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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
Introduction: An end to quotas?The liberalization of the global system of trade restraints on exports of textiles and clothing from developing countries, which had operated for more than four decades, was accomplished on 31 December 2004 with the full implementation of the Agreement on Textiles and Clothing (ATC). The freeing-up of trade in textiles and clothing from nontariff barriers was heralded as one of the most significant outcomes of the Uruguay Round negotiations that led to the founding of the World Trade Organization (WTO). This crucial agreement affects nearly 4% of world trade in manufactures, worth $453 billion in 2004 (WTO 2005). Benefits from the ATC were expected to be divided between competitive Asian suppliers and consumers in the markets of Europe and North America. Expected losers were the protected suppliers in the domestic markets of those two regions, and marginal exporters that had emerged in many locales in the developing world purely as a result of "quota-hopping" investments in footloose clothing factories. "Temporary" quantitative limits on exports of textile and clothing products from developing countries were first imposed in the late-1950s on Asian economies.1 Quantitative restrictions on textile and clothing exports from developing countries generally were formalized in 1962 under the Long-Term Agreement on Cotton Textiles. These restrictions on cotton textiles were extended to products from man-made fiber, wool, silk, and vegetable fiber under the Multifibre Arrangement (MFA), which became effective in 1974, through 1994. The quotas negotiated between industrial and developing countries were administered by exporting countries, and the rents generated led rapidly to the emergence of interest groups, in both sets of countries, which had a strong motive in seeing the system remain intact. Hence the breakthrough in the Uruguay Round, which led to the ATC as of 1 January 1995, can be viewed as one of the triumphs of free trade advocates across the globe. The ATC was gradually implemented in four phases over a 10-year period beginning on 1 January 1995 and ending on 31 December 2004. The liberalization had two dimensions: first, the phased integration of harmonized system tariff codes or lines into the General Agreement on Tariffs and Trade (GATT) (16% in 1995, 17% in 1998, 18% in 2002, and 49% in 2005); and second, higher growth rates in remaining quota-constrained categories (6.96% in 1995-1997, 8.7% in 1998-2001, and 11.05% in 2002-2004) (James et al. 2003).2 In this way, the ATC gradually but progressively liberalized world trade in textiles and clothing in these two dimensions of integration and growth in the remaining quotas. During those 10 years, however, several unforeseen developments occurred that have important consequences for the outcome of the liberalization. The first of these is the post-Uruguay Round proliferation of preferential trade agreements around the major trading hub countries of the European Union (EU)—Belgium, France, Germany, Italy, and United Kingdom—and North America. These agreements include programs aimed at providing new life to the textile complexes in the older industrial economies through "outsourcing" and "production sharing" arrangements with neighboring developing countries and countries in transition from central planning to market economies. The preferential agreements include so-called "free trade agreements" as well as unilateral preference treaties such as the General Preferential Tariff program of Canada, the Everything But Arms initiative of the EU, and the African Growth and Opportunities Act of the United States (US). All of these discriminatory agreements are enforced by rules of origin that usually encourage exclusive use of textile intermediate products (yarn and fabric) from the hub countries. That these agreements have had a substantial impact on the direction and composition of trade is not in doubt. What is in doubt is whether they will continue to allow high-cost textile producers in the hub countries to survive. The second unforeseen development during the negotiation of the ATC was the dramatic emergence of the PRC as an industrial power and its accession to WTO in late 2001, near the end of the second phase of the implementation of the ATC. The fact that the PRC would benefit from the relaxation of quotas meant that the benefits expected from the agreement by other large Asian suppliers of textiles and clothing would, at a minimum, have to be shared with it. The extent to which the PRC would gain, however, remains uncertain. This is because the accession agreement includes a special textile safeguard arrangement that is valid through 2008.3 The imposition of safeguard quotas on the PRC in mid-2005 by the EU and US (followed by other WTO members including Argentina, Brazil, Peru, and Turkey) is significant in that the PRC is the world's leading producer and exporter of clothing and is a major producer and exporter of intermediate and made-up textile products. As the PRC's shares of the EU (30%) and US (25%) imports of all textile and clothing products in 2005 were large, imposition of quota restraints may erode gains to consumers through prices higher than would otherwise have been charged. This also means that the world is not completely quota free (except for a brief interlude in early 2005). Hence, one may refer to the "almost" post-quota era between the present and the end of 2008. Even then the outcome is not determinate because the PRC's accession agreement allows WTO members to treat the PRC as a nonmarket economy for another extended period (up to 2016). This allows any WTO member to enact antidumping measures by comparing import prices of PRC goods with prices of similar goods in a representative market economy rather than domestic prices of these goods in the PRC.4 In any case, normal WTO safeguards and other contingent forms of protection remain available.5 In this section of the Asian Development Outlook, the historical significance of production and trade in textiles and clothing in the economic development of the Asian Development Bank (ADB) developing member countries is discussed and past performance is briefly reviewed. Then new statistical data that are collected on a "real time" basis in the EU and US for the entire year of 2005 are examined in order to understand the trends under the (almost) quota-free trading environment and, in particular, to compare the situations of preferential and nonpreferential suppliers. Finally, an agenda for future reform of trade policy in this important area of world trade is considered, an agenda that may be influential both in the current Doha negotiations and in crafting other trade agreements.
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