Pacific threat looms for textiles

With all the brouhaha over China-India border issues and election in Pakistan, one issue that has received little attention in the Indian media is the proposed US-led Trans-Pacific Trade Pact (TPP).

This is understandable, as India is not party to the proposed trade pact involving Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the US. However, it has serious implications for India’s textile and clothing sector.

Textile and clothing accounts for roughly five per cent of India’s GDP, 15 per cent of its industrial output and export earnings and provides livelihood support to 55 -60 million people directly or indirectly.

Trade diversion

It is important to analyse the effect of TPP on India’s textile and clothing sector, as the US is an important export destination. When it comes to the export of readymade garments and made-ups, the US alone accounts for 30 per cent of India’s total exports. TPP will affect India’s textile and clothing sector (and of all non-TPP member countries like Brazil or China) in two ways.

First, exporters from TPP member countries will get preferential access in the US market vis-à-vis exporters from non-TPP member countries, such as India. This will put India’s garment exports (to the US) at a disadvantage as US import duties on readymade garments are quite high with average duty at around 7.9 per cent; duties on some clothing items are as high as 32 per cent according to WTO tariff profile database.

Second, a key feature of the TPP – ‘yarn forward rule’ --- makes it mandatory to source yarn, fabric and other inputs from any or a combination of TPP partner countries to avail ‘duty preference’. This is likely to disrupt the well-integrated global supply chain in textile and clothing.

Implications for India

It will induce garment manufacturers in the TPP countries to source their inputs from TPP countries at the cost of non-TPP countries, even if the suppliers in TPP regions are not the least cost. This will be a clear case of trade diversion – moving trade away from more efficient producers to less efficient producers.

Though this rule is ‘primarily’ aimed at restricting the benefits accruing to Chinese manufacturers of yarn and fabrics from further opening of the lucrative US markets for clothing, it will create a comparative disadvantage for all non-TPP member countries, including India.

India’s textile and clothing sector is under severe pressure from slowing demand in key export markets, and backdoor entry of Chinese goods via Bangladesh under South Asian Free Trade Area that allows duty-free import of garments from Bangladesh into India.

Clothing retailers hit

The likely exclusion from US’ GSP benefits is another headache for the sector. If this were not enough, to comply with its commitments to WTO, India will have to phase out its export incentives in textiles and clothing.

Export competitiveness is deemed to be achieved if a country’s global export share of a specific product group (defined as a section heading of the ITC-HS) is 3.25 per cent or more in two (consecutive calendar) years. India’s share in world export of textile and clothing (falling under section heading XI of the HS) already crossed this limit in 2007. As a result, India will have to phase out its export sops for the sector by 2015. Only 17 per cent of the textile and clothing exports under NAFTA and Central American Free Trade (CAFTA) have gone through the ‘yarn forward rule’. Yet, US trade negotiators are pushing it in the proposed TPP. Clearly, the move seems to be protectionist, aimed at reviving indigenous textiles industry at the cost of the foreign, but it will limit the freedom of clothing retailers to choose their suppliers. In the process, it will also disrupt the global textile supply chain of which India is a part.

The way forward

That explains the strong opposition of clothing retailers (e.g. JC Penny, Levis and Gap) and their associations (e.g. TPP Apparel Coalition) to the yarn forward rule. To deal with this, the US trade negotiators have come up with the idea of ‘short supply list’ – that will give some flexibility to clothing retailers in sourcing their inputs (which are not available in TPP region) from non-TPP countries.

India’s best bet can be the conclusion of WTO Doha round at next Ministerial in Bali, which will deflate the interest of TPP member countries in the trade pact. Unfortunately, that seems unlikely, given the American disinterest in the round. Joining TPP can help India’s textile and clothing sector, but accepting US-promoted WTO-plus proposals on IPR, investment protection, services and state-owned enterprises will not find favour with policymakers or India Inc. Getting India’s vulnerable products in TPP’s ‘short supply list’ is yet another option that can be explored.

India’s market for premium apparel is growing at 10-12 per cent a year. India can consider sponsoring its own yarn forward rule in the Regional Comprehensive Economic Partnership (of which it is a party) that will find support from China, the biggest loser of the rule.

Going forward, India can leverage it to negotiate with the US for dilution of the TPP’s yarn forward rule.

The likely loss in export of textile items to TPP countries will have to be compensated by gains in other markets. Here, tweaking the rules of origin to stipulate utilisation of yarns and fabrics of Indian origin as a pre-condition for allowing duty free import of garments from Bangladesh will help India’s fabrics export. It will also check backdoor entry of Chinese fabrics into India via Bangladesh.

India needs to continue pushing its exports to non-traditional emerging markets of Africa, Asia CIS and Latin America. The textile and clothing sector is heavily protected in Mercosur countries with import duties as high as 35 per cent on many items.

Expediting the conclusion of India-Mercosur Comprehensive Economic Cooperation Agreement will help counter the impending trade diversion because of the yarn forward rule under TPP.

Some kind of product differentiation (e.g. voluntary carbon labelling) will protect our textile and clothing exports in the US despite the impeding post TPP comparative cost disadvantage vis-à-vis TPP partner countries like Vietnam.

(The author is Group Economist of a corporate house. Views are personal.)

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