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Asian Development Outlook 2006 : I. Developing Asia and the World : Textiles and Clothing in the Post-Quota Era: The Outlook for Asian Suppliers
Recent performance under the ATC and in the (almost) post-quota eraIn 2003 and again in 2004, growth in world textile and clothing trade was in double digits (WTO 2005), averaging 12-13% in value. Asian exports of textile and clothing products to Europe and North America increased at an annual rate of 18% during these 2 years in dollars and euros (Anson and Brocklehurst 2005). In 2005, growth was anticipated to expand in volume terms (as all quotas are on the volume of exports and not on the value, which is determined by prices and quantities) but the outcome in value terms was indeterminate because it was not known if increases in volumes would outpace decreases in prices. Then again, it was only at the midnight hour of the fourth and final phase of the ATC that binding quotas on nearly half of all textile and clothing tariff lines in the harmonized system were finally ended for all WTO contracting member states by Canada, EU, and US. The elimination of quotas is a double-edged sword for developing countries because of the existence of discriminatory preferential trade agreements with industrial countries. These agreements provided a large "margin of preference" to beneficiaries prior to 2005 because the tariff equivalent of the quotas imposed on large Asian nonpreferential suppliers was substantial. The elimination of quotas therefore implied a significant erosion of the margin of preference enjoyed by preferential suppliers as the tariff equivalents fell to zero as of 31 December 2004. This meant that shifts in market shares away from preferential suppliers and downward pressure on prices were likely to be seen as 2005 progressed. The United States Office of Textiles and Apparel was empowered to rapidly collect import data on textile and clothing imports by quota categories, even after quotas were eliminated, through electronic data processing. It increased its efforts beginning in 2005 to monitor imports from the PRC in view of the special safeguard agreement that was part of the WTO accession agreement with that country. Data therefore became available by product and source country of imports with only a 2-month lag. Similarly, Eurostat put in place a system to monitor textile and clothing imports on a "real time" basis for the same purpose.12 In the US case, detailed data on imports under special import programs are available so that preferential imports may be distinguished from imports facing most-favored nation tariffs. These data allow for the separation of what is happening in terms of volume and value (and, consequently, unit prices) in various categories of textile and clothing imports from preferential and nonpreferential suppliers, as well as for more aggregate measures of imports such as market share. The following sections offer an overview of Asian exporters' recent performance to the US and EU markets.  United States marketClothingThe annual volume changes of US imports from all major suppliers for clothing in million square meter equivalents for 2002—2005 are shown in Table 1.4.1, which indicates a 10.3% increase in 2005 over 2004 and represents a sharp acceleration of growth compared with the previous year. The value of US imports of clothing in millions of current US dollars rose by about 6%—indicative of falling unit prices in 2005 compared with 2004 (Table 1.4.2). Clothing imports from the PRC increased by nearly 100% in volume and by about 70% in value—revealing a steep cut in unit values of the PRC's products. The full-year increase in the PRC's share of the US import market of about 12% in volume and 8% in value cements the PRC's position as the lead supplier of US imports of clothing, despite the imposition of safeguard quotas in the second half of the year.  In contrast, former major quota holders like Hong Kong, China; Taipei,China; and Korea (ranked by size of quota holdings) saw a cumulative drop in market share from 9.7% in 2004 to 6.1% in 2005 in volume and a drop from 11.1% to 8.4% in value over the same period. Preferential suppliers overall saw a decline in market shares in clothing shipments in volume of about 5% and in value by a little more than 4% in 2005 compared with 2004 (Tables 1.4.1 and 1.4.2). A group of competitive Asian suppliers more than held their own in the US market in 2005 led by Bangladesh, India, Indonesia, Cambodia, Pakistan, Sri Lanka, and Viet Nam, cumulatively increasing volume share by about 1 percentage point to about 24% in 2005 versus 23% in 2004, and increasing value share to 22.7% from 20.5% over the same time frame. This group managed this performance mainly because their unit values kept pace or grew faster than volumes. In fact, in Viet Nam and Sri Lanka, volumes rose more slowly than the world average but values increased more rapidly than the world average. Moreover, in the case of Indonesia growth of value (nearly 20%) clearly outpaced volume growth (17%), indicating that rather than competing directly with the PRC, producers moved into higher-quality clothing lines. In particular, high growth in shipments of cotton clothing figured prominently in the success of these Asian suppliers, offsetting a generally weaker performance in shipments of MMF clothing. The latter category has much higher tariffs than cotton clothing (typically over 20% as against 10% for cottons) that may have priced some of them out of the market for certain products, compared with the PRC. The PRC lifted the volume of MMF clothing shipments by 140% in 2005 but increased value by half that, indicating a sharp reduction in its prices of MMF clothing. Even though the PRC also faces high tariffs on these items, its price competitiveness was strong enough to overcome them. Preferential suppliers were also able to preserve their market share in MMF clothing (a decline of 3.5% in volume but only 1.7% in value) better than in cotton clothing (a decline of 7.8% in volume and 7.2% in value). In some contrast to competitive Asian suppliers, Malaysia, Philippines, and Thailand continued to have fading performances in clothing shipments in both volume and value terms relative to the world average. This suggests that producers in these cases failed to adjust in the manner of the more competitive suppliers. Small and marginal suppliers in the US market, such as the Fiji Islands and Nepal, which had already been losing ground before the ending of quotas, were hard hit in 2005. Most of the countries in Central Asia as well as Maldives and Mongolia saw their market shares evaporate in 2005. These were cases where distance and geography now count for more than other factors and, with the end of quotas, footloose producers have packed up and moved on. In the main, however, many countries' fears of being squeezed out of the US market—by a combination of the rising strength of the PRC on the one hand and the proliferation of US preferences with non-Asian suppliers on the other—were not realized.  TextilesIntermediate textile products include yarns and fabrics used in the manufacture of clothing. The trade in intermediate textile products is concentrated in fewer countries than trade in clothing, reflecting the large scale-economies in production of textiles compared with clothing. Only seven Asian suppliers have a market share in US imports of textile intermediates of more than 1%, compared with double that number for clothing (Tables 1.4.3 and 1.4.4). Similarly, only three preferential suppliers (Canada, Mexico, and Israel-ranked by size) have a share exceeding 1% of US imports of intermediate textile products compared with seven preferential suppliers of clothing. Imports of intermediate products are aggregated in Tables 1.4.3 (volume) and 1.4.4 (value).  The volume of trade measured by US imports increased by only 3% in 2005 from the previous year and the increase in value was even smaller, at only 2%. Only three big Asian suppliers had growth in shipments of intermediate textile products to the US after 2004 large enough to increase market share: the PRC (up 83% in volume and 56% in value); India (up 79% in volume and 22% in value); and Indonesia (up 7% in volume and 4% in value). Other significant Asian suppliers such as Korea and Taipei,China increased the volume of shipments but saw values fall, losing market share in value terms. Only Canada, Mexico, and Israel, among all preferential suppliers, ship large amounts of intermediate textile products to the US and all of them saw decreases in the volume of shipments in 2005 of 5—6%. However, Mexico increased the value of its shipments enough to increase market share marginally. Indeed the market share of preferential suppliers as a group fell hardly at all in value (by only about two tenths of a percentage point), indicating that preferential rules of origin are likely at work, diverting trade in these products. This is in fact unsurprising, given the stringent "triple-transformation" (covering the second through fifth major steps in production shown in Figure 1.4.1 above) rules of origin in the North American Free Trade Agreement (NAFTA) as regards textiles and clothing. Asia might benefit by looking at EU and US experience with rules of origin in negotiating and designing rules for its own bilateral and regional trade agreements that will influence the future textile and clothing trade of its developing countries. The US has demonstrated some flexibility in designing rules of origin in preferential agreements as far as intermediate textile products are concerned. For example, the US-Central American Free Trade Agreement (CAFTA) allows cumulation13 in textiles and clothing between CAFTA and NAFTA so that textile yarns and fabrics from Mexico are counted as originating within the CAFTA countries. In its free trade agreement with Jordan, either US or Israeli fabrics or clothing parts may be used in Jordan's clothing shipments to the US with duty-free treatment.14  European Union MarketFollowing the PRC's entry into WTO in late 2001, the country's access to the EU market improved: its shipments of textile and clothing products to the EU rose, and its share of the market in volume terms increased from 17% in 2001 to 26% in 2004 and in value terms from 18% in 2001 to 23% in 2004 (Tables 1.4.5 and 1.4.6). Most Asian suppliers lost market share but the biggest losers were the large quota holders (Hong Kong, China; Korea; and Taipei,China). India, Philippines, Sri Lanka, and Thailand had small initial losses in 2002 but market shares were quite stable in 2003 and 2004. Several Asian suppliers with preferential access to the EU under the Generalised System of Preferences and the Everything But Arms initiative actually improved market shares, including Bangladesh, Cambodia, and Pakistan during 2002-2004. Nepal and Viet Nam did not perform well despite available preferences. Non-Asian preferential suppliers had a similarly mixed performance. Turkey did well between 2002 and 2004 and firmed up its place as the second-largest developing country supplier, after the PRC. However, preferential suppliers in the Mediterranean rim and North Africa, such as Tunisia and Morocco, lost market share in that period. Romania and Bulgaria, on the other hand, performed reasonably well.  Unit values of EU imports have fallen since the end of 2002, as total import volume has increased more than import value. In 2005, growth in import volume exceeded that in import value by just 1.6 percentage points, so downward pressure on prices in the EU was muted. The impact of the final phase of quota integration by the EU was expected to be less than in the US case, as the liberalization had gone further in Europe than in North America under the ATC, largely because the EU eliminated quotas for many small supplier countries earlier under various arrangements or because the lines it chose to liberalize were of real commercial interest to developing country exporters. However, as the PRC was quota constrained in some important categories, some significant shifts in 2005 were seen, and its overall market share rose sharply from 23% to 31%, or by over one third. India is the only other Asian supplier that gained market share following the liberalization in the fourth and final phase of the ATC. Every preferential supplier lost market share, as did former large quota holders. In 2005, the EU introduced a system to monitor imports from the PRC and eight other Asian economies (Bangladesh; Cambodia; Hong Kong, China; India; Pakistan; Sri Lanka; Taipei,China; and Thailand) in 15 categories of clothing (similar to the merged categories in the US case) and six categories of intermediate textile products deemed to be "sensitive." Indeed, prior to the final implementation of the ATC, the European Commission had prepared and published "alert levels" of imports in textile and clothing categories that had been used to allocate quotas under the ATC, and so forewarned the PRC that it would take action if the alert levels (expressed in volume terms) were breached. In the first quarter of 2005, shipments from the PRC rose at rates of over 100% relative to the same period in 2004 in volume terms in eight categories of clothing and textiles: knit shirts and t-shirts, sweaters, men's trousers, blouses, hosiery, women's overcoats, and dresses; and woven flax fabric.15 In two other categories, volumes were up by over 60%: brassieres and cotton fabrics. Thus, in the second quarter of the year, the European Commission started the process of introducing special safeguards on these 10 categories and in June 2005 negotiated a comprehensive agreement to restrict these products. However, before the ink was dry on the agreement, import shipments that had already been in transit began arriving at European ports in amounts that breached the agreed limits. Ironically, a trade dispute resulted immediately with angry retailers demanding customs release shipments that were technically in violation of the negotiated agreement. This incident became known as the "bra war" as thousands of brassieres piled up in docks and customs warehouses. The comprehensive agreement appeared to be unraveling even before the EU negotiators could unpack their suitcases after returning from negotiations in Beijing. Fortunately, a full trade war was averted when the EU compromised and agreed to allow the items to be released but to be counted against the quota for 2006. It is too early to tell if the EU safeguard quotas will have the same effect of slowing the buildup in the PRC's market share or even reversing it, allowing the other Asian suppliers or preferential suppliers to fill the gap.
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