Technical Report: SADC Rules of Origin in Textiles and Apparel: Review and Policy Options (DRAFT FOR COMMENT)

Transcription

1 Technical Report: SADC Rules of Origin in Textiles and Apparel: Review and Policy Options (DRAFT FOR COMMENT) Tomasz Iwanow, Trade Economist Submitted by: AECOM International Development Submitted to: USAID/Southern Africa May 211 USAID Contract No. 674-C PO Box 629 Plot 5668, Tholo Park, Fairgrounds Gaborone, Botswana Phone (267) Fax (267)

2 Table of Contents Summary and Policy Recommendations: Introduction SADC Rules of Origin in the Textiles & Apparel Industry The impact of Rules of Origin: Some empirical evidence SADC Regional Trade Agreement (RTA) Negotiation Agenda and Rules of Origin Overview of SADC s Trade in Textile and Apparel Angola Democratic Republic of Congo (DRC) Lesotho Madagascar Malawi Mauritius Mozambique Seychelles South Africa Tanzania Zambia Zimbabwe Rules of Origin and Trade in Textiles and Apparel in SADC Industrial policy and reforms of SADC ROO: Effects of Tariffs, Preferences and Other Incentives Policy Options for reform of SADC Rules of Origin Policy Option 1: Double transformation Rule of Origin (Status quo) Distributional Effects The impact on SADC s Trade Negotiation Agenda The problem of transshipment Policy Option 2: Implement relaxed single transformation Rule of Origin Distributional Effect Impact on SADC s Trade Negotiation Agenda Preventive and Enhancing Measures Policy Option 3: Implement a preferential single transformation Rule of Origin to SADC LDCs only Distributional Effects Impact on SADC s Trade Negotiation Agenda Mitigation, Preventive and Enhancing Measures Conclusion Bibliography Appendix:

3 Summary and Policy Recommendations: The Southern African Development Community (SADC) Protocol on Trade, currently applies a strict double transformation Rule of Origin (ROO) that requires fabrics and yarn for garment manufacturing to be produced within SADC in order to qualify for preferential treatment. Among the arguments in favor of these rules is a desire to promote SADC-wide integrated value-chains for garments and textiles by encouraging producers at each stage to source from within the region. The rule is also aimed at preventing transshipment of garments from outside SADC. However, the double transformation rule has failed to spur the development of integrated value-chains but has instead stifled intra-sadc trade in textile and garments. Overall, garment producers have struggled to source sufficient amounts and quality of fabrics and yarn from within the region and hence they are often unable to fulfill the SADC ROO. Detailed analysis of trade data indicates that as the result intra-sadc trade in textiles and apparel has been severely restricted to the extent that trade between many Member States is negligible. Intra-SADC trade in textiles and garments as per cent of total SADC imports has fallen from 19% in 2 to 14% in 29. SADC economies increasingly import garments from South East Asia whose share of imports increased from 44% to 56% in the last decade. Currently, SADC ROO require more integrated domestic and regional sourcing and production linkages than are currently commercially feasible in the region. Given SADC s limited capacity for manufacturing of fabrics and yarn, regional trade in these products amounted to a mere US$ 26 million and constituted to only 4.5% of intra-sadc trade in textiles and apparel sector. This report presents option for the reform of the current structure of SADC s ROO in textiles and apparel in light of the changing pattern of globalized trade in manufactures. ROO may be able to act as a catalyst for growth of textile and apparel sector in SADC, leading to growth in exports and employment. To do so, ROO need to be designed to be more consistent with international trade in fragmented tasks (as opposed to complete products) and need to be open to countries with sufficient levels of complementary inputs. Liberalization of ROO to a single transformation rule, which does not place any restrictions on the source of materials for garment production, is likely to align SADC textile and garment sector more closely with international production chains. The experience of the United States (US) African Growth and Opportunities Act (AGOA) shows that liberalization of ROO can lead to large manufacturing export supply responses in SADC countries. Lesotho and Madagascar, for example, have experienced a boom in the export of textiles and apparel to US which has in turn led creation of thousands of jobs. Much like AGOA, liberalization of ROO to the single transformation rule within SADC is likely to enhance intra-sadc trade, employment and enhance poverty alleviation in the region but given SADC s relatively small market size these effects will be smaller than these for AGOA. Nevertheless, the garment industry is of key importance for several SADC countries and is a leading employer and revenue and foreign exchange earner. Therefore, even small gains in the sector are significant for local populations where unemployment is high. The key challenge in the reform of SADC ROO is divergence in industrial policies toward the sector among Member States. While Southern Africa Customs Union (SACU) 3

4 maintains significant protection for both textiles and apparel, other Member States such as Madagascar, Mauritius and Lesotho have a more export-oriented strategy. These differences lead to asymmetries in the outcome of the ROO reform. Some Member States are likely to obtain a higher margin of preference than others depending on the industrial policies applied. Therefore, some policy harmonization is essential in order to reap full benefits of preferential liberalization. This study reviews policy options available to SADC regarding ROO reform. The following options are assessed from the perspective of trade and economic effects as well as in the light of the ongoing SADC trade negotiations with third parties: Option 1: No reform - Double Transformation Rule : Inhibits intra-sadc trade: The current structure of ROO raises the price of garments production for exports into SADC by requiring firms to source material from within the region. Therefore, policy option 1 is likely to inhibit regional trade, reduce potential production and employment and impact negatively on the global competitiveness of SADC. Trans-shipment of goods from outside SADC. The double transformation ROO makes it difficult for transshipment of goods originally from outside of SADC through a low MFN duty Member State to a high MFN tariff Member State in order to avoid paying high tariffs. However, control on trans-shipment is inherently a customs issue and is most effectively addressed through the strengthening of controls on trans-shipment rather than through ROO. Unsuccessful in the development of regional value-chains. Double transformation rule has so far not been instrumental in the development of regional value chains in textiles and garments sector and hence it is unlikely to achieve this in the future. Inconsistent in the SADC negotiations with other Regional Economic Communities (RECs). The Economic Partnership Agreements (EPAs) operate under a single transformation ROO and this is likely to be a significant point of negotiation for the future Tripartite FTA. Liberalization of ROO is therefore likely to facilitate the conclusion of FTAs with these regions. Option 2: Single Transformation Rule of Origin: Increases intra-sadc trade. Liberalization of ROO will decrease the costs of exporting to SADC by allowing firms to source inputs from the most competitive suppliers. As a result, SADC Members States that already have production capabilities in garments production will enhance their regional exports. A limited increase in production and exports is foreseen for Madagascar, Malawi, Mauritius, Lesotho, South Africa, Swaziland and Tanzania. As such, the policy is likely to strengthen regional integration and provide employment and alleviate poverty is SADC. Some adjustment costs in Member States. In particular South Africa, the biggest SADC economy, is likely to increase its imports of textile and garment from within the region, with associated small but negative impact on production and employment in the sector. These effects will however be minor as imports increases will be small and South African producers themselves are foreseen to increase their exports to SADC. South African consumers are likely to benefit as a result of lower price of imported garments. Facilitates negotiations of Free Trade Areas (FTAs) with third parties. The adoption of single transformation ROO in textiles will align SADC ROO with these of the EPAs and the rules currently utilized by the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC) and hence facilitate the conclusion of these negotiations. 4

5 Promotes competitiveness and integration with global value chains. The manufacturing sector is now increasingly globalized and characterized by fragmented production patterns whereby assembly of components and final products can take place in many different locations and countries. Comparative advantage now resides in quite narrowly defined tasks and the effect of tightly restrictive ROO is to prohibit participation in production processes of this type. Therefore relaxation of ROO is likely to lead towards integration of SADC textile and apparel producers in the global value chains and promote their competitiveness. Option 3: Single Transformation Rule applied for SADC Least Developed Countries (LDCs) only Increases intra-sadc exports of apparel of SADC LDCs. LDCs with productive capacity in apparel are foreseen to increase their regional exports. A limited increase in exports is likely to occur in Madagascar, Malawi, Lesotho, Swaziland and Tanzania. Complicates negotiations of FTAs with third parties: This mixed approach regarding liberalization of ROO is likely to complicate negotiations for the EPAs and the Tripartite FTA as it is inconsistent with the rules currently applied by COMESA and the EAC. Promotes competitiveness and integration with global value chains for SADC LDC: Refer to policy option 2 for details. Consistent with World Trade Organization (WTO) Rules and Regulations: This policy option is entirely consistent with WTO s rules as regulations that allow for special preferences to be granted to LDCs. 5

6 List of Abbreviations AGOA BLS CET CIF COMESA DRC EAC EPA EU IEPA FTA HS LDC MENA MFA MMTZ NIC PTA RTA REC ROO SACU SADC SARS SA SSA TDCA UN US WTO African Growth and Opportunity Act Botswana, Lesotho, Swaziland Common External Tariff Cost Insurance and Freight Common Market for Eastern and Southern Africa Democratic Republic of Congo East African Community Economic Partnership Agreement European Union Interim Economic Partnership Agreement Free Trade Agreement Harmonized System Least Developed Countries Middle East and North Africa Multi Fibre Agreement Malawi, Mozambique, Tanzania, Zambia Newly industrialized Countries Preferential Trade Agreement Regional Trade Agreement Regional Economic Community Rules of Origin Southern Africa Customs Union Southern African Development Community South Africa Revenue Service South Africa Sub-Saharan Africa Trade and Development Cooperation Agreement United Nations United States World Trade Organization 6

7 1. Introduction This study is a part of the wider consultative process of Southern African Development Community (SADC) Protocol on Trade which has commenced with 24 Mid-Term Review of the Protocol. In August 21, the SADC Ministerial Task Force on Regional Economic Integration meeting noted that the review of Rules of Origin (ROO) for textiles and clothing was still outstanding and that it was important for the matter be resolved expeditiously. The importance of the textiles and clothing industry covering items Harmonized System (HS) Chapters 5 to 63 to the economies of the region was also noted and it was agreed to address the problems arising out of application of existing rules, as they seem to struggle to promote intra-regional trade. The Task Force therefore agreed to establish an Experts Group to review the outstanding ROO. This report aims to facilitate and support the work of the Experts Group. In particular the study will: (i) Describe and provide analysis of the strengths and weaknesses of the current SADC ROO on textiles and apparel; (ii) Analyze available data on trade flows and the impact of the current rules on the level of intra-sadc trade in textiles and apparel; (iii) Compare and contrast SADC ROO with those under the African Growth and Opportunities Act (AGOA) and those utilized by the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC) with whom SADC is currently negotiating the Tripartite Free Trade Area (FTA); (iv) Provide specific recommendations for the reform of SADC ROO for textiles and clothing. ROO are an important feature of preferential trade agreements (PTAs). In theory, they are meant to prevent trade deflection through low tariff partners. In practice, ROO can inhibit regional trade by requiring that fabric and yarn used in the production of apparel to be sourced from within the PTA. SADC s ROO in the textile and apparel sector are currently highly restrictive. The double transformation rule requires for fabric, yarn and garments to be produced within SADC to quality for FTA treatment. By analyzing the patterns of trade in textiles and apparel in SADC and beyond this report shows that the current structure of SADC s ROO have stifled regional trade in textiles and apparel with associated negative effects on employment creation and competitiveness in the region. Garment producers have struggled to source sufficient amounts and quality of fabric from within the region and, as a result, the cost of producing garments in SADC is higher than in other regions. Enhancing intra-sadc trade in textiles and apparel is crucial from the perspective of strengthening regional integration and achieving a more equitable and prosperous SADC. The example of the Newly Industrialized Countries (NIC), mostly in Asia, shows that the textiles and apparel sector is one of the key sectors which act as a catalyst for a development of manufacturing capabilities and targeting higher value-added sectors. This report highlights that relaxing SADC s ROO can promote regional trade and enhance manufacturing employment. It also provides specific options for ROO reform. The report is structured as follows. Section 2 provides an overview of the current structure of SADC ROO. Section 3 describes some empirical evidence on the impact of ROO for trade and development. Section 4 analyzes ROO from the perspective of negotiations towards the Economic Partnership Agreement (EPA) and the Tripartite FTA. Section 5 is a detailed analysis of SADC trade patterns in the textiles and garments industry. Section 6 analyzes the impact of ROO on SADC s exports of textiles and apparel. Section 7 examines interaction between tariff and industrial policies in the context of reforming SADC s ROO. 7

8 Section 8 overviews policy options for a reform of SADC s ROO and, finally, section 9 concludes. 2. SADC Rules of Origin in the Textiles & Apparel Industry There are essentially two types of sector-specific ROO in the textiles and apparel industry: Single stage transformation allows for the fabric and other intermediate inputs to be imported from any source for garments manufactured to qualify for preferential treatment. Double stage transformation requires for intermediate inputs such as fabrics used in garments manufacture to be made in an eligible country. This rule is much more restrictive with regards to sourcing of inputs. Some RECs, such as for example COMESA, do not have specific ROO for textiles and apparel and apply general rules to all manufacturing sectors. SADC currently applies a restrictive double transformation rule which requires fabrics used in the production of apparel to be sourced from within SADC in order to qualify for preferential treatment. The arguments promoted in favor of the double transformation ROO include: To promote an integrated fabric-garments value chains by encouraging producers at each stage to source from within the region. To prevent trans-shipment of garments from outside of SADC via a low-tariff Member to a high-tariff Member. 3. The impact of Rules of Origin: Some empirical evidence There is only a limited amount of work on the impact of ROO on trade. However, the existing studies overwhelmingly show that restrictive ROO limit trade. Mattoo et al. (22) suggest that the benefits to Africa from AGOA would have been approximately five times greater without the restrictive ROO. Augier et al. (24) use a sectoral cross-section model to focus on the impact of rules of origin for textiles and apparel. Their results indicate that lack of cumulation of rules of origin in textiles may reduce trade between non-cumulating countries by up to 73% in 1995 and 81% in Estevadeordal and Suominen (24) employ a synthetic ROO restrictiveness index compiled on the basis of the underlying features of ROO across a range of PTAs. This index is then used in an augmented gravity model. Their results suggest that rules of origin do serve to restrict trade, and that measures that allow for a relaxation of their restrictiveness (such as diagonal cumulation) enhance trade. Portugal-Perez (27) explores the differences between the European Union (EU) and United States (US) trade preferences to African economies. Although similar in the extent of preferences for apparel these agreements differ in the ROO. The main finding is that relaxing ROO by allowing the use of fabric from any origin increased significantly exports of apparel by about 3% for the top seven beneficiaries of AGOA s third country fabric provision, and broadens the range of apparel exported by these countries. To summarize, this section has highlighted that there is an emerging consensus among quantitative studies that restrictive ROO inhibit trade. 8

9 4. SADC Regional Trade Agreement (RTA) Negotiation Agenda and Rules of Origin SADC currently negotiates RTAs with several regions in the world. The most prominent among these agreements are the Tripartite FTA between COMESA, EAC and SADC and the EPA with the EU. The EPAs as currently negotiated have more relaxed ROO as do COMESA and the EAC with whom SADC is negotiating the Tripartite FTA. The negotiations for these agreements are complicated by SADC s restrictive double transformation ROO as successful conclusion of negotiations requires an alignment ROO throughout and between regions. An Interim EPA (IEPA) with the EU was signed on June 4 th, 29 by some members of the SADC Negotiations Group including Southern Africa Customs Union (SACU) Members Botswana, Lesotho and Swaziland (BLS) and Mozambique. The agreement created a tarifffree quote-free zone among the signatories applicable to substantially all trade. Different liberalization schedules for imports of goods from the EU have been agreed on with some transitional periods. Crucially, a relaxed single transformation ROO in the textile and clothing sector was also agreed. The rule allows SADC apparel exporters to source fabrics and other intermediate inputs from any country in the world and qualify for preferential tarifffree exports to the EU. The IEPA was not signed by all Members of SACU and this has created some legal and technical complications for SACU. Trade relations of South Africa and Namibia SACU Members that have not signed the IEPA are still governed by the Trade, Development and Cooperation Agreement (TDCA). Currently, there are substantial differences in the trade liberalization schedule and rules of origin between the TDCA and the IEPA which creates a misalignment of SACU s Common External Tariff (CET) and provide opportunities for trade deflection. Overall, the ROO in the South Africa s TDCA with the EU are different from those under IEPA. In the textiles and garments sector, the TDCA ROO require that garments have to be made from fabric made in South Africa or in the EU - a highly restrictive two-stage transformation rule to qualify for preferential treatment. The differences in the ROO between IEPA and TDCA would allow for textiles and garments from EU to enter South African and Namibian market through SACU partner and avoid paying full SACU duties. There are currently extensive consultations between the EU, the SADC EPA Negotiations Group and South Africa to negotiate a solution to this misalignment problem. COMESA and EAC are currently in a process of establishing respective customs unions hence ROO will no longer be required. Under the FTA, COMESA does not have product specific rules and applies general rules to all its manufacturing sectors. The key principles under which goods can be accepted in the importing country as having been produced /manufactured in another COMESA country are: 1. Goods should be produced totally in the exporting member state such that there are no foreign materials added to the manufacturing process. Such goods are live animals, agricultural produce e.g. maize, cotton, etc., this is called, Wholly produced rule ; or, 2. When goods are being made and there are some foreign materials added to the manufacturing process, those foreign materials should not be over than 6% of the Cost, Insurance and Freight (C.I.F) value; this is called Material content rule ; or, 3. When good are being made and the raw materials are foreign, then, in the course of the manufacturing process, there should at least be 35% value addition; this is called Value addition rule ; or, 9

10 4. Those goods when the companies make them and the raw material are foreign, during the manufacturing process, the Tariff heading of the final product should be different from the tariff heading of the foreign raw materials; this is called Change in Tariff Heading rule ; In order to qualify for preferential treatment, COMESA Member States need to satisfy one of these rules. Despite not having sector specific rules COMESA ROO are in essence similar to a single transformation rule. The manufacture of apparel from imported fabric necessitates a change of tariff heading and hence satisfies rule 4 above. AGOA is a US unilateral preference program that significantly liberalizes market access to the US for 37 designated Sub-Saharan African (SSA) countries. Qualifying African countries benefit from duty-free access to the US market under the act. In the case of AGOA, an exception was made for a number of the beneficiary countries to allow their garment makers to source fabric from third countries. AGOA trade preferences have increased exports of apparel for some SADC countries, especially for Lesotho and Madagascar and created thousands of jobs in the industry. One of the key factors for successful conclusion of the Tripartite FTA is reaching an agreement on the structure of ROO. The current restrictive ROO might act as a stumbling block in these negotiations as they differ from ROO applied in COMESA, EAC and IEPA. 5. Overview of SADC s Trade in Textile and Apparel 1 Since the creation of the SADC FTA, regional trade in textiles and clothing has expanded significantly. As illustrated in Table 1, in 2 this trade amounted to almost US$ 4 million. It had risen to well over US$ 6 million in 28 before decreasing to US$ 475 million in 29 due to the global economic recession. SADC s imports of textiles and apparel from the rest of the world have actually risen more sharply and doubled in the same period. In 2 SADC imported textiles and apparel worth US$ 1.9 billion from outside of the region and in 28 these imports rose to US $3.8 billion before falling to US$ 3.2 billion in 29. The share of total SADC imports of textiles and clothing that originates from within the region has dropped from 19% in 2 to only 14% in 29. Table 1: SADC Imports of Textiles and Clothing 2-9 in USD ' Total Imports Intra-SADC Trade Table 2 shows the distribution of SADC imports of textiles and clothing by region/country. It highlights that in the past decade China has captured over 4% of the SADC s textiles and 1 Detailed statistics on intra-sacu trade are not available hence for the most part were not analyzed in this section. 1

11 clothing market, up from 17% a decade earlier. The countries/regions that have decreased their share of SADC market in the last decade were Europe, North America and SADC itself. Table 2: The source of SADC imports of textiles and garments by region 2 29 Asia 44.% 58.2% China 17.% 4.4% India 1.3% 7.8% Taiwan 6.1% 2.6% Korea 5.4% 1.7% Vietnam 1.% 1.% SADC 19.1% 14.7% Europe 17.% 11.9% North America 4.8% 2.7% MENA 4.6% 5.8% Australia & Oceania.8%.7% South America.3%.4% Table 3 shows SADC Member States share in intra-sadc textiles and clothing exports. Mauritius the most competitive textiles and garments exporter has captured 19.4% of intra- SADC trade. The second largest regional exporter is South Africa with 18.4% share. Zimbabwe, a big exporter of cotton, has a roughly 13% share in intra-sadc trade. Malawi, Lesotho and Tanzania all have roughly a 6% share in intra-sadc trade in textiles and apparel. Table 3: SADC Member States share in intra-sadc total Textiles and Clothing exports (29) Zambia, 4.8% Madagascar, 1.8% Tanzania, 6.% Mozambique,.4% Lesotho, 6.5% Malawi, 6.7% Zimbabwe, 12.8% Mauritius, 19.4% South Africa, 18.4% Source: Own calculation based on UN Comtrade database. Data for Lesotho are a general estimate based on disaggregated data from the Lesotho s Bureau of Statistics. Moving on to an analysis of intra-sadc imports, the country that imports most textiles and clothing from the region is South Africa with a 31% share (Table 3). Madagascar is the second largest intra-sadc importer. It imports large quantities of fabric for its clothing 11

12 factories from Mauritius. Zimbabwe, Mauritius, Zambia and Malawi all have roughly 6% share in the total intra-sadc imports. Table 3: SADC Member States share in intra SADC total Textiles and Clothing imports (29) Angola, 3.6% Tanzania, 1.5% Malawi, 3.8% DRC, 4.2% Mozambique, 5.2% Zambia, 5.8% South Africa, 31.2% Mauritius, 6.4% Zimbabwe, 6.9% Madagascar, 11.2% The importance of the textiles and clothing sector varies significant in SADC (Table 4). For some Member States such as Mauritius, Madagascar or Lesotho it is the main manufacturing sector of the economy. At the other extreme, countries such as Seychelles or Namibia have very limited productive capacity in the sector. The country specific variations in the importance of textiles and apparel sector indicate that each country will be affected differently by a reform of SADC s ROO. Table 4 shows that the share of the textiles and clothing sector exports in total manufacturing exports. Mauritius, Lesotho and Madagascar are countries for which the textiles and garment industry is the most important. Over 7% of their manufacturing exports come from this industry. In fact, Mauritius is ranked 1 st and Lesotho 16 th in the world regarding textiles and garments exports per capita. 2 Table 4: The Textile and Garments industry in SADC Exports (in US$ million) Textile Exports per Capita Manufacturing Exports per Capita % share of T&C in Manuf. exp Population Mauritius 958 1,3 755,1 172,9 7.4 Lesotho 37 2, 25,2 217, Swaziland 134 1,2 114,5 395,2 29. Madagascar 69 19,1 36,1 4, Botswana 3 1,9 15,6 113, Kenya 27 38,5 7,1 33,6 2.9 South Africa ,7 5,89 766,2.8 Malawi 31 14,3 2,14 6, Zimbabwe 14 12,5 1,8 46,8 2.3 Tanzania 6 42,5,13 7, 1.9 Source: Own calculation based on UN Comtrade Data 2 Excluding Macau and Hong Kong which predominantly re-export textiles and clothing originally produced in China. 12

13 There are also significant differences among SADC Member States in the composition of their exports. The majority of intra-sadc exports are in finished garments but some countries like Malawi, Zambia and Zimbabwe export significant amounts of cotton and other fibers. Table 5 shows the composition of intra-sadc exports by country and for the region overall. It shows that two thirds intra-sadc trade in the sector is in apparel, 28% of this trade is in fibers such as cotton, silk and yarn and only 4.5% is trade in fabrics. There seems to be a clear distinction between countries that predominantly export apparel such as Madagascar, South Africa and Tanzania and those that are the providers of raw materials such as Zimbabwe and Zambia. Only in the case Malawi the share of exports in fibers is roughly equal to that of apparel. Table 5: Composition of intra-sadc exports (29) Fibers (e.g Cotton, Fabrics Apparel Yarn) US$ ' % share US$ ' % share US$ ' % share Madagascar % 1.% % Malawi % 7.% % Mauritius % % % Mozambique % 14.6% % SADC % % % South Africa % % % Tanzania % 11.% % Zambia % 11.4% % Zimbabwe % 194.3% % In order to assess the distributional effects of any reform of SADC s ROO it is necessary to provide a detailed analysis of SADC s trade patterns in the sector. This analysis is provided below for each SADC Member (except for Botswana, Namibia and Swaziland for which data are not available). 5.1 Angola Angola is a large, net importer of textiles and clothing and since the end of the civil war has experienced phenomenal growth in imports amounting to 22.5% a year. In 29, it imported US$ 34 million worth of textiles and apparel. The vast majority of these imports were from outside of SADC with only US$ 17 million (less than 5% of the total) coming from the SADC region (Table 6). South Africa is the main SADC exporter of textiles and apparel to Angola. 13

14 Table 6: Angola s imports of Textile and Clothing (2-9) in US Dollars ( ) Statistics show that Angola s exports of textiles and apparel are negligible and hence these were not analyzed here. 5.2 Democratic Republic of Congo (DRC) Since 2, the DRC has dramatically expanded its imports of textiles and clothing. In 2, these imports amounted to less than US$ 4 million and rose to over US$ 12 million in 29 (a more than threefold increase). As in the case of other SADC Member States, the increase in import demand was largely fulfilled by countries from outside the region as only 15% of DRC s imports was satisfied by SADC. South Africa is a well-established exporter to DRC with exports of roughly US$ 8-1 million a year. Since 26, Tanzania and Zambia also began exporting clothing and textiles to DRC and have reached export levels of roughly US$ 1 million per year. Table 7: DRC imports of Textile and Clothing (2-9) in US Dollars ( ) Total Imports Imports from SADC Imports from SA Total Imports Imports from SADC Imports from SA Imports from Tanzania Imports from Zambia DRC, like Angola, is not a significant exporter of textiles and apparel with exports in 29 amounting to less than US $2 million. 14

15 5.3 Lesotho Data for Lesotho s intra-sacu trade is not available. However, a rough estimate based on disaggregated data from Lesotho s Bureau of Statistics shows that around 15% of Lesotho s production in the sector is exported to South Africa. Lesotho exports to SADC are estimated to amount to roughly US$ 35 million worth of clothing which places Lesotho as the 5 th largest exporter of apparel in SADC. As mentioned above the Kingdom is one of the biggest per capita exporters of textiles and apparel in the world. This is due to its large exports of clothing to the US. In fact, since 2, Lesotho a country of only 1.8 million people - has been Africa s largest exported of apparel to the US. As indicated in Table 8, after the introduction of AGOA, Lesotho s exports of textile have experienced staggering growth rates. In fact, in the six year period these exports grew four-fold from US$ 11 million to over US$ 45 million. The average annual exports growth rate in that period was a staggering 33.5%. Since the expiry of the Multi-Fiber Agreement (MFA), at the end of 24, which ended quotes and other quantitative restriction on export from Asia, Lesotho s exports to US have decreased. Nevertheless, Lesotho remains one of Africa s biggest exporters of apparel. Table 8: Lesotho s Exports of Textiles and Apparel to the United States (in US Dollars, ) Export in US Dollars (Millions) % change 26.6% 53.2% 49.2% 22.4% 16.1% -14.3% -.9% -.9% -11.4% -18.1% Source: Otexa 5.4 Madagascar Madagascar has the third biggest textile and garments industry in SADC (after Mauritius and South Africa). Much like Lesotho, Madagascar is one of the countries that has benefited most from the preferential access to the US under AGOA. The introduction of single transformation ROO has been one of the key elements behind Madagascar s success in exporting apparel. In sharp contrast to Lesotho, Madagascar s clothing exports are much more diversified. Despite this fact, only 2% of Madagascar s exports of textiles and apparel are destined to the SADC market. Table 9 shows that, in 29, Madagascar exported over US$ 46 million worth of textiles and apparel. There was a sharp decline in exports in comparison to 28 when Madagascar exported over US$ 8 million in the sector. A fall of nearly 5% can clearly be attributed to the political turmoil in the country. As a result, in 29, the US government suspended AGOA preferences to Madagascar which has further aggravated the fall in exports. 15

16 Table 9: Madagascar exports of Textile and Clothing (2-9) Total Exports Exports to SADC Madagascar is also a large importer of clothing and textiles. A significant part of Madagascar s imports are inputs for the garment industry (Table 1). In 29, Madagascar has imported US$ 32 million in the sector with US$ 53 million coming from SADC (s 16.5% of total). Table 1: Madagascar imports of Textile and Clothing (2-9) in US Dollars ( ) Total Imports Imports from SADC Malawi Malawi has a small textiles and garment sector. As indicated in Table 4 about 4% of Malawi s exports to SADC are cotton and the rest are finished garments. Since the introduction of Malawi, Mozambique, Tanzania, Zambia (MMTZ) SACU Agreement, Malawi experienced a significant rise in exports of garments which were, in particular, destined for the South African market. In 2, these exports amounted to only US$ 12 million and in 28 they have nearly tripled to US$ 3 million (Table 11). Since 29, Malawi s exports to SADC have started to decline partly due to the global economic recession but mostly due to the expiry of the MMTZ SACU Agreement. In 21, when the agreement expired Malawi s exports to South Africa have nearly disappeared. In the first 9 months of 21, these exports were worth only US$ 3 million. 16

17 It is important to note that Malawi is the only SADC country for which exports of textiles and garments to SADC constitute a significant share of total exports in the sector. As shown in Table 11 in 27 the share of Malawi s export to SADC as per cent of total export was 64%. Table 11: Malawi s export of Textile and Clothing (2-1) in US Dollars ( ) 8 7 in US Dollars ' Total Exports Exports to SADC Exports to SACU Source: Own calculations based on UN Comtrade and SARS Data. Data for the last quarter of 21 are a forecast based on first 9 months of South African imports As in the case of several other SADC members, Malawi has significantly increased its imports of textile and clothing in the past decade (Table 12). This increase was not the result of higher imports from SADC but rather increased imports from the rest of the world. South Africa is SADC s biggest exporter of textile and clothing to Malawi. Table 12: Malawi s export of Textile and Clothing (2-9) in US Dollars ( ) Total Imports Imports from SADC Imports from SACU 5.6 Mauritius Mauritius is one of the world s most competitive producers of textiles and garments and as indicated earlier it is also a country with the largest per capita exports in this sector in the world. Since 2, Mauritius has exported roughly US$ 1 billion a year worth of textiles and apparel with a decline to around US$ 8 million towards the end of the decade (Table 13). In 29, only 14% (US$ 113 million) of exports of Mauritius were destined for the SADC s market with more than half of these exports going to South Africa. 17

18 Table 13: Textiles and Apparel Exports of Mauritius (2-9) in US Dollars ( ) Total Exports Exports to SADC Exports to SA Mauritius also imports a significant amount of goods in the clothing and textiles category (Table 14). A significant share of these exports are inputs for production of garments. These are usually sourced from Asian economies rather than from SADC. Table 14: Textiles and Clothing Imports of Mauritius (2-9) in US Dollars ( ) Total Imports Imports from SADC Imports from SA Imports from Zambia Mozambique In comparison to the size of the country, Mozambique is a fairly small exporter of textiles and apparel. Textiles exports have increased to nearly US$ 5 million in 27 albeit from a fairly low base (Table 15). Mozambique s textiles and clothing exporters have been significantly affected by the world s economic recession. Exports in the sector fell to US$ 3 million in 29. Despite the proximity of the large South African market, as well as Mozambique s participation in the MMTZ SACU Agreement, exports to SACU and South Africa, in particular, are low. Only in 27 these exports reached a little over US$ 1 million. 18

19 Table 15: Mozambican Exports of Textiles and Clothing (2-9) in US Dollars ( ) Total Exports Export to SA Table 16 shows that since the end of Mozambique s civil war imports in the sector have increase five-fold from US$ 2 million in 2 to nearly US$ 1 million in 29. Less than 2% of these imports come from SADC with South Africa being the biggest exporter. Table 16: Mozambican Imports of Textiles and Clothing (2-9) in US Dollars ( ) Total Imports Imports from SA Imports from SADC 5.8 Seychelles Seychelles - the smallest economy in SADC does not have a textile and clothing industry therefore all of the country s demand is satisfied by imports. Its imports fluctuate between US$ 8-14 million a year with only a fraction of these imports coming from SADC economies (Table 17). South Africa with about 2% share of Seychelles total imports does figure prominently on the list of top importers for the country. 19

20 Table 17: Seychelles exports of Textiles and Clothing (2-9) in US Dollars ( ) Total Imports Imports from SADC Imports from SA 5.9 South Africa South Africa is, by a large margin, the biggest and most diversified economy in SADC. It is also the second largest exporter of textiles and clothing in SADC with exports amounting to between US$ 6-8 million a year (Table 18). South Africa exports 2% of its total exports to SADC. Also within SADC it is the second largest exporter with US$ 17 million of exports in 29. South Africa exports textiles and clothing to almost every SADC country with prominent export destinations being Angola, Mauritius, Mozambique, Zimbabwe and Zambia. Table 18: South Africa s exports of Textiles and Clothing (2-9) in US Dollars ( ) Total Exports Exports to SADC Exports to Angola Exports to Mauritius South Africa is a large importer of textiles and clothing even by world s standards. In the past four years in has imported goods worth a little over US$ 2 billion a year (Table 19). Interestingly, despite the opportunities presented by this large market SADC exporters have captured only a small share of South African market. 3 According to the data, South Africa is the second least integrated country in SADC in terms of imports of textiles and garments. The share of South Africa s imports coming from SADC countries (excluding intra-sacu trade) is only 7.5%. It is also important to note that in the past decade South African imports increased by a factor of two - from less than US$ 1 billion to US$ 2 billion. In the same period imports from SADC have also increased two-fold but given that these imports came from a 3 This analysis excludes intra-sacu trade for which trade data are not available. 2

21 much lower base the share of SADC s imports in South Africa s total imports has actually decreased. Table 19: South Africa s imports of Textiles and Clothing (2-9) in US Dollars ( ) Total Imports Imports from SADC Tanzania Table 2 shows that in the past decade Tanzania has developed a comparatively large textiles and clothing sector with total exports hovering at around US$ 15 million. Tanzania s exports to SADC have steadily increased since 25 and, in 29, reached US$ 35 million (nearly 25% of total exports). In 29, Tanzania s top four export destinations within SADC were the DRC, Mozambique, Zimbabwe and Zambia. Interestingly, despite Tanzania s participation in the MMTZ SACU Agreement, its exports to SACU are negligible. This shows that preferences provided by the agreement were not fully utilized by Tanzania. Tanzania s exports to South Africa were also not affected by the expiry of the agreement and in 21 remained at a little above US$ 2 million. Table 2: Tanzania s exports of Textiles and Clothing (2-9) in US Dollars ( ) Total Exports Exports to SADC Export to DRC Export to SA Total Exports As in the case of other SADC countries, Tanzania s imports of clothing and textiles have increased significantly in the past decade (Table 21). In 2, these imports amounted to US$ 8 million whereas in 29 they were nearly twice as large and stood at US$ 156 million. The analysis above has indicated that Tanzania has one of the largest shares of total exports going to SADC countries. This is in stark contrast to its imports of which just a tiny fraction comes from the SADC Member States. In fact, in 29 only 4% of imports in the sector came from SADC, of which 9% were from South Africa. 21

22 Table 21: Tanzania s imports of Textiles and Clothing (2-9) in US Dollars ( ) Total Imports 8 Imports from SADC 6 Imports from SA Zambia The SADC market is an important export destination for Zambian exports of textiles and clothing. In 29, two thirds of Zambian exports in the sector were destined to SADC (Table 22). The vast majority of these exports was cotton with South Africa being a major export destination. Much like other countries in the MMTZ configuration also Zambia has failed to tap on the opportunities provided by the MMTZ SACU Agreement and has only exported negligible amounts of garments to South Africa. Table 22: Zambia s exports of Textiles and Clothing (2 and 29) in US Dollars ( ) 2 29 value %share value %share World Exports % % Export to SADC % % Exports to SA % % According to the statistics Zambia imports half of its total imports in textiles and apparel from other SADC countries (Table 23). South Africa is the key SADC exporter of textiles and garments to Zambia. Table 23: Zambia s imports of Textiles and Clothing (2-9) in US Dollars ( ) Total Imports Imports from SADC Imports from SA

23 5.12 Zimbabwe Given Zimbabwe s economic and political turmoil, both exports and imports of textiles and clothing have fallen in the past decade. Total exports of clothing and textiles of which the majority is cotton have fallen from US$ 25 million in 2 to a little over US$ 13 million in 29. SADC Member States and South Africa, in particular, are the destination of the vast majority of Zimbabwe s exports. In 29, Zimbabwe exported US$ 75 million of textile and apparel of which US$ 6 million to South Africa. The vast majority, or 84%, of these exports were in cotton and other fibers. Table 24: Zimbabwe s exports of Textiles and Clothing (2-9) in US Dollars ( ) Total Exports Exports to SADC Exports to SA 6. Rules of Origin and Trade in Textiles and Apparel in SADC There is considerable evidence, internationally and in the region, that restrictions on the use of imported raw materials, in the form of restrictive rules of origin or more direct local content requirements, are costly to comply with and reduce the competitiveness of the raw material users and generally do little to assist the development of the raw material producing industries (refer to section 3). By imposing a requirement that in order to qualify for preferential treatment exporters have to source their inputs for production of garment within SADC the ROO significantly diminished the value of these preferences. This is essentially for two reasons. Firstly, SADC producers of fabric and other intermediate inputs seem not to have the capacity to fulfill the needs of garment industry. Although a considerable amount of fabric is produced in SADC and is used in the manufacturing of garments, the quantities and qualities available are not always sufficient to meet the garment-makers demands. Secondly, the requirement to import fabric from within the region raises the price garments produced in SADC as apparel producers are often unable to source from the most competitive or cheapest source. These two problems increased the cost of production of garments to the extent that in some instances it becomes non-viable commercially to export to SADC. In effect restrictive ROO became the key stumbling block on production of garments in SADC. The most competitive producers of textiles and apparel, in most part based in Asia, have significantly increased their share in SADC imports at the expense of SADC Member States. The share of Asian imports as a per cent of SADC s total textiles and apparel imports has risen from 44% to 58% in the past decade. 23

24 The contrast of intra-sadc trade flows with those destined for the United States shows that SADC countries have insufficient textile production facilities to supply international markets in large quantities or even to be internationally competitive without some flexibility in ROO, despite trade preferences. The clear link between single transformation ROO and export success in the apparel industry is easy to identify as, in several cases, the provision of preferential market access coupled with relaxed ROO has resulted in phenomenal exports increases. The introduction of AGOA by the US Government in 2 has supported the growth of exports of apparel in Lesotho. Lesotho s exports to the US rose from over US$ 1 million in 2 to US$ 45 million in 24. Without a textile industry of its own, Lesotho s garment industry was able to source fabric from the most competitive locations in the world, and make it up into garments for large US retailers (such as Wal-Mart and Kmart) and branded-goods merchandisers (such as GAP). A lack of significant fabric manufacturing capacity means that fabric is imported into Lesotho mainly from Asian countries (and to a minor extent from its SACU neighbors) to be made up into garments for export. A similar rise in exports to the US as a result of AGOA has occurred in Madagascar. In the case of Madagascar, we can trace the termination of AGOA preferences in 21 and the fall in export to the US. 4 In 27, Madagascar exported textiles and apparel worth US$ 287 million to the US. The termination of AGOA decreased these exports dramatically. In the first 11 months of 21 Madagascar exported only US$ 53 million worth of apparel to the US. It seems that the full impact of the termination of AGOA was only felt in the final months of 21 when exports have virtually disappeared. In fact, from September to November 21, Madagascar only exported apparel worth US4.5 million to the US. Much like AGOA, the MMTZ SACU Agreement provided for relaxed single transformation ROO for Malawi, Mozambique, Tanzania, and Zambia in the SACU market. Also this Agreement had a positive but smaller effect on the SADC garments industry. Since the signing of the agreement, Malawi s export to SACU have increased from a little over US$ 1 million to US$ 35 million in 27. The majority of these imports were in finished garments. The termination of this agreement at the beginning of 21 had a dramatic effect on Malawi s exports to SACU. Already in 29 these exports had decreased to US$ 25 million. From January to September 21, Malawi s exports to SACU have almost fully disappeared and amounted to only around US$ 2.5 million. It is important to note that out of the four countries benefiting from the MMTZ SACU Agreement only Malawi has managed to penetrate SACU s market and has to some extent taken advantage of trade preferences. Zambia, for example, exports mostly cotton to SACU. This indicates that although single transformation ROO seem to be the key in enhancing exports of garments other important factors like productive capacity, skills availability, preference margins, macroeconomic stability etc. are also important in utilizing trade preferences. Although the development of a regional value chain is one of the arguments put forward to support double transformation rules, there is preciously little evidence that since the establishment of the FTA these production networks have developed. In 26, Lesotho has opened its first textile mill - Formosa which produces denim to garments manufacturers domestically as well as to countries as far as Malawi. The key factor in the construction of the mill were concerns over the expiry of AGOA s single transformation ROO provisions rather than the creation of SADC value chains in the textile and garment industry. The discussion of the impact of ROO should be viewed in light of the changing pattern of globalized trade in textiles and apparel. Two factors in particular contribute to these 4 The termination of AGOA for Madagascar was related to a successful coup which toppled a democratically elected president. 24