uncertainties, China announced on 27 December 2004 that export duties to be levied over the next three years on six major T&C categories (coats, skirts, knit and non-knit shirts, pajamas and underwear) from the beginning of Duties will range from 2-6 US cents per item, with most items taxed at the low end of that dutiable range.

12 12 Generally, those export duties are perceived by many as a token gesture, with limited real impact (Browne, 2004, p. A10). For comparison, the export tax equivalent for China of the ATC quotas in 1997 was 20 per cent for textiles and 33 per cent for clothing in the North American markets. The corresponding figures in the EU market are 12 and 15 per cent (Nordas, 2004, p. 25). Conclusions International trade in T&C will be free from quota restrictions among WTO members from Both developed and developing countries will benefit greatly from quota-free trading in T&C products. However, most of them are not well prepared for the post-atc environment, despite a 10-year transition period. Generally, income gains from lower consumer prices will exceed the adjustment costs in developed countries. Meanwhile, developing countries will have a higher share of the clothing and, to a much less extent, textiles markets in the US and the EU. This will provide a further push for the relocation of T&C production facilities from the developed to the developing world. China and India are expected to gain most from the post-atc trading environment. In addition, suppliers who used to rely heavily on quota-free and/or preferential tariffs would lose a large part of their market shares. These exporters include several in ASEAN. Furthermore, non-wto members in the region can still be subject to quota restrictions and non-mfn import tariffs, which are much higher. Structural adjustments, policy reforms and additional investment will be necessary in all countries, including those in the region, in the post-atc trading environment. Short-term costs and dislocations are inevitable in the T&C sectors. Already there is anecdotal evidence from the media of factory closings in, relocation from, and higher unemployment in several ASEAN countries. The smaller and less developed economies in the region will have to manage more difficult challenges in the process. However, the larger ASEAN countries can match the (potential) competitive strength of India. This is due to their higher labour productivity in garment assembly and, more generally, to more modern production facilities and transport infrastructure in the region. China has a clear and present competitive edge over most T&C exporters, including those in ASEAN and South Asia. There are, however, several options to mitigate some of the adverse impact of the challenges from China and India. Through suitable procurement and production mixes, for example, several regional LDCs and other regional economies could sustain their shares or even gain larger shares in the EU and Canadian as well as US markets. In this context, the formation of an integrated supply chain in the ASEAN region or within East and Southeast Asia will be helpful. Equally important, such a production chain can be an alternative supply source for the major retail groups and brand-name marketers in developed countries. This is

13 13 because the prospects of a steady, orderly and uninterrupted flow of T&C products from China are far from certain in the coming decade. Among other problems to be managed by China are the widespread power shortages and the issue of government subsidies to loss-making SOEs in relation to the non-market economy status of China at the WTO. A more important source of uncertainty is the WTO-related textiles safeguard provision and the transitional product-specific safeguard mechanism. Lastly, joint ventures can be set up with T&C enterprises in China. This is another option for the more developed ASEAN economies which typically have sufficient resources and expertise in organization and management. Besides, T&C are a sunset industry in these economies, and as such it is much less important as a source of employment and foreign exchange earnings. **********************************

14 14 Table 1. Textiles and Clothing Exports from Asia to the United States, 2003 (US$ million) Countries Textiles (T) Clothing(C) Total Value % of T/T&C China 3, , , India 1, , , Pakistan 1, , , Republic of Korea , , Japan Turkey , , Thailand , , Indonesia , , Bangladesh , , Iran Philippines , , Hong Kong SARC , , Malaysia , , Sri Lanka , , Viet Nam , , Cambodia , , Singapore Lao PDR Myanmar Total (including rest of the world) 17, , , Source: USITC at

15 15 Chart 1. Top Ten Exporters in the Clothing Market of North America China 16% 50% India 4% 15% Hong Kong SARC Bangladesh 6% 4% 2% 9% Trade with quota (base: 1997) Country Indonesia Philippines Thailand 0% 4% 2% 4% 2% 3% Trade without quota ( ) Mexico 3% 10% Rest of the Americas 5% 16% EU 0% 5% Rest of the World 12% 28% 0% 10% 20% 30% 40% 50% 60% Percentage (%) Source: Nordas (2004, p. 30) Chart 2. Top Ten Exporters in the Clothing Market of EU China 18% 29% Country India Hong Kong SARC Turkey Indonesia Bangladesh Morocco 3% 3% 3% 4% 5% 4% 6% 6% 6% 6% 9% 9% Trade with quota (base: 1997) Trade without quota ( ) Poland Other Central & Eastern Europe 5% 4% 6% 9% Other North Africa Rest of the World 6% 5% 24% 30% 0% 5% 10% 15% 20% 25% 30% 35% Percentage (%) Source: Nordas (2004, p. 28)

16 16 REFERENCES Bhagwati, Jagdish and Arvind Panarariya, 2004, The Bra in Your Wardrobe, The Asian Wall Street Journal, December 28. Browne, Andrew, 2004, China s Textiles Duties Unlikely to Pacify Rivals, The Asian Wall Street Journal, December 28. Lee, Jane Lanhee, 2004, China Textile Firms Face Challenges, Asian Wall Street Journal, 28 December. Mekong Capital, 2003, WTO Agreement on Textiles and Clothing (ATC): Impact on Garment Manufacturing in Cambodia, Laos and Vietnam, Ho Chi Minh City, Mekong Capital, December. Nordas, Hildengunn K., 2004, The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing, Geneva, WTO. OECD, Working Party of the Trade Committee, Structural Adjustment in Textiles and Clothing in the Post-ATC Environment, Paris, OECD Trade Policy Working Paper No. 4, August. UNCTAD, 2002, Trade and Development Report 2002, New York and Geneva, UNCTAD. UNCTAD, 2003, Trade and Development Report 2003, New York and Geneva, UNCTAD. USITC, 2004, Textiles and Apparels: Assessment of the Competitiveness of certain Foreign Suppliers to the U.S. Markets, Investigation No. 332/448, Washington, D.C., USITC, February. Wehrfritz, George and Alexandra Seno, Succeeding at Sewing, Newsweek, 10 Jan WTO, 2001, Comprehensive Report of the Textiles Monitoring Body to the Council of Trade in Goods on the Implementation of the Agreement on Textiles and Clothing during the Second Stage of the Integration Process, Geneva, WTO, Document No. G/L/459, July. **********************************