The Hindu Business Line : Indian textiles in quota-free world

A tough future awaits the Indian textiles and apparel industry after the end of the MFA quota dispensation. Competition will be rife. The industry will do its best to protect existing markets and make inroads into those of its rivals, mainly from China.

THE AGREEMENT for Textiles and Clothing (ATC) — which came into force along with the WTO framework for multilateral trade in 1995 — stipulates that the quota system for textile exports and imports under the Multi-Fibres Agreement (MFA) will finally be phased out by January 1, 2005. More specifically, in terms of the agreement, the transition period, which began in 1995, would be operative for ten years and, by the end of that time, all textiles and apparel articles will have to be brought under the GATT discipline, subject to the same rules as are the products of other sectors.

Since India is a participant country of the MFA, the objective here is to study the implications of the end of the MFA regime on world trade generally in textiles and apparel, also the projected impact on the Indian textile and apparel industry, as seen through the eyes of the US International Trade Commission (USITC), which has just come out with a 583-page study on the subject entitled "Textiles and Apparel: Assessment of the Competitiveness of Certain Foreign Suppliers to the US Market".

To set the perspective, the MFA was negotiated under GATT 1947 and was functional from 1974 to 1994. In the eyes of the USITC, the agreement was intended to deal with domestic market disruption in importing countries — that is, developed economies — while allowing the exporting, or developing, nations to expand their textile and apparel trade as much as possible. This was achieved by the MFA through the instrument of negotiating bilateral agreements on export quotas.

According to the Commission, this was a departure from GATT in two ways: (a) the quotas were allowed on a country-specific basis thus deviating from the principle of equal-treatment multilateralism in all matters pertaining to international trade; and (b) they contradicted the general principle of reducing or avoiding quantitative restrictions of any sort in international trade. (Under the MFA, quotas were established by the US, the EU, Canada and Norway.)

The MFA was, therefore, basically an aberration if the spirit of GATT was considered, and being such it was only a matter of time before it was terminated — though not without a protracted struggle put up by the protagonists on both sides of the divide.

The MFA regime is going to end on the last day of December 2004, and it is clear that because of this there will be a disturbance in the flow of international trade in textiles and apparel. What will be the nature of the impact, specifically for the US market?

The Indian interest will be affected because of the globally competitive position its textiles and apparel industry is currently placed in. The USITC says that China is expected to become the "supplier of choice" for most US importers (the large apparel companies and retailers) because of its capacity to make almost any type of textile and apparel product at any quality level at a competitive price. But over-dependence on one supplier is strategically bad in international trade. So, according to the Commission, US importers will also tap other low-cost sources, particularly India, which also has a very large manufacturing base for textiles and apparel and a large supply of relatively low-cost skilled labour.

But, first, let us consider the US textiles and apparel import scenario during the quota regime and see which exporters have ruled the roost. In an exhaustive table covering the period 1997-2002, the first five places (for 2002) have been occupied by China (4,963 million square meters equivalent), Mexico (4,335 million sme), Pakistan (2,563 million sme), Korea (2,032 million sme) and India (1,544 million sme). Interestingly, the USITC report says that, in recognition of the role that Pakistan has played in the war against terrorism, Washington has granted Islamabad an increase of 15 per cent in the base quota levels for 2002 and a special swing (a shift of unused quota from one category to another) of 25 per cent for the period 2002-2004 for 14 categories of cotton and manmade fibre apparel. Further, Pakistan was also granted special swing for 2002-2004 of eight per cent for cotton trousers, knit shirts, and knit blouses, and 25 per cent for cotton and manmade-fibre underwear and men's and boys' woven shirts. All of the special swing was over and above the normal swing provided in the bilateral agreement between the two countries.

After the quotas are removed, what will be the likely impact on US imports of textiles and apparel products? As far as China is concerned, the USITC says (as mentioned earlier) that the country is likely to be the "supplier of choice". However, uncertainly regarding textile-specific safeguards contained in China's WTO accession agreement with the US will make the future uncertain for importers. This apart, over the long run, the Commission expects competitiveness to diminish as strong economic growth in China is likely to lead to greater domestic demand for textiles and apparel, and also for the labour and capital going into the production of these articles. The Commission says that Chinese per-unit labour costs are very low due to low wages and high productivity. As far as inputs are concerned, the country itself produces fabrics, packaging and most other components that are used to make apparel and made-up textile articles. Further, Chinese products are considered by US industry to be among the best in the world.

As regards India, the report says that it is likely to remain a competitive supplier to the US in the post-quota period and is considered by many US firms to be the primary alternative to China. However, as with China, it is expected that competitiveness will diminish over the long run as domestic economic growth increases competition for the inputs used by the Indian textiles and apparel sector.

The plus points vis-à-vis India are that it has a huge, relatively inexpensive and skilled labour force; it has impressive design expertise; it is among the world's largest producers of yarns and fabrics; and it produces a wide range of apparel articles and is considered a particularly competitive source for home textiles (bed linens, towels, etc). The report adds that personal safety, security of shipments between factories and ports, and bureaucratic red-tape and infrastructure are "issues" with many US firms "using agents in lieu of dealing directly with producers".

More specifically, although US retailers described Indian firms as innovative, particularly in design functions, poor infrastructure and an inefficient bureaucracy were cited as areas of major concern but not as factors that would necessarily determine investment and sourcing decisions.

A number of US firms cited the "lack of transparency in legal requirements and complicated paperwork" which led to an increase in producer costs and necessitated the appointment of a broker instead of the much-preferred direct-dealing with manufacturers. Poor infrastructure included a lack of deep-water ports and an antiquated railway network.

The report found that labour productivity in India, Bangladesh and Pakistan was 20-25 per cent lower than in China despite the fact that India had a very large pool of skilled and unskilled workers and well-educated management and technicians.

In summing up, the only point that can be made with any degree of certainty is that a tough future awaits the Indian textiles and apparel industry after the end of the MFA quota dispensation. Competition will be rife. Left to itself, the industry will do its best to protect existing markets and make inroads into those of its rivals, mainly from China. Needless to say, effective Government assistance would be of great help in implementing this campaign. The question is: Will such help be forthcoming in the right direction and in the appropriate doses?

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