The Hindu Business Line : EU enlargement: It may stretch India's textiles sector

THE textiles and clothing trade (T&C) represent 5.7 per cent of world exports. In four decades, world T&C increased more than 60 times from less than $6 billion in 1962 to $342 billion in 2001 (in nominal terms).

The more labour intensive clothing sector has grown faster than textiles, and represents 57 per cent of world T&C trade.

The growth of trade in this sector has, however, witnessed a slowdown in value terms since the mid-1990s, particularly under the Agreement on Textiles and Clothing (ATC), explained in part by reduced prices due to increased competition among supplier countries.

In the late 1980s developing countries overtook industrialised countries in their share of T&C exports. They now account for 50 per cent of world exports of textile and 70 per cent for clothing. This difference is explained by the fact that the clothing industry is more labour intensive than textile, giving labour-abundant developing countries a comparative advantage.

As for India, the EU and the US remained major export destinations for textiles and clothing.

In 2002, the India's share in the EU's external trade imports of textiles and clothing was some 8 per cent and 5 per cent, respectively. These figures indicate the importance of the EU market for the India's T&C.

This is more so, when we consider the fact that the EU is the world's largest trader in textiles and clothing products.

In 2002, the EU's total trade amounted to euro 113 billion. It is also the world's biggest exporter of textile products and the second largest exporter of clothing products. In 2002, the EU exported a total euro 43.8 billion with a negative balance of euro 27.8 billion.

The EU T&C sector was composed of some 1,77,000 enterprises (mostly small- and medium-size) employing 2.1 million people, and with a turnover of euro 200 billion. Since the ATC came into force in 1995, the EU imports have increased at a steady pace, despite the quantitative restrictions (quotas).

In 2002, the value of imports amounted to euro 72.4 billion, an increase of 60 per cent over 1995. Imports from countries subject to quotas rose by a similar magnitude. Nearly a third of all textiles and clothing now brought in the EU are imported (31 per cent in 2000).

The EU quotas inherited from the Multi-Fibre Arrangement (MFA) are being phased out in a 10-year staged reduction plan that started on January 1, 1995. Quotas that have not been lifted in any of the three stages of liberalisation so far have been increasing significantly by the year, creating new opportunities for exporters.

Between 1995, the first year of the ATC, and 2004, the volume of quotas for WTO countries will have doubled. In addition, imports under quota represent less than a third of all textiles and clothing imports. The low take-up still leaves the countries concerned significant scope for boosting their exports.

The EU tariffs (MFN rates) for textile and clothing imports are low and will go down further thanks to the EU's commitments in the WTO. The developments in the EU market are significant for India's T&C trade due to the final integration of all products under ATC from January 1, 2005 and the enlargement of the EU in May 2004. The EU enlargement is a cause of concern for India. It may result in strengthening investment and sub-contract relationships in the T&C sector within the EU to gain cost advantage.

The EU enlargement should also be seen in terms of the inherent characteristics of the Indian T&C industry.

Recently, Indian exports appeared to have lost some ground to China. This causes some concern for the long-term competitiveness of Indian textiles and clothing sector in a liberalising world after quota removal.

In addition, India's neighbours, Pakistan, Bangladesh and Sri Lanka, have signed Free Trade Agreements with the EU providing them with 7-10 per cent tariff advantage over India.

Though India is optimistic of increasing its exports, post-MFA, that will depend largely on its preparedness to switch from simple fabrication in a buyer-driven value chain to meeting the requirement of one that is market driven.

Moreover, the progress of the Doha Development Agenda on various tariff and non-tariff barriers as part of market access issues and the emergence of Regional Trade Agreements (RTAs) will also shape the industry.

As for India, the future may be seen in terms of progress in the two major existing markets — the US and the EU — and exploring new avenues in Asia, Africa and the Americas.

As for current markets, especially the EU, issues such as its enlargement, present and probable tariff and non-tariff barriers and so on should be considered. Indian exporters have a tough task of maintaining not only the cost competitiveness but also segment specialisation.

The Government should also direct its policy measures to improve the segment specialisation of the textiles and clothing sector rather than providing sops to boost the sector's competitiveness.

(The author is Associate Professor, Indian Institute of Foreign Trade, New Delhi)