Textiles, post-quotas - A tangled skein for developing countries

THE Agreement on Textiles and Clothing (ATC) was designed essentially to correct a long-standing anomaly in the multilateral trading system. Since the mid-1960s, the international trade in textiles and clothing was virtually excluded from the GATT purview. It was governed by a system of quotas, which deviated from some of the basic principles of the GATT and, therefore, constituted derogation to the multilateral trading system. This quota system was institutionalised through the multi-fibre arrangement (MFA). The MFA continued until the WTO Agreements came into effect on January 1, 1995.

It is obvious that the departure from the basic principles of multilateral trading system constituted a major distortion in international trade, more so as the restrictions applied mainly on exports from developing economies. One of the principal aims of the Uruguay Round was the removal of such trade distortions. Consistent with these aims, it was agreed that negotiations should be undertaken to bring about the reintegration of the textiles and clothing sector into the mainstream of multilateral rules on international trade. It is in this connection that the Uruguay Round Negotiations brought about an agreement to deal with this subject and its integration with international trade.

The ATC, which seeks to replace the MFA, is one of the few sector-specific agreements of the World Trade Organisation. It is limited in its scope and duration. It sets out provisions that are to be applied during a 10-year transitional period, starting from 1995. It seeks to secure the integration of trade in textiles and clothing into the normal rules of the GATT, through gradual phase-out of quota restrictions that have long been applied through the MFA regime.

The integration process is to be carried out in four stages. At each stage, products amounting to a certain minimum percentage of the volume of the country's imports in 1990 are to be included in the integration process and are given below:

  • Sixteen per cent of the volume of a country's imports of the products on the list, on the date of entry into force of the Agreement (that is, January 1, 1995);
  • A further 17 per cent at the end of the third year (January 1, 1998);
  • A further 18 per cent at the end of seven years (January 1, 2002); and
  • The balance, up to 49 per cent, at the end of the tenth year (January 1, 2005).

Istanbul declaration
This final phase-out, scheduled for the beginning of the next year, is turning out into a contentious issue among many developing countries. The ball for this was set rolling in June this year, when, in the Istanbul Declaration, partners in the Global Alliance for Fair Trade in Textiles and Clothing urged the WTO to reconsider the phase-out of the MFA regime and extend the present system by a few more years. In this connection, this 90-member Global Alliance for Fair Trade in Textiles and Clothing, representing 47 countries, made the following demands on the WTO:

An emergency meeting of the WTO to analyse and identify solutions to the pending crisis associated with the expiration of textile and clothing quotas on January 1, 2005. These could include an extension of the current system, the development of a new system or the use of other WTO mechanisms.

Implement automatic and seamless transitional safeguard mechanisms to prevent massive disruptive surges of trade from a few countries. The damage associated with the removal of a limited number of quotas in 2002 under the third stage of the phase-out must not be repeated. For example, during that removal, almost all the benefits went to a single supplier, which significantly cut prices.

Expedited and effective remedies to all types of unfair trading practices employed by certain major supplying countries, including currency manipulation, state-sponsored subsidies and state-provided non-performing loans, among others.

What has set the cat amongst the pigeons is that the WTO itself, in its report released in August 2004 on The Global Textile and Clothing Industry post the Agreement on Textiles and Clothing, concluded "that China and India will come to dominate world trade in textiles and clothing with post-ATC market shares for China alone estimated at 50 per cent or more".

Similarly, a recent report to the US Congress points out that the end of the MFA, in January 2005, potentially risks 713,000 US jobs. The Report quotes the American Textile Manufacturers Institute study pointing out the fact that Chinese apparel imports took 53 per cent of the American market in June 2003, and this share is projected to rise to 75 per cent in 2004.

Moreover, Mexico and the nations of Central America and the Caribbean are projected by the Report to lose one million textile and apparel jobs following the removal of MFA quotas, causing great economic distress and possible social and political unrest. The Report goes on to predict that the other major textile-producing nations, such as Bangladesh and Sri Lanka would also be affected.

Meeting of the WTO Council for Trade in Goods
It is in this background that on October 1, the WTO Council for Trade in Goods, started its third and final review of the implementation of the Agreement on Textiles and Clothing (ATC), under which all remaining quota arrangements in the sector would be removed on January 1, 2005. In the meeting, under an agenda item, on "post-ATC adjustment-related issues", Mauritius is reported to have presented a proposal on behalf of co-sponsors Bangladesh, Dominican Republic, Fiji, Madagascar, Sri Lanka and Uganda for the WTO Secretariat to carry out a study aiming at identifying the adjustment-related issues and costs that may arise with the phase-out of the ATC.

These countries emphasised that the textiles and clothing industry was critical for them as a source of employment, as the share of this sector was well in excess of 50 per cent of their total exports.

They expressed concern that the ATC expiry would result in industry losses and revenue shortfalls, with few winners and many losers, and have an impact on global sectoral trade flows. Consequently, Mauritius and other co-sponsors stressed the need for "solutions to the adjustment costs" and "other challenges that would follow ATC expiry".

The world's large textile producing countries - China and India are looking forward to completing integration of the textiles trade to the international trade as they consider it to be a reflection of their comparative advantage in this sector.

This is making many other developing countries that have enjoyed the relative comfort of the old system, decidedly nervous, so much so, that they are now seeking to have the Agreement extended for another three years. Now, Mexico, along with Mauritius and Turkey, is leading this call and has so far have reportedly mustered the support of a group of 22 countries. All these are clear signs of an impending developing country versus developing trade war.

But what is also interesting is the strategy of the US on this matter. Washington was concerned over the likely "adverse fallout on small producers". "With the elimination of textile quotas at the end of 2004, it is widely expected that production patterns will shift away from small exporting countries to the large players such as China and India," the US is reported to have stated. Surely, the US wants to fish in troubled waters.

It is to be noted that the WTO in all probability will proceed as scheduled with the January 1, 2005 deadline. Strange as it may sound, the Indian official has been more proactive than Corporate India.

Clearly pointing out that adjustment "costs and challenges were inseparable from trade reform" at the October 1 meeting, New Delhi has taken the right step on this matter. However, the stakes are high and it is a dynamic and evolving situation. Today's friends could be tomorrow's enemies.

What is important is that India's textile industry needs to strategise on this issue and provide necessary inputs to the Government.

It must articulate whether it favours an extension to the ATC regime or an expiry to the ATC as scheduled. And to do so, the textile industry must evolve a clear consensus and act in tandem with the Government.

Published at
http://www.thehindubusinessline.com/2004/11/19/stories/2004111900320900.htm