The removal of import quotas on clothing and textiles is likely to lead to greater dominance by transnational corporations (TNCs) relying on economies of scale and consolidating production in larger factories in countries where economic fundamentals are sound, an UNCTAD study predicts.
The study, TNCs and the Removal of Textiles and Clothing Quotas (UNCTAD/ITE/IIA/2005/1), released today, also notes that the dismantling of quotas on 1 January 2005, following the expiration of the WTO Agreement on Textiles and Clothing, is expected to increase competition for the foreign direct investment (FDI) that drives production and exports in the clothing and textile sectors. And it predicts that the end of the quotas will lead to tougher requirements on countries that aspire to be export bases for such products.
In numerous developing countries, clothing and textile production is already dominated by East Asian TNCs that operate factories.
Emergence of TNC producers from East Asia
TNCs are becoming increasingly important in the global distribution and production of apparel and textiles. That a few very large retailing companies (based in the US, Europe and Japan) shape trade and production patterns is well known. But TNCs are also expanding their role in the production stage. In contrast to retailers, however, these TNCs are often based in East Asia, with large factories across the world (see box).
In Africa, production increases in recent years in Lesotho, Madagascar, Mauritius and South Africa have been accounted for mainly by East Asian TNCs, such as Ramatex Berhad, China Garments Manufacturers and Lesotho Precious. The same is true in Latin America and the Caribbean, where foreign producers dominate export production in the Dominican Republic, Honduras and Mexico. The picture varies in Asia, but in Cambodia, most members of the Cambodian Garment Manufacturers Association are headquartered in Taiwan Province of China, China and the Republic of Korea. In the case of China, foreign-invested enterprises account for more than a third of the country´s exports of textiles and clothing.
Quota removal has sharpened competition for FDI
With the removal of quotas, sourcing and investment decisions are affected more by economic fundamentals. Low labour costs alone will not be sufficient to attract investment, UNCTAD predicts. There is likely to be more consolidation of production into even larger factories in a smaller number of locations. China and India are in a particularly strong position in this new geography of production, but various factors may also work against too much consolidation. Proximity to markets continues to play a role for some product categories, and some producers have signalled that they will retain several production bases in order not to become too dependent on any single source country.
Remaining trade preferences will also affect the location of textiles and clothing production. This may provide opportunities for countries in Africa, Latin America and the Caribbean to develop their exports to the US and European markets. But tariff preferences tend to erode over time, and the importance of geographical proximity has to be weighed against the ability to manage overall production and distribution processes. Countries seeking to be preferred exporters will have to improve their competitiveness and capabilities.
Staying competitive in a world without quotas
Many developing countries are highly dependent on their exports of textiles and clothing(1)
. The removal of quotas generally is lead to intensified competition for export-oriented FDI which is seen as the most efficient way to participate in global chains. Data on FDI projects in textiles and clothing manufacturing show that China, Bulgaria, the United States, Hungary, Brazil and India attracted the largest number of such projects in 2002-2004.
To become or stay competitive as host locations, the UNCTAD study urges countries to develop the ability to attract investment under conditions that will enable them to move up from simple assembly to "full-package" production. Key policy areas include identification of specialized niches; skills training and technological upgrading; investment in information technology; improvement of infrastructure, such as ports and export processing zones; and leveraging of existing tariff preferences in the global trading system. Investment promotion agencies could identify some of the major transnational producers as key addresses for future marketing activities.
|Box: Examples of East Asian TNCs|
The Esquel Group (Hong Kong, China), a cotton shirt manufacturer, employed 47,000 people in 2003 and has textile production in China and apparel manufacturing in China, Malaysia, Mauritius, Sri Lanka and Viet Nam.
Nien Hsing (Taiwan Province of China) is the world´s biggest jeans manufacturer, with production plants in Lesotho, Mexico, Nicaragua and Swaziland, employing some 17,000 workers and reporting nearly $300 million in revenues in 2001.
Top Form (Hong Kong, China) is the world´s number-one producer of brassieres and has more than 8,500 employees and production plants in China, Thailand and the Philippines.
Boolim (Republic of Korea), a maker of athletic, casual and knit wear, is established in more than 25 countries.
Carry Wealth Group (Taiwan Province of China), a producer of knit tops, woven bottoms and sweater tops, has plants in China, El Salvador, Indonesia, Lesotho and Viet Nam.
Yue Yuen/Pou Chen Industrial Holdings (Hong Kong, China) is a production TNC in the footwear industry. It is the world´s largest manufacturer of branded athletic and casual footwear, with 242,000 employees worldwide.