University of New South Wales University of New South Wales Faculty of Law Research Series 2009
Year Paper
The Statistics Tell a Story; An Asian Look at the Evolving Global Textiles & Clothing Trade after Quota Expiry
Umair Ghori∗
∗University of New South Wales This working paper is hosted by The Berkeley Electronic Press (bepress) and may not be commer- cially reproduced without the permission of the copyright holder. http://law.bepress.com/unswwps-flrps09/art16 Copyright c 2009 by the author. The Statistics Tell a Story; An Asian Look at the Evolving Global Textiles & Clothing Trade after Quota Expiry
Umair Ghori
Abstract
Textiles and clothing is a sector of critical importance to developing and least developed countries in terms of employment and export earnings. Majority of these countries are forced to be over-reliant on this sector for lack of better al- ternatives. With the end of quotas in 2005 and the resulting increase in compe- tition, many countries are facing serious adjustment challenges including pref- erence erosion, loss of market share in the prime export markets of the US and EU, heightened competition from China and other countries possessing compar- ative advantage in this sector, reduction in average prices of exports (amongst others). There were numerous case studies that attempted to predict the effects of quota elimination. However, in light of the available statistics and figures, many of the pre-elimination predictions have proven to be inaccurate. Many countries that were predicted to be “winners” have not as successful as anticipated earlier and many countries that were predicted as “victims” have emerged as survivors and posted respectable growth rates. This article highlights the evolving global trade in textiles and assesses the pre-elimination estimates in light of the available statistics.
“The Statistics Tell a Story; An Asian Look at the Evolving Global Textiles & Clothing Trade after Quota Expiry.”
Umair Hafeez Ghori ∗∗∗
CONTENTS INTRODUCTION [2]
I. BRIEF HISTORY LEADING UP TO QUOTA-EXPIRY [3] II. TRANSITION TOWARDS QUOTA ELIMINATION [5] III. OVERVIEW & SCOPE OF THE ARTICLE [10] IV. CASE STUDIES [13] i. China [13] (a) US-China [18] (b) EU-China [24]
ii. South Asia/SAARC [29] (a) India and Pakistan [34] (b) South Asian LDCs [47]
iii. Far-East/ASEAN [61] (a) Cambodia [68] (b) Indonesia [74] (c) Malaysia [81] (d) Philippines [87] (e) Thailand [93] (f) Vietnam [103]
V. CONCLUSION [114]
ABSTRACT Textiles and clothing is a sector of critical importance to developing and least developed countries in terms of employment and export earnings. Majority of these countries are forced to be over-reliant on this sector for lack of better alternatives. With the end of quotas in 2005 and the resulting increase in competition, many countries are facing serious adjustment challenges including preference erosion, loss of market share in the prime export markets of the US and EU, heightened competition from China and other countries possessing comparative advantage in this sector, reduction in average prices of exports (amongst others). There were numerous case studies that attempted to predict the effects of quota elimination. However, in light of the available statistics and figures, many of the pre-elimination predictions have proven to be inaccurate. Many countries that were predicted to be “winners” have not as successful as anticipated earlier and many countries that were predicted as
∗ Sessional Lecturer, University of New South Wales (e-mail: [email protected]). The author thanks Prof. Ross Buckley for his valuable guidance and support. All responsibility for views, omissions and errors rests solely with the author.
Hosted by The Berkeley Electronic Press “victims” have emerged as survivors and posted respectable growth rates. This article highlights the evolving global trade in textiles and assesses the pre-elimination estimates in light of the available statistics.
INTRODUCTION Textiles and agriculture represent key concerns of the developing countries and least developed countries (LDCs) in the WTO. Most such countries have traditional agrarian backgrounds and, unlike industrialized nations, rely on agricultural output for sustaining economic activity. Within these countries, the textiles sector engages large amounts of labor and, with low initial capital and relatively simple technology required, traditionally represents the first step on the road to industrialization.1
The global trade in textiles achieved a milestone in January 2005, with the abolition of quotas. This was a major shift in an area vital to the economies of the developing countries and LDCs as trade in textiles and clothing may offer the only feasible route to industrialization for many of these countries. These countries are vulnerable to changes in global financial and trading patterns and rely on textiles industries for providing employment to their populace.
Most developing countries, particularly in Asia, are forced to be overly reliant on textiles industries due to economic constraints and for lack of better alternatives. The textiles and apparel sector has fewer barriers to entry and does not require huge capital investment or highly skilled workers. Yet, this sector has also been the subject of extensive protectionist policies since the beginning of the industrial revolution. 2
1 See Kitty G. Dickerson, Textile Trade: The GATT Exception , 11 St. John’s J. Legal Comment. 393, 393 (1996); Kitty G. Dickerson , Textiles and Apparel in the Global Economy 318–319 (2d ed. 1995); Michael Murawski, Lacking Support: China Suffers a Textiles Trade Let Down by Politics and Poor Preparation in the EU, 30 Suffolk Transnat’l L. Rev. 141, 144 (2006) ; Ratnakar Adhikari & Yumiko Yamamoto, The Textile and Clothing Industry: Adjusting to the Post-Quota World in Industrial Development for the 21st Century: Sustainable Development Perspectives 183– 184 (United Nations Department of Economic and Social Affairs, 2007). 2 The earliest recorded attempt at regulating textiles trade was in the late seventeenth century when the British prohibited Indian cloth from being imported in order to foster the rising English textiles industry. The industrialisation age saw the UK emerging as the undisputed leader in textiles production and in line with the prevalent economic policy of mercantilism, trade regulation assured that exports were higher than imports to increase national wealth (See: Dickerson , Id at 319; See also Pietra Rivoli , Travels of a T-Shirt in the Global Economy 152–156 ( 1st ed. 2005 ); Textiles and clothing assumed a symbolic status of independence, self-reliance, employment for the masses and progress. A very famous example is of Mahatma Gandhi (the founding father of India and the leader of the independence movement from the British). He followed his famous non-violent policies of civil disobedience and adopted the swadeshi policy which involved
2 http://law.bepress.com/unswwps-flrps09/art16 I. BRIEF HISTORY LEADING UP TO QUOTA-EXPIRY While the history of protectionism in textiles trade stretches back for centuries into the age of mercantilism, it is interesting to note that similar trends permeated global multilateral trade in the post-World War II period.
Until 1 January 2005, trade in textiles and clothing was subjected to a sector-specific treatment in international trade law. The foundations for this “discrimination” were laid in the early 1950's with the Voluntary Export Restraints (VERs) imposed on Japan in the post-war years due to US concerns about the impact of cheaper Japanese exports on domestic manufacturers. 3 This was the genesis of the institutionalized protectionism in textiles and apparel trade which continued for the remainder of the twentieth century.
The self-centered protectionist concerns voiced by the US and subsequently by European industry interests were about the threat to domestic textile industries from low-cost, low- wage competition from producers in developing countries. The constant demands by industry associations for protection manifested itself first in the Short-Term Agreement Regarding International Trade in Textiles (STA) 4 and then the Long-Term Arrangement Regarding Cotton Textiles (LTA) 5. The LTA was an enhanced reinforcement of the STA and represented
the boycott of foreign-made goods, especially goods of British origin. Gandhi emphasized that khaddi (homespun cloth) should be adopted by all Indians as their dress instead of British-made textiles. 3 VER is an agreement whereby the exporting country agrees to limit / control exports so that the importing country does not impose restrictive trade measures like quotas, high tariffs etc. Martin Wolf writes that in the history of VERs, “Textiles appear to have been the leading sector” to cover “new exporters, new products and new fibres.” However, VERs have not just been limited to textiles and clothing but have also been employed as an export restraint measure on automobiles, steel and consumer electronics ( See Martin Wolf, Why Voluntary Export Restraints? An Historical Analysis, 12(3) the World Economy 286 (1989) . 4 The STA was effective from October 1961 to September 1962 and allowed one year restrictions on designated categories of cotton textiles. It is noteworthy that only cotton textiles were targeted in the STA (defined as a textile product in which 50% or more of the fibre content is cotton). Other textiles such as manmade fibres and wool did not fall within the ambit of the STA (Dickerson, supra note 1, at 406-407; See generally Vinod K. Aggarwal , Liberal Protectionism: The International Politics of Organized Textile Trade , (1st ed. 1985). 5 The LTA was concluded at the expiry of the STA and it came into force on 1 October 1962. The LTA went beyond the scope of the STA and its period of effectiveness was 5 years. It was renewed again in 1967 and in 1970. At each renewal, there was a progressive increase of restrictions encompassing a wide range of cotton products ( See Sanjoy Bagchi , International Trade Policy in Textiles – Fifty years of Protectionism 48 (1st ed. 2001); Dickerson, supra note 1, at 408-409). By manufacturing clothing out of synthetic and manmade fibers, many developing countries managed to circumvent quotas under LTA until the first MFA ( See Donald B. Keesing & Martin Wolf, Questions on International Trade in Textiles and Clothing 4(1) The World Economy 79, 94 (1981) .
3 Hosted by The Berkeley Electronic Press the fallacious approach that trade in textiles was different from trade in all other goods and had to be dealt with separately.6
These two regimes marked the beginning of a distinct regime for textiles and apparel trade that existed parallel to the regular GATT framework and this legitimized violations of the cardinal principles forming the very basis of GATT i.e. non-discrimination in trading (the MFN principle), the National Treatment principle and the general prohibition on applying quotas on imports. 7 However, despite these endeavours to protect their domestic industries, the US and European industries experienced a steady decline in the face of increasing textiles and apparel imports. 8
The initial aim of the quota regime was to protect domestic producers in developed countries from cheap textile and apparel imports from developing countries. 9 Taking inspiration from the independently negotiated agreements between various member and non-member countries, the GATT contracting parties agreed that the scope of GATT Article XIX on safeguards should be expanded for textiles and apparel. 10
Following the lapse of the LTA, the Multifiber Arrangement ("MFA") was concluded in 1974 which allowed importing countries to impose quotas on textile imports whenever any surge in imports of particular items threatened domestic industries. 11 By restricting imports of cotton textiles and apparel, US policy incidentally encouraged exporters to diversify into wool and the increasingly popular man-made fibres such as nylon and polyester. Imports of man-made fiber apparel from Asia rose by 2500 percent between 1964 and 1970. This led to the
6 Perhaps the best illustration of this view are the following remarks by former US President Richard Nixon in 1969 in his ‘Special Message to the Congress on United States Trade Policy’ on 18 November 1969 at http://www.presidency.ucsb.edu/ws/index.php?pid=2325&st=textile+import+problem&st1=special+measures (Dec. 21, 2007): By expanding world markets, our trade policies have speeded the pace of our own economic progress and aided the development of others…We must seek a continued expansion of world trade, even as we also seek the dismantling of those other barriers – political, social and ideological – that have stood in the way of freer exchange of people and ideas, as well as of goods and technology…[H]owever, the textile import problem of course, is a special circumstance that requires special measures. 7 See Dickerson , supra note 1, at 330; Bagchi, supra note 5 , at 48 8 For example, the US textiles and apparel imports grew by 11.5% annually during the STA and the LTA (1961 to 1972) ( See Dickerson , Id. at 331). 9 See Ira Kalish, Quotas End, Uncertainty Continues; Understanding the Impact of the Agreement on Textiles and Clothing (Deloitte Research Study, 2005) at 3, available at http://www.deloitte.com/dtt/cda/doc/content/DTT_DR_Quotas_Feb05%281%29.pdf (Dec. 22, 2008). 10 See Dickerson, supra note 1, at 404; See also Kevin Kolben, Trade, Monitoring, and the ILO: Working to Improve Conditions in Cambodia's Garment Factories , 7 Yale Hum. Rts. & Dev. L.J. 79, 88 . 11 Kolben, Id, at 89.
4 http://law.bepress.com/unswwps-flrps09/art16 intensive campaign by domestic US textile interests to extend the scope of the LTA to other fibers, which resulted in the MFA. 12
The MFA allowed the use of quotas in a selective manner. This clashed with fundamental obligations in GATT Articles I, XI & XIII. The MFA went through a series of extensions from 1974 through to 1994. The final series of extensions enabled importing countries to impose quotas as punitive measures against exporting countries that routed exports through a third country thereby taking advantage of that country’s unutilized quota. 13
II. TRANSITION TOWARDS QUOTA ELIMINATION Quotas benefited many countries by retarding the growth of producers with comparative advantage in this sector (such as Pakistan, India and China) by imposing limits on textiles and apparel imports by specific countries. 14 Quotas provided certainty of access to the US and EU markets for smaller exporters who otherwise would have been unable to compete with more established exporters. This will be further examined in case studies in this article. With the conclusion of the Uruguay Round of WTO negotiations, the GATT contracting parties concluded the Agreement on Textiles and Clothing (ATC) which provided for a gradual phasing out of the MFA over ten years and the integration of the textiles and clothing trade in the WTO/GATT framework. The integration process envisaged by the ATC specified how members should integrate the products listed in the Agreement into the traditional GATT rules. In the first stage (beginning January 1995), the WTO Members were required to integrate at least 16% of their 1990 imports of textiles and garments. In the second stage (beginning January 1998), a further 17% was to be integrated. In the third stage (beginning January 2002), a further 18% was to be integrated. The residual 49% was to be integrated automatically on the expiry of the ATC on 1 January 2005.
The ATC provided for a special transition safeguard mechanism that was intended to protect members against damaging surges in imports during the transition period from products,
12 Rivoli , supra note 2, at 129. 13 Bagchi , supra note 5, at 140; Kolben, supra note 10, at 89 footnote 61. 14 See Ratnakar Adhikari & Yumiko Yamamoto, Flying Colours , Broken Threads: One Year of Evidence from Asia after the Phase-out of Textiles and Clothing Quotas, (Tracking Report, UNDP Colombo) (Dec. 2005), at 7; See also Ratnakar Adhikari & Chatrini Weeratunge, Textiles & Clothing Sector in South Asia: Coping with Post-quota Challenges , (South Asia Yearbook, 2006), at 110; See Denis Audet, Smooth as Silk? A First Look at the Post MFA Textiles and Clothing Landscape , 10 J Int’l Economic Law 267, 268 (2007) ; See also Tony Heron, The Ending of the Multifibre Arrangement: A Development Boon for the South?, 18(1) The European J. of Dev. Research 1, 2 (2006) .
5 Hosted by The Berkeley Electronic Press subjected to quotas prior to integration within the traditional GATT framework. The criteria for invocation of the transitional safeguards was based on the discredited concept of market disruption from the MFA. However, the difference between the two lies in determination of serious damage to the domestic industry i.e. the MFA incorporated a standard based on “substantially low prices of increased imports” to establish market disruption. This was removed in the ATC, which prescribed a standard based on taking into account the totality of imports from all sources and attributing damage only to the source responsible for sharp and substantial increases in imports. 15
The phase-out of quotas was also not without controversy with importing countries accused of ingeniously "backloading" the phase-out leaving the most restrictive quotas on the most valuable products until the final elimination. 16 The initial impression of many developing countries that the ending of quotas and artificial restraints on their access to the worlds’ richest markets would greatly benefit them was soon replaced by the concern that China would dominate global textiles trade, taking advantage of its huge industrial base and abundant labor resources.
Quota elimination resulted in the unlikeliest of alliances between developed countries industry associations on the one hand and LDC producers on the other. One example is the initiative by Mauritius, Nepal and Bangladesh in 2004 to call for an emergency WTO meeting to consider the “unintended negative consequences for vulnerable economies” from the phase out of the quantitative restrictions on textiles and clothing on 1 January 2005. 17 As a result, Mr. Supachai Panitchpakdi, the then Director General of the WTO, convened consultations to discuss the need for calling such a meeting. However, no was consensus achieved regarding the need for such a meeting. 18 The Director General acknowledged that there were considerable adjustment challenges faced by many countries in the post-ATC era and stated that “overall ATC implementation would bring considerable welfare and
15 See Article 6:4 of the ATC. In determining serious damage, the same economic variables, as in the MFA, were considered. The procedures for taking action were also similar to the MFA i.e. consultations between the concerned countries and referral to the monitoring body 16 See Montfort Mlachila & Yongzheng Yang , The End of Textiles Quotas: A Case Study of the Impact on Bangladesh , 6 (IMF Working Paper WP04108, 2004). 17 See UNCTAD, Assuring Development Gains from the International Trading System and Trade Negotiations: Implications of ATC Termination on 31 December 2004, Paragraph 6 (TD/B/51/CRP.1) UNCTAD Trade and Development Board, 51 st Session, Geneva, Oct. 4-15, 2004 available online: http://www.unctad.org/en/docs/tdb51crp1_en.pdf (Dec. 6, 2008). 18 Id.
6 http://law.bepress.com/unswwps-flrps09/art16 efficiency gains for the global economy as well as benefits for the consumers.” 19 It was agreed that concerned parties could air their views and concerns at the final review of the ATC implementation in the WTO Council for Trade in Goods (CTG).20
The ending of quotas meant increased competition amongst producers of textiles and apparel. The obvious overall advantage in global terms is the availability of cheaper textiles products. 21 However, the elimination of quantitative restrictions left many developing nations is the erosion of their ability to compete in a ruthless free trade environment where established players like China and India hold the advantage in terms of production capacity, cheap labor costs, active state support and necessary infrastructure that allows them to offer full package services, quick processing of foreign orders and turnaround times. 22
Another example of calls for ‘fair trade’ in the quota free era is the Istanbul Declaration Regarding Fair Trade for Textiles and Clothing (the “Istanbul Declaration”) issued jointly by the US, Mexican and Turkish industry associations in March 2004. 23 The Istanbul Declaration called for an extension of the quota restrictions until 31 December 2007 and recommended that during the interim period, “WTO members should undertake a full review of global textile and clothing production, export and market circumstances so as to determine whether to finalize the phase out process on January 1, 2008 or to develop an appropriate alternative arrangement.” This declaration gained support from industry associations and trade groups from Europe, North America, and African countries. 24
19 See WTO DG Consults Members on Possible Emergency Meeting to Discuss Textiles and Clothing Adjustment Challenges , (WTO Press Release No. 384, August 4, 2004); See also Hong Kong Trade Development Council, Developments in the Textiles and Clothing Trade: Impact of Quota Elimination from 2005 , (January 26, 2005), available at http://www.tdctrade.com/econforum/tdc/tdc050103.htm (Dec. 28, 2008). 20 See UNCTAD, supra note 17. 21 E.g. Hong Kong Trade Development Council states that in the US context the removal of quotas as well as import tariffs, would save US $ 13 Billion in prices paid by the US consumers ( See Hong Kong Trade Development Council, supra note 19, Paragraph 4). 22 See generally Dr. John Hall, China Casts a Giant Shadow; the Developing World Confronts Trade Liberalization and the End of Quotas in the Garment Industry , 5 J. Of Int’l Bus. & Law 1, 8 (2006) ; See Ira Kalish, supra note 9, at 1-5 & 6. 23 See generally Global Alliance for Fair Textile Trade (GAFTT) at www.fairtextiletrade.org (Dec. 6, 2008). Text of the Istanbul Declaration is available online at: www.fairtextiletrade.org/istanbul/declaration.html ; See also UNCTAD, supra note 17, Paragraph 6. 24 See Hall, supra note 22, at 9; See also ‘Istanbul Declaration Wins Endorsement from EUROCOTON’, available online at: http://www.itkibusa.org/eurocoton.pdf (Dec. 6, 2008).
7 Hosted by The Berkeley Electronic Press The text of the Istanbul Declaration betrays the China-specific nature of the demands of the “representatives of textile and clothing producers from countries and regions throughout the globe.” Specifically, Paragraph 1 of the Istanbul Declaration states that:
Circumstances associated with the textile and clothing quota integration process…changed dramatically since the adoption of the Uruguay Round and the initiation of the quota phase out process in 1995…the January 2002 admission of the People’s Republic of China into the WTO represents a substantial and material condition not contemplated when our countries agreed to the Uruguay Round timetable for the quota phase out. The fact that China will now be treated as a WTO member for purposes of the phase out has irrevocably altered the reasonable transformation of global production and sourcing patterns that the elimination of quotas had originally intended.
The Istanbul Declaration further claimed that removal of quotas and the consequent advantages enjoyed by China would adversely affect “30 million jobs” worldwide and would also result in monopolisation of the global textiles trade by a few countries. Additionally, Paragraph 3 of the Istanbul Declaration claims that:
…trade in this sector has been compromised by the use of trade distorting practices in a few dominant countries. These practices include deliberate currency undervaluation, state subsidies and the proliferation of non-performing loans and rebate schemes, among others. For example, such trade distorting practices have allowed China to drop prices for textile and apparel products by as much as 75 percent and have given China an unassailable and unfair advantage in world markets for textiles and clothing. (emphasis added)
Whilst the wording of the Istanbul Declaration does little to hide its China specific focus, its sponsors conveniently ignore the fact that China’s accession to the WTO was a result of 15 years of painstaking negotiations where every facet of China’s entry into the WTO (including
8 http://law.bepress.com/unswwps-flrps09/art16 textiles) was covered. 25 Therefore, it can be argued that the sponsors of the Istanbul Declaration knew the implications of China’s accession to the WTO and the claim that there was a “substantial and material” change in circumstances “not contemplated” when the Uruguay Round time table for the quotas phase out was agreed is simply not accurate.
The sponsor associations of the Istanbul Declaration also ignored the fact that China was not a part of the WTO when the ATC regime was concluded, and therefore Chinese textiles and apparel exports were subject to sharp quantitative restrictions. 26 Arguably, the sponsors of the Istanbul Declaration were the direct beneficiaries of such restrictions and they feared that without artificial suppression of China’s textiles exports in an era of open competition, they would lose market share to competing Chinese exports.
The Istanbul Declaration was followed in June 2004 by a meeting in Brussels that resulted in the Brussels Communiqué of the Istanbul Declaration Partners in the Global Alliance for Fair Trade in Textiles and Clothing , which enjoyed support from textiles and clothing trade associations from 47 countries. 27 The Brussels Communiqué emphasised adopting “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.” 28
The transition and the eventual end of quotas revealed vast conflict of interests among LDCs and developing countries. These conflicts and the importance of this sector has meant that even after quota elimination, LDCs and developing countries are yet to adopt a unified stand on these issues.
25 China applied for admission to the GATT (WTO’s predecessor) in 1986. The GATT formed a Working Party comprising all interested GATT Contracting Parties to examine this application and negotiate terms for China’s accession. With the formation of the WTO in 1995 the trade negotiations were continued under the auspices of a successor WTO Working Party (similarly comprising of all interested WTO members ( See USTR, Background Information on China’s Accession to the World Trade Organization (Dec. 11, 2001), available online: http://www.ustr.gov/Document_Library/Fact_Sheets/2001/Background_Information_on_China's_Accession_to _the_World_Trade_Organization.html (Dec. 16, 2008); See generally Thomas Rumbaugh & Nicolas Blancher, China: International Trade and WTO Accession , (IMF Working Paper WP/04/36, 2004) available online: http://www.imf.org/external/pubs/ft/wp/2004/wp0436.pdf ( Dec. 21, 2007). 26 Id , Box.3, at 11. 27 See generally NCTO, Textile and Clothing Trade Associations from 47 Countries Call for Emergency WTO Meeting to Address Crisis Associated with Expiration of textile and Apparel Quotas, (Jun. 17, 2004), available online: http://www.ncto.org/newsroom/brussels02.pdf (Dec. 6, 2008); See also UNCTAD, supra note 17, Paragraph 7. 28 NCTO, id .
9 Hosted by The Berkeley Electronic Press III. OVERVIEW & SCOPE OF THE ARTICLE The aim of this article is to look at the performance of major textiles producing and exporting countries in Asia in the post-quota period in light of the available statistics and the issues raised in the academic literature.
Asia has been chosen as the focus of the case studies primarily due to Asia being involved in the several migrations that have taken place since the 1950s in the global textiles and apparel trade. 29 Briefly, the first migration of the textile industry took place in the 1950s and early 1960s with the shift of manufacturing to Japan from North America and Western European countries. 30 The second shift involved the shifting of production from Japan to Hong Kong, Taiwan and Korea during the 1970s and 1980s whilst the more recent third migration has been from Korea, Taiwan and Hong Kong to China and several other developing and least developed countries in Asia, Africa, Central and Latin America. 31
Numerous studies were conducted prior to the termination of the ATC to predict possible consequences and the impact of quota expiry on international trade in textiles. 32 Whilst the estimates and projections varied, the broad consensus was that:
a) China would be the major beneficiary of the termination of quotas; b) Production would shift to countries that were previously inhibited or constrained by quotas; c) The global trade in textiles and apparel would grow after the lifting of quotas and general reduction in prices of textiles and apparel products due to increased competition benefitting consumers;
29 See Gary Gereffi , The International Competitiveness of Asian Economies in the Apparel Commodity Chain , (ADB, ERD Working Paper Series No.5, 2002) 9. 30 Id. 31 Id. 32 See e.g. USITC, Textile and Apparel; Assessment of the Competitiveness of Certain Foreign Suppliers to the U.S. Market (Publication No. 3671, 2004); Stephen MacDonald et al, The Agreement on Textiles and Clothing: Impact on U.S. Cotton’ by Cotton and Wool Situation and Outlook (Economic Research Service, CWS- 2001,USDA, 2001); Hildegunn Kyvik Nordås, The Global Textile and Clothing Industry Post the Agreement on Textiles and Clothing (WTO Discussion Paper No. 5, 2004); ATMI, The China Threat to World Textile and Apparel Trade (2003) Available online: http://www.ncto.org/textilecrisis/china.pdf (Feb. 24, 2009) ; Richard Appelbaum, TNC and the Removal of Textiles and Clothing Quotas’ (UNCTAD, 2005); Matthais Knappe, Textiles and Clothing Uncertainties Before and After the Quota Phase-Out , International Trade Centre (UNCTAD/WTO, 2004).
10 http://law.bepress.com/unswwps-flrps09/art16 d) China and, to a lesser extent, India would increase their market shares in textiles and apparel exports, however, there was no consensus on the extent of the increase; e) Textiles and apparel imports by the US from China would increase; f) US textile and apparel manufacturers would be adversely affected leading to reduced operations, industrial retrenchment and shut down of manufacturing facilities due to heightened competition from China, India and other suppliers; g) Preferential trade agreements would cushion the impact of quota expiry for apparel manufacturers in the Caribbean, Central and Latin America, the Middle East and Africa; h) The US, EU and other WTO members may resort to trade remedy measures in response to the increased imports from China, India and other Asian suppliers; i) Countries proximate to the US and EU and in receipt of preferential treatment would fare better than their competitors; j) Countries with limited textiles production capacities and heavily reliant on quotas for export of apparel products would face massive erosion in their exports to the US and the EU.
This article examines the statistics and current academic literature on textiles and apparel producers in Asia to analyse the following issues in the context of global trade in textiles and apparel after quota expiry:
What is the future of Outward Production Processing (OPP) in light of quota elimination (especially in light of the trend of shifting entire apparel production lines from one country to another to benefit from preferential treatment extended by developed countries to certain developing and least developed countries)?
What has the export performance been of countries that enjoy proximity and preferential trade with the US and the EU?
What was the impact of preferential access for some developing countries and least developed countries to the US and the EU market in light of the restrictive Rules of Origin (ROO)?
11 Hosted by The Berkeley Electronic Press Did elimination of quotas render preferential treatment redundant?
Was there an impact of reduction in tariffs and did it have any positive effects on developing countries?
Detailed examination of each and every Asian country that produces and exports such products is difficult, therefore, this article concentrates on major South and East Asian based producers.
In addition to these producers, particular attention will be given to China since the phenomenal increase in its textiles exports has given rise to issues that merit special consideration.
Most Asian countries rely on textiles and apparel production for providing employment and export earnings. The figures show that Asian countries have consistently ranked amongst the top exporters of textiles and apparel in the world especially to the major markets of the US and the EU. Asian countries also provide an interesting contrast in that the potential winners and losers in the post-elimination period can be found here. However, despite the predictions and estimates before 1 January 2005, the results so far are mixed and have surprised many analysts. Such is the unpredictable nature of trade in this sector that even countries that were widely expected to benefit from quota-free trade in textiles and clothing have not been fully able to utilize the opportunities whilst some countries predicted to be on the losing end of this change are facing serious adjustment challenges.
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IV. CASE STUDIES (i) China:
“Hide brightness and nourish obscurity.” (Ancient Chinese saying)
“With duty-free status, Chinese penetration of the US market would increase dramatically as US apparel imports would shift away from Western Hemispheric producers that use US-made components to producers in Bangladesh and Cambodia that would be using Chinese-made components.” (Cass Johnson, President of the US NCTO, 2005 33 )
China has the largest share of world trade in textiles and apparel. According to the WTO’s 2006 figures the combined total of Chinese textiles and apparel exports amounted to US $ 144.08 Billion (US $ 48.68 Billion for textiles and US $ 95.4 Billion for apparel) which was 22.3% and 30.6% share of global textiles and apparel trade respectively. In 2007, the combined value of exports by China grew to US $ 115.2 Billion (US $ 55.97 Billion for textiles and US $ 115.2 for apparel) which was 33.9% and 33.4% of global textiles and apparel trade respectively.34 China was unanimously predicted by analysts to be a major beneficiary of the quota elimination and after the lapse of four years continues to dominate global textiles and apparel trade. The rise of China in this sector is further reinforced by its rich history of manufacturing and exporting silk to Europe and the Middle East. 35 According to various commentators,36 China’s capacity to dominate this sector of world trade is due to a variety of reasons:
33 See The Local Content Paradox at the WTO: A Minor Lapse or Lapse or Organised Hypocrisy?, ICTSD (Vol. 12 (3), May 2008), available online: http://ictsd.net/i/news/bridges/11999/ ( Jan. 27, 2009). 34 See WTO, International Trade Statistics 2007 & 2008. Available online: http://www.wto.org/english/res_e/statis_e/its2007_e/its07_merch_trade_product_e.pdf & http://www.wto.org/english/res_e/statis_e/its2008_e/its08_merch_trade_product_e.pdf (Feb. 15, 2009). 35 See generally Dickerson , supra note 12; See also Mark Williams, Kong Yuk-Choi & Shen Yan, Bonanza or Mirage? Textiles and China’s Accession to the WTO, 36 (3) J. of World Trade 577, 578 (2002) . 36 See Nathan Associates, Changes in the Global Trade Rules for Textiles and Apparel: Implications for Developing Countries ( Nov. 20, 2002) Available online: http://www.nathaninc.com/nathan/files/ccPageContentdocfilename145825705546TCB_Textiles_(final).pdf (Mar.12, 2009); See further Jordan Speer, Sourcing in China: Firms Discuss Advantages, Issues, Bobbin (Jan. 1, 2002); See generally statement of Mr. Peter McGrath, Chairman of the Board of USA ITA (US Association of Importers of Textiles and Apparel) testimony before the USITC Investigation 332-448, Textile and Apparel: Assessment of the Competitiveness of Certain Foreign Suppliers to the US, (USITC, Jan. 22, 2003); See also EU Directorate General on Trade, Evolution of Trade in Textile and Clothing trade World-Wide-Trade Figures and Structural Data, Background Papers, prepared for the Conference on The Future of Textiles and Clothing trade After 2005 (Brussels, May 5-6, 2003) at 1, available online: http://trade- info.cec.eu.int/textiles/documents/102.doc (Mar. 11, 2009); See generally Hall, supra note 9; See generally Appelbaum, supra note 32; .
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1) China exports almost half of its apparel production, out of which only one-third is exported to the US or EU. This reflects the significant growth potential for Chinese exports as quotas are phased out and the prime markets of the EU and the US open up to Chinese exporters. In order to support its apparel production operations, China is also the world’s third largest importer of textiles behind the EU and the US. 37
2) Due to China’s extensive infrastructure and ability to adapt, it offers a wide range of options in apparel production which is matched by few around the world. According to Carlos Moore, “…no other country comes close to shipping as many [10-digit SIC] headings as China.”38
3) China supplies its own textile and apparel industries with all necessary inputs which include one of the world’s largest production capacities for cotton, flax and ramie, and silk (the principal exception is wool, which it gets mainly from Australia and New Zealand).
4) In event of sourcing raw materials that are not available domestically, China can easily source high quality imported inputs from geographically proximate suppliers such as South Korea, Taiwan and Japan which serve to reduce lead times in manufacturing apparel as well as keep the cost low enabling China to price its apparel products competitively.
5) Industry friendly policies by China’s government that have encouraged textile and apparel exports.
6) Entrepreneurial expertise from Hong Kong and Taiwanese investors that hold huge stake in Chinese industries.
7) Abundance of cheap and skilled labor in the past (although this attribute is declining due to recent rises in labor costs which will be discussed below).
37 China imports around half of its textiles needs to support its apparel manufacturing. According to WTO figures, in 2006, China imported US $ 16.36 Billion worth of textiles which was 2.1% of total merchandise imports for China ( See WTO, International Trade Statistics 2007 , supra note 34). 38 See specifically Statement by Carlos Moore to USITC, supra note 36, at 2.
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8) Textiles and apparel industries operated by state-owned enterprises are recipients of Chinese government’s subsidies, which is critical in keeping the prices of Chinese products low.
9) Chinese currency operates on a fixed exchange rate and is reportedly undervalued by 30%-40%, lowering the cost of its exports.
10) China has the capacity to produce apparel of all qualities and standards. Japan and Australia are major examples of consumer driven markets where quotas were liberalised early and China managed to capture an overwhelmingly large share of the market. 39
11) China has rapidly modernised its textiles and apparel manufacturing infrastructure. In 2004, US $ 4.5 Billion worth of the latest textiles and apparel related machinery was imported which increased China’s efficiency and capacity to produce higher quality products on tighter timelines. 40
Given its immense textiles industrial infrastructure and production capacity, China’s entry into the WTO in 2001 carried consequent inclusion into the ATC which meant that China would be accorded all benefits and rights available to a member of ATC including unrestricted access to textiles and apparel export markets. This was a cause of concern for interest groups based in the developed countries since abolition of quotas was expected to change the competitive position of textiles exporting countries. Previously, China’s textiles exports were subject to severe and comprehensive restrictions. 41
Before analysing China’s textiles and apparel export performance in the quota-free period, the following must be kept in mind:
39 E.g. in 2004-05, China held a 73% share in Australian apparel market. Its closest competitor was Italy with just 4% of the share ( See US Commercial Service, Apparel in Australia, available online: http://www.apparelandfootwear.org/pdf/isa0409australia.pdf (19 Feb. 19, 2009); Whilst Japan accounted for highest number of foreign direct investment projects (11 in total accounting for 22.9% share of total FDI projects in textiles and apparel in China during 2002-04) (Appelbaum, supra note 32, at 23). 40 See UNDP, Adjusting to a New Era for Textiles and Clothing , (Asia-Pacific Human Development Report, 2006) at 87. 41 See Rumbaugh & Blancher, supra note 25, at 11.
15 Hosted by The Berkeley Electronic Press 1) China’s membership of the WTO and consequent membership of the ATC delayed any quota free benefits to China for at least 4 years because 49% of textiles and clothing products were integrated into the GATT framework upon expiry of the ATC on 31 December 2004. According to some estimates, 86.5% and 73.3% of textiles products that were exported to the US and the EU respectively remained subjected to quotas until 2005 which effectively hampered the benefits of quota elimination from flowing to China. 42
2) China’s accession was preceded by negotiation and conclusion of the textile safeguard (TS) that was made part of the China’s accession protocol to the WTO. 43 Briefly, the special TS was available for 7 years from the date of accession i.e. until 31 December 2008. This safeguard covered all products that were the subject of the ATC and could be implemented if increased imports were causing or threatening to cause “market disruption.” These safeguards were used to curb inflow of Chinese exports not only by the US and the EU but also by other countries such as Turkey, Colombia, Brazil and Argentina.44 Under the TS mechanism simply requesting consultations results in immediate imposition of quotas equal to 6% or 7.5% more than the amount imported over the previous 12 months. 45
3) In addition to the TS, Chinese exports were also subjected to the Transitional Product- Specific Safeguard Mechanism (PSS) whereby a country could impose restrictions on imports if it could demonstrate that the imports were causing or threatening to cause serious injury to domestic firms producing similar products. 46 The PSS is an available remedy for twelve years from 11 December 2001. 47 This mechanism may only be imposed after consultations or, in circumstances warranting immediate remedial
42 See generally Ian Dickson, China’s Interest in the World Trade Organization’s Deregulation of International Textile Trade, paper presented at the conference China and the WTO (Australian National University, Mar. 16-17, 2001). 43 See USTR, Background Information on China’s Accession to the World Trade Organisation (Dec. 11, 2001). 44 See Chinese Textile Exports Surge; US, EU to Invoke Textile Safeguard ?, ITCSD Bridges Weekly Trade News Digest, Vol.9 (No.11) (Apr. 6, 2005); See also Post-Quota Textile Trade Starts to Take Shape, ITCSD Bridges Weekly Trade News Digest, Vol.9 (No.2) (Jan.26, 2005); See also Congressional Research Service (CRS), US Clothing and Textile Trade with China and the World: Trends Since the End of Quotas (Order Code RL34106), (Jul.10, 2007), at 5. 45 See WTO, Report of the Working Party on the Accession of China, WT/ACC/CHN/49 (Oct.1, 2001), Paragraph 242 (c) [hereinafter referred to as WTO, Report of the China Working Party ]; See also CRS, supra note 44, at 5 46 See WTO, Protocol on the Accession of the People’s Republic of China , WT/L/432 (Nov 23, 2001), Section 16 [hereinafter referred to as WTO, China’s Accession Agreement ]. 47 Id, Section 16(9).
16 http://law.bepress.com/unswwps-flrps09/art16 action, provisional measures can be imposed. Moreover, for this type of safeguards the importing country has the option of imposing quotas, tariffs or any other form of import restrictions. The PSS can be imposed for up to three years as against the TS mechanism which can only be imposed for one year. Keeping these mechanisms in mind, even after the expiry of the TS, the restrictions on Chinese textiles and apparel exports may continue until 2013. This means that until 31 December 2008, Chinese textiles and apparel exports were subject to two safeguard regimes which enabled importing countries to employ safeguards under either one of the mechanisms (i.e. TS or PSS). However, under the terms of China’s WTO Accession Protocol the importing country may not apply both types of safeguards to the same product simultaneously. 48
4) Chinese textiles exports may also be subjected to anti-dumping measures for 15 years after accession (i.e. until 2016) whereby the members can rely on special “non-market economy” methodology in the WTO Anti-Dumping Agreement to determine dumping. The non-market economy provisions imply that domestic prices cannot be used as a basis of reference and this increases the likelihood of a positive finding in an antidumping investigation. 49
5) The ATC only removed quotas and does not affect tariffs which can still be employed as a means of discouraging foreign imports of textiles and apparel in order to protect sensitive domestic sectors.
Despite the above restrictions (and after one year of its accession to the WTO) in 2002, China accounted for 13.5% and 20.6% share of world textiles and apparel exports respectively. This was during the ATC regime when quota restrictions were still in place and as has been pointed out in Article 2, these quotas subsisted on textiles and apparel categories that were more important to China and other textiles exporting countries in terms of value. These categories were liberalised at the very end. It is also interesting to note that within a few months of quota expiry, the EU and the US took immediate advantage of safeguard measures to impose a fresh series of quantitative restrictions on a wide range of Chinese textiles and apparel exports.
48 WTO, Report of the China Working Party , supra note 44, Paragraph 242 (g). 49 WTO, China’s Accession Agreement , supra note 46, Section 15.
17 Hosted by The Berkeley Electronic Press (a) US-China Trade: Under the terms of China’s WTO Accession Protocol, the US had restricted some Chinese textiles and apparel. 50 Later, the US progressively expanded the level of restrictions in December 2003 51 to include products that had been integrated as per the ATC integration schedule. This was done again in October 2004 52 whereby quota restraints were imposed on more products. These restrictions were to last one year in line with the terms of China’s WTO Accession Protocol. Whilst these restrictions were in force, the US textiles industries and interest groups petitioned for further restrictions on the basis of “anticipated increase in imports of these products threatened to disrupt the US market for such products.”53 Following an investigation by the US Department of Commerce into the alleged disruption in the domestic market by Chinese textiles and apparel exports, China eventually agreed to exercise voluntary restraint over its textiles and apparel exports to the US and entered into an agreement to this effect with the US in November 2005 (the “US-China MOU”).
The US-China MOU effectively limited Chinese exports on 34 categories of products which accounted for approximately one-third of its textiles and apparel exports to the US in value terms. However, it covered most but not all categories of textiles and apparel for 2006-2008. For apparel, the quota increase rate was 10% for 2006, 12.5% for 2007 and 15% in 2008 whereas for textiles the increase rate was 12.5% for 2006-2007 and 15% in 2008. 54 This agreement was valid until 31 December 2008 and its expiry coincides with the ending date of the TS in China’s WTO Accession Protocol. 55
In addition to the US-China MOU, the US has extensively relied on tariff barriers to control access to its market. Review of the US general tariffs rates until 2007 for each of the 14 articles included in textiles and apparel reveals that there has been a conscious effort to maintain import barriers on a selective basis. Figure 1 demonstrates that there is broad range
50 See generally ITCB, New US-China Textile Agreement, (Nov. 17, 2005), available online http://www.itcb.org/Documents/ITCB-MI52.pdf (7 Mar 2009). 51 Id . These categories comprised: (i) Category 222 – knit fabric; (ii) Combined Categories 349/649 – cotton and manmade fibres brassieres; and (iii) combined categories category 350/650 – cotton and manmade fibres dressing gowns and robes. 52 Id . These products comprised cotton, wool and manmade fibre socks (Combined Categories 332/432/632). 53 See USTR, Article V: Trade Enforcement Activities in 2006 Trade Policy Agenda and 2005 Annual Report, 236 , Available online http://www.ustr.gov/assets/Document_Library/Reports_Publications/2006/2006_Trade_Policy_Agenda/asset_u pload_file765_9077.pdf (Jul.18, 2008). 54 CRS, supra note 44, at 24 55 WTO, Report of the China Working Party , supra note 44, Paragraph 242.
18 http://law.bepress.com/unswwps-flrps09/art16 of tariffs imposed on textiles and apparel imports wherein the US may impose “peak” tariff rates in special circumstances (textiles and apparel products fall under the HS Codes from 50- 63 where HS 61 and 62 are apparel products).
Figure 1 demonstrates high general and peak tariff rates maintained by the US thereby maintaining a certain level of protection for its domestic textiles and apparel market. The imposition of higher tariffs on certain items in each HS Article is designed to restrain imports of certain textiles and apparel products. 56
It is interesting to note the quota utilisation rate of Chinese exports in 2005 and 2006 (before and after signing of the US-China MOU). In 2005 (refer to Table 1) the utilisation rate of 8 out of 10 products was 100% and this was interpreted as controlling the increased imports from China. 57 US Industry interests used these figures to claim that as soon as quota restraints under the ATC would expire there would be an increased surge that would cause serious market disruption in the US. It was at this point in time that the US-China MOU was concluded.
56 CRS, supra note 44, at 4. 57 Id , at 23.
19 Hosted by The Berkeley Electronic Press In 2006, one year after the restrictions of the US-China MOU were in place, utilisation of the 22 separate quotas established under the US-China MOU was not complete but uneven. 58 A comparison of quota utilisation in 2005 and 2006 of common import categories out of the 22 categories included in the US-China MOU demonstrated that there was no second surge and that these apprehensions were exaggerated since the expected market adjustment following quota expiry had already occurred in 2005 (refer to Table 1).
According to US Department of Commerce (OTEXA) statistics for year 2007-2008 (See Table 2), China continued to expand its share of the US textiles and apparel market by recording a 6.5% increase (this represents a share of 33.69% share of the US textiles and apparel market). This came at the expense of mainly Mexico and Canada, which despite enjoying preferential access and proximity to the US market registered negative growth (refer to Figure 2). However, China also managed to snatch share from established textiles manufacturers such as Indonesia and Pakistan as well as displacing the Philippines.
(Table 1) Chinese Quota Utilisation Rate Prior to US-China After US-China Source: CRS MOU MOU Category Utilisation Rate 2005 Utilisation Rate 2006 Combed Cotton Yarn (301) 72.00% 38.60% Hosiery (332/432/632-A & B) 100.00% 81.75% Cotton Shirts & Blouses (338/339) 100.00% 83.10% Men's woven shirts (340/640) 100.00% 66.00% Cotton Trousers (347/348) 100.00% 86.20% Brassieres & support garments (349/649) 71.50% 75.00% Underwear (352/652) 100.00% 71.60% Other synthetic filament fabric (620) 100.00% 15.80% Manmade fiber knitted shirts & blouses (638/639) 100.00% 80.80% Manmade fibre trousers, breeches etc.(647/648) 100.00% 79.90%
(Table 2) US Department of Commerce (OTEXA) Total Textiles and Apparel Imports into the US (July 2007 - July 2008) Source: OTEXA Top 15 Exporters (Data in Million US $)
Year ending growth Exporter Year ending 2007 Year ending 2008 percentage China 30162.903 32123.016 6.5 Mexico 6064.865 5395.016 -11.04
58 Id , 24-25.
20 http://law.bepress.com/unswwps-flrps09/art16 India 5036.807 5147.648 2.2 Vietnam 3667.808 4972.246 35.56 Indonesia 4206.102 4204.551 -0.04 Bangladesh 3191.401 3273.039 2.56 Pakistan 3233.879 3137.789 -2.97 Honduras 2494.824 2527.983 1.33 Cambodia 2317.197 2463.102 6.3 Italy 2142.633 2222.667 3.73 Hong Kong 2422.396 2110.421 -12.88 Thailand 2095.56 2075.043 -0.98 Canada 2420.918 1985.564 -17.98 Philippines 2011.683 1684.349 -16.27 San Salvador 1511.615 1544.825 2.2
(Table 3) US Imports of Textiles and Clothing from Top 15 Exporters (1995 - 2007) Import value in Million US $ ( Source: ITCB, Evolution of Textile & Clothing Imports into the United States, (1990- 2007)
Exporter 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 China 4800 4890 6024 5900 6129 6527 6536 8744 11609 14558 22405 27068 32320 Mexico 3036 4229 5928 7453 8621 9693 8945 8619 7941 7793 7146 6376 5626 India 1614 1736 2010 2287 2384 2741 2633 2993 3212 3633 4617 5031 5104 Vietnam 18 24 26 29 38 50 49 952 2484 2720 2881 3396 4458 Indonesia 1336 1493 1872 1973 1959 2380 2553 2329 2376 2620 3081 3902 4206 Bangladesh 1115 1178 1498 1695 1754 2205 2205 1990 1939 2066 2457 1998 3191 Pakistan 965 1011 1197 1427 1475 1835 1924 1983 2215 2546 2904 3250 3170 Honduras 921 1223 1663 1878 2164 2328 2348 2444 2507 2678 2629 2445 2518 Cambodia 0 2 99 362 587 816 953 1061 1251 1442 1727 2151 2435 Italy 1464 1703 1846 1976 2002 2129 2063 2031 2182 2261 2143 2068 2233 Canada 1651 1995 2401 2756 3053 3350 3162 3199 3118 3086 2844 2587 2202 Hong Kong 4391 4031 4100 4623 4465 4707 4403 4032 3818 3959 3607 2893 2124 Thailand 1417 1400 1661 1964 2074 2447 2441 2203 2072 2198 2124 2124 2059 Philippines 1702 1705 1846 2072 2156 2289 2248 2042 2040 1938 1921 2085 1794 Sri Lanka 1025 1139 1362 1488 1470 1677 1698 1527 1493 1585 1677 1703 1590
Tables 2, 3 and Figure 2 highlight the strong growth of Chinese textiles and apparel exports to the US market. According to ITCB statistics, China’s textiles and apparel exports in 2007 to the US had 33.5% share of the US market as compared to the second largest exporter (Mexico) which had 5.8% followed by India, Vietnam and Indonesia with 5.3%, 4.7% and 4.4% respectively (ITCB statistics closely match OTEXA estimates as well - see Figures 2 & 3). However, according to Textiles Outlook International, US apparel imports from China declined by nearly 10% in the first quarter of 2008 as compared to the corresponding period in 2007. 59
59 See China Loses its Competitive Edge in Clothing, Textiles Intelligence , Press Release (Jul. 15, 2008).
21 Hosted by The Berkeley Electronic Press The Top-15 Exporters to the US Market have a combined share of 78.51% of the total US textiles and apparel market according to the OTEXA statistics (refer to Figure 4). The residual share of 21.49% is taken by other exporters. China again tops the list with the lion’s share of the US market despite being under TS and PSS safeguards.
Considering the above statistics, it appears that China’s ascent as the top textiles and apparel exporter to the US coincides with its accession to the WTO and phasing out of quotas (both of which prevented China from exporting increased quantities of such products prior to 2001). However, strong growth of Chinese textiles and apparel exports to the US lends credence to the prediction that the US would not only import more textiles and apparel from China after phasing out of quotas but also that China would manage to expand its market share of the US market by capturing most of the market growth at the expense of other exporters who were unable to significantly increase their exports (refer to Figure 3). The exception is Vietnam which recorded a healthy year-on-year increase of 35.56% in the US market for years 2007-2008.
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23 Hosted by The Berkeley Electronic Press In 2008, however, there were indications that the explosive growth of Chinese textiles and apparel exports had subsided due to a combination of reasons that included the safeguards imposed by the EU and the US (discussed below), higher raw materials, increasing global energy costs, global environmental standards, costs arising from compliance with improved labor standards and restrictive credit regulations by Chinese Government to control inflation and lower tax rebates available to exporters. 60 Moreover, Chinese exports have also been affected by rising Chinese currency and labor costs as compared to other Asian producers. 61
In 2009 with the expiry of TS, it was estimated that Chinese exporters would experience resurgence in the US market. However, many retailers in the US had established business and sourcing relationships in other Asian suppliers like Bangladesh, Cambodia, Vietnam etc. which continue to operate at low labor costs and also receive preferential treatment due to their LDC status and therefore, these retailers may well continue sourcing from these countries even beyond 2009-10 especially when the Chinese currency is on the rise and currencies of other competitors like India and Pakistan have experienced declines of 28% and 27% respectively.62 Initial 2009 reports already suggest that Chinese exports to the US in major categories of 347/348 (M/B and W/G Cotton Trousers) increased by 59% in volume terms over the corresponding period in 2008. 63 Similarly, US imports in category 647/648 (Manmade Fiber Trousers/Shorts) from China increased by 31% and by 42% in Category 338/339 (Cotton Knit Shirts) in volume terms. 64 Growth was also recorded in Category 638/639 (Manmade Fiber Knit Shirts/Blouses) by 53%. All of these categories had been restricted under China specific safeguards and with the lifting of these restrictions, the growth spurt is easily noticeable and will likely continue for the rest of 2009.
(b) EU-China Trade: Table 4 and Figure 5 demonstrate the impressive growth of Chinese exports to the EU. In this prime market, China’s textiles and apparel exports in 2007 had 32.9% share as compared to
60 Id ; See also Michael Byrnes/Reuters, Chinese Textiles Lose out to Rising Costs and Currency Surges , The Wall Street Journal/LiveMint (Aug.13, 2008)
24 http://law.bepress.com/unswwps-flrps09/art16 the second largest exporter (Turkey) which had 14.8%, followed by India, Bangladesh and Romania with 7.5%, 5.7% and 3.9% respectively.
The EU adopted an ‘early warning system’ in April 2005 to observe any adverse effects on the EU market due to growing exports from China. After considering the first three months of trade data immediately after lifting of the quotas, which demonstrated significant increase in Chinese exports in the newly liberalised categories, the EU initiated an investigation into 9 categories of Chinese textiles exports. 65 Taking this into consideration, the EU called for consultations with China which was widely perceived as a precursor of imposition of safeguard measures. EU and China eventually concluded a bilateral agreement in June 2005 (which was valid until December 2007). This agreement was popularly referred to as the Memorandum of Understanding (MOU) Agreement between the EU and China 66 and covered 10 of the 35 categories of Chinese exports that were liberalised upon quota expiry. 67
(Table 4) EU Imports of Textiles and Clothing from Top 15 Exporters (1995 - 2007) Import value in Million US $ ( Source: ITCB )
Exporter 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 China 5959 6605 7249 7533 8577 9090 9428 11121 14580 18202 25902 29470 36886 Turkey 5530 5760 6134 6823 6992 7019 7498 8824 11221 12963 13506 14152 16555 India 3831 3833 3659 3637 3681 3790 3859 3936 4706 5508 6531 7504 8449 Bangladesh 1380 1568 1767 1942 2019 2516 2660 2729 3666 4843 4623 6066 6341 Romania 1359 1539 1784 2200 2439 2595 3230 3799 4702 5245 4984 5008 4364 Tunisia 2404 2526 2415 2686 2696 2552 2796 2975 3358 3524 3335 3391 3898 Morocco 2264 2223 2232 2377 2353 2290 2483 2598 2938 3169 2955 3108 3617 Pakistan 1553 1608 1605 1640 1602 1570 1629 1882 2365 2886 2508 2874 3329 Hong Kong 3399 3234 3016 2982 3063 2975 2396 2267 2445 2514 2176 3201 2331 Indonesia 1969 1969 2197 2209 2148 2289 2170 1953 2064 2175 1953 2290 2228 Switzerland 2354 2087 1773 1781 1743 1607 1570 1548 1852 1926 1781 1804 2151 Bulgaria 413 460 544 661 699 795 1000 979 1295 1565 1608 1836 1858 US 2212 2326 2378 2279 2036 1953 1777 1559 1480 1407 1511 1673 1749 Vietnam 373 469 577 618 702 769 754 726 685 906 966 1440 1744 Thailand 1127 1092 1117 1107 1206 1230 1097 1125 1275 1453 1322 1457 1495
65 These categories included T-shirts, pullovers, blouses, stockings and socks, men’s trousers, women’s overcoats, brassieres, flax or ramie yarn and woven fabrics flax 66 See generally Commission Regulation 1084/2005 Amending Annexes II, III and V to the Council Regulation (EEC) 3030/93 on Common Rules for Imports of Certain Textile Products from Third Countries, 2005 O.J. (L177/19) (the “MOU Agreement”); See also a summary of ‘EU-China Textile Agreement’ (Jun.10, 2005), available online: http://ec.europa.eu/external_relations/china/intro/memo05_201.htm (18 Mar 2009). 67 These ten included pullovers, men’s trousers, blouses, t-shirts, dresses. Brassieres, flax yarn, cotton fabrics, bed linen, table and kitchen linen ( See specifically Press Release by the Directorate General for Trade of the European Commission on the EU-China Textile Agreement (Brussels, Jun.12, 2005), Available online: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/05/201&format=HTML&aged=0&language= EN&guiLanguage=en (Mar.17, 2009); See also ITCB, supra note 66.
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It is pertinent to note that the EU-China Agreement allowed for a growth of the restricted categories of products between 8% and 12.5% per annum for 2005, 2006 and 2007 which
27 Hosted by The Berkeley Electronic Press represented a higher growth rate as compared to the 7.5% growth rate permitted under China’s WTO Accession Protocol.
However, the MOU Agreement proved to be inadequate in stemming the tide of Chinese exports which filled its quotas faster than expected and resultantly the EU authorities detained Chinese origin textiles and apparel imports at quaysides.68 This led to another round of negotiations that culminated in an amendment to the MOU Agreement known as the “Shanghai Agreement” 69 whereby China agreed to no additional apparel exports in 2005. Moreover, the parties agreed to allow the detained Chinese exports into the EU with half of the items counting towards the 2006 quota whilst the remainder entered unconditionally. 70 The Shanghai Agreement also enabled flexibility in the allowed amounts for 2006 and 2007 by permitting year-to-year carryover and inter-category transfer. 71 Figures 6, 7, 8 & 10 highlight the stellar growth of China’s textiles and apparel exports to the EU market.
According to Textile Outlook International, between 2000 and 2005 the average price of textile imports fell by 21% while the price of apparel imports declined by 24%. 72 Six months after lifting of quotas, Chinese origin textiles and apparel imports into the EU arose at an astounding rate i.e. between 63% and 541% in the products covered by the Shanghai Agreement resulting in a serious average unit price drop of up to 62% in the case of dresses. 73
Indications at the end of third quarter 2008 were of an impending surge in Chinese exports to the EU coupled with falling prices e.g. Shipments from China in Pullovers categories
68 See EU Reaches Deal with China on Clothing , International Herald Tribune (Sep.6, 2005), Available online: http://www.iht.com/articles/2005/09/05/business/textile.php (Mar.18, 2009); See also Michael Murawski, Lacking Support: China Suffers a Textiles Trade Let Down by Politics and Poor Preparation in the EU, (30) Suffolk Transnational Law Review 141, 150 (2006) . 69 See generally Commission Regulation 1478/2005, Amending Annexes V, VII and VIII to Council Regulation (EEC) No 3030/93 on Common Rules for Imports of Certain Textile Products from Third Countries, 2005 O.J. (L236) (hereinafter referred to as the “Shanghai Agreement”). 70 See European Commission Adopts Regulation to Clear Blocked Chinese Textile Imports, EC Press Release (Sep.12, 2005), available online: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/05/1124&format=HTML&aged=0&language=EN &guiLanguage=en (Mar.18, 2009). 71 Id. 72 See Bocconi University (Essec Business School), Business Relations in the EU Clothing Chain: from Industry to Retail and Distribution, (Final Report, October 2007) at 18, available online: http://ec.europa.eu/enterprise/textile/documents/clothing_study_oct_2007.pdf (Nov.27, 2008). 73 See EU Textile Imports from China: Some Important Points, EC Press Release (Sep.12, 2005), available online: http://ec.europa.eu/trade/issues/sectoral/industry/textile/memo120905_en.htm (Mar.18, 2008).
28 http://law.bepress.com/unswwps-flrps09/art16 increased by 91% in Euro terms after a 23% decline in Chinese prices. 74 In the same period, China’s market share rose to 51% in this category, 45.46% in W/G Trousers, 23.84% in Blouses. However, China slightly lost its market share in categories of M/B Trousers and T- Shirts where China recorded -4.74% and -3.97% declines in value to take 44.25% and 21.55% of market share respectively. These categories were restricted under the EU-China MoU/ Shanghai Agreement (see Figure 16 below).
With the end of safeguards, it is expected that China would continue its dominance of the EU market. However, as the case studies would demonstrate later on, Vietnam and India are emerging as fierce contenders hungry for their share of the EU pie.
(ii) South Asia:
South Asia is an interesting study of contrasts when viewed against the backdrop of quota expiry since the anticipated gainers and losers can be found here in close proximity. It is
74 EmergingTextiles.com, EU Clothing Imports per Category and Origin: Unit Value Comparison in 3 rd Quarter 2008 (Statistical Report), (Feb.19, 2009), available online: http://www.emergingtextiles.com/?q=art&s=090219-clothing-eu-import&r=search¬e=1 (Feb.21, 2009).
29 Hosted by The Berkeley Electronic Press home to established textiles players such as India and Pakistan as well as LDCs such as Sri Lanka, Maldives, Nepal and Bangladesh that overwhelmingly rely on apparel production and export. During the MFA and ATC era, India and Pakistan were shackled by quantitative restraints by developed countries which greatly limited their export growth potential but at the same time these restraints enabled other Asian countries to organise their own textiles and apparel industries. Quota imposing developed countries that imported textiles and clothing lacked domestic production capacity to meet internal demands. This demand was met largely by Asian LDCs that organised their industries with export orientation concentrating primarily on apparel and readymade garments.75
Similar to China, South Asia also possesses the advantages of a cheap, abundant and skilled labor force. India and Pakistan also grow their own cotton and have textiles and apparel industries that are vertically integrated. The textiles and apparel sector is also a major recipient of government support which is a major factor in maintaining international competitiveness in the post-elimination period. 76 As has been discussed in Article 3, like the majority of developing countries and LDCs, the textiles and apparel sector is not only a major source of export earnings (See Figure 10) for the South Asian countries but is also a major employer and a source of revenue for the governments. 77 However, Asian LDCs became increasingly vulnerable to change due to combination of factors involving lack of innovation, limited diversity in export products, little or no vertical integration and reduced competitiveness in the post-elimination period. 78
Therefore, the ATC quota expiry carried with it a multitude of consequences ranging from increased competition to potential opening of new markets that have been examined in the preceding articles. Most studies conducted prior to quota expiry predicted that amongst the South Asian producers, India (and to some extent Pakistan) would benefit from the lifting of the quotas and that less competitive and vertically integrated apparel focused South Asian
75 See UNDP, supra note 40, at 79 & 84; See also Appelbaum, supra note 32, at 42; See further Ratnakar Adhikari, One Year After Phasing-out of T&C Quotas: Where Does South Asia Stand?, 2(1) Trade Insight 33 (2006) ; See also Adhikari &Weeratunge, supra note 14, at 110. 76 Ratnakar Adhikari & Chatrini Weeratunge, Textiles and Clothing Sector in South Asia; Current Status and Future Potential, (Briefing Paper No. 4, 2007), (South Asia Watch on Trade, Economics & Environment), at 1. 77 This sector employs 38 Million people in India, 15 Million in Pakistan, 2 million in Bangladesh, 300,000 in Sri Lanka and over 200,000 in Nepal (According to sources cited in Meenu Tewari, Deepening Intraregional Trade and Investment in South Asia: The Case of the Textiles and Clothing Industry, (Working Paper 213, 2008), (Indian Council for Research on International Economic Relations), at 4. 78 Adhikari, supra note 75, at 33.
30 http://law.bepress.com/unswwps-flrps09/art16 LDCs would be on the losing end in an era where the certainty and comfort of a guaranteed quota based share of the worlds’ lucrative export markets is no longer available. 79 However, four years after expiry of quotas, the performance of South Asian producers has painted a mixed picture that has surprised many analysts.
A quick comparison of per hour labor costs (See Figure 11) in major apparel manufacturing countries in Asia demonstrates that South Asian countries are amongst the cheapest producers of apparel in terms of labor costs. Yet despite possessing an abundance of skilled and cheap labor as well as being a region that ranks amongst the foremost producers of cotton, South Asian countries have yet to achieve their full potential. Textile producers like India and Pakistan are situated in convenient proximity to apparel producers such as Sri Lanka, Bangladesh and Nepal which should ideally enable easy sourcing of fabrics, cloth, yarn and other necessary inputs. However, numerous factors ranging from regional politics (e.g. India- Pakistan rivalry) and attempts to protect national industries to complex ROO maintained by the developed countries that encourage use of their content as opposed to regional content have meant that complementary business processing relationships have not prospered within South Asia.
Regional free trade agreements that reduce or eliminate tariff and non-tariff barriers can enhance South Asian competitiveness in the global economy in the post-elimination era especially after the December 2008 expiry of the TS measures on China. 80 Whilst there has been an effort amongst the South Asian countries to establish a free trade regime that encourages mutual trade, the favourable impact on textiles and apparel is less than satisfactory as the member states have excluded textiles and apparel tariff lines from the liberalization process. 81 Therefore, the substantial tariff barriers that South Asian countries
79 See e.g. discussions predicting the possible impact of quota elimination in Appelbaum, supra note 32, at 42; See also Ashe Haté, Shisir Khanal, John Larsen, Paul Smart, Romina Soria & David Zanni, The Expiration of the Multi-Fiber Arrangement: An Analysis of the Consequences for South Asia, (Public Affairs 860: Public Affairs Workshop, International Issues, 2005) (Robert M. La Follette School of Public Affairs, University of Wisconsin-Madison), at 17; See further ILO, Promoting Fair Globalization in Textiles and Clothing in a Post- MFA Environment, (Report for discussion at the Tripartite Meeting on Promoting Fair Globalization in Textiles and Clothing in a Post MFA Environment, Geneva 2005), at 8-9; See also Hall, supra note 22, at 12-17; See UNDP, supra note 40, at 80. 80 William James, Asian Textile and Apparel Trade: Moving Forward with Regional Integration, (ERD Working Paper No. 111, Asian Development Bank, 2008) at 1. 81 South Asian countries concluded SAFTA Agreement in 2006 in order to promote better mutual trade relations. However, textiles and apparel items have been included in sensitive lists and face exclusions which perhaps partially explain why there has been no recent growth in intra-regional trade amongst the South Asian countries. The total exclusions in textiles and apparel for South Asian Free Trade Area numbers 389 for
31 Hosted by The Berkeley Electronic Press maintain in order to protect their industries are counterproductive and remain a major hurdle in regional integration (Figures 12 and 13 highlights the high average and bound MFN tariff rates that South Asian producers maintain to textiles and apparel imports).
Bangladesh, 300 for India, 494 for Nepal, 291 Pakistan and 20 for Sri Lanka ( See generally SAARC Secretariat, http://www.sarc-sec.org ; See also James, id, at 7-8.
32 http://law.bepress.com/unswwps-flrps09/art16 The following extract from a 2007-08 survey and interviews conducted by Meenu Tewari succinctly summarises the situation in South Asia:
The overwhelming finding from numerous interviews in Bangladesh and (especially) Sri Lanka was that despite proximity to India and Pakistan, and the much greater distance between them and PRC and other East Asian countries, “it is cheaper for us to source from PRC [and East Asia] than it is to source from India or Pakistan.” The difference is not only in absolute costs…but includes energy costs, the bureaucratic costs of sourcing and transporting goods from and within South Asia versus from PRC or East Asia, and the myriad tariffs, para-tariffs, infrastructure gaps, port costs and other non-tariff barriers that make it costly to source fabric efficiently even from across a contiguous border as in the case of Bangladesh and India, or India and Pakistan, relative to other parts of Asia. 82 (emphasis added )
82 Meenu Tewari, supra note 122, 43.
33 Hosted by The Berkeley Electronic Press
(a) India & Pakistan: India has traditionally been a key player in the global textiles and apparel trade and was a strong advocate against quotas. India’s textiles and apparel industries employ close to 30 million workers (according to 2003-2004 estimates), account for 14% of total industrial output, 30% of total exports and earn substantial foreign exchange. 83
India is not only well endowed with natural resources linked to cotton production 84 but also possesses vertically integrated industrial infrastructure to produce textiles for exports as well as inputs for its local apparel industries. India ranks second after China in terms of installed
83 Textiles sector employment is the second largest employer in India after agriculture sector (ILO, supra note 79, at 25); See also Ashe Haté et al, supra note 79, at 17; See Danish Hashim, Cost & Productivity in Indian Textiles: Post MFA Implications, (Working Paper 147, 2004) (Indian Council for Research on International Economic Relations), ii. 84 According to 2006-7 estimates, India is the world’s second largest producer of cotton after China. Together, China, India and Pakistan account for half of the world's cotton production and two-thirds of world cotton consumption. Pakistan is the world's fourth largest producer and third largest consumer ( See India 2nd largest global cotton producer, Business Line , (Oct.4, 2006), available online: http://www.thehindubusinessline.com/2006/10/04/stories/2006100403030800.htm (Jul.25, 2008). In other raw materials, apart from cotton, India ranks first in jute, second in silk and fifth in synthetic fibers and yarn ( See ECORYS, Trade Sustainability Impact Assessment for the FTA between EU and the Republic of India , TRADE07/C1/C01 – Lot 1 (Report submitted to the EC Directorate General for Trade), (Jan.21, 2009), at 132- 133).
34 http://law.bepress.com/unswwps-flrps09/art16 capacity in spinning machinery, first in plain looms and fourth in shuttle looms. 85 However, India’s strength lies in production of textiles and fabric inputs for manufacture of clothing. For industrial and technical textiles such as billboard and signage fabric, India imports from China. 86 In this respect, India is a huge untapped market for other producers of technical textiles.
India also stands out as a feasible alternative to foreign buyers who plan to avoid over- reliance on China in the post-elimination period by diversifying their procurement sources. These advantages are coupled with active government support, low labor and input costs, stable economy, highly developed fashion industry and aggressive marketing to attract investment into this sector. 87 Unfortunately, these advantages also meant that Indian products were themselves subjected to quota restraints by the developed countries which effectively stifled growth of the Indian textiles and apparel industries. Nevertheless Indian textiles and apparel industries continued to perform well despite being under artificial quantitative restrictions.
India’s advantages are offset by a number of drawbacks such as bureaucratic inefficiencies at ports and higher international transportation cost to the prime US and the EU markets e.g. it takes 24 days on average to ship goods from Indian ports to the US market as against 12 days from Hong Kong, China to the US. 88 In the time sensitive apparel sectors, such delays increase turnaround time as well as costs of apparel products indirectly. Also, India has poor road infrastructure and higher energy costs which all contribute in raising costs of Indian textiles and apparel products which in turn affect India’s capacity to compete in the global textiles and apparel market. However, in spite of these impediments, India is still viewed widely in academic analysis as a winner in the post-ATC expiry period. According to USITC officials, India alone has the ability to compete against China 89 in this sector of world trade.
85 Id . 86 Id, at 136. 87 According to Adhikari & Weeratunge, this enables up to 98.5% of value addition within India itself (Adhikari & Weeratune, supra note 14, at 116); India benefitted from the 2004 SARS outbreak in China which severely affected the Chinese apparel industry prompting foreign buyers to establish linkages with India ( See Indian Garments in a Brave New World, Domain-b (Dec. 29, 2004), available online: http://www.domainb.com/industry/textiles/20041229_new_world.html (Jul.27, 2008). 88 See generally Dean Spinanger & Samar Verma, The Coming Death of the ATC and China’s WTO Accession: Will Push Come to Shove for Indian T&C Exports? , (Kiel Institute for World Economics, 2003); See Appelbaum, supra note 32, at 45. 89 See Appelbaum, id , at 45.
35 Hosted by The Berkeley Electronic Press Estimates conducted prior to the quota expiry predicted that India would increase its share of world textiles trade from 4% to 15% between 2005 and 2010 which would mean creation of more than 1 million jobs during this period.90 Indeed, there were optimistic estimates of a 50% expected increase in India’s exports in the first quarter of 2005 alone. 91 However, at the end of 2005, the figures painted a different picture which meant that Indian producers and exporters had failed to capitalise on the situation e.g. Indian exports to the EU in the first quarter of 2005 grew by just 5% as against the projection of 50% growth, whilst Chinese exports to the EU experienced a 59% increase. 92 However, considering ITCB figures, India managed to make some gains in the post-elimination period whereby Indian textiles and apparel exports to the US market grew by 9.54% between 2005 and 2007 while in the EU market, it notched up a much better growth of 22.7% in the same period]. India’s share of the US and the EU market in 2007 is illustrated in Figures 4, 6 & 8.
India’s growth must be considered against the backdrop of quota and safeguard restraints on China with which India competes in the EU and the US markets. Indian textiles producers realise that “overseas buyers see India as a preferred supplier next to China. But global buyers are keen to do business with suppliers who provide one-stop solutions and are able to provide the volumes that they need.” 93 As a result of this trend, retailers like Wal-Mart, Gap, H&M, and JC Penny etc. are now increasingly sourcing from India. 94
The restraints on China presented an ideal opportunity for India to make inroads into the prime markets of the west. However, as the figures demonstrate, India has not capitalised on the situation to the maximum extent possible. Some analysts blame lack of economies of scale as a major factor that has hampered India’s competitive strength. 95 This was due to the dispersed nature and small structure of Indian apparel manufacturing units that were classified as cottage industries. This was partially done to provide employment throughout
90 See ILO, supra note 79, at 25; See also Hall, supra note 22, at 29 91 See Kaushik Basu, Winners and Losers in Textile Shake-Up (Mar. 2, 2005), Available online: http://news.bbc.co.uk/2/hi/south_asia/4294679.stm (Aug.5, 2008). 92 See Cris Prystay, India Plays Catch-Up in Textiles: Labor Rules Hinder Country From Benefiting From End of Quotas , The Wall Street Journal A15 (Dec.1, 2005). 93 Statement by Siddhartha Rajagopal, Texprocil Executive Director referred to in Government of India, Ministry of Textiles Industry ‘Technology Upgradation Fund Scheme (TUFS) (01-04-2007 to 31-03-2012) , Circular No. 4, No. 28(19)/2008-MS (Jul.28 2008), Available online: http://www.aepcindia.com/portal/tufs_a.asp (Aug.20, 2008) [hereinafter referred to as TUFS ]. 94 See Haté et al, supra note 79, at 19; Rajagopal, id . 95 Haté et al, id , at 18-19; Adhikari & Weeratunge, supra note 14, at 116; Hall, supra note 22, at 31-32; Prystay, supra note 92.
36 http://law.bepress.com/unswwps-flrps09/art16 the country. Also, restrictive Indian labor laws that prohibited hiring of contract labor and also made it difficult for employers to retrench workers were also cited as a major impediment in growth of the textiles and apparel industries by some analysts and industrialists.96
Nevertheless, India has taken measures to enhance its productivity and competitiveness by undertaking large scale industrial upgrades supporting a Technology Upgradation Fund (TUF) which proved to be a boon for the local industry.97 This fund was also supplemented by reduction of excise duties on import of machinery, establishment of industrial zones accommodating apparel manufacturing units and reform of foreign investment laws. 98 However, any reform of the present socialist leaning labor laws would likely face stiff resistance from labor groups and trade unions concerned about the impact of an increasingly competitive global trade in textiles and apparel on their employment. 99 Therefore, in absence of any reform of labor laws labor-related inefficiencies will continue to impact on India’s productivity and competitiveness in the coming years even when India upgrades its industrial infrastructure and investment laws.
India also stands to greatly benefit from concluding a FTA with the EU particularly with regards to OPP since increased access to the Indian economy will ease import and exports. 100 However, for India to drive maximum benefit out of this deal, it must ensure that interests of the EU investors such as intellectual property rights protection, improved trade facilitation, reformed competition policies, removal of non-tariff barriers are met. 101
Problems similar to India also plague Pakistan, which is India’s regional rival and competes with India in all of the major export markets in the world across a number of sectors. Pakistan too was counted amongst the potential beneficiaries (albeit to a lesser extent) in the post-
96 Hall, supra note 22, at 31-32; Prystay, id . 97 See generally TUFS , supra note 93. 98 See also Shankar, Post-MFA regime: Textile Restructuring and The Impending Turbulence, Liberation (Jan. 2005), Available online: http://www.cpiml.org/liberation/year_2005/january/mfa_regime.htm (Mar.7, 2009); T Surendar, Textiles: The Big Factories Are Coming, Businessworld (Nov.15, 2004), available online: http://www.businessworldindia.com/nov1504/index.asp (Mar.17, 2008);V Sridhar, Towards New Frontiers, Frontline (Nov.6-19, 2004), available online: http://www.hinduonnet.com/fline/fl2123/stories/20041119003710500.htm, (Jul.27, 2008); See also Prystay, supra note 92. 99 See Shankar, supra note 98; Haté et al, supra note 79, at 18-20, 100 ECORYS, supra note 84, at 143. 101 Id , at 143 & 147-148.
37 Hosted by The Berkeley Electronic Press elimination period. Pakistan is important in geo-political terms and the textiles and apparel sector represents a significant industry that provides employment to 38% of the manufacturing labor, contributes more than 60% to the total export earnings of the country and accounts for 46% of the total manufacturing. 102 Figure 10 illustrates the overwhelming reliance of Pakistan on this sector of trade for its export earnings in 2006-07 (i.e. 74%) soon after expiry of quotas which perhaps also explains why Pakistan has been a vocal critic of the quota system in the past.
The Pakistani textile industry concentrates on the early stages of textiles processing i.e. cotton ginning, spinning and weaving and as such is highly dependent on its agricultural sector (constituting 25% of its GDP in 2005) for supply of crucial raw material. 103 This concentration of activities also means that Pakistan is a predominant exporter of cotton yarn, cloth and fabric which is the primary input for manufacture of cotton apparel and therefore, relies extensively on textiles for its exports earnings (47.5% in 2003 according to UNCTAD estimates; 44.1% in 2006 according to WTO international trade statistics).
In addition to textiles industries, Pakistan also has a sizable apparel and made-ups industries and is considered to be the leading exporter of bed linen to the US and the EU (See Figure 14). According to 2008 OTEXA statistics, Pakistan’s share (14.46%) in the US market in this sub-sector is second only to China (58.08%).
Pakistan’s textiles and apparel industry is divided into cottage industries and some small/medium sized family owned plants. The cottage industries traditionally carry out 80%- 90% of apparel manufacturing activities through subcontracting whilst the more organised plants account for almost 90% of textiles and fabric production. 104 The apparel production is concentrated mostly in large urban centres in Karachi and Lahore and is the primary employer of women that engage in basic stitching, sewing and cutting activities in apparel manufacture. 105
102 Government of Pakistan, Textile Vision 2005, at 1, available online: http://www.pakboi.gov.pk/pdf/Textile%20Vision%202005.pdf (Jan 23, 2009) [hereinafter referred to as Textile Vision ]. 103 Id , at 7. 104 Adhikari & Weeratunge, supra note 14, at 117; See also Karin Astrid Siegmann, The Agreement on Textiles and Clothing: Potential Effects on Gendered Employment in Pakistan , 144 (4) International Labour Review 401, 408 (2005) ; Appelbaum, supra note 32, at 46 105 Siegmann, id , at 408-409. Siegmann cites 2003 estimates of Pakistan Ministry of Finance which puts the count of urban apparel manufacturing units at 5000; See also Appelbaum, supra note 32, at 46.
38 http://law.bepress.com/unswwps-flrps09/art16 The primary advantages that Pakistan possesses are an abundance of low cost labor and a large cotton production base backed by some level of vertical integration in the weaving, ginning and spinning sectors which is able to readily supply low-cost inputs to the local apparel industries. With these advantages, many analysts placed Pakistan amongst the potential gainers in the post-expiry scenario.
Pakistan managed to export textiles and clothing worth US $ 10.68 Billion in 2005 which reached US $ 11.17 Billion in 2007.106 Similar to other South Asian exporters, Pakistan also targets the US and EU markets for its textiles and clothing exports. After expiry of quotas, Pakistan performed reasonably well in the US market, increasing exports by 19.2% in value terms and 20.9% in volume terms during the first seven months of 2006. 107 In the same period, Pakistan managed to register a 19.4% increase in value terms and 4.7% in volume terms in the EU market. 108 This performance could have been better had the EU not imposed a 13.1% antidumping duty on Pakistan’s major export of bedlinen. It is interesting to know that bedlinen exports (covered by HS Article 63) in the period January – May 2005 (immediately after the quota expiry) to the EU fell by 22% whilst the same product exports to the US increased by 34%. 109 However, Pakistan was unable to hold on to its growth in the US market in years after the quotas were lifted. Figure 15 takes into account the principal items that Pakistan exports to the US and in which there is stiff competition from India and China. With the exception of a few categories such as 339, 363, 347, 362 (refer to Figures 14 & 15), Pakistan has lost major share to China and India.
106 WTO, International Trade Statistics (2005-08), available online http://www.wto.org/english/res_e/statis_e/statis_e.htm (Jan.27, 2009) 107 Adhikari & Weeratunge, supra note 14, at 115 & 117. 108 Id. 109 See Munir Ahmad, Trade in Textiles and Clothing – Reflections from an Asian Perspective, (2nd Asian Textile Conference, New Delhi, Jan. 18-19 2007), at 6-7.
39 Hosted by The Berkeley Electronic Press 40 http://law.bepress.com/unswwps-flrps09/art16
In 2006, the total exports to the US (according to OTEXA and ITCB estimates-See Table 3) stood at US $ 3.25 Billion which fell to US $ 3.17 Billion in 2007. The corresponding figures for India, by comparison, are US $ 5.03 Billion for 2006 and US $ 5.104 Billion for 2007. This lacklustre performance of a country that was expected to perform much better in the quota free era is attributable to a number of factors:
• In the EU market, Pakistan’s exports in 2005 were US $ 2.5 Billion which fell from US $ 2.87 Billion in 2004 (See Table 4). This illustrates the combined impact of EU’s antidumping duty on Pakistan’s bedlinen, increased international competition and the reintroduction of 12% customs duty on imports from Pakistan. 110
• Pakistan’s exports were further affected when EU excluded Pakistan from its GSP+ Program for preferential treatment as a result of the outcome of the famous EC-Tariff Preferences case in the WTO DSB. The 2007 statistics (see Table 4) show that Pakistan’s exports have staged a modest recovery and its exports to the EU stood at US $ 3.3 Billion (with a market share of 3% in the EU market) which may be attributable to reduction of the antidumping duty from 13.1% to 7.6% in December 2005 which had positive effect on Pakistan’s bedlinen exports to the EU in 2006- 2007. 111 Figure 17 would shed further light on this.
At this juncture, it would be useful to compare Pakistan and India’s performance in the US and the EU markets in some important categories of imports where China was restrained by quotas in an attempt to reveal any capitalisation by India and Pakistan:
(1) According to the US-China MOU Agreement, quotas were placed on 34 Categories of textiles and apparel exports of Chinese origin which included (amongst others) US OTEXA Categories 332, 339, 338, 340, 345, 347, 348 & 363 (refer to Figures 14 & 15) that are top export items of India and Pakistan to the US. A quick perusal of the 2007-08 figures shows that in spite of the quantitative restrictions on China, Pakistan
110 ILO, supra note 79, at 25 111 See Pakistan: EU Reducing Anti-Dumping Duties, Asian Textile Business (Feb.1, 2006), available online http://www.allbusiness.com/asia/1084243-1.html (Jul.25, 2008) (See further Figure 17).
41 Hosted by The Berkeley Electronic Press failed to make any gains and in fact lost market share in Categories 332, 338, 339, 340, 345 & 348 while posting a healthy 26.76% increase in Category 347 and a 22.43% increase in Category 363 and maintaining its share in Category 362. By comparison, India maintained or increased its share in Categories 338, 339, 340, 345, 347, 348 & 363 and only lost out in Category 332 by experiencing a reduction in market share of 26.42%. China, on the other hand, continued to dominate the market in Categories 332, 340 & 345 whilst losing out in Categories 338, 339, 347 & 348 whilst under quota restraints.
(2) According to the EU-China MOU Agreement, 10 product categories were subjected to renewed quotas i.e. EU Categories 2 (Cotton fabrics), 4 (T-shirts), 5 (Pullovers), 6 (Men's trousers), 7 (Blouses), 20 (Bedlinen), 26 (Dresses), 31 (Brassieres), 39 (Table linen), 115 (Flax yarn). Figure 16 takes into account some of the important categories and considers the first quarter 2008 changes for China, India and Pakistan in terms of value shares in these categories. A pattern similar to the US market emerges where Pakistan has managed to maintain a share of 6.32% in Men’s/Boy’s Trousers categories whilst experiencing a decline by -30.77% in value share terms in the Pullovers category. In other categories, growth has stagnated. Whereas, China shows a healthy growth in the categories considered in Figure 16 and India has managed to keep a sizable stake in the EU market as well in these categories. The only category where Pakistan has outperformed its rival exporters is the bedlinen category (See Figure 17). In 2007, Pakistan managed to secure new market share after EU imported increased volume of bedlinen from Pakistan which jumped by 33% in value terms to 294 million Euros. In the preceding two years, shipments from this origin were up 52% in value terms. This was despite continued imposition of anti-dumping duties on Pakistani bed linen which for Pakistani products are ranging from 0% up to 8.5%, in addition of a GSP rate of 9.6% (instead of a "third-country" tariff of 12%). 112
Pakistan’s strong performance in this category may be attributable to the reduction in EU antidumping duty on Pakistan’s bedlinen as well as the decline of Pakistan Rupee decline against the Euro. In March 2009, Pakistani exporters received the welcome news of the
112 EmergingTextiles.com, EU Imports of Cotton Bedlinen in 2005-2007 (Statistical Report) (Apr.10, 2008), available online: http://www.emergingtextiles.com/?q=art&s=080410-home-eu-bed-linen&r=bedlinen¬e=1 (Nov.23, 2008).
42 http://law.bepress.com/unswwps-flrps09/art16 removal of the antidumping duty on the bedlinen exports to the EU. 113 However, for a producer that relies extensively on textiles and apparel exports, it is a cause of concern that this lacklustre performance came in a period where China was under quantitative restraints by the US and the EU.
Therefore, it can be said that Pakistan and India (to lesser extent) have failed to capitalise on the quotas imposed on China and with the lapse of the TS in December 2008 and eventually the PSS in 2013, Pakistan’s textiles and apparel industry would be especially hard hit by increase in the resulting competition from China and other regional rivals more than India.
This view is further reinforced if the disadvantages that Pakistan’s textiles and apparel sector faces are taken into account. Pakistan’s textiles and apparel industries are characterised by lack of product diversity and innovation even though the Government of Pakistan has stressed increasing the share of man-made fibre based products in the downstream industry and expanding the raw material base for the MMF sector by encouraging the production of polyester staple fibre and other man-made fibres within the country as part of the Textile Vision 2005 policy. 114 Expanding options by increasing product diversity is essential for expansion of the apparel sector in the post-elimination period. Also, diversity assists in “de- risking” the sub-sectors where there is stiff foreign competition from other exporters which means that in case of failure of foreign orders or shortfall in exports, production can be shifted over to other products.
113 See Anti-Dumping Duty on Bed Linen Export Ends. The News (Mar.6, 2009), available online: http://thenews.jang.com.pk/daily_detail.asp?id=165833 (Mar.6, 2009). 114 Textile Vision 2005 , supra note 102, at 474
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45 Hosted by The Berkeley Electronic Press In face of the looming economic slowdown in the US and the EU the urgency to diversify assumes increased importance since Pakistan concentrates on exporting cotton based products to the US and the EU as against mixed cotton/polyester or blended cotton products. Polyester and manmade fibre products are considered more affordable than 100% cotton products that cost more and are difficult to maintain and iron. 115 With the economic recession looming, the average consumer spending on clothing will likely fall and consumers may well prefer the cheaper products. India and China by comparison will not be severely affected because between 70-85% of their production is domestically consumed as against Pakistan where the domestic consumption is only 15% and 85% of apparel product is exported. 116
In addition to the typical third world problems of poor road and ports infrastructure, bureaucratic inefficiencies and political instability, Pakistan also faces obsolescence in its industrial infrastructure particularly the primary sectors of ginning and weaving which, according to one estimate, are only one-fifth as productive as in the developed world. 117 To offset this shortcoming, the Government of Pakistan announced loans to textiles industries as part of the Textile Vision 2005 policy package to upgrade their existing infrastructure as well as introducing tax reforms, promotion of market and product diversification and adoption of uniform standards. 118 In order to enhance Pakistan’s competitiveness in the global market, the Government of Pakistan also took measures to encourage product diversification and expansion into the manmade fibre and women garments sub-sectors as well. 119
In the backdrop on the war on terror, when Pakistan under Pervez Musharraf took a major policy u-turn and aligned itself with the US, there were even reports that the US could enter into a free trade agreement with Pakistan as well. Until 2004, there were indications that such an agreement was on the cards as Pakistani negotiators conveyed to the US that in exchange for cooperation on war in Afghanistan, the US should reduce barriers to market entry (especially tariffs which were as high as 29% in some categories). 120 The US retail industry backed this move by Pakistan but eventually US textiles industry groups pressured the US
115 See Pak Textile Sector May be Severely Hit by US Slowdown, The News (Nov.30, 2007), available online http://thenews.jang.com.pk/print1.asp?id=83495 (Jul.25, 2008). 116 Id. 117 Haté et al, supra note 79, at 20. 118 See Textile Vision 2005, supra note 102, at 476 & 483-490; Haté, id , at 22. 119 Appelbaum, supra note 32, at 46; Haté, id , at 22. 120 Rivoli, supra note 2, at 158.
46 http://law.bepress.com/unswwps-flrps09/art16 Government and to date no such agreement has materialised. 121 . Needless to say any FTA/PTA, with the developed countries such as the EU, US, Canada or Japan would give Pakistan’s textiles and apparel industry a competitive edge over its regional rivals. The need for an FTA/PTA is further reinforced if the rising number of FTA/PTAs in recent years is taken into consideration and also if the EU-India FTA foes ahead which would adversely affect Pakistan’s export performance in the EU market.
(b) South Asian LDCs: Figure 10 outlines the overwhelming dependence of countries in South Asia on textiles and apparel exports. These countries rely on these sectors to provide employment and for economic growth. There was a broad pre-elimination consensus that quota expiry would usher an era of despair, mass industrial enclosure, unemployment and economic collapse in the face of stiff competition from China. However, four years after quota expiry these countries have not only held their own but even managed to increase their shares in some categories in the EU and the US markets.
Bangladesh is one such nation that employs almost 2 million people (mostly women) and where apparel accounted for 83% of the country’s exports in 2006-07, 10% of its GDP and 30% of its manufacturing output. 122 The EU and US are virtually the only destination of Bangladeshi apparel exports (absorbing nearly 95% of the country’s exports). 123
Various 2007 statistics demonstrate that Bangladesh experienced stellar growth in its apparel exports two years after the expiry (See Tables 2, 3, 4 and Figures 3, 4, 5, 8 & 10). According to ITCB statistics for 2007, the combined exports of Bangladesh in this sector to the US and the EU markets amounted to US $ 9.532 Billion which was greater than combined Pakistani textiles and apparel exports to these two markets (US $ 6.5 Billion). This growth trend proves how off the mark many trade pundits were who predicted that countries such as Bangladesh would face extreme competition from more established exporters and substantial erosion in their existing market share. Contrary to such predictions, one Bangladeshi source stated that
121 Id , at 158-160. 122 See WTO, International Trade Statistics 2007 ; See further Meenu Tewari, Deepening Intraregional Trade and Investment in South Asia: The Case of the Textiles and Clothing Industry, (Working Paper 213, Indian Council for Research on International Economic Relations, 2008) at 4; See also Appelbaum, supra note 32, at 43; Adhikari & Weeratunge, supra note 14, at 113. 123 In 2007, 64% of apparel exports from Bangladesh were directed towards the EU whilst the corresponding figure for the US was 30% (Tewari, id , at 7)
47 Hosted by The Berkeley Electronic Press the overall textiles and apparel exports have doubled from US $ 6.2 Billion in 2004 to US $ 12 Billion in 2007. 124
Bangladesh typically competes in the low end market segment in apparel where its comparative advantage in abundant low cost labor is more pronounced and has also managed to establish critical backward linkages into spinning and weaving which has enabled 25% of the country’s woven textiles and 80% of the knitwear inputs to be met locally. 125 This benefits Bangladeshi apparel producers exporting to the EU since knitwear is a better integrated sub-sector within the Bangladeshi domestic textile value chain and this enables better value retention under EU’s GSP regime. 126 Moreover, Bangladesh’s advantage in knitwear was increased with the devaluation of Bangladeshi Taka in 2005-06 which made exports of this kind cheaper whilst the imports of woven fabrics became more expensive hence the same effect was not felt in this sub-sector to the same scale. 127
Bangladesh has capitalised to some extent on its GSP treatment status from the EU and managed to notch its market share in 2007 at 7.6% with a growth rate of 17.8% for years 2004-2007 (See Figures 8 & 10). However, as has been extensively discussed in academic literature, preferential treatment recipients could achieve higher market penetration leading to higher growth rates in the same period after quota expiry if certain rules requiring local content and transformation were liberalised.128
Bangladesh’s performance in the US market (refer to Figures 3 & 4 and Table 3) is not at the same level as in the EU since the US does not extend any preferential treatment to textiles and apparel exports of Asian origin. The growth rate in the US market for Bangladeshi exports stood at 2.56% in July 2008 according to OTEXA estimates (See Table 2). Whilst this figure is not as impressive as Vietnam (35.56% for the corresponding period in the US market), Bangladesh’s tenacious performance has proven that in the years following expiry of
124 Tewari quotes interviews conducted in Dhaka, Bangladesh in 2007 (Tewari, id , at 7). 125 Bangladesh has amongst the lowest wages in the world (US $ 0.22 per hour) ( See Textiles Intelligence, supra note 59); Tewari, supra note 122, at 7. 126 Id, at 7; See also Michiko Hayashi, Trade in Textiles and Clothing; Assuring Development Gains in a Rapidly Changing Environment, (UNCTAD/DITC/TNCD/2006/9) (UN Publication, 2007), at 16. 127 See Adhikari & Weeratunge, supra note 14, 119. 128 See Bob Fisher, Preference Erosion, Government Revenues and Non-Tariff Barriers, 29 (10) The World Economy 1377, 1378 (2006) ; See generally Bernard Hoekman & Çaglar Özden, Trade Preferences and Differential Treatment of Developing Countries: A Selective Survey, (World Bank Policy Research Paper No. 3566 (Washington DC, 2005); See also Audet, supra note 14, at 275; ILO, supra note 79, at 34.
48 http://law.bepress.com/unswwps-flrps09/art16 quotas, LDCs can compete in the prime export markets of the US and the EU both with or without preferential treatment being extended. However, Bangladesh’s performance must be considered in the context of safeguard restraints on China imposed by the EU and the US (refer to Table 3 and Figures 2 & 3).129
The export performance of Bangladesh is undermined by typical shortcomings in their infrastructure, roads, bureaucratic hurdles and long lead times that nearly all LDCs face in this sector, however, a major disadvantage is that Bangladesh is not producing domestic cotton. Perhaps this explains why Bangladesh is highly dependent on textiles imports and foreign inputs to keep the apparel production lines running. Another disadvantage is limited product diversity which concentrates on low-end apparel products like knit t-shirts, men’s and boys cotton knit and non-knit shirts, men’s and boy’s trousers, wool pullovers and manmade fibre products.130
Until September 2008, Bangladesh demonstrated a healthy export performance despite economic slowdown in the developed countries (particularly the US) and the consequent reduction of buying power of the consumers. US importers continued to buy from Bangladeshi manufacturers and the apparel exports rose by 16% to US$10.7 billion, reflecting an 11% increase in woven clothing exports while knit clothing exports were up 21.50% a reflection, perhaps, of the low labor costs associated with Bangladeshi products. 131 Bangladesh clearly capitalised on its advantage of low production costs relative to other supplying countries like China and its Asian competitors such as Vietnam and Indonesia.132
In 2008, similar to previous years, apparel exports still accounted for 75.8% of total shipments from Bangladesh. Therefore, Bangladesh represents one of those countries that have their socio-economic future dependent on the vicissitudes of the global apparel market. Any impact on export sector especially in currency terms which raise the prices of Bangladeshi apparel exports would have far reaching effects on the whole economy. A comparison of Bangladesh with the other Asian LDCs follows further below in this article.
129 Adhikari & Weeratunge, supra note 14, at 119. 130 Ashe Haté, supra note 79, at 25; Adhikari & Weeratunge, id , at 128-132; Tewari, supra note 122, at 38-41; Appelbaum, supra note 32, at 43. 131 Emerging Textiles.com, Bangladesh Resists Clothing Market Slowdown; Statistical Report, (Sep.18, 2008) available online: http://www.emergingtextiles.com/?q=art&s=080918-bangladesh-clothing-country- report&r=search¬e=1 (Jan.28, 2009). 132 Emerging Textiles.com, (Ibid).
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Another LDC manufacturer in South Asia is Sri Lanka which has performed enough to prove pre-elimination predictions wrong. Similar to Bangladesh, Sri Lanka possesses no indigenous cotton production base and relies extensively on imports of inputs. Sri Lanka is distinct from the rest of South Asian producers in that its product mix comprises cotton as well as blends of manmade fibres and it has managed to carve a niche market for its women’s intimate apparel products and swimwear. Unlike mass production of low-cost apparel at low wage, Sri Lanka has endeavoured to establish itself as an “ethical producer” of apparel with comparatively better wages in the region (See Figure 11 for a comparison with other Asian producers).133
The strategy of concentrating on niche markets has led to a remarkable diversification of exports by Sri Lanka from the standard low-value added apparel items to more specialised products ranging from women’s intimate apparel to body armour and flak jackets for military clients.134 Compliance with the international labor and environmental standards has further benefited the island nation. Renowned brands such as Victoria’s Secret, Triumph, Sara Lee, Speedo and many others have sourced their products from Sri Lanka for a long time. 135
Sri Lanka’s emphasis on high value added items meant its products did not experience the decline in prices predicted in the wake of quota elimination i.e. as quotas are lifted and competition between exporters intensified, some countries would lower or be forced to lower the prices of their merchandise to stay competitive. 18 considers figures of the 4 major South Asian producers by way of comparison to illustrate the changes in unit prices (expressed as percentages) in the EU market in years 2004-2006 (i.e. one year before and after quota expiry). The results are varied and may be attributable to a variety of reasons. For India, the costs arose due to the comparatively higher quality of its products as well as rise in costs of associated inputs. For Bangladesh, that concentrates on the low-value added production of apparel in high volume, the prices fell by 3.5% after quota expiry (in 2005) and then rose by 23.4% in 2006 possibly due to the effects of the safeguards imposed on China which also
133 See Tewari, supra note 122, at 7-8; See also Adhikari & Weeratunge, supra note 76, 1 134 See Lanka Page, Bullet-Proof Jackets New Weapon in Sri Lankan Export Armoury (Sep.2, 2006), available online: http://lankapage.wordpress.com/2006/09/02/bullet-proof-jackets-new-weapon-in-sri-lanka-export- armoury/ (Sep.29, 2008). 135 See Sri Lanka industry: Fears over garment sector unfounded, The Economist Intelligence (Nov.25, 2005); Sri Lanka's Brandix to set up largest textile factory in India, The Economic Times (Nov.18, 2005); See also Eric Ellis, Victoria's Secret's Secret? Hint: It's In the Indian Ocean, Fortune (Jun.9, 2004), available online: http://www.ericellis.com/mas.htm (Sep.29, 2008); Appelbaum, supra note 32, at 47; Lanka Page, id .
50 http://law.bepress.com/unswwps-flrps09/art16 affected Pakistan in similar fashion. The disparity between increase in unit prices of Pakistan and Bangladesh is due to the fact that Pakistan places heavy reliance on textiles exports rather than apparel exports. The Sri Lankan exporters, by comparison, experienced a steady rise in prices which demonstrates a continued inflow of foreign orders and profitability of the nation’s textiles and apparel sector.
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Sri Lanka and Bangladesh received preferential treatment from the EU from the EU under the EU GSP/EBA regimes. A review of the statistics for these two countries from both the US and EU reveals an interesting picture for countries that were thought to be casualties of the quota elimination process (See Figures 20 & 21). Even though the EU extends preferential treatment to apparel from Asian LDCs like Bangladesh and Sri Lanka (amongst others), statistics show that:
1) Sri Lanka’s performance in the US market is more consistent over the last seven years (both prior to and after elimination of quota restraints) than in the EU market. This may be attributable to the “double transformation” rule that is part of the EU preferential treatment regime under which in order to qualify for duty free access into the EU, apparel products must satisfy the “double transformation” test i.e. yarns must be transformed into fabrics which must be transformed into apparel. This burdens the LDCs that do not possess a vertically integrated textiles manufacturing infrastructure operating with their apparel industries. In the US market, where Sri Lanka is not constrained by counter-productive ROO in preferential trade regimes, its export performance is much better than in the EU market (refer to Figure 20 & 21).
2) Bangladesh exports more apparel to the EU market than to the US (nearly twice as much according to 2007 statistics). This demonstrates the positive effects of the EU GSP/EBA scheme that has enabled Bangladesh to maintain its competitiveness in the post-elimination era (see Figure 21). Perhaps this may be attributable to the regional cumulation incorporated within the new EU preferential regime enabling LDCs that concentrate on producing apparel (like Bangladesh or Sri Lanka) to employ fabrics, yarns and other inputs from other regional producers such as India, Pakistan or other ASEAN countries, provided that the required transformation has occurred in those yarn, fabric producing countries and other requirements of duty free access under the EBA are met.
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53 Hosted by The Berkeley Electronic Press Bangladesh and Sri Lanka also benefitted from the safeguards imposed on China by the US and the EU in 2005-06. This is evident from the trade statistics for the years 2005-2007 (refer to Table 5). The positive effects of these one year safeguards can be gauged from the impressive combined growth rates of exports by Bangladesh and Sri Lanka to the US and the EU. This growth is more pronounced in the years 2005-06 when safeguards were applied throughout the year as compared to 2004-05 when the safeguards had just came into effect. Also noteworthy is the growth rate subsiding in 2006-07 when China started to slowly gain lost ground due to the increase in quota rates built into the safeguards (see discussion on US- China and EU-China MoU in the preceding section of this article).
Nevertheless, the statistics for years 2005-07 (i.e. from quota expiry and imposition of TS safeguards on China) paints a picture of respectable growth rates by the South Asian producers (particularly Bangladesh) in the prime textiles and apparel markets of the world.
(Table 5) Percentage of Annual Growth Combined US & EU Textiles and Apparel Calculated from Imports from 4 South Asian Producers ITCB statistics for years 2004-07
Exporters 2004-05 2005-06 2006-07 2005-07 Bangladesh 2.41% 21.88% 4.90% 25.72% Sri Lanka 3% 8.64% 3.53% 11.88% India 18% 11.06% 7.51% 17.74% Pakistan -0.38% 11.62% 5.77% 16.72%
However, by first quarter of 2008, even though total apparel exports by Sri Lanka rose 5.55% at US$735 million, exports to the US fell 11% at US$361 million while shipments to the EU rose by 16.66% at US$336 million. 136 To illustrate further, Sri Lankan exports to the EU increased by 40% in Euro terms in February from the same month in 2007 after increasing by 19% in January in sharp contrast with increases of only 6.15% and 1.59% in the last two months of 2007, respectively. Whilst, exports to the US experienced steady decline, falling by 17.57% in March in US $ terms following falls of 6.52% in January and 2.38% in February. 137
136 Emerging Textiles.com, Waiting for renewal of 3-Year EU's GSP-Plus Provision; Sri Lanka's Exports Falling to U.S., Surging to E.U. (Country Report) (May. 27, 2008), available online: http://www.emergingtextiles.com/?q=art&s=080527-country-report-sri-lanka&r=search¬e=1 (Jan.29, 2009). 137 Id .
54 http://law.bepress.com/unswwps-flrps09/art16 This decline was attributable to the preferential access in the form of the GSP+ regime by the EU which grants three year duty-free access to Sri Lankan textiles and clothing exports. This was to initially expire at the end of 2008 and would only be renewed subject to improvement in working conditions in a country faced with a prolonged civil war and high inflation. 138 The eligibility of GSP+ program is based upon progress towards implementation of higher labor and environmental standards and this has motivated Sri Lankan exporters to develop a certification program aimed at proving ethical practices which demonstrates the importance Sri Lankan producers are giving to upholding high labor standards. These exporters realise that it is the GSP+ preferences which enabled the Sri Lankan industry to weather the increased competition in the post-elimination period. To this end, apparel exporters have developed ethical trading through a label called "Garments without Guilt" and a certification system managed by Swiss group SGS. 139
Similar to Bangladesh, Sri Lanka has benefitted from the advantages under the GSP program. However, exporters fear that Brussels will not renew the GSP+ eligibility in late 2008 as a result of poor human rights records in the ongoing civil war in the country. The EU eventually did renew GSP Programme eligibility for Sri Lanka pending investigations into “alleged human rights violations” 140 but the flip-side of compliance with these stringent standards is that labor costs would rise in addition to rising costs due to increased inflation and consumer prices. This would force the domestic clothing industry to significantly increase wages in the near term and this would have implications on the competitiveness of Sri Lankan products in the international markets with Sri Lankan exports becoming more expensive.
Apart from the question of pricing, there are other factors limiting Sri Lanka’s productivity and progress in this sector, the foremost being the lack of vertically integrated production due to a shortage of textiles production facilities and concentration on specialised apparel production. This has meant that Sri Lankan exporters import most of their inputs which
138 Id. 139 See Adhikari & Weeratunge, supra note 76, at 6; Emerging Textiles.com, supra note 136 ; See generally Dilshani Samaraweera, Made in Sri Lanka, Ethical Garments , Financial Times, available online: http://sundaytimes.lk/060827/ft/3.0.html (Sep.27, 2008); See also Garments Without Guilt, available online: http://jaaf.eureka.lk/ (Sep.27, 2008). 140 See Sri Lanka: Makes EU GSP+ List, Pending Investigation , Just-Style (Dec.13, 2008). Even though Sri Lanka’s eligibility for GSP+ scheme is dependent on the pending probe into human rights violations, if the EU decides to withdraw trade preferences under the scheme, a six month notice would be given which effectively gives Sri Lankan exporters preferential entry into the EU until October 2009 (Just-Style, id ).
55 Hosted by The Berkeley Electronic Press results in longer lead times in fashion and time-sensitive apparel categories. 141 In addition to the typical third world problem of poor roads, ports and communications infrastructure, Sri Lanka’s exports are narrowly concentrated on low value added items,142 even though there has been recent diversification towards higher value added export products along with promotion of ethical labor and environmental standards that has attracted orders from large foreign buyers and retailers.
Amongst the ranks of South Asian LDCs, Bangladesh and Sri Lanka have emerged as survivors in the port-elimination era and in some export categories have even surpassed their regional (and much better organised) rivals in export volumes. However, Nepal and Maldives became the post-elimination era casualties. These countries possessed no comparative advantage in textiles and apparel exports i.e. no indigenous production of cotton and high dependence on imports and hence there was no vertical integration or backward and forward linkages within their respective industries. Thus the concentration was on apparel manufacture and export. The establishment and existence of apparel manufacture in these two countries was directly due to the quotas under MFA and its predecessor regimes. 143
With the elimination of quotas and increased competition, these two countries were the first casualties of the new trading environment that was free from artificial restraints. Although, lifting of quotas cannot be the sole cause for the demise of this sector in these two countries because the decline started in the years prior to quota expiry which expedited the process. 144
In Nepal, investment mainly came from Indian exporters in the 1980s aimed at circumventing quotas and hoped to capitalise on the special and differential treatment extended to Nepal owing to its status as LDC. 145 By the late 1990’s the apparel industry had become the largest in Nepal and in 2003, accounted for 35% of all merchandise exports by this country. 146 The genesis of the Maldives apparel industry is similar to Nepal except that most of the workers were foreigners. 147 The apparel industry accounted for one-third of total merchandise exports until 2003 and then went into decline so that by 2006 there were no
141 See ILO, supra note 79, at 50. 142 See Adhikari & Weeratunge, supra note 14, at 122. 143 Id . 144 See Adhikakri and Weeratunge, supra note 76, at 1-2. 145 See Ashe Haté et al, supra note 79, at 22 146 See Appelbaum, supra note 32, at 44; 147 See Adhikari & Weeratunge, supra note 14, at 114
56 http://law.bepress.com/unswwps-flrps09/art16 exports by this sector. 148 The scale of the decline can be illustrated by the fact that in 2004, the total exports from this sector stood at US $ 81.4 Million which fell to US $ 4.8 Million in 2005 (a reduction of 94%). Currently, there is no production in this in the Maldives. 149
At its zenith in the early 1990s, this sector in Nepal accounted for 12% of total employment (approximately 100,000 people) in the manufacturing sector. 150 However, by mid-2006, this figure declined to only 5,000 people. 151 Nepal overwhelmingly relied on the US market, which accounted for 80% of its merchandise exports, for its narrow range of apparel manufactures. 152 The quota system had allowed Nepalese apparel industries to be “insulated” against foreign competition and as a result Nepalese producers did not diversify their product base. With the US extending preferential treatment to African producers under AGOA and due to combination of numerous problems ranging from a Maoist insurgency to obsolete manufacturing infrastructure, geographical isolation as well as high costs of inputs and labor, Nepal in 2005 experienced a decline of 25.8% in value terms and 41.3% in volume terms as compared to 2004.153 In the EU market, Nepal experienced a decline of 6.1% in value and 11.7% in volume terms in the corresponding period. Even after imposition of safeguards on China, Nepalese industry did not show any signs of recovery. 154 The only viable export item is the traditional Nepalese handicraft goods (like woollen carpets) that carry niche importance in the western markets. This product was never under quotas and was therefore not affected by quota expiry. 155 Currently, Nepalese industry is experiencing continuing losses and there are few hopes of its revival unless concerted efforts are taken at the governmental, entrepreneurial and international donor level. 156
In a classic illustration of “quota hopping” in a “footloose” sector, apparel manufacturing in Maldives and Nepal was spurred primarily from foreign investors who constantly scoured the
148 Id . 149 See Hayashi, supra note 126, at 25; Adhikari & Weeratunge, supra note 14, at 117; Adhikari & Weeratunge, supra note 76, at 2. 150 See UNDP, supra note 40 , at 84. 151 See Adhikari & Weeratunge, supra note 14, at 114 152 See Ashe Haté, supra note 79, at 23; See also Adhikari & Yamamoto, supra note 9, at 192-193. 153 See Appelbaum, supra note 32, at 44; See also Richard P. Appelbaum, Assessing the Impact of the Phasing out of the Agreement on Textiles and Clothing on Apparel Exports on the Least Developed and Developing Countries , (Paper 05, University of California Santa Barbara Center for Global Studies, 2004), at 49; See also Ashe Haté, id , at 22-23 154 See Adhikari & Yamamoto, supra note 9, at 192. 155 See Adhikari & Weeratunge, supra note 14, at 118. 156 See generally UNDP Regional Centre in Colombo, Addressing the Impact of Garment Quota Phase out on Nepal, (Research Brief, 2007).
57 Hosted by The Berkeley Electronic Press world for regions with unutilized quotas from where they could carry out OPP for exports. 157 These two countries provide a good example of how OPP activities in certain countries have been adversely hit by expiration of quotas. Maldives and Nepal are not isolated examples of this trend. Since the expiration of quotas, the continued viability of OPP operations in other parts of the world such as Africa (under AGOA) and Caribbean (CBI/CBTPA) has been questioned as well. 158 With the lifting of quotas, distance and time become critical barriers against continued OPP operations unless “the margin of preferential duty exceeds the difference between the OPP-related cost and the logistical cost incurred for competitive suppliers.” 159 Therefore, OPP is only a feasible option where the OPP-recipient country is located in proximity to the OPP-initiator country and this is especially true in the light of the growing trends of lean retailing where quick turnaround and short lead times demand that production is sited closer to the primary market. 160
Proximity coupled with preferential access and low labor costs allowed the Caribbean producers to survive the post-expiry scenario in face of stiff competition from Asian competitors such as China, India, Bangladesh, Vietnam and others. 161 Conversely, it was the lack of proximity and not low labor costs and preferential access that spelled doom for the Maldives and Nepalese apparel industries and some African beneficiaries under AGOA. This can be demonstrated by the by the poor performance of AGOA recipient countries in the post-elimination period and the close down of apparel manufacturing sites in Botswana and Lesotho that were established to take advantage of trade opportunities presented under the US AGOA regime. 162 This can be further illustrated by a comparison in the US market of African countries (under AGOA), Nepal and the Caribbean countries (that enjoy proximity to the US as well as receive preferential treatment) in the post-elimination period.
157 See Ashe Haté et al, supra note 79, at 22; See also Appelbaum, supra note 32, at 44; Adhikari & Weeratunge, supra note 14, at 117; Adhikari & Weeratunge, supra note 76, at 1-2. 158 See Heron, supra note 14, at 13. 159 See Audet, supra note 14, at 275. 160 See Tony Heron, An Unravelling Development Strategy? Garment Assembly in the Caribbean Basin after the Multifibre Arrangement, 25 (2) Bulletin of Latin American Research 264, 277 (2006) . 161 Although their performance is not as impressive as South Asian LDCs (See Table 6); Heron, id , 277. 162 See Audet, supra note 14, at 275; See also Post-Quota Textile Trade Starts to Take Shape, ICTSD Bridges , Vol.9, No. 2 (Jan.26, 2005).
58 http://law.bepress.com/unswwps-flrps09/art16 (Table 6) Comparison of Leading Sub-Saharan African, Caribbean and South Asian LDCs Producers in the Post-Elimination Period in the US Market 2006-08 (Export Figures in US $) Source: OTEXA
Regime/Regions Producers 2006 2007 2008 CBTPA/CBI Dominican Republic 1,855,015,941 1,550,490,762 1,060,794,572 Honduras 2,629,050,201 2,445,447,004 2,517,999,687 El Salvador 1,646,419,735 1,433,174,483 1,507,316,039 Costa Rica 491,589,847 479,494,899 431,548,408 Jamaica 56,494,558 48,860,905 36,612,176 Haiti 406,340,140 449,683,466 452,206,347
AGOA/Sub- Botswana 30,046,649 28,676,816 31,499,394 Saharan Africa Cameroon 388,569 231,738 516,004 Ethiopia 3,614,838 5,995,851 4,908,518 Ghana 5,173,618 9,534,710 7,865,836 Kenya 271,021,220 263,721,082 249,036,112 Lesotho 390,712,124 387,031,425 383,525,513 Madagascar 277,099,960 238,438,804 289,689,942 Malawi 22,781,165 18,186,761 19,825,465 Mali 67,884 42,191 671,626 Mozambique 2,516,176 693,549 160,659 Namibia 53,223,668 33,237,435 28,624,052 Niger 4,755 252,218 97,681 Nigeria 173,021 102,946 81,395 Senegal 74,766 73,973 48,387 Sierra Leone 135,134 560,733 287,697 Swaziland 160,997,148 135,268,891 135,284,398 Tanzania 4,099,000 3,714,752 3,238,908 Uganda 4,843,622 1,258,077 1,150,042
South Asian LDCs Nepal 95,777,738 84,921,014 70,534,615 Maldives 4,719,927 1,401 0 Bangladesh 2,456,926,163 2,997,871,424 3,191,221,645 Sri Lanka 1,677,028,018 1,702,827,293 1,590,426,057
Table 6 takes into account major CBI/CBTPA producers, AGOA/Sub-Saharan Africa producers that are beneficiaries under the ‘special apparel rule’163 and the four South Asian LDCs. Review of the figures reveals the following:
163 The ‘Special Apparel Rule’ under the AGOA regime enables lesser-developed beneficiary sub-Saharan African countries to use non-US fabric and yarn in apparel wholly assembled in their countries and while qualifying for duty- and quota-free treatment until September 30, 2012. Exports under the Special Rule are subject to a cap (AGOA limits imports of apparel made with regional or third country fabric to a fixed percentage of the aggregate square meter equivalents (SME) of all apparel articles imported into the United States. For the year beginning October 1, 2006, the aggregate quantity of imports eligible for preferential treatment under these provisions is an amount not to exceed 6.44% of all apparel articles imported into the US. Out of this, apparel imported under the Special Rule for lesser-developed countries is limited to an amount not to exceed 3.5% of apparel imported into the US in the preceding 12-month period. Apparel articles entered in
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1) Bangladesh and Sri Lanka have out-competed all of the rival LDC producers that enjoy proximity to the US market as well as being beneficiaries under preferential treatment regimes such as AGOA, CBI/CBTPA with the exception of Honduras (which nevertheless only bests Sri Lanka and not Bangladesh).
2) Drastic decline of Maldives and reduction of exports from Nepal are highlighted vis-à-vis other LDCs in the context of diminishing future of OPP in the post-elimination period for countries that do not enjoy proximity to the US.
3) Dominican Republic, Honduras and El Salvador’s performance as compared to African producers under AGOA indicates that proximity factor becomes decisive where there are competing producers that are all recipients under a preferential regime.
4) The counter-productive impact of stringent ROO incorporated within the preferential regimes operated by the US in “favour” of the LDCs is highlighted when compared to the performances of South Asian LDCs such as Bangladesh and Sri Lanka that are not restrained under stringent ROO to source their inputs from less competitive US suppliers. The operation of ROO to the detriment of Caribbean and African countries and the establishment of ‘captive markets’ have been discussed in Article 3 as well and the figures in Table 6 certainly back those assertions up.
5) Performance figures in the US market of Sri Lanka and Bangladesh also demonstrate that the US clothing retailers are looking towards Asian producers more than they are looking to African and Caribbean exporters to fill their orders in the post-elimination period. Not being bound by stringent ROO to
excess of these quantities are subjected to otherwise applicable tariffs. The duty-free cap is not allocated amongst eligible countries and is filled on a "first-come, first-served" basis). For the purposes of this preferential treatment regime, Lesser-developed countries are those with a per capita gross national product of less than $1500 a year in 1998 as measured by the World Bank (See US Department of Commerce, International Trade Administration portal on AGOA: http://www.agoa.gov/eligibility/apparel_eligibility.html ) (Sep.29, 2008)
60 http://law.bepress.com/unswwps-flrps09/art16 source their inputs from US sources exclusively has meant that Bangladesh and Sri Lanka can look to competitive Asian producers to fulfil their import needs and compete aggressively in the US market.
(iii) ASEAN/Far-Eastern Countries: ASEAN Countries are amongst the foremost producers and exporters of textiles and apparel in the world as is evident by their consistent export performance in recent years. It comprises a diverse range of producers such as LDCs like Cambodia and Vietnam that are overwhelmingly reliant on apparel manufacturing. ASEAN also includes developing countries such as Indonesia, Malaysia and Thailand that concentrate on textiles and apparel exports although as Figure 22 demonstrates that this sector has been relegated to secondary position after diversification from textiles and apparel sector to other manufacturing sectors.
Similar to China and South Asia, there is an abundance of skilled labor engaged in the textiles and apparel sector (mostly in the labor intensive apparel manufacturing compared to the more capital intensive textiles sector) although the labor costs in some of the countries reviewed in this case study are not low if compared to the neighbouring manufacturers (See Figure 11).
In yet another similarity to South Asia, quota system was again a major reason behind establishment of textiles and clothing industries in the Far-East since restrictions on Japan (and later on Taiwan and Korea) prompted investors to look for sites with unutilized quotas and where labor cost was low and this lead to the “spillover” establishment of textiles industries in Malaysia and Indonesia and also apparel assembly operations in Cambodia, Vietnam and the Philippines (this would be further discussed below).
ASEAN countries compete with textiles and apparel exporters from across the world in the US and the EU market including South Asian countries. Even though statistics show that South Asian producers are somewhat evenly ranked in these two markets, as a regional trading bloc ASEAN countries have certain advantages over South Asian countries.
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The foremost advantage is the reduced tariff rates maintained by ASEAN producers (See Figures 25 & 26). Vietnam again stands out as an exception. However, when compared to South Asian producers, these tariffs are low (see Figures 12 & 13). This has meant that many South Asian producers find textiles, fabrics and other inputs from ASEAN producers to be much cheaper than the ones produced in Pakistan or India. Additionally, ASEAN countries have established the ASEAN FTA (AFTA) with the specific aim of further reducing tariff barriers. This was implemented through the Common Effective Preferential Tariff (CEPT) Scheme for AFTA whereby more than 99% of the products in the CEPT Inclusion List of Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand were reduced to the 0%-5% tariff range. 164
Prior to the expiry of quotas most analysis 165 predicted that ASEAN countries possessing little or no comparative advantage in textiles and apparel manufacturing would face declining export levels internationally and would be forced to reduce their prices in order to retain their share in the primary export markets of the world. After quotas expired the results were mixed and somewhat baffling. A quick glance at Figures 23 and 24 that consider the export figures
164 See further ASEAN Secretariat, ASEAN Free Trade Area, available online: http://www.aseansec.org/12021.htm (Nov.21, 2008). 165 See e.g . studies referenced is supra note 32.
64 http://law.bepress.com/unswwps-flrps09/art16 according to ITCB statistics of some of the ASEAN countries under review, reveal that with the exception of Vietnam all other producers have either experienced modest growth or experienced slight declines.
Similarly, the effect of quota expiration and the resulting increase in competition has also had a mixed impact on prices. The effects on prices also include currency fluctuations, rises/declines in labor, transport and production costs as well as tariffs. Figure 27 considers percentage change in the US market in price for cotton t-shirts (which is a staple export item for all of the countries under consideration) in years 2007 and the first half of 2008. Again the results are mixed with rise and declines across the board (except for Vietnam). Additionally, Figures 28 and 29 take into account EU imports in HS Articles 61 and 62 apparel for years 2004-2007 and the results do not show a drastic decline in prices contrary to what was predicted in the pre-elimination analysis. This will be further discussed in case studies below.
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Both ASEAN and SAARC countries have competed in the post-elimination US and EU markets against preferential exporters. Figure 10 considers the performance of the ASEAN and SAARC countries under review in the case studies and compares them with the combined performance of preferential exporters from CBI, AGOA and CAFTA. Strong growth in value terms is evident from the statistics of ASEAN and SAARC producers. As the case studies would further demonstrate both ASEAN and SAARC manufacturers have lodged strong volume and value growths since expiration of quotas with some moving into the higher value added product categories. 166
From the US statistics it also appears that preferential suppliers were unable to compete effectively compete once quotas were lifted on non-preferential suppliers (mostly from Asia). The surge in shipments to the US soon after quota elimination in 2005 came mainly from China as was discussed in the foregoing case study on China. As a result, the US imposed selective restrictions on shipments in the latter half of 2005 which were later crystallised in the US-China MOU the effects of which have been discussed in this Article. Due to these
166 James, supra note 80, at 11-12.
67 Hosted by The Berkeley Electronic Press safeguards, China’s growth rate in the US market was drastically reduced in volume terms for both clothing (from 98% to under 11%) and for textiles (from 25% to 11%).167
This immediately provided opportunities for ASEAN and SAARC producers to move in and capture further market share in the US market e.g. in 2006, ASEAN increased its apparel exports by 16% volume and value whereas SAARC exporters also benefited by increasing their exports 10%–11% in volume and value terms.168 However, as the case studies would show, there were few categories in which gains were made and China maintained its overall grip on the US market in spite of the safeguards, opening of competition and reduction in export prices by some major exporters. Figure 10 further illustrates that preferential exporters failed to capitalise on the restrictions on China and experienced negative growth in both volume and value terms by about 12% and 6% respectively in 2006.
The case studies in this Article consider Cambodia, Indonesia, Malaysia, Philippines, Thailand and Vietnam since not only do these countries fall amongst the leading textiles and apparel exporters but also because the rest of the ASEAN Members i.e. Singapore, Brunei, Laos and Myanmar either do not possess significant textiles and clothing industries or there are difficulties in obtaining data and trade figures for their export performance. The objective behind examining the six ASEAN producers is to establish the veracity of the issues raised in Article 3 in light of the latest and historical statistics.
(a) Cambodia:
“We are extending our labor standards beyond the end of quotas because we know that is why we continue to have buyers…if we didn’t respect the unions and the labor standards, we would be killing the goose that lays the golden eggs” (Cham Prasith, Cambodian Minister of Commerce, 2005 169 )
“Instead of encouraging us with words, buyers should do it with actions. In countries that don’t care about child labor, environmental protection or social justice, of course their prices will be cheaper. We believe the trend must change. If not, it will be a sad story for some factories.” (Van Sou Ieng, President of the Garment Manufacturers’ Association of Cambodia, 2003 170 )
167 Id , at 12. 168 Id . 169 Quoted in Elizabeth Becker, Cambodia's Garment Makers Hold Off a Vast Chinese Challenge, The New York Times, May. 12, 2005, available online: http://www.nytimes.com/2005/05/12/business/worldbusiness/12cambodia.html (Feb.17, 2009).
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Cambodia was also predicted to be a potential casualty of quota elimination as a result of rising competition from other developing countries in Asia (especially China). 171 The LDCs in which apparel industries were established as a result of the quotas under the MFA regime were anticipated to be its first victims of the lifting of quotas. Whilst the performance of this LDC producer is not at the same level as other leading LDC exporters such as Bangladesh and Vietnam in the post elimination era, it has managed to survive well enough to prove the trade experts wrong.
In yet another instance of “quota hopping”, investment in Cambodia’s apparel manufacturing factories was initiated by investors from China, Taiwan, Hong Kong and Korea who were on the lookout for manufacturing sites with abundant low cost labor and unused quotas from the major markets of the EU and the US. 172 Figure 11 indicates that Cambodia’s labor costs are amongst the lowest in Asia. Investment flowed throughout the 1990’s (during the MFA and the ATC regimes) and this resulted in a mass migration of workers from rural areas into urban areas similar to the industrial revolution in the UK as highlighted in Article 1. 173
Cambodia, like other LDC concentrates on low-value added, mass produced apparel items for exports. It has little in the way of textiles manufacturing infrastructure and is therefore, highly dependent on imports of fabrics and inputs for its apparel industries (textiles accounted for 24.5% of all imports by Cambodia in 2006-07). 174 Perhaps this also explains why the average tariff levels on textiles are fairly low at 9.6% in 2007-08 (nominally down from 9.7% in 2006-07) (see Figures 25 and 26) since Cambodia requires constant supply of fabrics and other inputs at low cost to keep its garment assembly operations running. Conversely,
170 Quoted in Daniel Ten Kate, New World Order; Can Cambodia’s Garment Industry Survive?, the Cambodia Daily, Sep. 6, 2003, available online: http://www.camnet.com.kh/cambodia.daily/selected_features/new_world_order.htm (Feb.17, 2009). 171 According to ATMI estimates conducted prior to quota expiry, Cambodia was projected to lose US $ 676 Million worth of apparel exports to China (ATMI, supra note 32, at 12); See also 2006 estimates by NCTO which projected losses of Cambodian textiles & apparel exports worth US $ 1,313 Million due to combined effects of quota elimination and expiration of safeguards on China; For comments on Cambodia’s unexpected performance immediately after quota expiry see Munir Ahmad, Textile and Clothing; One Year of Evidence, (Asia-Pacific Trade and Investment Initiative, UNDP, WTO Ministerial Conference in Hong Kong, 16 December 2005). 172 Hall, supra note 22, 23-24; See also USAID, Measuring Competitiveness and Labor Productivity in Cambodia’s Garment Industry (June 2005), at 3. . 173 See Dr. John Hall, Human Rights and the Garment Industry in Contemporary Cambodia, 36 Stan. J. Int’l l. 119, 128 (2000). 174 See WTO, supra note 34.
69 Hosted by The Berkeley Electronic Press average MFN tariffs for garment imports are higher (at 28.5% in 2006-07 and 2007-08) than South Asian producers for similar reasons of protecting the domestic apparel sector (refer to Figures 25 and 26).
Cambodia in the past experienced solid growth in export of its apparel and this is evidenced by the fact that its exports grew from US $ 26 Million in 1995 to US $ 2 Billion in 2004. 175 By 2005, there were close to 238 companies manufacturing apparel around the capital Phnom Penh out of which only 5% were owned by Cambodian nationals. 176
Figure 22 highlights the importance of the apparel sector and Cambodia’s overwhelming dependence on apparel exports within the total merchandise exports of this country in 2006- 07 relative to other exporters in the Far-East/ASEAN region. The Cambodian Government feared adverse impact on the local employment levels in the post-elimination period due to shifting “footloose” patterns of global sourcing especially since most of the factories were foreign-owned.177 Sourcing by foreign brand name retailers constitutes a critical lifeline for Cambodia’s apparel dependent economy. For example, in 2004-05, 40% of apparel exports from Cambodia were sourced by the US brand ‘Gap’ for its Banana Republic and Old Navy fashion lines.178 Hence, there was a major concern in 2004 that with the expiration of quotas, the Gap would source exclusively from China (from where it sourced one-sixth of its merchandise) especially considering the fact that labor costs in Cambodia were higher than China by 25%.179
According to ITCB statistics, Cambodia managed to gain 2.5% share of the US export market in 2007. Figure 31 highlights the growth of Cambodia in the US market from years 2004 to 2007. Whilst the statistics are not as impressive as Bangladesh or Vietnam (see Tables 2, 3 & 6) Cambodia has managed a respectable 29.10% growth rate for years 2005-07 with an additional 6.3% growth in its apparel exports to the US in financial year ending 2007/2008 (refer to Table 2 and Figure 3). Additionally, Cambodia’s T-Shirt exports under important categories 338, 339, 340 and 341 recorded an overall price fall of -1.51% in 2007 (see Figure 27) which is a major reason for its competitive performance in the US market. In the first half
175 See USAID, supra note 172, at 3; UNDP, supra note 40, at 89 176 See USAID, Id , at 3. 177 See Hall, supra note 22, at 24-25; 178 See Appelbaum, supra note, 153 at 54; UNDP, supra note 40, at 89; Hall, supra note 22, at 24; USAID, supra note 172, at 4. 179 See Appelbaum, supra note 153, at 54; UNDP, supra note 40, 89.
70 http://law.bepress.com/unswwps-flrps09/art16 of 2008, Cambodian exports increased by 5.07% increase in prices (refer to Figure 27) which demonstrates that it is a viable exporter to the US market as well as disproving the pre- elimination analysis that increased competition would lead to countries predicted to be on the losing-end massively reducing the prices of their exports.
Similarly in the EU market (refer to Figure 24 & 32), Cambodia’s exports grew by 15.37% from years 2005-07 even though its volume of exports to the EU is considerably less than in the US and it faces tough competition from regional rivals such as Bangladesh, Vietnam, China, Sri Lanka, Indonesia and Thailand as well as apparel producers located proximate to the EU such as Turkey. Nevertheless, the EU represents a major export destination for Cambodian garment exports, notwithstanding it only holds a minor market share of 0.6% in the EU. The statistics do, however, indicate that Cambodia has managed to survive the initial increased competition upon quota expiry as well as recording a modest growth rate which was enough to prove the pre-elimination estimates off the mark.
Cambodia has attempted somewhat successfully to establish itself as an ethically conscious apparel manufacturing venue and it is to this endeavour that it owes its relative success in the
71 Hosted by The Berkeley Electronic Press post-elimination era. This approach has also been successfully followed by Sri Lanka (as discussed above) and in the case of Cambodia has resulted in the continued survival of its apparel industries e.g. combined apparel exports to the US and EU in 2007 reached US $ 3.2 Billion. 180 The basic rationale behind the policy to improve labor standards was not only to appeal to the large socially-conscious foreign retail corporations but also the end-consumers in target markets. The projection was simple and effective -Cambodia offers low-labor costs, continued sourcing would be helping to keep the factories running and many of the world’s poorest would be keeping their jobs.
The 1999 US-Cambodia Bilateral Textile Agreement was the manifestation of this policy whereby the US agreed to continue preferential treatment (in the form of higher quotas and lower tariffs) to Cambodian garment exports and Cambodia agreed to maintain ILO labor standards. 181 This Agreement was extended until December 2004 beyond its original framework which lasted until December 2001. 182 This Agreement led to the establishment of the Better Factories Cambodia project under the auspices of the ILO which aimed at monitoring compliance, capacity building, advisory support and establishing minimum labor standards after consulting the government, private sector and trade unions. 183 It is noteworthy
180 Calculated from ITCB and OTEXA Figures. 181 UNDP, supra note 40, at 89; Hall, supra note 22, at 25-26. 182 See HKTDC, US, Cambodia Extend Bilateral Textile Agreement, Washington Grants Quota Increase, (Jan.14, 2002), available online: http://info.hktdc.com/alert/us0201.htm (Jan.3, 2008); Hall, supra note 22, at 26 183 See Adhikari & Yamamoto, supra note 1, at 212; ILO, supra note 79, at 21.
72 http://law.bepress.com/unswwps-flrps09/art16 that with the expiry of the quotas in 2005, the ability of the US to directly monitor labor standards in Cambodia diminished. However, as a result of this programme, Cambodian exporters realised that in terms of productivity and efficiency they would not be able to compete with much better organised producers unless Cambodia’s appeal as a producer of ‘ethically safe’ garments is maintained. This is critical for both the apparel producers in Cambodia as well as major retailers sourcing from Cambodia who have been affected by allegations of running sweatshops operations and employing child labor.184
Even though, there were significant improvements in labor standards across Cambodian apparel industries, growth on the basis of low labor costs and respect for ILO standards alone are not enough especially when there are myriad impediments that limit or hamper growth potential such as governmental corruption, complex import-export laws and antiquated business regulations. 185 All of these typical third world factors combine to affect the performance of Cambodian apparel industries and for the continued growth (indeed the very survival!) of Cambodian garment manufacturing, Cambodia has to “strengthen rule of law, reduce corruption and improve trade facilitation” in order to remain competitive. 186
184 See generally Samnang Chea and Hach Sok, Cambodia’s Accession to the WTO: ‘Fast Track’ Accession by a Least Developed Country , (Managing the Challenges of WTO Participation: CASE STUDY 8), available online: http://www.wto.org/English/res_e/booksp_e/casestudies_e/case8_e.htm#fnt17 (Sep.26, 2008); See Elizabeth Becker, Cambodia's Garment Makers Hold Off a Vast Chinese Challenge, The New York Times, May. 12, 2005, available online: http://www.nytimes.com/2005/05/12/business/worldbusiness/12cambodia.html (Mar.11, 2009); See also Daniel Ten Kate, New World Order; Can Cambodia’s Garment Industry Survive?, the Cambodia Daily, Sep.6, 2003, available online: http://www.camnet.com.kh/cambodia.daily/selected_features/new_world_order.htm (Mar.11, 2009). 185 See USAID, Measuring Competitiveness and Labour Productivity in Cambodia’s Garment Industry, (June 2005) , at 4 available online: http://www.nathaninc.com/nathan2/files/ccLibraryFiles/Filename/000000000029/Cambodia%20Garment%20Se ctor%20Main%20Report%20_Nathan.pdf (Mar. 11, 2009). 186 Per Ros Harvey (ILO, Chief Technical Advisor in Cambodia) quoted in Jennifer Maul, Promoting Cambodia’s Competitiveness in a Post-MFA World, Carnegie Endowment for International Peace, available online: http://www.carnegieendowment.org/files/Cambodia.pdf (Sep.28, 2008).
73 Hosted by The Berkeley Electronic Press (b) Indonesia:
“It was actually my buyer’s idea. He approached me and asked why I am not going to open a factory in Cambodia. You have good performance but you don’t have enough quota…From Myanmar we cannot ship to USA because they have human rights problems. From Vietnam we can’t send to USA because of political problems. Thailand has quotas. This has left only Cambodia. Now we split the production. For the EU market, we manufacture in Indonesia, while for the US market we manufacture in Cambodia. Because we have in Cambodia no quota problem for the US and in Indonesia we have no quota problem for the EU” (An Indonesian manufacturer 187 )
Indonesia is one of the more developed economies in the Far East and is considered a major manufacturer and exporter of textiles and apparel. Figure 22, however, demonstrates that it is not heavily dependent on textiles and apparel exports to sustain its economy as compared to other developing countries and LDCs in Asia and elsewhere.
The above quote highlights the regional linkages of textiles and apparel manufacturing industries in the region and how quickly it adapts to changing circumstances. It is with this adaptability in mind, an assessment of Indonesian textiles and apparel industries should be undertaken especially since quota expiry evaporated the “advantage” that Cambodia held in this instance over Thailand and Indonesia. This entails yet another process of readaptation for Indonesian exporters and manufacturers as they come to grips with the increased competition in this sector.
The tradition of manufacturing of fabric and textiles is much older in Indonesia as compared to countries that owe establishment of textiles and apparel due to quotas under MFA and its predecessor regimes. 188 The apparel industry emerged in the late 1970s and quickly took on an export posture in the early 1980s as a result of combination of factors that involved the end of oil boom, comparative advantage in low labor costs, unutilized quotas and governmental incentivisation in the form of subsidised interest rates and undervalued real exchange rate. 189 In the 1980s, the quotas under MFA regime acted as a catalyst in luring foreign manufacturers into Indonesia which contributed immensely to the establishment of the garment industry that consequently led to growth of the local textiles industry which
187 Quoted in Peter Dicken & Markus Hassler, Organizing the Indonesian Clothing Industry in the Global Economy: The Role of Business Networks, 32 Env’t & Plan. A 263, 276 (2000) . 188 During the 1920s and the Dutch Colonial Rule, Indonesia had a thriving a weaving industry ( id , at 265). 189 See Mari Elka Pangestu, The Indonesian Textile and Garment Industry: Structural Challenge and Competitive Challenges in Mari Elka Pangestu & Yuri Sato (Eds), Waves of Change in Indonesia’s Manufacturing Industry (1997) at 29, 31.
74 http://law.bepress.com/unswwps-flrps09/art16 expanded in order to meet the domestic fabrics and input needs. 190 At this stage, Indonesian exports primarily targeted the US market (with 60% of Indonesian apparel exports destined for the US) while the EU absorbed 15% of Indonesian apparel. 191
After a decade of quick growth, by mid-1990s Indonesia was amongst the top exporters of the world in clothing accounting for 2.1% of total world exports. 192 At this juncture, Indonesia had effectively diversified its export destinations; as a result Japan absorbed 10% of Indonesian apparel exports, EU share grew to 30%, whilst there was a decrease in the US share of Indonesian apparel (with 20%). 193 Tables 3 & 4 illustrate that Indonesia has consistently featured amongst the leading exporters of textiles and apparel in the world between years 1995-2007.
Successive Indonesian governments took effective measures in advancing Indonesia’s position as a leading manufacturer and exporter of both textiles and apparel. However, it was not always that textiles and clothing sector was prioritised. This is evidenced by Indonesia’s policy during the 1970s which stressed import-substitution as a measure to advance the country’s industrialization which affected the apparel industries since the high cost of using domestic textiles meant that its apparel exports were not always cheaper. 194 In the 1980s, measures taken in the aftermath of the collapse in world oil prices lead to positive developments in Indonesian manufacture and exports of textiles and apparel. These measures included:
1) Devaluation of the Indonesian currency, the rupiah which increased the competitiveness of Indonesian garment exports 195 ;
2) Introducing a duty exemption and drawback facility in 1986 which allowed exporters easy access to required inputs on the same basis as an export processing zone 196 ; and
190 Id , at 54. 191 See Dicken & Hassler, supra note 187, at 266. 192 According to WTO Annual Report 1996, cited by Dicken & Hassler, id , at 265. 193 Id , at 266. 194 See Hal Hill, Indonesia’s Textile and Garment Industries: developments in an Asian Perspective, (Occasional Paper No. 87, Institute of South East Asian Studies, Singapore) at 65-66. 195 Id , at 67. 196 Id .
75 Hosted by The Berkeley Electronic Press 3) Relaxing foreign holding regulations that attracted foreign investors into Indonesian garment manufacturing business. 197
These measures capitalised on the demand side opportunities that opened up for low-wage, labor intensive industries such as textiles and apparel during the time when Indonesia shifted to more export-oriented policies. Further boost was given by a liberal foreign investment climate and policies for investors. 198 The fact that 98% of apparel manufacturing firms operating in 1997 entered Indonesia after these measures were initiated in 1986-87, highlights the effective measures taken by the Indonesian government, manufacturers and entrepreneurs that enabled Indonesian textiles and apparel industries to compete effectively in the global market 199 during the MFA/ATC regimes.
There were mixed opinions in Indonesia on the possible effects on its textiles and apparel exports with the impending demise of the quota system in 2005. 200 The typical anticipated fears were against China’s domination in this sector which would lead to the erosion of Indonesia’s market share in the main developed markets of the world. According to pre- elimination analysis by Nordås, Indonesia was projected to increase its market share of EU textiles market from 4% to 5% and maintain its share of the EU apparel market at 3% whilst in the US textiles market, Indonesia was predicted to maintain its share at 3% and experience a decline in market share in the apparel market from 4% to 2%. 201 ATMI’s pre-elimination analysis predicted projected export losses of Indonesia to China of around US $ 1.39 Billion. 202 After quota expiry and imposition of safeguards on China by the EU and the US, NCTO in 2006 estimated projected losses of Indonesia pertaining to the lifting of safeguards to be around US $ 1.58 Billion.203
On the other hand there were some entrepreneurs that viewed quota expiry as an event that would purge the quota dependent and competitively weak firms from the sector.204 Such
197 See Dicken & Hassler, supra note 187, at 267. 198 See Pangestu, supra note 189, at 57-48. 199 See Dicken & Hassler, supra note 187, at 266-267. 200 See Countries Consider Adjustment Costs Of Textile Quota Phase-Out, ICTSD Bridges Weekly Trade News Digest (Vol.8, No.32) (Sep.29, 2004); See Zakki Hakim, Textile Sector to Struggle after Quota Termination, the Jakarta Post, (Dec.28, 2004). 201 See Nordås, supra note 32, at 24-30. 202 See ATMI, supra note 32, at 12. 203 See NCTO, supra note 27, at 2. 204 See Hakim, supra note 200.
76 http://law.bepress.com/unswwps-flrps09/art16 industrialists have in the past called upon the Indonesian government for continued improvement in investment policies, measures to counter rising labor costs and poor tax administration as well as easy access to capital for modernising of machinery and plant infrastructure in order to remain competitive in the post-elimination period. 205
Seemingly, in the years close to quota elimination, Indonesia was disadvantaged in terms of preferential treatment in the US and the EU markets since the US did not extend GSP treatment to Asian textiles producers (with an exception only in the case of bilateral FTA) and the EU did not include Indonesia amongst the beneficiaries of its preferential trade regimes.206 Additionally, there was also the element of proximity which went against Indonesia. This meant that African producers under AGOA, Caribbean producers under CBI/CBTPA and Euro-Mediterranean countries (such as Tunisia, Turkey etc.) as well as beneficiaries under the EU preferential treatment regimes held an edge over Indonesia in the US and the EU markets respectively. Perhaps this is further displayed by a quick review of statistics for years 2001-2004 for these two markets (see Tables 3 and 4) where the performance figures have displayed a mixed trend.
In the US market, this may well be due to high level of duties maintained by the US towards Indonesian origin products e.g. in 2001 for Indonesian synthetic fibre woven apparel the average duties were around 20%, whilst global average duties for US imports were 12.5% and NAFTA countries only paid 0.9% duty. Similarly, effective duties on US apparel imports in 2001 amounted to 0.5% for NAFTA compared to 18.2% for Indonesia. Furthermore, in cotton woven apparel average overall duties on imports into the US were 10.2%, for NAFTA members it was 0.2% but ranged from 15%-17% for developing countries such as Indonesia that fell outside the preferential regimes. 207
In spite of these barriers and challenges, the export performance of Indonesia was better than expected. A detailed perusal of Figures 1-4, 6-10, 23, 24, 31 and Tables 2-4 demonstrates that Indonesia has managed to hold onto its market share and also managed to increase it except in the EU apparel market (refer to Figure 32) in the post expiry scenario. According to the US OTEXA Figures for Year Ending 2008 (i.e. July 2007 to July 2008) Indonesia managed to
205 Id . 206 William James, David Ray and Peter Minor, Indonesia’s Textiles and Apparel: The Challenges Ahead, 39 (1) Bull. of Indonesian Econ. Stud. 93, 95 (2003) . 207 James et al, Id , at 96 citing USITC database figures for 2001.
77 Hosted by The Berkeley Electronic Press maintain its exports and recording only a slight drop in growth rate of -0.04% as compared to preferential suppliers such as Mexico (which exported larger volume of exports at US $ 5.4 Billion) which experienced a decline by 11.04% in the same period. Nevertheless this performance by Indonesia was respectable if compared to regional rivals such as Philippines, Thailand, Hong Kong and Pakistan all of which recorded declines of -16.27%,-0.98%, - 12.88% and -2.97% respectively. Compared to the a decline of -0.04% in first half of 2008, the overall growth rate of Indonesia in the US market was 7.22% for years 2006-2007 according to OTEXA figures (refer to Table 3 and Figure 2). In 2007-08, Indonesia enjoyed 4.41% share of the US textiles and apparel market ranking amongst the Top-10 exporters in this sector to the US (refer to Figure 4). In particular categories 338, 339 and 340 (refer to Table 7) Indonesian exporters recorded increases in 2006-07 period in terms of value of exports. Overall, Indonesian cotton t-shirts recorded a 12.12% increase in prices for 2007 (which includes one year before and two years after quota expiry). However, the increased competition from Vietnam and China resulted in a price drop of -16.19% recorded in the first half of 2008 (see Figure 27). This not only demonstrates an attempt by the Indonesian manufacturers to stay competitive and match prices with regional rivals but also shows that with the anticipated lifting of China specific safeguards in end-2008, countries are willing to match prices in order to cling onto their share in the US market.
In the EU market, however, Indonesia’s performance was not as impressive as in the US. In 2006-07, the growth rate of total textiles and clothing exports by Indonesia to the EU stagnated at -2.78% with regional rivals such as Bangladesh, Pakistan, Vietnam and Thailand recording growth of 4.33%, 13.66%, 17.43% and 2.54% respectively whilst Hong Kong experienced a massive decline of -37.32% (see Table 4). According to Eurostat figures, Indonesia took 2.2% and 2.1% share of the EU textiles and apparel market respectively (refer to Figures 6 & 8). Since the end of quotas the overall percentage growth of Indonesia stood at 12.34% (calculated from ITCB figures between years 2005-07). This was due to increased exports of textiles but reduced exports of apparel by Indonesia to the EU (the comparative figure in the US stood at 26.74% for growth percentage for years 2005-07) (See Figures 23 & 24). According to Emerging Textiles figures and calculations, Indonesian value and volume share of the EU clothing market in the first half of 2008 stood at 1.91% and 1.71% respectively which in the first half of 2005 (six months after quota expiry) were 2.09% and 1.86% respectively. Therefore, the rising competition from Euro-Mediterranean preferential suppliers such as Turkey, Romania, Tunisia and Morocco as well as Asian apparel giants
78 http://law.bepress.com/unswwps-flrps09/art16 such as Bangladesh, China and India has affected Indonesia’s foothold in the EU clothing market.
Overall, these figures demonstrate that Indonesia has managed to survive and post growth rates in the post-quota US market but has registered mediocre performance in the EU market in 2007-08. However, these figures must be assessed by keeping the Indonesian post- elimination strategy in mind i.e. diversifying export products from over-reliance on the low- end market segment and venturing into the high value added segment in order to compete with China’s onslaught.208 This response of the Indonesian manufacturers highlights their supply diversification capacity as well as product differentiation that is central characteristic of the consumer markets of the EU and the US. 209
Additionally, Indonesia’s performance must be assessed in the categories where China faced restrictions under safeguards until December 2008. In order to do so, Table 7 takes into consideration some of the main categories of exports by Indonesia where China was restrained under the US safeguards and attempts to highlight Indonesia’s performance in these categories.
Table 7 demonstrates that Indonesia’s gains as a result of safeguards imposed on China have been minimal. However, as a result of the safeguard restrictions, China’s growth was somewhat retarded enabling Indonesia to stay in the US market as a major exporter without experiencing any major loss of market share.
(Table 7) Major Textiles & Apparel Export Products to the US Import Market (Year Ending August 2006- 2007) Indonesia Vs. China (Data in Million US $) OTEXA Categories Indonesia Indonesia China China 2006 2007 2006 2007 332 COTTON HOSIERY 4.398 4.215 46.318 110.248 338 M/B KNIT SHIRTS, COTTON 228.852 262.519 385.99 597.585 339 W/G KNIT SHIRTS/BLOUSES, 387.437 585.257 740.799 1132.717 COTTON 340 M/B COTTON SHIRTS, NOT 227.095 241.058 214.431 446.465 KNIT
208 See World Bank, Indonesian Textiles and Apparel: A New Dawn for a “Sunset Industry , (Financial & Private Sector Development Technical Note, Issue No.4, September 2007). 209 Id .
79 Hosted by The Berkeley Electronic Press 345 COTTON SWEATERS 25.472 14.683 199.689 491.393 347 M/B COT. 201.537 191.915 406.061 548.777 TROUSERS/BREECHES/SHORTS 349 BRASSIERES, OTHER BODY 17.47 22.821 68.433 77.965 SUPPORT GAR 352 COTTON UNDERWEAR 51.295 56.958 101.977 191.768 443 M/B SUITS, WOOL 9.577 29.382 50.165 53.425 447 M/B WOOL 10.551 20.444 23.404 30.033 TROUSERS/BREECHES/SHORTS 632 MMF HOSIERY 10.379 6.59 186.724 247.58 640 M/B NOT-KNIT MMF SHIRTS 42.249 37.485 70.271 89.903 646 W/G MMF SWEATERS 31.161 19.39 160.502 210.887 619 POLYESTER FILAMENT 5.577 3.961 15.455 25.979 FABRIC 638 M/B MMF KNIT SHIRTS 67.167 82.167 93.514 145.388 639 W/G MMF KNIT SHIRTS / 140.529 145.9 607.739 799.739 BLOUSES 647 M/B MMF 170.396 157.793 276.591 357.852 TROUSERS/BREECHES/SHORTS 648 W/G MMF 222.72 214.281 244.235 339.185 SLACKS/BREECHES/SHORTS
In mid-2008, it was clear that Indonesian exports were not surging partially due to decline in the US market for reasons of economic slowdown and partially due to increased competition from Vietnam and other Asian producers. Despite Vietnam's success, China's reduced competitiveness was thought to benefit Indonesian exports since its currency depreciated, making Indonesian exports cheaper for importers and retailers. 210 Moreover, according to Indonesian Textile Industries Association some Indonesian manufacturers were reportedly venturing into other Asian LDCs such as Laos for manufacturing apparel using Indonesian textiles capitalising on declining import tariffs pursuant to ASEAN agreements.211
Another dimension of the diversification strategy followed by Indonesia is venturing into other developed markets such as Japan 212 . In 2007, whilst the Economic Partnership Agreement (EPA) between Japan and Indonesia was being negotiated, 58% and 81% of textiles and apparel imports respectively into Japan came from China with Indonesia’s share being 6% and 0.6% for textiles and clothing respectively. 213 Japan, imported US $ 5.821
210 See Emerging Textiles.com, Indonesian Clothing Industry Confronted with Rising Production Costs (Country Report) (Jun.25, 2008), available online: http://www.emergingtextiles.com/?q=art&s=080625-country- report-indonesia&r=search¬e=1 > (Jan.26, 2009). 211 Id . 212 See Indonesia’s makers eye trade deal with Japan, Just-Style News , (Jan.24, 2007) 213 Id .
80 http://law.bepress.com/unswwps-flrps09/art16 Billion worth of textiles and US $ 22.541 Billion worth of apparel in 2005 and represents a viable market for Indonesia to break into. 214
In addition to product diversification and capitalising on safeguards on China, Indonesia’s survival strategies in the post-elimination period features extensive upgrade of industrial infrastructure by investing in advanced plant machinery to boost production. 215 Possible measures recommended by analysts include reduction of tariffs and taxes on medium and high-quality intermediate products that are required as inputs in the apparel manufacturing process, remedying complicated customs regulations, improving exporters access to working capital, supporting WTO measures on reduction of tariffs in order to mitigate disadvantage of non-preferential access and entering into bilateral or regional free trade arrangements. 216
(c) Malaysia Malaysia displays the advanced characteristics of a country that has moved on from basic textile and apparel manufacture to investing in other countries along the lines of developed countries. Figure 22 shows that Malaysia is the least reliant country on textiles and apparel exports as compared to the rest of ASEAN Members (in particular the ones under consideration). This can be explained by the fact that Malaysia has a relatively advanced economy in the region and concentrates primarily on a wide range of sectors such as electronics, palm oil and palm oil based products, crude petroleum, petroleum products and liquefied natural gas and timber based products, amongst others.217 Textiles and clothing industry occupies a secondary role in the Malaysian economy.218 However, this can be slightly misleading since a brief historical review (see below) of Malaysian industrial
214 See WTO, International Trade Statistics 2006, available online: http://www.wto.org/english/res_e/statis_e/its2006_e/its06_toc_e.htm (Jan.24, 2009). 215 See World Bank, supra note 208. 216 See William James et al, supra note 206, at 101. 217 According to official 2008 Malaysian statistics, the country’s export earnings were dependent on wide ranging sectors such as electronics and electrical products (38.5% of total exports), palm oil and palm oil based products (10% of total exports), crude petroleum (6.6% of total exports), petroleum products (4.6%), liquefied natural gas (5.1%), timber and timber products (3.3%) ( See Department of Statistics Malaysia, Malaysia External Trade Statistics August 2008, available online: http://www.statistics.gov.my/eng/index.php?option=com_content&view=article&id=279:malaysia-external- trade-statistics-august-2008-&catid=39:malaysias-external-trade-statistics-&Itemid=12 (Oct.26, 2008). 218 The total share of textiles and clothing export in the Malaysian exports was 1.92% and 1.8% for 2005 and 2006 respectively ( See Malaysia External Trade Development Corporation, Malaysia's Trade Performance 2006, available online: http://www.matrade.gov.my/cms/content.jsp?id=com.tms.cms.article.Article_hide_Malaysia's%20Trade%20Per formance%202006 (Oct.26, 2008).
81 Hosted by The Berkeley Electronic Press development reveals that Malaysia was never exclusively or overwhelmingly reliant on textiles and clothing exports as is the case with many emergent economies in Asia.
The secondary position of this sector in Malaysia may also be explained by the fact that clothing industry is labor intensive and low labor costs are a principal basis of international competition in the world’s primary export markets. In Malaysia, however, labor costs are amongst the highest in the region e.g. during the 1990s real wages in Malaysia arose by 9% a year. 219 By 2004-05, the average labor costs in Malaysia’s manufacturing sector (that includes textiles and clothing sub-sectors), according to one survey, was US $ 2.37 per hour, which, when compared to competitors such as China (US $ 0.79 per hour), India (US $ 0.60 per hour), Indonesia (Malaysia’s immediate neighbour US $ 0.33 per hour and Thailand (US $ 0.92 per hour) explains the decline of textiles and apparel exports in the post-elimination period. 220 According to Figure 11, the 2008 per hour apparel production cost in Malaysia was US $ 1.18 which was amongst the highest rates (second only to Thailand) compared with regional rivals such as Indonesia, the Philippines, Bangladesh, Pakistan and India. It is also interesting to note that average Malaysian labor costs were always higher than its neighbouring countries during the 1980s when Malaysian textiles and apparel industries recorded impressive growth figures e.g. according to a 1985 estimate, Malaysian labor costs along with various mandated payments made in addition to wages were four times higher than in China, Indonesia and Sri Lanka and about two times higher than Pakistan and Thailand. 221 Therefore, the reason behind Malaysian competitiveness lay not in the competitive labor costs but the artificial trading environment created by the MFA quotas that enabled non-competitive producers to enter this sector of world trade which otherwise would have been economically non-feasible due to high costs (this feature of the quota system has been extensively highlighted in academic literature). Malaysia’s textile and apparel industry’s formation and prosperity are a classic example of geographical dispersion as a result of quotas imposed on another country (under quotas) which forces the industry in one country to relocate to another country (facing little or no restrictions). It was the imposition of quotas on
219 See Zakariah Rashid, Malaysia’s Textile and Clothing Industry in The Effects of Liberalization in Asia’s Textiles, Clothing and Electronics Industries, (Background Papers, Article 2, Studies in APEC Liberalization) at 1. 220 See Renminbi Revaluation: An Update, PRU News, (Jul.28, 2005) citing IMD World Competitiveness Yearbook 2005 . 221 See Sara Douglas, The Textile Industry in Malaysia: Coping with Protectionism, 29 (4) Asian Surv. 416, 423-424 (1989) citing Malaysian Industrial Development Authority and United Nations Industrial Development Organisation, Medium and Long Term Industrial Master Plan, 2:12 (Kuala Lampur: MIDA, 1985) at 41.
82 http://law.bepress.com/unswwps-flrps09/art16 Hong Kong’s apparel industries that acted as a catalyst in establishment of this industry in Malaysia. 222 The cycle continued further when Malaysia attracted quotas, the spill over reached countries such as Sri Lanka, Bangladesh and other countries. 223
The origin of Malaysia’s textiles industries can be traced back to the late 1950s when a small weaving mill was established pursuant to the Malaysian Pioneer Industry Ordinance, 1958 which aimed at substituting imported textiles with local textiles. 224 The industry grew steadily during the quota schemes under various regimes and concentrated on both cotton and manmade fibre such as polyester staple fibre and polyester filament to cater to the local garments industries that were geared towards exports and that almost began at the same time by engaging in low-end items such as knitwear and socks. 225 Thanks to consistent measures by the Malaysian government between 1968 and 1978 that attracted foreign investment into these sectors, Malaysia achieved an annual growth rate of 33.8% in textiles exports during these years. 226 In total percentage of merchandise export terms, exports of textiles stood at 8.4% in 1970 which rose further to 13.5% in 1987. 227
In terms of output and value addition, the textile sector produced 66% of total industry output in textile and apparel with 64% of value addition in 1984 whilst for the same year the figure for the apparel sector was 34% of textile and apparel industrial output and 36% of value addition with nearly all of the merchandise was geared towards the export markets. 228 Renowned brands like Ralph Lauren, Christian Dior, Yves St. Laurent, Adidas, Nike amongst others sourced their merchandise from Malaysian manufacturers. 229
From 1990 to 1994, textiles exports grew at the average annual growth rate of 22.1% whilst the comparative growth figure for apparel was 11.3%. These growth figures are somewhat misleading since the value of apparel exports was higher than that of textiles exports i.e. Malaysian apparel exports grew from US $ 1.315 Billion in 1990 to US $ 2.07 Billion in
222 See Douglas, id , 433; See also David Birnbaum, How Hong Kong Beat the Textiles Quotas, The Wall Street Journal, Jan.5, 1987 at 13. 223 See Douglas, supra note 221, at 433. 224 See Rashid, supra note 219, 2; Douglas, id , 421. 225 See Douglas, id . 226 Id . 227 See Fong Chan Onn, Technological Leap, Malaysian Industry in Transition, (OUP New York, 1986) at 32 & 39. 228 Douglas, supra note 221, at 423 citing Malaysia’s Department of Statistics figures from Survey of Manufacturing Industries (Kuala Lampur, National Printing Department, 1985). 229 Id .
83 Hosted by The Berkeley Electronic Press 1994 as compared to Malaysian textiles exports which grew from US $ 343 Million in 1990 to US $ 831 Million in 1994. 230
With the conclusion of the Uruguay Round of Multilateral Trade Negotiations, the consequent formation of the WTO and the coming into force of the ATC regime, it was thought that Malaysian textiles and clothing exporters would receive a significant boost as the trade balance in global textiles exports shifted from developed countries to the developing countries. 231 Since the Malaysian textiles and clothing industries always adapted around the prevalent international and domestic policies, quotas under the MFA and its predecessors were looked upon as an “unmitigated evil” since it enabled Malaysian exporters to have certainty of market access to the US and the EU markets. 232 During the subsistence of the quotas, Malaysia was quick to expand in unrestricted categories (if quotas were imposed on these categories then the level of exports formed the base level for the new quotas). 233 Similar to other developing countries, quotas in the case of Malaysia encouraged product diversification and a move to higher value added items for export. 234 It was thought that with the gradual relaxation of MFA quotas throughout the ATC regime, Malaysia would benefit along with other developing countries as well especially with the increased shift in production of textiles from Newly Industrialized Economies to ASEAN. 235
However, this view has to be examined in the light of actual growth demonstrated in the trade statistics by the Malaysian textiles and apparel industry during the phase out of quotas and the performance in the post–elimination period. To determine this, Malaysia’s performance in the principal EU and the US market is examined from years 1995 to 1999 (see Figure 33) and then in 2000-2007 (see Figure 34) encompassing both the phase out years as well as the post- elimination years. During the first five years of the ATC regime, Malaysia notched a growth percentage of 8% in the years 1995-1999 in the US market whilst experiencing a 5.6% decline in the same years in the EU market. 236
230 APEC, Patterns of Textile, Clothing and Footwear Trade within APEC (1990-1994), (Research Report, May 1997) at 168-169. 231 Rashid, supra note 219, at 4. 232 Douglas, supra note 221, at 432. 233 Id . 234 Id ; Rashid, supra note 219, at 4. 235 Rashid, id , at 4-5. 236 Calculated from ITCB figures referred to in Figures 33 & 34.
84 http://law.bepress.com/unswwps-flrps09/art16
Two years after elimination of quotas, the overall Malaysian export figure for textiles and apparel to the US and the EU market in 2007 stood at US $ 1.164 Billion which fell from US $ 1.304 Billion in 2006 and US $ 1.221 Billion in 2005 (see Figure 34). The gradual post-
85 Hosted by The Berkeley Electronic Press elimination decline of Malaysian exports both before and after the end of quotas which started well before quota expiry, with Malaysian exports to the US peaking at US $ 852 Million in 2000, whilst the highest recorded export figure to the EU in the last 15 years to the EU stood at US $ 642 Million in 1997 is demonstrated in Figure 34. 237
Malaysian exporters recorded a negative growth rate in the years since the quota expiry. From years 2005-07, the decline in the US and the EU markets stood at -0.78% and -11.47% respectively (See Figure 23 & 24). Also noticeable is that Malaysian Cotton T-shirt prices (a major export category) fell by -3.79% during years 2007 but arose by 5.25% in the first half of 2008 (refer to Figure 27). Whilst this is one category of export, it can be safely surmised that if this rise in unit prices is spread to other categories, this would also affect the competitiveness of Malaysian apparel.
As is evident by the above statistics, Malaysia primarily targets the US market for its exports over the EU. This objective is seen in Malaysian entrepreneur’s investments in African beneficiary countries under the AGOA regime in order to capitalise on the preferential treatment for textiles and apparel exports from these countries to the US e.g. Malaysia was one of the investor countries in apparel production sites in Lesotho (along with Taiwan, China and Mauritius).238 Also, Malaysia’s Ramatex Group invested US $ 50 Million in Namibia in 2001 with the aim of developing vertically integrated facilities encompassing fibre manufacture, knitted apparel, spinning, knitting, dyeing and printing of fabrics. 239 However, this project failed and Ramatex Group pulled out of Namibia after closing down its operations. It was criticised for using the country as a temporary production site to take advantage of preferential access under AGOA without any regard for labor welfare. 240 This example highlights the “footloose” nature of this sector with investors coming in to take
237 Source: ITCB, EU-25 Imports of Textiles and Clothing from Top 30 and Some Other Exporters (1995 - 2007), available online: http://www.itcb.org/Documents/ITCB_TDEU_95-07.pdf 238 See Post-Quota Textile Trade Starts to Take Shape, ITCSD Bridges Weekly Trade News Digest, (Vol.9, No.2) (Jan.26, 2005). 239 See Emerging Textiles.com, Ramatex selects Namibia instead of South Africa, (Jan.27, 2001), available online: http://www.emergingtextiles.com/?q=art&s=010627-comp&r=namibia¬e=1 (Jan.26, 2009); See generally the ‘History’ of the Ramatex Group on its official website: http://www.ramatex.com.my/history.htm (Sep.28, 2008). 240 Herbert Jauch, The Ramatex Closure In Namibia: Hard Lessons To Be Learned, (Mar.14, 2008), available online: http://www.namibian.com.na/2008/March/columns/08F0362BB6.html (Sep.25, 2008); See also AGOA Extension to Boost US-Africa Textile Trade, Foreign Direct Investment , Aug.1, 2002, available online: http://www.fdimagazine.com/news/fullstory.php/aid/59/AGOA_extension_to_boost_US- Africa_textile_trade.html (Sep.29, 2008); See also 3,000 Jobs Will Be Lost in Malaysian Textile Factory Closedown, NewsTracker, Mar.10, 2008, available online: http://www.theshebeen.org/economy/7771- namibia-3-000-jobs-will-lost-malaysian-textile-factory-closedown.html (Sep.29, 2008).
86 http://law.bepress.com/unswwps-flrps09/art16 advantage of preferential regimes during the subsistence of the quota regimes under the MFA/ATC and withdrawing investments as a result of increased competition in the post- elimination period. Table 6 demonstrates that compared to South Asian and Caribbean LDCs, the export performance of African manufacturers that were beneficiaries under AGOA regime has been poor. This example is yet another reinforcement of the view that quota expiration renders preferential treatment regimes (such as CBPTA/AGOA etc.) redundant since freer competition results without quotas, tariffs are reduced gradually and many countries opt for bilateral FTAs as means of breaking into the developed countries market. 241
Further illustration of the US focused trade policy in this sector is the negotiations for the proposed the US-Malaysia Free Trade Agreement which, according to one report, will shift the post-quota investment balance from China back to Malaysia. 242 Additionally, Malaysian textile industry may benefit from the proposed EU-ASEAN ‘Minus FTA’ (which excludes Laos, Burma and Cambodia). 243
Even though Malaysia has a diverse export basket, which means that the impact of quota expiry is not pronounced as in the case of the Caribbean and African countries that are overwhelmingly dependent on apparel manufacture and exports, the effects of the decline would impact the employment levels in this sector and whilst the decline has been gradual and not abrupt, Malaysia has to take concrete measures such as reduction in overall labor costs in order to stay competitive in this sector of world trade.
(d) Philippines: Philippines is another exporter that established a textiles and clothing industry as a result of opportunities generated due to quota system. Figure 22 shows that Philippines reliance on textiles and clothing for export earning is not as high (6% share of the country’s total merchandise exports) as other ASEAN Members under review.
The establishment of local textiles industry in the 1950s to complement the local garment industry was motivated by policies of import substitution, import and exchange control, tax
241 See generally Heron, supra note 14. 242 Bilaterals.org, Textile FDI shifting from China to Malaysia, Jan.23, 2007, available online: http://www.bilaterals.org/article.php3?id_article=6983 (Sep.29, 2008). 243 Bilaterals.org, EU-ASEAN minus FTA expected in three years time, Aug.6, 2008, available online: http://www.bilaterals.org/article.php3?id_article=12879 (Sep.29, 2008).
87 Hosted by The Berkeley Electronic Press exemptions and high import tariffs. Under such favourable policies the textile sector grew quickly (from 1 mill in 1951 to 24 mills in 1955) and concentrated on knitting, hosiery and other low value added activities.244 However, the resulting lack of competition meant that the textile sector lacked dynamism and efficiency.245
Compared to the textile sector, the clothing sector developed initially as a result of the Philippines Embroidery Act, 1961 which allowed for duty free import of raw materials for local production, processing and re-export. 246 Philippines garments industry performed well during subsistence of the quotas due to low labor costs coupled with additional governmental incentives such as tax credits, reduced income tax, tax exemptions from imported capital equipment and export taxes. Resultantly, in 1970, Philippines exported clothing worth US $ 36 Million which grew to US $ 681 Million in 1990 and further reached US $ 3 Billion in 2000. 247 Clothing sector came to dominate the textiles sector and assumed more importance due to its better export performance as well as being a source of employment for the masses.
It is interesting to note that quotas were not only the catalyst for establishment of the textiles and clothing industry in the Philippines but also determined the major export markets as well. Primary export markets for the Philippines were APEC countries which, according to 1990 figures, took 82.8% of textiles and 98.4% of clothing exports of the Philippines. 248 Within APEC, USA, Australia, Canada, Singapore, Japan and Taiwan were the primary export destinations for textiles and apparel exports of the Philippines.
In 1994, textiles exports from the Philippines reached US $ 173 Million out of which US $ 104 Million was exported to APEC economies. Similarly, the clothing exports in 1994 were US $ 897 Million out of which US $ 471 Million was exported to APEC economies. 249 Within the APEC Members, the US accounted for 80% of exports whilst amounting to 50%
244 Aleli dela Paz-Kraft, Philippines Textiles and Clothing Industry in The Effects of Liberalization in Asia’s Textiles, Clothing and Electronics Industries (Background Papers, Article 3, Studies in APEC Liberalization) at 2. 245 Id . 246 Id , at 2 & 4. 247 In 1972, the textiles clothing and footwear industries in the country employed close to 78,000 workers accounting for 8.5% of total manufacturing production. By 1992, this figure jumped to 330,000 workers that accounted for 1.4% of the total employed workers in the country. Over the same twenty year period, the share of this sector in the total manufacturing sector employment rose from 19% to 34% ( See APEC, supra note 247, Box A11.1, at 197); Paz-Kraft, supra note 244, at 4; ILO, supra note 79, at 26. 248 APEC, id , at 198-199. 249 Id , at 199-200.
88 http://law.bepress.com/unswwps-flrps09/art16 of total overall exports by the Philippines. In 2007-2008, the market share of the Philippines textiles and clothing exports to the US was 1.77% (See Figure 4). This trend is interesting to note since exports from Philippines to Australia (which represents one of the proximate developed country markets within APEC) was not maintained after 1991. 250
High reliance on apparel production meant that Philippines was a net importer of textiles with major import categories being knitted and crocheted fabrics, woven cotton fabrics and manmade textiles. 251 In 1990, the overall textile imports were US $ 564 Million which increased to US $ 822 Million in 1994 out of which US $ 522 Million and US $ 770 Million respectively was imported from APEC Members. 252 Therefore, it can be easily surmised that apparel exports from Philippines were primarily destined for the US market and these were manufactured mostly by imported fabrics from newly industrialized Asian economies.
Anticipating increased competition and adjustment challenges in the post-elimination period, Philippines Department of Trade and Industry, the Department of Labor and Employment in cooperation with Garments and Textiles Export Board (the industry representative body) announced a series of measures in 2004 encompassing move onto higher value added items for export manufacturing as well as improving labor productivity in as a capacity building initiative. Additionally, assistance form industry unions was sought to put such measures in place since industry restructuring always entails social costs such as retrenchment and industrial close downs. 253
Whether these measures have succeeded or not has to be determined in light of the available statistics and the actual export performance of Philippines manufacturers. Figures 35 and 36 trace the performance of the Philippines textiles and apparel exporters in the US and EU market respectively during the ATC and in the post-expiry period. Figure 15 also shows that in recent years Philippines textiles and clothing exports peaked in 2000 with total exports to the US reaching US $ 2.289 Billion and then gradually declining leading up to quota expiry on 31 December 2004.
250 APEC statistics show that Philippines exported US $ 14 Million worth of clothing to Australia in 1991 which fell to US $ 6 Million in 1992 ( id , at 200). 251 Id , at 202. 252 The primary suppliers during this time-period were Taiwan, Korea, Hong Kong and Japan ( id , at 202). 253 ILO, supra note 79, at 26-27.
89 Hosted by The Berkeley Electronic Press After quota elimination, Philippines exports demonstrate mixed results. The exports to the US market picked up again in 2006 (reaching US $ 2.085 Billion) and then falling to US $ 1.794 Billion in 2007 (See Figure 16).
This may partially be due to the safeguards imposed upon China by the US but also due to increased specialisation in product categories 338 (men’s/boy’s shirts) and 339 (women and girls cotton knit shirts) in which US imports from the Philippines rose 32% and 75%, respectively after recording increases in 2005. 254 However, this increase was not maintained in 2007 (as is demonstrated by Table 8). Furthermore, in years 2006-2007, the increase in categories 347 (cotton trousers) was less as compared to the previous two years when they rose 184% and 174% respectively. 255 In other major categories, 336 (cotton dresses), 340 (non-knit shirts for boys/men) and 341 (cotton woven shirts for women/girls), shipments from the Philippines decreased. This is further elucidated by Table 8 below which takes into account years in which China was under TS (i.e.2006-2007).
Even though Philippines industry has been declines due to increased competition, a major factor affecting performance of the Philippines manufacturers is the high labor costs, which according to 2008 estimates was US $ 1.07/hour (amongst the highest in Asia) (refer to Figure 11). It is clear that the gains made by Philippines exporters in the US import market were temporary in nature as is demonstrated by 2007-2008 statistics which show that:
Philippines experienced a continual decline in its market share of the US throughout year 2008 even though safeguards were in place. Table 2 cites figures from July 2007 to July 2008 where export growth by Philippines in the US market was -16.27%.
During safeguards, China’s growth rate was retarded and stood at 6.5% but Vietnam emerged with the highest growth rate recorded during the period under consideration and it is clear that Vietnam managed to steal US market share from the Philippines as well as from other Asian producers (refer to Table 2).
254 Emerging Textiles.com, US Apparel Imports from the Philippines in 2006 (Country Report), Apr.9, 2007, available online: http://www.emergingtextiles.com/?q=art&s=070409-apparel- philippines&r=philippines¬e=1 (Jan.30, 2009). 255 Id .
90 http://law.bepress.com/unswwps-flrps09/art16 The overall growth rate of the Philippines in the US market in the first two years since quotas ended was -7.08% (see Figure 23) whilst its growth rate in the EU market was 0% (refer to Figure 24).
In major categories 338, 339, 340, 639 (refer to Table 8) Philippines experienced decrease in their exports to the US as is evident by 2006-2007 US Department of Commerce (OTEXA) statistics, which caused decrease in prices in the above categories by -4.36% in the first half of 2008. Perhaps this was an attempt by the Philippines manufacturers to stay competitive in the US market (refer to Figure 27).
91 Hosted by The Berkeley Electronic Press
(Table 8) Major Textiles & Apparel Export Products to the US Import Market (2006-2007) (Data in Million US $) Source: OTEXA Categories Philippines Philippines China China 2006 2007 2006 2007 332 COTTON HOSIERY 5.648 3.702 46.318 110.248 336 COTTON DRESSES 19.823 23.32 109.498 265.736 338 M/B KNIT SHIRTS, COTTON 160.87 125.801 385.99 597.585 339 W/G KNIT SHIRTS/BLOUSES, COTTON 347.332 324.788 740.799 1132.717 340 M/B COTTON SHIRTS, NOT KNIT 103.192 72.729 214.431 446.465 341 W/G NON KNIT BLOUSES 47.782 29.368 100.167 144.63 345 COTTON SWEATERS 5.406 7.248 199.689 491.393 347 M/B COT. TROUSERS/BREECHES/SHORTS 105.873 70.463 406.061 548.777 349 BRASSIERES, OTHER BODY SUPPORT GAR 4.797 2.096 68.433 77.965 352 COTTON UNDERWEAR 35.89 37.382 101.977 191.768 443 M/B SUITS, WOOL 2.855 4.312 50.165 53.425 447 M/B WOOL TROUSERS/BREECHES/SHORTS 2.661 1.912 23.404 30.033 632 MMF HOSIERY 5.059 1.012 186.724 247.58 640 M/B NOT-KNIT MMF SHIRTS 4.289 2.601 70.271 89.903 646 W/G MMF SWEATERS 6.118 2.96 160.502 210.887 619 POLYESTER FILAMENT FABRIC 0.925 0.704 15.455 25.979 638 M/B MMF KNIT SHIRTS 34.132 40.435 93.514 145.388 639 W/G MMF KNIT SHIRTS / BLOUSES 83.786 81.416 607.739 799.739 647 M/B MMF TROUSERS/BREECHES/SHORTS 39.316 33.66 276.591 357.852 648 W/G MMF SLACKS/BREECHES/SHORTS 90.586 59.076 244.235 339.185
92 http://law.bepress.com/unswwps-flrps09/art16 (e) Thailand: Similar to Indonesia and Malaysia, Thailand’s reliance on textiles and clothing exports is low i.e. only 5% of the total merchandise exports for the country in 2006-2007 (see Figure 22). However, the importance of this sector lies in its foreign export earnings and provision of employment. 256
Establishment of textiles mills in Thailand on commercial basis started in 1946 as a response to the shortages in the post-second world war period as battered nations started rebuilding themselves. 257 However, the production was significantly affected as a result of imported cotton textiles from Pakistan in the late 1950s which attracted import restriction measures from the Thai government on cotton yarn imports and cotton fabrics in 1955 and 1957 respectively. 258
After the introduction of the Investment Promotion Act 1960 by the Thai government, much needed investment initially came into the ailing sector from local, Chinese and Hong Kong entrepreneurs and later on from Japanese firms in (mid-1960s) specialising in manmade fibre production which injected much needed vitality into the Thai textiles sector.259 The Japanese investments were themselves triggered by the VER restrictions on its exports to the US (as part of the LTA regime which has been discussed in Article 1) and formed part of a broad plan that also encompassed other Asian producers such as Malaysia, Indonesia and the Philippines to circumvent LTA restrictions as well as to diversify into other protected markets. 260 As quota restrictions under MFA in the 1970s expanded as well as increase in production costs, labor costs and appreciation of currencies of the emerging Asian industrialized countries such as Korea, Hong Kong and Taiwan, further investments came into the Thai textiles sector on the same pattern as Japanese investments a decade earlier. 261
256 According to official Thai government statistics, the textiles and clothing sector employed 1.08 Million workers in 2005 and exports in this sector for the same year stood at US $ 5.554 Billion ( See Thailand Office of Industrial Economics, Textiles and Wearing Apparel; Industrial Situation by Sectoral (2005), available online: http://www.oie.go.th/industrystatus21_en.asp?ind=10 (Nov.5, 2008). 257 See Suphat Suphachalasai, Export Growth of Thai Clothing and Textiles, 13 (1) the World Econ. 51, 55 (1990) . 258 Id . 259 Id . 260 See generally Hikoji Katano, Japanese Enterprises in ASEAN Countries , Research Institute for Economics and Business Administration (1981), Kobe University, Japan. 261 See Suphachalasai, supra note 257, at 56 & 69.
93 Hosted by The Berkeley Electronic Press Thailand also enjoyed low labor costs as well as enjoying competitive production costs due to wide range of alternative production technologies. 262
Textiles production was again affected in the mid-1980s not only due to increasing imports since the requirements of the swiftly expanding local garments industries could not be met by local fabric and other inputs but also because Thailand was not a producer of high grade cotton, therefore, imports of textile fibres increased two-fold in the mid-1980s to meet the expansion in clothing production for exports. 263
During the quotas under MFA, Thailand recorded growth rates in textiles and apparel exports e.g. in total textiles exports, Thailand’s growth rate for years 1980-1990 was 64.44% rising from US $ 330 Million worth of exports in 1980 to US $ 928 Million in 1990. 264 Similarly, Thailand increased its share in the world apparel export market from 0.7% in 1980 to 3% in 1991 (exporting US $ 3.7 Billion worth of apparel) with an average annual change of 27%. 265 These figures lend credence to the view that quotas under the MFA benefitted Thailand (and many other emergent producers) by restricting like-exports from other more established competitors. However, within a few years time, growing exports from Thailand eventually attracted quantitative restrictions from the US as well in the years 1985 and beyond, which negatively hampered growth of Thai textiles and clothing industries, although the country continued to benefit from quota rents under the MFA regime.266 Restrictions under MFA on mass-produced items also forced manufacturers to shift onto higher value added items as well as to diversify into non-MFA/non-quota restrained markets such as countries in the middle- east, Japan and Singapore. 267
It is also worth noting that as trade in textiles and clothing progressed towards the ATC- transition period (years 1995 onwards till quota expiry), share of textiles exports in the Thai economy’s total merchandise fell from 5.1% in 1980 to 3.5% in 1993-94 but apparel export share increased from 4.1% in 1980 to 11.4% in 1993. 268 In 1994 (one year before the phase out period began), Thailand was ranked as the eighth largest clothing exporter in the world
262 Id , 57. 263 Id , 58. 264 See GATT, International Trade; Trends and Statistics, (Geneva, 1995) at 119. 265 See GATT, International Trade; Trends and Statistics, (Geneva, 1992) at 61. 266 See Suphachalasai, supra note 257, at 60-61, 69. 267 Id , at 69-70. 268 See GATT, supra note 264, at 119; GATT, supra note 265, 84; APEC, supra note 247, at 241.
94 http://law.bepress.com/unswwps-flrps09/art16 when it exported US $ 1.59 Billion and US $ 4.66 Billion worth of textiles and clothing respectively. 269 These figures demonstrate that Thailand has in the past concentrated more on apparel processing and exports (which is a labor intensive activity) rather than the more capital intensive textiles industry. As a result, Thailand displays two trends typical of such countries:
1) Thailand has been a major importer of textiles in the past i.e. Thailand was a net importer of clothing and textiles until 1972 but has since then become a net exporter which coincides with Japanese investment into textiles and clothing in the mid- 1970s. 270 This trend continued well into the 1990s, where Thailand’s total textiles imports stood at US $ 898 Million which grew to US $ 1.357 Billion in 1994, US $ 1.630 Billion in 2000 and US $ 1.986 Billion in 2005 (refer to Figure 20). 271 Thailand’s main suppliers have been other APEC countries such as Taiwan, South Korea, Japan, China and Hong Kong (which supplied 91.3% and 88.5% of textiles imports to Thailand in 1990 and 1994 respectively). 272 These countries were still the principal suppliers of yarn and fabrics to Thailand in 2004-05 which has enabled Thai producers to reduce costs of fabrics and other inputs required in the apparel production process. Thailand has also maintained low tariff barriers to textiles imports in order to ensure continuous supply of fabrics and other inputs to the local apparel industry that are not produced domestically and also to keep input costs low for the apparel production process. This is apparent from Figures 25 and 26 which shows that Thailand maintains an average tariff rate of 8.1% for textiles imports in 2006-2008 (the lowest rate amongst the leading ASEAN/Far-East textiles and apparel producers under consideration).
3) Keeping previous case studies in mind and considering the general global trends, there is little hesitation to assume that Thailand most likely competed in the global apparel trade not only on the basis of low input costs in the form of cheap textiles imports from other Asian producers (as well as from domestic textiles industries) but also due to low labor costs. However, Thailand has not maintained low labor costs
269 GATT, supra note 264 , at 119 & 124; APEC, id . 270 See Suphachalasai, supra note 257, at 59. 271 See APEC, supra note 247, at 246 citing DFAT’s STARS database (December 1995 and April 1997); See also WTO, International Trade Statistics 2001, 2006. 272 See APEC, supra note 247, at 248 citing DFAT’s STARS database (December 1995 and April 1997).
95 Hosted by The Berkeley Electronic Press throughout the 1990s and onwards (as is evident by a review of labor costs in the 1990s and 2008) e.g. during the 1990s, a survey by Bangkok Bank estimated that the average per hour wage rate in Thailand was around US $ 0.63 as compared to US $ 0.56, US $ 0.46, US $ 0.33, US $ 0.26, US $ 0.24 and US $ 0.16 for Malaysia, Philippines, India, China, Sri Lanka and Indonesia respectively. 273 The same trend has continued after quota expiry as well and this is illustrated in Figure 11 which highlights that Thailand, according to 2008 estimates by Emerging Textiles, now has one of the highest labor costs in the region (at US $ 1.325 per hour). Therefore, similar to Malaysia, the reason behind Thailand’s export growth and competitive performance in the past was due to the existence of quotas without which Thai industry could not effectively compete in the world textiles and apparel market.
Prior to quota expiry, ATMI estimated that Thailand would face a projected loss of US $ 1.161 Billion to China as a result of quota elimination. 274 Similarly, after US imposed safeguards on China, NCTO estimated that Thailand would lose US $ 1.575 Billion worth of textiles and clothing business in the US market to China due to the combined effects of quota
273 See Survey cited in APEC, supra note 247, at 242. 274 See ATMI, supra note 32, at 12.
96 http://law.bepress.com/unswwps-flrps09/art16 expiry and removal of safeguards on China. 275 However, after quotas were eliminated, Thailand’s overall exports to the world in textiles and clothing sector have lodged a respectable growth, increasing from US $ 6.693 Billion in 2005 to US $ 6.967 Billion in 2007 276 but it experienced a mixed result in the EU and the US market (see Tables 2-4 and Figures 3, 4, 23 & 24).
The US represents the single largest export market for Thai products (Thai exports to the US stood at US $ 2.059 Billion in 2007 and held 2.18% share in the US textiles and apparel market).277 According to US OTEXA statistics for year ending July 2007 to July 2008 (see Table 2) Thai textiles and apparel exports experienced a slight decline of -0.98% (see also Figure 3). In the first two years since quota expiry, considering ITCB statistics, Thailand experienced an overall growth rate of -3.17% (see Figures 23 & 31). This is important since it seems that in a majority of categories where restrictions were placed on China under TS, Thailand failed to boost their exports to the US market (this is further examined in Table 9). 638 M/B MMF KNIT SHIRTS 77.815 95.89 93.514 145.388 639 W/G MMF KNIT SHIRTS / BLOUSES 34.055 40.091 607.739 799.739 (Table 9) Major Textiles & Apparel Export Products647 M/B MMFto the US Import Market (2006- 109.981 112.316 276.591 357.852 2007)TROUSERS/BREECHES/SHORTS (Data in Million US $) 648 W/G MMF SLACKS/BREECHES/SHORTS 41.667 39.418 244.235 339.185 Source: OTEXA Categories Thailand Thailand China China 2006 2007 2006 2007 332 COTTON HOSIERY 5.327 4.584 46.318 110.248 336 COTTON DRESSES 13.284 8.979 109.498 265.736 338 M/B KNIT SHIRTS, COTTON 171.545 185.6 385.99 597.585 339 W/G KNIT SHIRTS/BLOUSES, COTTON 121.429 114.655 740.799 1132.717 340 M/B COTTON SHIRTS, NOT KNIT 47.906 45.324 214.431 446.465 341 W/G NON-KNIT BLOUSES 68.645 65.147 100.167 144.63 345 COTTON SWEATERS 34.058 20.343 199.689 491.393 347 M/B COT. 44.101 41.86 406.061 548.777 TROUSERS/BREECHES/SHORTS 349 BRASSIERES, OTHER BODY SUPPORT 28.128 24.197 68.433 77.965 GAR 352 COTTON UNDERWEAR 201.262 180.82 101.977 191.768 342 COTTON SKIRTS 29.349 16.775 470.2 388.57 447 M/B WOOL 5.535 5.321 23.404 30.033 TROUSERS/BREECHES/SHORTS 632 MMF HOSIERY 5.544 4.122 186.724 247.58 640 M/B NOT-KNIT MMF SHIRTS 11.43 8.261 70.271 89.903 646 W/G MMF SWEATERS 14.993 4.925 160.502 210.887 619 POLYESTER FILAMENT FABRIC, Lt-Wt 2.424 2.416 15.455 25.979
275 See NCTO, supra note 27, at 2 276 See Thai Textiles Institute (2005-2007 statistics), available online: http://www.thaitextile.org/eng/default.asp (Nov.11, 2008). 277 See Table 3 and Figure 4.
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Since beginning of safeguards on China, Thailand managed to increase its exports to the US market in some of the restricted categories e.g. in category 339, Thailand recorded a 14.06% increase in value during the first quarter of 2006 (January – March 2006) and in category 352, the value increase was 20.11% in the same period. 278 This consequently led to increase in unit value of Thai exports even though Thai apparel was 40% more expensive as compared to Chinese apparel yet in the restricted categories such as 339, Thai exports went from being 13% more expensive in the first three months after quota expiration to 33.75% cheaper. 279 However, Table 9 demonstrates that Thailand failed to hold onto these gains in the restricted categories considered above e.g. declines in major categories 339 and 352 are apparent. Similarly, across other categories 332, 336, 340, 341, 345, 347, 342, 349, 447, 632, 640, 646 and 648 Thai exports registered declines of varying degree in value terms. However, in categories 338 and 638, Thailand recorded respectable growth. These figures, when considered with Figure 27, appear respectable since the declines examined in the categories above are not drastic given the reduction of -4.84% change in unit prices of Thai cotton T- shirts exports to the US in 2007 (corresponding to US OTEXA categories 338 & 638). In the first half of 2008, the price increased nominally by 0.44% and this figure suggests that Thailand has managed to maintain its price level for a major product category whilst maintaining its market share in the US market (see Table 2).
In contrast to the US market, Thailand does not feature as prominently in the EU market where its textiles and clothing exports have been steady (see Table 4). According to 2007 ITCB figures, Thailand’s exports to the EU stood at US $ 1.495 Billion (see Table 4 and Figure 12) with a market share of 1.3% in 2007.280 In the first two years since expiration of quotas, Thailand registered a growth rate of 11.57% in the EU market (see Figure 24) increasing its exports from US $1.322 in 2005 to US $ 1.457 Billion in 2006 (see Table 4). Furthermore, Thailand has managed to keep its price levels steady and has not experienced considerable declines as was predicted in the pre-elimination scenario whereby increased
278 See Emerging Textiles.com, Higher Shipments and Cheaper Prices Compared with China; Thailand’s Apparel Export Growth Worries the US (Country Report), May 19, 2006, available online: http://www.emergingtextiles.com/?q=art&s=060519Tmark&r=thailand¬e=1 (Jan.30, 2009). 279 Id . 280 The official Thai figures put exports for 2007 at US $ 1.324 Billion ( See Thai Textiles Institute 2005-2007 statistics), available online: http://www.thaitextile.org/eng/default.asp (Nov.11, 2008); See also ITCB, EU-25 Imports of Textiles and Clothing from Top 30 and Some Other Exporters (1995 - 2007), available online: http://www.itcb.org/Documents/ITCB_TDEU_95-07.pdf (Nov.12, 2008).
98 http://law.bepress.com/unswwps-flrps09/art16 competition would result in reduction of prices by countries in order to stay competitive in the world markets (see Figures 28 & 29) which takes into account HS 61 and 62 exports to the EU, Thailand had managed to keep its prices steady in the post-elimination period in the EU market (with the exception of a major reduction in HS 62 prices from 20.06 Euro/kg in 2006 to 17.30 Euro/kg in 2007). 281
In contrast to the main target market of the US, Thai exporters have actually managed to increase their exports to the EU in years since the quota expiry (2005-2007) (See Figures 31, 32 & 39). Although, in the first half of 2008, Thailand’s clothing exports (under HS 61 & 62) experienced a 4.35% increase in volume but decreased by 4.04% in value. Overall, the picture in the EU market was mixed during the subsistence of the EU-China safeguards. The statistics and figures demonstrate that the anticipated downward pressure on prices of clothing after quota expiry has not significantly affected Thai exports to the EU, although the ADB has predicted that the downward effect on prices would substantially increase after 2008 when remaining safeguards on China are lifted under categories 4/4C T-Shirts (Knit); 5 Pullovers; 6 Trousers; 7 Women & Girls Shirts; 29 Women & Girls dresses; and 31 Brassieres. 282
Keeping in view, the performance figures and statistics as well as comments made above on the high labor costs and large import volume for textiles, the question is how does Thailand compete in the world market especially in the US and the EU? The figures reviewed above show that Thailand has registered a mixed result in the US and EU markets with trends showing both gains and declines in export categories after quota expiry. One major factor in the relative success of the Thai textiles and clothing industry is diversification into non-quota markets 283 which was a policy pursued by Thai exporters long before quota expiration e.g. Figure 18 takes into account total Thai clothing exports to both MFA-quota restrained and non-MFA quota restrained countries during 1977-1987. A review of Figure 18 shows that prior to 1985 (when US imposed quotas on Thai exports) exports to non-quota markets are developing slowly; an immediate jump in exports to non-MFA markets is evident for years 1986-1987, although exports to MFA-quota restrained markets still exceed non-MFA exports.
281 See William James & Juan Paolo Hernando, Extra-EU Imports of Clothing and EU Preferential Trade Policies in the Post-Quota Era: The Position of Asian Suppliers in the Largest World Market for Clothing Imports, (ADB Economics Working Paper Series No. 125, October 2008) at 10-11. 282 Id . at 16. 283 See Adhikari & Yamamoto, supra note 1, at 214; See also Adhikari & Yamamoto, supra note 14, at 36.
99 Hosted by The Berkeley Electronic Press In 1986, the import share of Thai apparel in EU and US market was 1.1% and 1.6% respectively whilst in non-MFA markets such as the middle-east, Thailand stood at fourth place behind EU/EC, Hong Kong, Korea. 284
284 See Suphachalasai, supra note 257, at 60 & 63-64.
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101 Hosted by The Berkeley Electronic Press The trend of Thailand not relying for exports on just the EU/US market (unlike the majority of developing countries) has continued well into the post-expiry period as well. This is illustrated in Figure 19 which shows that Thailand exported US $ 1.907 Billion worth of textiles and clothing to other countries in 2005 which grew further to US $ 2.104 Billion in 2007. It is also interesting to note that whilst the overall exports to US have declined in the post-expiry scenario, exports to other countries has registered substantial increase in 2007 so that the overall value of exports to other markets exceed exports to the US and the EU. These other countries may include African and South Asian LDCs (such as Bangladesh and Sri Lanka) that concentrate on apparel production.
Another factor in Thailand’s success in diversification is due to its focus on regional trade. Thailand is a major supplier of fabrics to other Asian countries (especially to the LDCs that concentrate on apparel production). Since the EU extends preferential treatment to textiles and clothing exports from Asia as well (unlike the US), EU’s recent liberalization of its ROO under its EBA/GSP regime to allow regional cumulation (as discussed in Article 3) has enabled Thailand to supply neighbouring apparel producers such as Bangladesh, Cambodia and Laos with competitively priced textiles and fabrics. 285 This has resulted in South Asian and ASEAN based apparel producers becoming a significant captive market for Thailand’s textiles industry (see Figure 20). In the post expiry period, Thailand has increased its intra- ASEAN exports of fabrics from US $ 270.1 Million to US $ 326.6 Million (see Figure 20). An increase in overall fabric exports to other countries can is also observable in Figure 20.
Thailand’s gains in this regard have also been helped by the liberalised intra-ASEAN preferential trade regime which has also allowed ASEAN textiles producers to recoup losses from intensifying competition in the multilateral trade arena and a non-liberalised South Asian regime where textiles and apparel sector are protected behind high tariff barriers (see Figures 12 & 13).286
Thailand is an example of a producer that is aggressively competing not just in the EU and the US market but in other export markets as well. Its early diversification strategy has mean that its textiles and clothing industries are still posting export profits despite losses and mixed results in the US market. Thailand was also suspected as re-routing/re-exporting cheap
285 See Adhikari & Yamamoto, supra note 257, at 36. 286 See Adhikari & Yamamoto, supra note 1, at 214; See also Adhikari & Yamamoto, supra note 257, at 36
102 http://law.bepress.com/unswwps-flrps09/art16 Chinese made goods to the US due to major price change on top of the strong growth recorded in the US market in years 2005-2006 which was a major hurdle in the ongoing US- Thai bilateral free trade agreement. 287 This delay did not favour Thailand since its regional export rival Malaysia was already in advanced stages of concluding its own FTA with the US. 288 Another factor in Thailand’s export success so far is its move to higher value added items and superior quality of goods.
(f) Vietnam: Textiles and apparel have formed a critical element of Vietnam’s export growth in recent years (comprising 16.9% of the country’s total merchandise exports in 2006-07) (refer to Figure 22). But what is more remarkable is the astounding pace of growth in a sector which is one of the most competitive and regulated in world trade. This has impressed international trade analysts on one hand and alarmed protectionist interests on the other along the same lines as China’s entry into the WTO.
Vietnam is a centrally planned economy and initiated economic reforms (referred to as the doi moi i.e. ‘renovation’ reforms) in the mid-1980s 289 shedding its traditional agrarian economy and moving towards-labor intensive manufacturing sectors with particular emphasis on export of manufactured goods 290 with textiles and apparel sector forming (in typical fashion) the core of the export oriented economic policy. 291 Vietnam had in the past targeted the Soviet/Communist leaning bloc of nations as its primary export market for textiles and clothing exports but with the collapse of the Soviet Union and the opening up of the US and the EU markets as well as the entry of Vietnam into the WTO in 2007 have all combined to realign Vietnamese export policies in a manner similar to the rest of the ASEAN Asian exporters.
The measure of Vietnam’s success can be gauged from the fact that prior to signing the Bilateral Trade Agreement (BTA) with the US in 2000 it was excluded from the US market
287 Emerging Textiles.com, supra note 278. 288 Id . 289 Khalid Nadvi & John Thoburn, Challenges to Vietnamese Firms in the World Garment and Textile Value Chain, and the Implications for Alleviating Poverty, 9 (2) J. of the Asia Pac. Econ. 249, 256 (2004). 290 See World Bank, Vietnam 2010; Entering the 21 st Century, (Vietnam Development Report, 2001) (World Bank Vietnam, Hanoi) at 12. 291 See Khalid Nadvi & John Thoburn, Vietnam in the Global Garment and Textiles Value Chain: Impacts on Firms and Workers, 16 J. of Int’l Dev. 111, 112 (2004) .
103 Hosted by The Berkeley Electronic Press due to political reasons and whilst Vietnam was readjusting export orientation after collapse of the Soviet Union, it also faced steep tariffs due to its non-membership of the WTO. 292 Vietnam being a “latecomer” to the textiles and apparel export sector also had to quickly adapt to increased global competition due to the impending phase out of the MFA quotas after expiry of the ATC and the resultant dominance of China. 293 Moreover, Vietnam had to mould its local labor and environmental standards according to international standards in order to attract foreign buyers and it also had to improve labor productivity in order to reduce lead times from order by foreign buyers to final delivery which is critical for any garments producer. 294
Textiles and apparel sector is important for Vietnam not only in terms of export earnings but has significant implications for poverty growth and increase in domestic employment levels. 295 Predictably, this has resulted in the predominance of garment manufacturing in the Vietnamese economy (see Figure 21) since there is abundance of cheap, skilled and willing workers. However, Vietnam also has a viable domestic textiles industry that is geared towards complimenting the local apparel production although the exports of textiles are considerably less.296 Having strong backward linkages is a strong attribute for any economy concentrating on textiles and clothing exports but as, Nadvi and Thoburn demonstrate, Vietnamese textiles sector is heterogeneous mix of state owned enterprises, private local firms and wholly owned foreign firms all of which have varying ties to the global markets internationally and to the Vietnamese establishment domestically which has inevitably affected export performances of the two sectors. 297
292 The US BTA was signed on 13 July 2000 but entered into force on 10 December 2001. It effectively restored mutual MFN status and requires Vietnam to undertake various market oriented reforms. The MFN status reduced US tariffs on Vietnamese exports from 40% to approximately 3% ( See CRS, The Vietnam – US Textile Agreement Debate: Trade Patters, Interests and Labor Rights, Jun.21, 2002, at 2); According to the World Bank, the average tariff reduction on all Vietnamese exports, as a result of the US – Vietnam BTA, was from 35% to 5% ( See World Bank Vietnam, Implementing Reforms for Faster Growth and Poverty Reduction, (Vietnam Development Report 2002), at 27; See generally the text of the US – Vietnam BTA which is available online: http://www.ustr.gov/assets/World_Regions/Southeast_Asia_Pacific/Vietnam/asset_upload_file917_10731.pdf (Nov.20, 2008). 293 See Hal Hill, Export Success Against the Odds: A Vietnamese Case Study, 28 (2) World Dev. 283, 286 (2000); Nadvi & Thoburn, supra note 291, at 112; Nadvi & Thoburn, supra note 289, at 290. 294 Nadvi & Thoburn, supra note 289, at 250. 295 Nadvi & Thoburn, supra note 291, at 112. 296 Id , at 253; Id , at 113. 297 Id , at 112.
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In the past Vietnamese textiles industries were criticised by local apparel producers as being unable to meet “the various demands of foreign buyers for specific fibre content, fabric construction, design, finish, quality and competitive prices.” 298 Ideally this should have resulted in low tariffs for textiles local apparel manufacturers to have easy access to fabric and other inputs but to the contrary, Vietnam maintains one of the highest average tariff rates for textiles imports in the region (at 30.4% in years 2006-2008 – see Figures 25 & 26). 299 Perhaps this is an attempt to provide protection to the local textiles industries which are dominated by large, inefficient state owned enterprises (SOEs) while at the same time keeping the tariffs low enough for apparel producers to source fabric and other textiles inputs from foreign sources that would meet the specifications of the foreign buyers. In spite of the high tariffs, Vietnam is a large net-importer of textiles (as is evident by Figure 21) with imports for textiles standing at US $ 4.94 Billion in 2007. The growth in imports of textiles by Vietnam coincides with the increased volume of apparel exports.
298 See Mekong Project Development Facility (MPDF), Vietnam’s Garment Industry: Moving up the Value Chain, (Private Sector Discussion No.7, Revised 2000) at 5; See also Vu Quoc Huy, Vi Tri Thanh, Nguyen Thang, Cu Chi Loi, Nguyen Thi Thanh Ha & Nguyen Van Tien, Trade Liberalization and Competitiveness of Selected Industries in Vietnam Project: Analysis of Qualitative Factors Affecting Competitiveness of Textile and Garment Firms in Vietnam, (Institute of Economics, Hanoi/International Development Research Center, Canada, 2001) at 21. 299 According to WTO World Tariff Profiles 2008, these levels have been maintained ( Source: http://www.wto.org/english/res_e/booksp_e/tariff_profiles08_e.pdf ) (Nov.28, 2008).
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Reportedly there have been improvements in the quality of fabric as investments from Korea and Taiwan enabled establishment of cotton and synthetic fabric production. 300 Growth in productivity was also registered since the 1990s when the textiles SOEs downsized leading to much improved productivity and profitability. 301
Overall, Vietnam’s export performance has been nothing short of spectacular. Figure 20 already highlights the increase in annual exports of textiles and apparel from 1986 (when the doi moi reforms were announced where Vietnamese exports amounted to a near negligible US $ 27.5 Million) to the start of the ATC regime in 1995 (where Vietnam’s overall exports of textiles and clothing was US $ 1.026 Billion representing 45.3% of the total manufactured exports of the country).302 This further grew to a total of US $ 2.12 Billion in 2000 and then
300 Interview of a foreign buyer cited in Nadvi & Thoburn, supra note 291, at 117. 301 See Nadvi & Thoburn, supra note 291, at 119 & 120. 302 See Hill, supra note 293, at 285.
106 http://law.bepress.com/unswwps-flrps09/art16 to US $ 5.406 Billion in 2005. 303 In 2007, Vietnam exported US $ 8.538 Billion worth of textiles and apparel products to the world. 304
Vietnam also stands out distinctly as compared to its neighbours, majority of whom compete and have competed aggressively in the US market more than the EU. One indication of this observation is the fact that after undergoing readjustment in the post-Soviet collapse era, Vietnam primarily exported to non-quota restrained markets such as Japan (which took in 42.2% of Vietnamese textiles and apparel exports in 1996). 305 Additionally, Vietnam concluded a trade agreement in 1992 with the EU that extended preferential quotas for clothing, which resulted in EU absorbing 43.3% of Vietnamese textiles and apparel exports in 1996. 306 Conversely, the share of exports to US market by Vietnam was only 2% in the same year when other regional exporters such as Thailand and Indonesia exported 41.1% and 57.7% of textiles and apparel products to the US market respectively and 27.3% and 12.7% respectively to the EU in the same year. 307
Vietnam’s penetration of the significant Japanese market, a non-quota restrained, extremely competitive market and with highly discerning consumer base, is a testament to the high quality of Vietnamese goods. Vietnamese exports to Japan were further expected to benefit from the Japan – Vietnam bilateral agreement that reduced Japanese import tariffs from 10% to 0% provided materials used in manufacturing have their origin in ASEAN or Vietnam.
As the case study would further demonstrate, Vietnam has demonstrated an astounding capacity to compete in the US market and it has lodged an impressive growth over the ATC era (1995-2004) and this impressive performance has continued (refer to Figures 2 & 3 above). From initial reliance on EU as the preferred-quota restrained market, the balance shifted to the US e.g. the US share in Vietnam’s total textiles and garments exports in 2007 was 52.21% whilst EU’s share was 20.42%. Only a decade earlier (refer to the preceding paragraph) EU took 43.3% of Vietnamese textiles and clothing exports.
303 WTO, International Trade statistics (2001, 2006), available online: http://www.wto.org/english/res_e/statis_e/statis_e.htm (Jan.29, 2009). 304 WTO, International Trade statistics (2008), available online: http://www.wto.org/english/res_e/statis_e/statis_e.htm (Jan.29, 2009). 305 See Hill, supra note 293, at 289. 306 Id , at 289-290; See Nadvi & Thoburn, supra note 289, at 254. 307 Id , at 289; See Nadvi & Thoburn, supra note 291, at 114.
107 Hosted by The Berkeley Electronic Press Since Vietnam was not a member of the WTO before 2007, expiration of quotas did not have a typical effect on the country’s exports partially because it was reliant evenly on MFA- restricted and non-MFA markets. However, prior to its accession to the WTO in 2007, Vietnam was receiving some quota relief from both the EU and later on from the US as well which had a positive impact on the country’s exports to these primary markets for textiles and apparel.
In 2007, Vietnam held 1.7% market share of the EU textiles and clothing market as compared to 4.7% share of the US market in the same year. Vietnam’s shift of export reliance to the US market came in the years 2001-2002 (refer to Tables 3 and 4) as a result of US – Vietnam Bilateral Trade Agreement (USBTA) which came into effect in December 2001. The USBTA levelled the playing field for Vietnam and other African, Caribbean and Latin American exporters to the US (typically recipient of preferential treatment under AGOA, NAFTA and CBI/CBTPA regimes). Prior to the USBTA, average tariffs for garment exports were as high as 60% that were cut down to 5% and Vietnam was ranked at 64 amongst the countries exporting textiles and garments to the US in 2001. 308 The effects on Vietnamese garment exports to the US were pronounced.
Whilst the exports of textiles and clothing from Vietnam to the EU in years 2001 and 2002 were US $ 754 Million and US $ 726 Million respectively the comparative figures for the same years in the US market were US $ 49 Million and US $ 952 Million respectively. In the very next year, the growth was even more impressive i.e. Vietnam’s exports to the US totalled US $ 2.484 Billion in 2003 whilst the comparative export figure for 2003 in the EU market fell to US $ 685 Million. Responding to the explosion of exports to the US, quotas were imposed on Vietnam from 1 May 2003 on all major export categories but that failed to deter further exports e.g. Vietnamese exports to the US in 2004 were US $ 2.720 Billion and in the first year since quota expiry the growth in exports to the US market continued unabated with exports of US $ 2.881 Billion in 2005 (refer to Table 3). From 2005 to 2007, Vietnam achieved a 36.8% growth rate in the US market (refer to Figure 23) and in the first quarter of 2008, Vietnam became the second largest supplier of textiles and clothing to the US after China. 309 Only a year earlier Vietnam was ranked fifth largest supplier and this growth came despite a Vietnam-specific monitoring programme that was established at the insistence of
308 See Nadvi & Thoburn, supra note 289, at 255; CRS, supra note 292, at 6. 309 See Vietnam Soars to US Second Largest Apparel Supplier, Just-Style, (Sep.11, 2008).
108 http://law.bepress.com/unswwps-flrps09/art16 the US industry to constantly review import figures and self-initiate anti-dumping proceedings if there is any evidence of injurious dumping. 310
According to 2007-2008 official US statistics, Vietnam occupied 5.21% market share of the US textiles and apparel export market (refer to Figure 4) and achieved a respectable 35.56% growth from July 2007 to July 2008 (see Table 2 and Figure 3). Figure 3 further demonstrates that whilst China’s growth along with other major exporters declined, Vietnam was by far the fastest growing exporter to the US despite existence of quotas and the monitoring programme. Vietnamese exports beat preferential and proximate suppliers such as Mexico and Canada, displaced established exporters such as Pakistan, Thailand and Indonesia whilst competing effectively against China and India. The question, therefore, becomes how did Vietnam compete against major exporters that are relatively better developed?
One way to answer this question may lie in examining prices of Cotton T-shirts in the US export market. This category has not only been heavily competitive and quota restrained in the past but is also a good indicator of price based competition especially in the post- elimination period. Figure 27 considers percentage change in prices of this item for ASEAN Far-East producers in the US export market for 2007 and the first half of 2008. Vietnamese T-shirt exporters reduced their prices by 9.21% in 2007 and in first six months of 2008 their prices declined by a further 7.65% (to be amongst the lowest in the ASEAN region with the exception of Indonesia). By contrast, unit price change in the same category for Chinese exports (with which Vietnam vies for share in the US market) was 10.80% in 2007 and 12.16% in first half of 2008 reflecting a combination of increased cost of production, rising currency and labor costs. 311 Similarly, Mexico (a proximate preferential treatment recipient under NAFTA) experienced an increase in unit price by 2.78% in the first half of 2008 312 whilst its exports to the US declined by 11.04% from July 2007 to July 2008 (refer to Table 2).
310 This programme was announced by the US Secretary of Commerce, Carlos Gutierrez in September 2006 which entails review of import data from Vietnam to determine whether there is sufficient evidence to warrant self-initiation of antidumping proceedings against Vietnam ( See http://ia.ita.doc.gov/download/vietnam-textile- monitoring/vtm-index.html (Nov.21, 2008); See also Just-Style, id . 311 See Emerging Textiles.com, US Cotton T-shirt Imports in First Half of 2008 (Statistical Report), (Oct.3, 2008), available online: http://www.emergingtextiles.com/?q=art&s=081003-apparel-us-cotton-t-shirt- import&r=us-apparel-import¬e=21 (Jan.29, 2009). 312 Id.
109 Hosted by The Berkeley Electronic Press Another reason for Vietnam’s outstanding export performance may be due to US-China safeguards that expired at the end of 2008. Table 10 considers some of the major categories where US granted preferential treatment to Vietnam 313 that are common with categories in which China was placed under safeguards restraints.
(Table 10) Major Apparel Export Products to the US Import Market (2006-07) (Data in Million US $) *Categories not restrained under quotas (refer to Annex B of the USBTA) Categories China China Vietnam Vietnam 2006 2007 2006 2007 334 OTHER M/B COATS, COTTON 395.232 592.668 26.825 48.299 335 W/G COTTON COATS 757.064 835.037 72.808 135.764 338 M/B KNIT SHIRTS, COTTON 385.99 597.585 219.791 300.088 339 W/G KNIT SHIRTS/BLOUSES, 740.799 1132.717 555.089 841.478 COTTON 340 M/B COTTON SHIRTS, NOT KNIT 214.431 446.465 108.38 138.47 341 W/G COTTON. 519.568 754.547 26.863 34.351 SHIRTS/BLOUSES,N-KNIT 342 COTTON SKIRTS 470.2 388.57 18.928 27.318 347 M/B COT. 406.061 548.777 207.568 244.82 TROUSERS/BREECHES/SHORTS 348 W/G COTTON 860.683 1217.388 403.561 530.051 TROUSERS/SLACKS/SHORTS 351 COTTON NIGHTWEAR/PAJAMAS 390.903 516.225 14.215 23.694 352 COTTON UNDERWEAR 101.977 191.768 18.262 15.156 359 OTHER COTTON APPAREL 586.315 576.347 47.685 50.141 443 M/B SUITS, WOOL* 50.165 53.425 33.679 34.358 447 M/B WOOL 23.404 30.033 9.166 11.383 TROUSERS/BREECHES/SHORTS 638 M/B MMF KNIT SHIRTS 93.514 145.388 43.543 78.836 639 W/G MMF KNIT SHIRTS / 607.739 799.739 52.29 149.605 BLOUSES 640 M/B NOT-KNIT MMF SHIRTS 70.271 89.903 47.687 46.512 641 W/G NOT-KNIT MMF SHIRTS / 354.802 421.198 19.655 29.855 BLOUSES* 642 MMF SKIRTS* 199.889 204.278 19.206 36.236 645 M/B MMF SWEATERS 12.196 14.893 0.313 0.603 646 W/G MMF SWEATERS 160.502 210.887 9.192 4.932 647 M/B MMF 276.591 357.852 93.084 111.11 TROUSERS/BREECHES/SHORTS 648 W/G MMF 244.235 339.185 95.707 176.855 SLACKS/BREECHES/SHORTS 651 MMF NIGHTWEAR / PAJAMAS 246.888 327.831 7.889 16.585 652 MMF UNDERWEAR 95.784 157.402 9.92 14.023 659 OTHER MMF APPAREL 846.185 1005.436 118.696 147.523
313 See USBTA (with Visa Arrangement and Amendments) . This Agreement first limited export of Vietnamese apparel to the US in May 2003 (see Article 4). The categories under quotas are listed under Annex B to the USBTA. Text of the USBTA available: http://www.tcc.mac.doc.gov/cgi-bin/doit.cgi?226:64:620517626:1:353 (Nov.21, 2008).
110 http://law.bepress.com/unswwps-flrps09/art16 In nearly all of the categories considered above i.e. Categories 334, 335, 338, 339, 340, 341, 342, 347, 348, 351, 359, 443, 447, 645, 647, 648, 651, 652 and 659 growth was recorded whilst in some of the similar categories considered above in Tables 7-9 for other ASEAN producers the results did not demonstrate extensive capitalisation of safeguards on China by other producers. Vietnam stands as an exception. Whilst the growth in China’s exports in these categories has always outpaced other exporters, any increase in exports is an indication of capitalisation by the exporter under consideration of safeguards on China.
Increase is also noticeable in Categories 641 and 642 which are non-restrained categories. The only declines noticeable in Table 10 are in categories 352 and 640 due to competition from Thailand and China. Therefore, as far as the statistics go, Vietnam has certainly taken advantage of the safeguard restraints on China and managed to increase its exports to the US market as compared to other regional exporters. The US Department of Commerce had conducted yearly review of Vietnamese imports into the US under the Vietnam monitoring programme and after comparing trends in unit values and import levels with other suppliers of these products to the US such as Bangladesh, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, India, Indonesia, Pakistan, Thailand, Cambodia, Macau, Malaysia and the Philippines concluded that there was insufficient evidence to self- initiate an antidumping investigation. 314
After shifting of export concentration to the US market, EU represents the second largest target market for Vietnam where its apparel exports had a market share of 1.9% in 2007 (see Figure 8). Although Vietnam lodged a healthy growth rate of 76.8% over the years 2004 to 2007 with 44.61% growth in the EU market in the first two years since quota expiration (see Figures 9 and 24), the value of exports is less than half of the exports to the US in value terms (compare Vietnam’s export performance in Tables 4.3 and 4.4).
In the first half of 2008, EU clothing imports (HS Article 61 & 62) from Vietnam were US $ 517 Million increasing from US $ 484 Million in 2007 which represented a value change of 6.82% over the first half of 2007.315 Similar to the US market, Vietnamese apparel exports to
314 See US Department of Commerce Press Releases (Oct.26, 2007 & May 6, 2008) (Available online: http://ia.ita.doc.gov/download/vietnam-textile-monitoring/vtm-index.html (Nov.21, 2008 ). 315 See Emerging Textiles.com, Vietnam Clothing Exports Further Surging but.. (Country Report) (Sep.25, 2008), available online: http://www.emergingtextiles.com/?q=art&s=080925-apparel-vietnam-country- report&r=vietnam¬e=1 (Jan.27, 2009); See Emerging Textiles.com EU Clothing Imports in First Half 2005-
111 Hosted by The Berkeley Electronic Press the EU were priced much lower than other ASEAN exporters i.e. for apparel articles under HS 61 the unit price (Euros/Kg) fell from 6.58 Euro/Kg in 2005 to 3.87 Euro/Kg in 2007 and for apparel articles under HS 62 the unit prices fell from 13.2 Euro/Kg in 2005 to 7.52 Euro/Kg (refer to Figures 28 & 29). This low price level has been consistently maintained since 2004 as compared to the rest of the ASEAN producers. However, unlike the US market where foreign buyers extensively sourced from Vietnam, EU retailers and buyers have yet to express the same level of satisfaction with Vietnamese manufacturers, therefore, the export value of Vietnamese merchandise remains low perhaps as an attempt to price goods as attractively as possible to snare market share from traditional suppliers of clothing to the EU.
It must also be kept in mind that Vietnam not only has to compete in the EU market against other Asian exporters but also has to deal with competitive proximate exporters such as Turkey, Romania, Bulgaria, Tunisia and Morocco. One possible explanation of low volume of exports from Vietnam may be concentration of low value added merchandise unlike Turkey and Tunisia that are manufacturers of high-end products that are valued higher. 316
Vietnam’s advantage (similar to all apparel producers) vis-à-vis their regional and other export rivals are their low labor costs. In 1994, Werner International estimated that Vietnam’s labor costs were US $ 0.40/hour.317 After the lapse of 14 years (in 2008), according to Emerging Textiles estimates, Vietnamese labor costs were US $ 0.38/hour (refer to Figure 11) while labor costs increased from US $ 0.5/hour in China (with whom Vietnam directly competes in major world markets) to US $ 1.08/hour in some coastal regions. 318 It was these labor costs that attracted Asian NICs to invest in the proximate market of Vietnam at a time when costs in other ASEAN/Far-East nations were rising. 319
2008 – Origins (Statistical Report) (Sep.23, 2008), available online: http://www.emergingtextiles.com/?q=art&s=080923-clothing-eu-import&r=eu-apparel-import¬e=16 (Jan.29, 2009). 316 See Emerging Textiles.com, EU Clothing Imports per Category and Origin: Unit Prices in 1 st Quarter 2008 (Statistical Report) (Jul.1, 2008), available online: http://www.emergingtextiles.com/?q=art&s=080701- clothing-eu-import&r=eu-apparel-import¬e=26 (Jan.29, 2009); See also Bulgaria: Europe’s Fastest Growing Textile and Clothing Producer Gears up for Further Expansion , Textiles Intelligence , Press Release (June 2007); See also Nebahat Tokatli, Asymmetrical Power Relations and Upgrading Among Suppliers of Global Clothing Brands: Hugo Boss in Turkey , 7 Journal of Economic Geography 67 (2007) (outlining Turkey’s evolution from a venue for cut-make-trim operations to high value added merchandise for the EU market). 317 Estimates by Werner International Inc. cited by Hill, supra note 293, at 296. 318 See Emerging Textiles.com, Apparel Manufacturing Labor Costs in 2008 (Statistical Report) (May 23, 2008), available online: http://www.emergingtextiles.com/?q=art&s=080523-apparel-labor- cost&r=free¬e=1 (Jan.29, 2009). 319 See Hill, supra note 293, at 296.
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In addition to the advantage of low labor costs, Vietnam took advantage of safeguards on China to boost exports whilst maintaining a favourable currency balance against the US Dollar (which made its exports cheaper). Vietnamese exporters have demonstrated immense adaptability especially in terms of maintaining labor standards that have become increasingly important in the global textiles and clothing trade due to consumer awareness and foreign retailers. However, these standards are only important as far as the US is concerned as is demonstrated by interviews conducted by Nadvi and Thoburn in 2003-2004 where it was reported that “compliance with labor standards was not an issue for supplying to Japan” since “Japanese buyers were especially concerned with overall quality and product detailing.” 320 On the other hand, labor and environmental standards associated with dyeing mattered for EU based buyers who stressed more on quality of the merchandise whilst for the US buyers, compliance with labor standards was of “paramount concern, followed by price and delivery schedules.” 321 Vietnamese firms have more or less managed to comply with these standards as is evident by their performance statistics examined above.
One major disadvantage faced by Vietnamese industry in the past was a lack of direct link with the foreign buyer and relying on intermediaries for production orders (the so-called “triangular manufacturing” according to Gary Gereffi). Whilst this mode of manufacturing may give retailers an advantage in terms of lowering cost of production, it leaves manufacturers vulnerable to price pressure from intermediaries and foreign retailers since the value addition is done at their end and not by the manufacturers. The manufacturers, in order to maintain competitive pricing, are forced to cut wages which has a severe human impact in terms of social costs. One indication of the vulnerability of the Vietnamese producers in the triangular manufacturing system is that many manufactures are unaware of their destination market. 322 To remedy this situation in the public sector industries, Vinatex (which is a conglomerate representing SOEs) has played a key role in establishing direct links between manufacturers and foreign buyers. 323
320 See Nadvi & Thoburn, supra note 289, at 259. 321 Id , at 259 & 261. 322 According to a survey of Vietnamese industry in 2004, half of the firms reported no knowledge of their final destination market ( See Nadvi & Thoburn, supra note 291, at 116). 323 See Nadvi & Thoburn, supra note 291, at 117 (Ibid).
113 Hosted by The Berkeley Electronic Press Another effort towards raising the quality and increasing value added content of Vietnamese apparel is the move from cut-make-trim (CMT) operations to free-onboard (FOB) model whereby the manufacturer is also responsible for sourcing fabric and recovers the cost in form of the final delivery price to the foreign buyer. This model favours the local textiles industries as well and perhaps that is why Nadvi and Thoburn report that three-quarters of SOEs are engaged in both CMT and FOB production. 324
With the end of safeguards on China and of the Vietnam Monitoring Programme in the US, Vietnamese producers have recorded strong growths in the figures available in the first few months of 2009 reflecting consumer buying trends in wake of the recession in the US market. 325 Along with Vietnam and China, Bangladesh also posted a healthy growth in some of the major apparel categories in the US market e.g. according to EmerginTextiles.com, Bangladesh and Vietnam managed to increase their exports to the US in Category 347/348 (Cotton Trousers for Men/Boys and Women/Girls) by 34% and 19% in volume terms in January 2009 whilst exports from preferential CAFTA suppliers declined by 52%. Similarly, in manmade fiber categories (647/648), Chinese and Vietnamese exports increased by 31% and 16.4% in volume terms in the same period. Growth was also recorded in categories 638/639 (manmade fiber knit shirts) with China recording 53% and Vietnam 27% growth in volume terms. 326
V. CONCLUSION Since quota expiration and the resulting integration of textiles and clothing into the WATO/GATT framework, many producers (not just in Asia) have been undergoing readjustment. One view is that since Asia was a major victim of the quota system, it is only fair that Asian producers should excel in textiles and apparel trade at the expense of those countries that prospered under the previous system. 327 However, the reality is not that simple. Millions of people in the poorest of countries in Africa, Caribbean, Latin America and other parts of the world are dependent on this sector for their livelihood and yet the liberalized trading environment for textiles and clothing offers them little. In this respect, quota expiry is a major test of the multilateral trading system under the WTO.
324 Id . 325 See EmergingTextiles.com, supra note 53. 326 Id . 327 Adhikari & Yamamoto, supra note 14, at 37.
114 http://law.bepress.com/unswwps-flrps09/art16 The case studies in this article have attempted to analyse the accuracy of major pre- elimination estimates, upon which many developing and least developed countries based their future adjustment plans. These were briefly summarized in Section III above.
The statistics since quota expiration reveal a story quite different from what was foretold prior to the “cataclysmic” end of quotas. The first story the statistics tell is that the widespread economic disruption that was predicted did not occur and that many “victims” have proven to be survivors and that many “winners” are either struggling or have become “victims.” For instance, in South Asia, Bangladesh and Sri Lanka have managed to record strong growths in some of the major categories in the US and the EU markets. These two countries have adopted different post-elimination strategies with varied success i.e. Bangladesh has concentrated on low value-added, mass produced apparel items, whilst Sri Lanka has adopted a two prong strategy of diversification to higher value added categories and promoted an image as an ethical manufacturer thereby appealing to socially conscious retailers and increasingly aware consumers in developed countries. This strategy was also adopted by Cambodia, although Cambodian producers have not diversified into the higher value added segment of apparel exports like Sri Lanka.
The case studies have also demonstrated the demise of the textiles and clothing industry in Nepal and the Maldives. These producers lacked a cotton growing base and did not posses any vertically integrated industries. Therefore, they were entirely dependent on textiles imports while manufacturing apparel solely on the basis of low labor costs to take advantage of unused quotas in the developed countries export market. These countries owed the existence of textiles and clothing industries simply because of the incubated environment created by the quotas. As soon as that incubation ceased, their textiles and apparel industries withered within a short time span. In this respect, pre-elimination predictions did come true.
Regarding growth and survival of the LDCs considered in the case studies in this article, one may raise the issue that Bangladesh, Sri Lanka and Cambodia owe their success to the preferential trade regimes extended to them by the developed countries (such as the EU GSP scheme) and that in the absence of preferential treatment margin, these producers would not be able to compete with China, India or other vertically integrated competitors regionally or globally. This point can be countered by comparing Asian LDC performance with LDCs in Africa, Caribbean and Latin America that receive preferential treatment into the EU and the
115 Hosted by The Berkeley Electronic Press US market. The comparison in Table 6 demonstrated that Asian LDCs like Bangladesh and Sri Lanka that do not get any preferential treatment for their apparel exports to the US market have fared much better than many of the preferential entry recipients such as AGOA and CBI/CBTPA exporters.
The statistics considered in the LDC comparison tell another story that foretold the benefits of proximity being a key to success in the competitive post-elimination environment. However, the statistics demonstrate that proximate exporters to the US have not fared any better than ones to the EU. While proximity is an advantage in terms of reduced lead times and reduced transport costs it cannot be the sole basis of competing in the post-elimination trading environment. Proximity does not appear to outweigh the cheap, abundant and efficient labor that is a major advantage enjoyed by some of the Asian producers considered in the case studies.
The LDC comparison reinforces the negative effects of the ROO incorporated within the preferential trade agreements and schemes adopted by the developed countries e.g. it is clearly evident that AGOA and CBI/CBTPA beneficiaries labor under the restrictive ROO that requires them to use US origin fabrics and inputs in order to qualify for preferential treatment for their apparel exports. One example is that of Sri Lanka, which receives preferential treatment under EU GSP but its exports to the US are higher than the EU (see Figures 20 & 21). Yet this does not discount the value of enjoying preferential access to the lucrative developed markets in this sector, therefore, the post-elimination strategy employed by LDCs involves controlling or procuring any possible advantage for preferential entry (be it GSP schemes or bilateral FTAs) and complementing with this domestic advantages such as low labor costs and adherence to high ethical standards.
Amongst the developing countries, India has largely fulfilled its “destiny” by recording healthy growth trends in both the US and the EU markets. The pre-elimination prediction that countries with vertically integrated textiles and apparel industries would fare better than import dependent producers has proven true as is evident by India’s performance along with Pakistan, Thailand and Indonesia (although their performance is not impressive as India). Amongst the developing countries, the Philippines stands out as another example of countries that were highly dependent on quotas for their textiles and apparel exports to the developed countries and seem to have benefitted only when restraints were imposed on producers with a
116 http://law.bepress.com/unswwps-flrps09/art16 comparative advantage in textiles and apparel manufacturing e.g. exports increased to the US coinciding with safeguards on China and then gradually dropping again. Another factor going against the Philippines is the high labour costs which, as has been demonstrated above, are the primary grounds of competition amongst the textiles and apparel exporters. Malaysian industries have also experienced declines and this sector is of secondary importance to the Malaysian economy which is comparatively much more developed than other Asian nations. It has diversified into investment in other countries that enjoy preferential entry to the US and the EU market but with little success. Thailand has focused on regional trade and diversifying its exports to other developed country markets in order to reduce dependency on the EU/US markets. In adopting this strategy, Thailand has experienced increased export volumes in spite of being one of the most expensive venues in terms of labor costs.
Vietnam has surprisingly emerged as an unlikely winner of quota expiry. It drastically increased its exports to the US and the EU markets taking full advantage of low labor costs, safeguards on China, favourable currency balance against the US Dollar (which made its exports cheaper) as well as adapting and maintaining labor standards that have become increasingly important in the global textiles and clothing trade due to heightened consumer and retailer awareness. Vietnam’s performance has impacted exports of preferential exporters to the US such as Honduras, Mexico and others in the CBI/CBTPA and AGOA regimes.
The statistics also tell that the anticipated Chinese tsunami of exports was somewhat exaggerated and that many countries that were predicted to drown have actually survived and thrived. Despite the safeguards that were in effect an extension of the quota system, China’s export performance has been impressive in the EU and the US market. However, there are indications that due to recent rises in wages, Chinese exports would no longer enjoy the comparative advantage in terms of low labor costs. If the rising trend in labor costs continues then perhaps China too would diversify into higher value added items or onto other sectors of production along the same lines as other developed countries. For the near future, Chinese domination of this sector is all but inevitable.
Pre-elimination analysis also focused on a reduction in prices and fall in wages for producer countries in wake of the quota expiry. This was predicted to give rise to socio-economic issues as countries indulged in a “race to the bottom” to compete for the lowest possible labor costs in order to retain or increase their market shares in developed countries. However, the
117 Hosted by The Berkeley Electronic Press statistics tell the opposite story. There was no wholesale slashing of prices and many Asian countries that experienced increases in exports to the US and the EU also saw increase in prices for their merchandise.328 These figures also reveal that some countries that had benefitted under quotas did experience price declines corresponding with an overall decline in their exports to the US and the EU markets.
The case studies have also highlighted the impact on OPP because of quota expiration e.g. the demise of industries in Maldives and Nepal. Malaysia’s ill-fated attempt to capitalize on AGOA preferential schemes in Namibia was also cited as an example. Overall, in the post- elimination period, it is expected that OPP-extending countries would favour venues that offer combination of low labor prices, high labor productivity, political stability, product diversity, preferential entry, low entry tariffs and presence of support infrastructure. Countries that compete solely on the basis of proximity or preferential entry or labor cost alone will be unlikely to be able to compete effectively in the increasingly competitive global textiles and clothing market.
The statistics have also shown that regional integration and reducing tariff barriers to forge closer regional utilization of inputs is the way forward. This is illustrated by leading ASEAN exporters performance compared with South Asian producers where garment producers in Bangladesh and Sri Lanka prefer to source from China and ASEAN textiles producers rather than India and Pakistan. For South Asia to forge ahead and remain competitive in the years ahead a regional FTA along the same lines of ASEAN FTA must be concluded. Whilst South Asian countries have concluded SAFTA, it remains ineffective in the textiles and clothing sector (which is the main industry in the region) due to sector-specific exclusions. Reducing tariffs and increasing intra-regional trade will give exporters the cost advantage that is currently unavailable due to protectionist interests. In the coming years, trade in this important sector of the global economy is expected to undergo further changes as new players emerge and older players graduate to other sectors of exports thus reducing reliance on textiles and clothing.
328 See e.g. Figures 20, 27-29
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