The coming windfall

By Shahid Javed Burki

The countdown has begun. On December 31, 2004 - a few weeks from now - the agreement among nations that has governed international trade in textiles and clothing will lapse and its place will be taken by the rules and regulations that apply to all other trade in goods and commodities.

Textile and clothing exports will cease to be governed by quotas placed by major importers. Instead, the trade in these items will be governed by the rules and regulations of the World Trade Organization (WTO).

Buyers in America, Canada, Europe and Japan will be free to purchase textiles and clothing from whichever source they wish. A free market will reign in the trading of items that are almost as critical for life as food and water.

Will this really happen? Will the major textile and clothing manufacturers in America, Canada, Europe, and Japan allow market forces to operate as freely in this sector as they do in most other? Or, conversely, will they once again manage to devise some way of restricting imports from the countries that have comparative advantage in producing these items of everyday consumption?

Will the countries in the developing world that are not natural producers of these items, but have built their industries on the basis of the distorted international markets created by the MFA system of quotas, succeed in persuading the major importers to maintain some restrictions on imports even after the demise of the current regime? If the promised opening of global trade in textiles and clothing really occurs, what is the likely impact on Pakistan?

This is not the first time I have addressed these questions in these columns. I am revisiting the subject in light of some recent developments and in light also of the findings of some of the large consulting firms that have been studying the impact of the lapse of the Multi-fibre Agreement, or MFA, on international trade in general and on developing countries in particular.

Textile trade may not suddenly become totally free on January 1, 2005. There is a concerted effort on the part of dozens of developing nations to urge the large textile importing countries to maintain quotas for some time longer - at least for another three years.

Fifty developing countries met recently in Istanbul, Turkey and signed a declaration requesting such an extension. The signatories to the "Istanbul Declaration" include, in addition to the host country, Bangladesh, Indonesia, Morocco, Sri Lanka, and Tunisia. While most of the Istanbul signatories fear China the most, they are aware they will also face serious challenge from India and Pakistan.

They are afraid that some 30 million jobs in the textile sector will be lost to China which, according to most of these countries, is not following fair trade practices.

By keeping its exchange rate undervalued, by allowing cheap finance to flow to textile businesses through the state-controlled banking sector, and by continuing to allow its workers to put in long hours, China will overrun the textile producers in the developing world.

These countries are also apprehensive since a large number of them have developed their textile industries in response to the MFAs. Some of the developing world's major textile exporters - Bangladesh, Cambodia, Colombia, Macao, Mauritius, Sri Lanka and Tunisia included - have little or no comparative advantage in this business. Many of these countries are now highly dependent on textile exports for foreign exchange earnings.

For Macao and Bangladesh, textiles and clothing account for 82 per cent of total exports; for Cambodia 76 per cent; for Mauritius 62 per cent, and for Sri Lanka 57 per cent.

There cannot be any doubt that the end of the MFA would imply some painful economic adjustments in these countries, including job losses for poor workers. These countries fear that with complete freedom granted to the buyers in the developed world, they will simply walk out and go to the places that are natural textile producers.

Accordingly, there is a strong demand for the continuation of the MFA. This is quite an extraordinary development since the developing countries have campaigned hard for several decades for the elimination of the constraints on imports put in place by the major consumers of clothing and textiles.

Under the protection of some kind of a restrictive trading arrangement, these textile exporters will be able to protect themselves against encroachment by the countries that have natural advantage in this industry.

Another constraint on the complete freedom of trade in textile is posed by the politically powerful lobby of manufacturers in some of the southern states of America - in particular the two Carolinas and Georgia.

They want the government to maintain at least 15 of the 91 quotas on imports due to expire at the end of this year. Washington can do this under the "safeguards" provision of the WTO, which allows the importing country to provide temporary relief to its producers against a sudden surge of imports.

China is particularly vulnerable under this provision since the bilateral agreement negotiated between the United States and China included the provision that if exports of some textile items exceeded the rate 7.5 per cent a year, Washington could impose high safeguards barriers on them.

This provision was invoked for some items in late October as President George W. Bush was gearing up for a tough presidential election. But with the elections over some of the political clout of textile producers may not translate into action.

Also, the European Union, the second largest consumer of imported textiles, has indicated that it will continue with some of the programmes of assistance it provides to poor textile producing countries.

Quotas might disappear but tariff differences will continue between exports from poor and not-so-poor countries. There are, however, all attempts to delay the change that is inevitable: the move of textile production away from the countries that were given some advantage through such trade distorting measures as the imposition of quotas towards those that have an enormous advantage in this line of business. But there is a counter-lobby at work in the United States as well as Europe that may succeed in neutralizing the pressure and political muscle of the textile producing states.

American buyers, with the interest of large retail stores in mind, argue that the burden of adjustment should not fall on the consumers who benefit from relatively cheap exports from the developing world. They correctly argue that, over time, the United States has lost the comparative edge in this business to the countries that have an abundant supply of cheap labour.

Change will not come suddenly as many producers and exporters in the countries that have a natural advantage in this sector are hoping. A number of large retail chains in the developed world - most notably Walmart of the United States, by far the largest purchaser of textiles in the world - have indicated that they will retain relationship for some time with their old suppliers. Over time, however, these stores will move to the countries that can offer them the best deals.

Pakistan, along with China and India, belongs to this second group of countries. All three are natural producers of textiles since they have highly integrated industries capable of doing all aspects of the work needed to produce the final product.

A shirt that today carries the "made in Sri Lanka" label and is sold in large American and European stores was perhaps made from the fibre and fabric manufactured in Pakistan or India, cut in China, and stitched, packaged and shipped from Sri Lanka.

The shirt probably used buttons imported from China. Should such a simple item as a man's shirt go through such a tedious journey towards its final destination? The fact that it does that is the consequence of the immense distortion that exists in the clothing industry as a result of the MFA regime that governs it.

All that is about to change. China, India and Pakistan are among the four largest producers of raw cotton in the world. The United States is the largest producer but it cannot translate this advantage into large textile output since it does not have the cheap labour on which the textile industry is highly dependent. For some years, the first three countries are likely to dominate the trade in clothing and textiles.

Will the demise of the MFA produce a bonanza for China, India and Pakistan? There is now a consensus among most analysts that these three countries will be the main beneficiaries of the end to the quotas.

All three are likely to double their shares in the international textile market that is currently estimated at $360 billion. At about $8 billion export earnings, Pakistan's share is slightly more than two per cent of the total world trade in textiles and clothing. It could rise to five per cent over a five-year period. In 2010, Pakistan's exports of textiles could amount to $20 billion out of a total of some $400 billion.

What about competition among these three large textile producers? Will the enormous Chinese textile industry also overwhelm the industries of India and Pakistan or will the latter two manage to create niches for themselves? There are two advantages working in favour of India and Pakistan.

First, of course, is the upward pressure on the wages of the textile workers in China. Those who are worried in the subcontinent about the threat posed by low wage products from China have only to look at the transformation that has occurred in some of the other countries in East Asia. Some of these countries also once dominated textile trade because of the presence of low wage labour.

In the 1980s, less than a quarter of century ago, Hong Kong, South Korea and Taiwan accounted for nearly a third of the global trade in textiles. Now their combined share has declined to a mere eight per cent of the total.

It is not inconceivable that in spite of the very large reservoir of labour, China will also ultimately price itself out of at least the lower end of the textile production chain as happened in several other East Asian countries. The structure of industrial wages in India and Pakistan will not change as rapidly as is likely to happen in China.

The second reason why China may not pose a permanent threat to countries such as India and Pakistan is the likelihood of some fundamental changes in the structure of the country's agricultural sector.

China is very short of agricultural land; only 11 per cent of its vast area is cultivable and this is close to the country's major cities. China's cities are expanding and moving into the countryside, significantly reducing the amount of land available for such "land-intensive" crops as cotton and food grains.

As China develops, as the incomes of its citizens increase, and as the pattern of consumption of its people changes, the demand for high value agricultural products will increase.

This will mean that more land will be taken out of extensive and put into intensive cultivation - from the production of cotton, wheat, maize and rice into fruits, flowers and vegetables.

It is not unimaginable, therefore, that China will cease to be a major producer of cotton. Once it becomes an even greater importer of raw cotton than it is at this time and as the wages of its workers rise, the country will lose its comparative edge in textiles and clothing industries.

The main conclusion to be drawn from this analysis of the coming transformation of the sector of textiles and clothing is that Pakistan stands to gain a great deal from the changes that are coming.

They will come as a result of the forthcoming end of the MFA regime and also because of the deep changes in the structure of the Chinese economy. How much Pakistan benefits depends on the way it restructures its industry. How should this be done and in what way should Pakistan prepare itself for the future are some of the questions I will raise and answer in this space next week.

[taken from http://www.dawn.com/2004/11/30/op.htm]

Date/Time Page Created: 12/01/2004

Date/Time Last Modified: 12/1/2004 8:30:23 AM

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