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Thursday, Sep 30, 2004

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End of textile quota regime — India must still spin faster to stay in place

G. Srinivasan

Unless huge investment and modernisation of the mills take place, and proliferation of unorganised mills is curbed, India would lose out to China in the textiles race. It is time mandarins in the Government acted quickly to reap positive results with the end of the quota regime at hand.

WITH the much-maligned Multi-Fibre Arrangement (MFA) — a violation of the basic principle of free and fair trade enshrined in the post-War General Agreement on Trade and Tariffs — all set to be dismantled shortly, attention is naturally on the immense benefits that free and fair trade in textiles would bring to cost-effective producers from the developing countries.

Whether the complete phase-out of the MFA by the end of this year and the ushering in of free trade in textiles and clothing by January 1, 2005 will really alter the fortunes of textile exporters from India and a host of other developing countries is a moot point, particularly given the lack of preparedness of the Indian textile industry, save the indigenous garment segment.

Curiously, some of the textile units are overly perturbed by the loss of captive markets in the form of quotas doled out to them by the developed countries even under the Agreement on Textile and Clothing (ATC) by the WTO in the transition period 1994-2004, when the phase-out was under progress.

Naturally, a few of them panicked and raised false alarms that attempts are being made to postpone the abolition of quota regime.

In fact the WTO held informal parleys in the first week of August with a wide range of its members in preparation for an emergency meeting of the Council for Trade in Goods (CTG) proposed by Mauritius to examine the adjustment costs pertaining to quota abolition.

Then the WTO Director-General, Dr Supachai Pantichpakdi, said that the regular session of the CTG, scheduled for October 1, provides a chance to the members to raise concerns on implementation, including those relating to adjustment cost issues.

It was also stated that at the October 1 CTG meeting, there would be a final major review of the ATC integration process, assisted by a report from the Textile Monitoring Body (TMB) of the WTO.

The provocation for an emergency meeting emanated from more than 100 US lawmakers asking the US President, Mr George Bush, to come to the rescue of the US textile industry and extend his support to the call for an emergency meeting of the WTO to reconsider the end-of-year termination of quotas for clothing and fabric in the global trade.

They cited the letter from 13 Senate Republicans and 16 Democrats, including the US Presidential candidate, Senator John Kerry, of Massachusetts, where they alleged that China's undisputed sway over the global textile and clothing trade would shake the economic and political stability of dozens of struggling allies such as Turkey, Egypt, Indonesia, the Philippines, Haiti, Mexico, the countries of sub-Saharan Africa, Central and South America.

Wisdom prevailed in the Bush Administration, as it was rightly reluctant to openly plead for an emergency meeting of the WTO to extend the deadline for ending the quota regime under duress from its own textile lobby.

Be that as it may, now that the CTG is scheduled to hold its meeting in Geneva on October 1, the Indian officials in the Ministry of Textiles are predicting that the issue of postponing the deadline for ending the MFA might not even figure at all, though the CTG would hold a major review of the ATC integration process of the past decade and how it proposes to bring in the integration of the textile and clothing segments so that they enjoy the same rules that govern global trade in other manufactured products once the quota regime goes.

However, this will in no way prevent hectic lobbying from taking place in a last-ditch bid to preserve the protection enjoyed by the developed countries for over 40 years.

These lobbies have created uncertainty about whether the process of integration that began ten years ago might not be held back and investment made in anticipation of quota phase-out might not turn sour.

Given the election campaign in the US, concerns abound over the impact of quota abolition on smaller economies. Though this is only a cloak to safeguard the interest of domestic textile industries in the US, it is not out of place to cite the incisive monograph of the International Textile and Clothing Bureau (ITCB) Executive Director, Mr Munir Ahmad, on "Trade in Textiles and Clothing: Some Hard Facts and the Way Forward," published in Geneva in August.

Mr Ahmad traces eloquently how developed countries such as the US and the European Union (EU) have fashioned their trade policy in such a way as to benefit their domestic textile and clothing industries to keep the low-cost suppliers of these products at bay.

Considering that out of $353 billion in world textiles and clothing exported in 2002, Asia (excluding Japan, Australia and New Zealand) accounted for $150.40 billion, or 42.6 per cent, the implication and ramification of developed country trade policy in textiles will have an adverse impact once the quota regime is over and the free trade in textiles begins.

The ITCB monograph says that in a bid to retain a share of textile production (and trade) for their domestic producers as long and as far as possible, the US and the EU have devised a method to put to `Rules of Origin' to innovative use. The existence of relatively high tariffs in textiles and clothing products in the developed world complement this operation.

The developed countries have told the importing developing nations not to worry about the quota restraints as the latter are allowed to export as much clothing as the developed country markets would bear, provided the finished product exported by the developing countries is made with developed country yarns and fabrics. The innovation is labelled `Outward Processing Trade' (OPT) in the EU, `Guaranteed Access Levels' (GALs) in the US. Later, the same basic concept is made over to free trade area (FTA) agreements and other preferential pacts.

Mr Ahmed estimates that now over 79 per cent of all US textiles and clothing exports are headed to countries with whom it has free trade arrangement or to whose exports to its own market it extends duty-free treatment on the rider that these exports incorporate US components (yarn and fabrics), while US textiles and clothing exports to these same countries was only 35 per cent in 1980.

Second, it is apparent that on imports from these countries, the US foregoes tariff revenue of over $2.5 billion a year that would otherwise be due if the most-favoured nation (MFN) rates were applied.

Third, the exporting developing countries concerned have come to rely heavily on US markets for their exports of apparel.

Thus, the results of the policy could not have been better from the US industry's perspective. They provide for a secure, captive market for its textile products worth over $15 billion a year; and reserving duty-free access on its home turf for processors in these countries diverts others, especially the Asians, away. On the European side, too, the strategy and the results are analogous to those in the US. Thus, Bulgaria, Morocco, Tunisia, Romania and Turkey had likewise been rendered dependent on the EU market for export of apparel and import of inputs from the EU for processing into garments.

So, even under the quota regime, the developed countries were able to have their domestic industries well guarded through trade policy arsenals and arm-twisting others, particularly the Asian developing countries, for being cost-, price- and product-competitive. Hence, the situation post-MFA phase-out period could well be imagined.

Moreover, in the absence of quota, the developed countries may try every trick to block the export of developing countries, particularly from the low-cost suppliers such as anti-dumping and anti-subsidy levy, not to speak of social clauses and labour standards.

The end of quota would see the importing countries focus on fewer countries, with those countries that either produce both the raw material and finished goods or that produce raw materials and are close to countries producing finished goods best positioned to capture new business. Importers most certainly will persist in diversifying their portfolios of countries, as no importing country could afford to put all its eggs in a single basket, given the risks it entails.

For both the US and the EU, Western countrieshave an innate advantage by dint of their location and ability to provide swift inventory replenishment to American and Candian retailers; countries in Southern Europe and Turkey command the same advantages with the EU markets. Where does this leave India in terms of gaining enhanced volumes of business, particularly from the big retail giants which would like to source their wares from cost-effective suppliers?

Economies of scale in production remain a distant dream in India as the organised textile mills in the country suffer from several disabilities and cost disadvantages with the fiscal policies remaining none too conducive to organic growth of this sector.

Unless huge investment and modernisation of the mills take place, and proliferation of unorganised mills (which were out of the Central value-added tax chain) is curbed, India would lose out to China in the textiles race.

It is time mandarins in the Government responsible for policy support and assisting the domestic textile and clothing industry acted quickly to reap positive results with the end of the quota regime at hand.

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