Developed and developing countries stand to gain substantially from world trade liberalization in textiles and clothing, but those gains will be compromised if new barriers emerge, an UNCTAD paper warned today.
So far, developing countries have "borne the brunt of a restrictive, managed, discriminatory, discretionary and non-equitable trading system", says Assuring Development Gains from the International Trading System and Trade Negotiations: Implications of ATC Termination on 31 December 2004 (document TD/B/51/CRP.1). The paper was prepared for the 51st session of UNCTAD´s governing body, the Trade and Development Board, which opened today in Geneva and continues through 15 October.
The study analyses the implications of the forthcoming expiration of the WTO´s Agreement on Textiles and Clothing (ATC). That will end more than 40 years of quota restrictions on textiles and clothing begun in 1962 by WTO´s predecessor, the GATT. The study also highlights the importance of factors other than quotas that affect trade in textiles and clothing.
"Determining countries´ performance in the textiles and clothing sector after ATC expiry cannot be reduced to a single calculation of who will win or lose", the study notes. However, both developed and developing countries can expect substantial gains, provided that no further protectionist measures are put in place.
"Giving in to protectionist demands to extend the ATC or to replace it by a plethora of protectionist non-tariff barriers, including contingency measures, would amount to taking away with one hand what ATC expiration gives with the other", the paper warns. It calls for providing priority assistance to least developed countries (LDCs) and other small economies that have trouble competing because of the lifting of import quotas. Other outstanding issues could also affect development gains and must be addressed properly.
Referring to the post-ATC adjustment, a meeting of the WTO´s Council for Trade in Goods last Friday discussed the concerns of the LDCs and other small economies under an agenda item on "Post-ATC adjustment-related issues". At that meeting, a number of these countries proposed to establish a WTO work programme to address the post-ATC adjustment issue and undertake a study examining the impact of the ATC expiry on those countries. Some countries, however, were against the proposal, feeling that adjustment issues should instead be addressed in the context of overall trade, as liberalization in general requires adjustment. Informal consultations will continue on this issue.
In overall terms, "developing countries with a comparative advantage in the [textiles and clothing] sector should see their production and exports increase in a post-ATC world, and in developed countries, lower prices for clothing will mean that consumers should be big gainers," the paper says. But it notes that such predictions are based on "the premise that major developed countries will avoid filling the ATC void with a barrage of new barriers". If that does not happen, it predicts, "developing-country firms that respond to market demands, move up the value chain and capture niche markets are poised to reap substantial gains in a post-ATC world".
On balance, the end of the ATC would contribute to the "upholding and safeguarding of an open, non-discriminatory, predictable, rule-based and equitable multilateral trading system", one of the UN Millennium Development Goals and also an objective endorsed by the São Paulo Consensus adopted at UNCTAD XI in June.
Why ending the quotas regime is important
The UNCTAD paper recalls that various studies have in the past estimated the efficiency and welfare gains accruing from the ATC´s end at $18 billion a year in the United States and ECU 25 billion a year in the European Union. For developing countries, income gains are estimated at $24 billion a year. Their export revenue gains could reach $40 billion and the sector could employ 27 million people.
One study found that although textiles and apparel account for less than 2% of total employment in the US economy, protecting them against import competition accounts for 83% of the net cost to the US economy of all import restrictions.
The high administration costs of the complex customs systems under the ATC regime will also be eliminated when the quotas are phased out, producing considerable savings given the size of the sector.
According to UNCTAD, studies of the implications of ATC quota elimination usually rely on the Global Trade Analysis Project model (GTAP). But the model has several limitations, and any projection of gains to some and losses to others should be viewed with caution. For example, it does not consider important determining variables of future trade patterns, such as supply capacity, competitiveness, market access, trade policies of major importing countries, preferential rules of origin, and market share of developing countries in exports to world markets.
Some adjustments in the industry will be inevitable during the first few years after the ATC expiry, UNCTAD says. However, developing countries have comparative advantage in the sector, and demands for textiles and clothing will continuously grow as the world´s population, incomes and living standard increase. The post-ATC scenario entails addressing the question of how countries will take advantage of the opportunities and overcome the challenges posed by ATC expiration. In this light, the paper highlights the following issues:
- Determinants of competitiveness are "quick-and-flexible response" systems; cost reduction; quality; investments in modern technologies; product innovation; speed; compliance with legal requirements; logistics and production costs; development of niche-based exports; revamping of national policies restricting competitiveness; and streamlining of transport, shipping and customs clearance, including the aspect of trade facilitation.
- The apparel value chain is relocating to countries with the lowest wages, including South-South investments.
- Owing to tariff peaks on textile products, tariff preference margins will probably remain quite significant, even though quota preferences will be eliminated.
- Substantial intertrade of textiles and clothing takes place between the US and the EU on the one hand and their respective preferred-country suppliers on the other. The high degree of intertrade is attributable partly to business relations established in the past and partly to the increasing trend towards "lean retailing". Rules of origin for regional trade agreements are likely to be another important factor influencing this trend, as they have been designed to encourage the use of preference-giving countries´ inputs.
- As shown in the WTO dispute settlement case on "United States - Rules of Origin for Textiles and Apparel Products", non-preferential rules of origin have a direct impact on trade in textiles and clothing.
- The effectiveness of current GSP schemes, along with country and product coverage for textiles and clothing, needs to be improved.
- Use of other contingency protection measures motivated by protectionist purposes must be avoided in order to reap the benefits of the ATC expiry.
- Non-tariff and market entry barriers can effectively block market entry for exporters that are unable to comply with often complex and stringent internal regulations and standards. These barriers will remain significant constraints for developing-country exporters and must be addressed adequately in order to ensure the gains of the ATC termination.
- Certain countries and industry segments are likely to experience some dislocation and therefore to require assistance with post-ATC adjustment. Given the high proportion of women in the sector, adjustment measures could also incorporate the gender dimension.
In order to benefit from the ATC expiry, the UNCTAD paper emphasizes, considerable investments will be required even in the countries that are expected to substantially gain from the expiry. Post-ATC adjustment concerns all, and it should not be isolated from the adjustment issues surrounding other industrial goods, services or agriculture. On the other hand, LDCs and small economies whose exports are dependent on textile products are vulnerable to the rigour of the ATC termination and will require special adjustment measures. Assistance to these countries should be provided by positive trade measures, such as improved preferential access in terms of product and geographical coverage, and by flexible conditions and rules of origin. Development funds to assist with strengthening supply capacity and modernizing technologies also need to be provided. Any measures that attempt to restrict textiles and clothing exporters or to separate the products from other goods are detrimental to efforts to assure development gains from the ATC expiry, UNCTAD warns.
