The post-MFA scenario

By Shahid Javed Burki

In this space last week, I discussed the costs of the Multi-Fibre Arrangement (MFA) for both developed and developing countries. The issue to discuss this week is: how will the forthcoming demise of the MFA affect developing countries and what would be the consequences for Pakistan.

Pakistan is among the four largest producers of cotton in the world, the United States, China and India being the other three. Its textile industry accounts for nearly two-thirds of its export and is by far the most important component of the manufacturing sector.

It is also the largest employer in the large scale manufacturing sector. The end to the MFA will have major consequences for the country's economy; perhaps not as significant as for Bangladesh but large enough for the government and the private sector to ascertain what is just around the corner.

Let us begin with Bangladesh - a country likely to suffer the most following the demise of MFA. The country's dependence on the garment industry can be easily seen from the following numbers.

Bangladesh has a labour force of about 60 million, of which 1.8 million is employed in the garment industry. As many as 15 million, or 25 per cent of the total work force, is engaged in such ancillary activities as button-making, packaging, and insurance underwriting.

In 2003, garments accounted for 77 per cent of total exports by value. The textile industry, therefore, is the backbone of the Bangladeshi economy. This happened not because the country had a comparative advantage in this sector. It was the result of the highly skewed system of production produced by the MFA quota system.

When Bangladesh became independent in 1971 and inherited a large export quota from Pakistan, a number of entrepreneurs rushed in from East Asia to set up businesses in the country.

The question now is whether, following the end of the MFA, there will be some disinvestment in the sector since Bangladesh would no longer be able to compete with countries such as China, India and Pakistan, whose export expansion was constrained by quotas.

What makes Bangladesh's situation really precarious is that its markets are highly concentrated. Some 94 per cent of its exports went to the countries that have limited the access to their markets by the imposition of quotas. This makes the country extremely vulnerable to the end of the MFA regime.

How vulnerable? One indication of this comes from what has already happened. In 2001 baby clothing became exempt from quotas, and Bangladesh's exports were reduced by one-half.

China was the main beneficiary. What happened to baby clothing could happen to other apparel as well. The IMF has estimated that the end of the MFA quotas could mean a decline of 25 per cent in Bangladesh's garment exports. Other estimates are even more pessimistic. A Bangladeshi think tank projects a decline of as much as 40 per cent.

This would have a devastating impact not only on the Bangladeshi economy. It will have severe social implications, in particular for women who constitute a significant proportion of the workforce engaged in the garment business.

Some analysts attribute the country's sharp reduction in fertility and population growth rates to the fact that women, employed in the garment industry, have seen a significant increase in the opportunity cost of their time.

It costs the families a great deal if women have to spend their time bearing and rearing children. Although garment workers earn as low as $20 a month, this is still a significant amount for poor families.

Bangladesh's loss is likely to be China's gain, possibly also that of India and Pakistan. There is agreement amongst most analysts that China will be the major beneficiary of the demise of the MFA. The best way of illustrating this is to look at the present shares of various clothing exporters to the US, by far the largest market for textiles in the world, before and after the MFA.

At this time, Latin America, with slightly more than one-fourth of the market share, is the largest supplier to the American market. In 2003, Mexico alone accounted for one-tenth of the US market, with that country's suppliers having benefited enormously from the privileged access granted by the North American Free Trade Agreement (Nafta).

China accounted for 16 per cent of the American market; Bangladesh, India, Indonesia, the Philippines and Taiwan each had four per cent of the share. Pakistan's share was slightly less than two per cent.

The most dramatic impact of the end of the MFA will be on China, India and Pakistan. China is likely to see its market share increase to 50 per cent. If we count Hong Kong as a part of China, the Chinese share in the US market will increase to 56 per cent.

The Indian share is likely to increase to 15 per cent and Pakistan to six per cent. The most dramatic decline will be for Mexico, that will see its share of the US market decline by more than one-third to only three per cent, and that of Bangladesh reduced by one-half to only two per cent.

One major change the end of the MFA regime will bring is to concentrate the attention of the buyers on a few markets. According to Hagen Decker of Kurt Salmon Associates, a consulting company that works with the clothing industry, quotas on the import of materials "have made the supply chain very complex. There is no reason to buy textiles from one country, have garments cut in another and sewn in a third."

With the quotas gone in January 1, 2005, there is every reason to believe that the buyers will concentrate their attention on a few areas where all these steps in the supply chain can be taken simultaneously. What the buyers will be looking for is a one stop shop.

According to Peter Liu, chairman of the American Chamber of Commerce in Hong Kong, "China happens to be the place where you can do it because within a certain area such as Pearl River Delta, you have everything you need to produce a garment."

Experts predict that the buyers in the post-MFA era will focus their attention on about ten centres of supply rather than deal with 40 or so they have to work with at this time.

Who is most at risk as a consequence of the forthcoming changes in the textile trade regime? According to a study by the European Union, 10 small and large developing countries will bear the brunt of adjustment that would result from the demise of the MFA.

The severest impact will be felt by Macao, China, a territory in which 82 per cent of the exports are accounted for by clothing and textile exports. Cambodia comes next with clothing accounting for more than 80 per cent of merchandise exports, followed by Bangladesh in which the share of clothing exports is more than three-fourths of the total.

According to this study, Pakistan is the fourth most vulnerable country with clothing accounting for 20 per cent of total exports and "other textiles" making up as much as 50 per cent. El Salvador, Mauritius, Sri Lanka, the Dominican Republic, Nepal and Tunisia make up the rest of the list of the few vulnerable states.

Is Pakistan really vulnerable? The fact that textile entrepreneurs in Pakistan think that the country may be vulnerable and are worried about the change that is occurring is indicated by the large amounts of investment they have made in recent years in modernizing their plants. They will have to do more than that and some guidance from the government will be of help.

Given that come January 1, 2005, there will be free access to the American, European and Japanese markets, the textile producers should carefully assess where they have comparative advantage.

Is it in garment and clothing or in high strength fabrics used in automobiles and in draperies and furniture? Some textile experts believe that Pakistan, given the strength of the relatively short staple cotton it produces, has a clear advantage in industrial fibers. If that is the case then that is where it should concentrate its attention.

Vulnerability, however, need not be determined by the share clothing and textiles have in total exports. This was the measure used by the European Union study. In fact, Pakistan is the only country in this list of supposedly vulnerable economies that has a comparative advantage in this industry.

My own analysis indicates that if the government and the private sector respond intelligently, Pakistan stands to benefit from the demise of the MFA rather than be adversely affected by it.

The main challenge to Pakistan will come from China, and to a lesser extent from India. Islamabad could use its leverage in the clothing market to form a strategic alliance not only to benefit from China's comparative advantage in this industry.

It could also use its own expertise in design and fashion to bring greater value to China's exports and its own foreign sales. But it is in South Asia where some new initiatives need to be taken.

I believe that the forthcoming demise of the MFA offers Pakistan and India an excellent opportunity to restructure their textile industry. This could be done in a way that the combined industry could gain a much larger share in global markets than individual countries have at present or those forecast for them by many analysts for the future.

One way of doing this would be to set up a textile working group within the Saarc that could formulate a strategy and draw up a plan to vertically integrate the cotton and textile sector not only in India and Pakistan but also include the threatened industries in Bangladesh.

There is a lot of installed capacity in Bangladesh that could form an important part of a well integrated South Asian textile industry. By beginning to work on textiles right away, the South Asian countries could bring some substance to the promise held out by the free trading area they have agreed to create in the subcontinent.

Pakistani producers should also persuade Islamabad to move on the fast track in dismantling the barriers to trade in South Asia, particularly in the textile sector. That way its producers may be able to form strategic alliances with the companies operating in this sector in Bangladesh and India. What is important is to recognize that this is the time to think strategically about the future.

[taken from http://www.dawn.com/2004/08/24/op.htm]

Date/Time Page Created: 12/01/2004

Date/Time Last Modified: 12/1/2004 8:30:16 AM

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