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Global Quotas... Hanging by a Thread

Published date:
Friday, 10 December 2004

At midnight on December 31 this year, quotas which have regulated international trade in textiles and clothing are to be abolished.

Textile Federation executive director Brian Brink says what was supposed to be a gradual process of phasing-in quota-free trade has boiled down to a huge hurdle at the tail end. He explains that textile and clothing quotas were first agreed in 1974, and throughout the ’70s, ’80s and ’90s developed countries erected a range of quotas against countries such as Hong Kong, India, China, Pakistan, Mauritius and Kenya.

Each country was allocated limited market access, measured in square-metre equivalents, on specific items, that they could export.

At the World Trade Organisation (WTO) Uruguay round in 1995 a protocol determined to phase these textile and clothing quotas out in four stages.

Developed countries such as the US, Europe and Japan and other countries, including South Africa, were obliged to notify the WTO which textile and clothing items they were not going to erect quotas on and, in the initial stages, quotas on insignificant low-volume imports, where domestic markets were not actually competing at all, were integrated or liberalised.

“Having reached the last of the four stages, the remaining quotas are going to fall away and they are the significant ones where the bulk of the trade is done,” says Brink.

The impact is that countries that are very competitive and aggressive in their exports, chiefly China and to a lesser extent India and a few others, will dominate the US, European Union (EU) and other international export markets for textiles.

“No matter what inroads the likes of Lesotho, South Africa, Bangladesh or Sri Lanka have made, we won’t be able to hold onto those and we will be reversed out of reasonably lucrative export markets,” says Brink.

Ironically this comes at a time when the textile industry has been urged to export to increase volume base and has finally accepted that it has to export because the local market is limited.

CloTrade president Jack Kipling says the removal of quotas on the importation of apparel into two of the world’s largest markets, the US and European Union, is set to have a dramatic effect on the clothing industry globally. “Nobody can be totally sure of the long-term effects of this move, but a number of unforeseen ramifications must also be expected,” he warns.

The Multi Fibre Agreement has been in place for over 40 years and has regulated the trade in textiles and apparel. It was the existence of quotas that drove the spread of the clothing industry to the point that, next to food, the clothing industry is the most global of all industries. “The decision to remove quotas on January 1, 2005, is set to turn on its head in the space of two to three years what has taken 40 years to develop,” Kipling says.

In a study conducted in the US 18 months ago, leading US retailers predicted that they would reduce by two-thirds the number of countries they deal with at present in a post-quota era. It is estimated that between 20- and 30-million jobs could shift globally.

Kipling says the clothing industry has always been recognised as the first step to industrialisation in a country, and many of today’s leading industrial nations owe their success to the clothing and textile industries 40 to 50 years ago.

“The removal of quotas, therefore, represents a major loss of opportunity to many developing countries around the world, including sub-Saharan Africa, with a corresponding increase of opportunity for those countries that have already established themselves as zones of excellence for the production of apparel able to offer economies of scale, such as China.” “China, when acceding to the WTO, has read the situation perfectly,” he says, “and now could be in a position to grab 80% of the world’s market share for clothing.” The countries most likely to lose market share are those developing countries which have not yet managed to achieve critical mass.

“South Africa is in a better position than many other countries for the simple reason that the South African clothing industry only exports 20% of its output,” says Kipling. “The clothing industries in many other countries are almost entirely reliant on exports to the US and EU: Swaziland and Lesotho are examples close to home.” A report in Business Day quotes Chinese ambassador Liu Guijin saying that South Africa’s textile companies have to raise their competitiveness and productivity to compete globally.

South African Textile Industry Export Council (Satiec) chairperson Thys Loubser says give us a level playing field and our labour, our management and our ingenuity in Africa will be able to compete against the best in the world.

China has pegged its currency to the US dollar and, if South Africa’s currency is considered overvalued, then the Chinese currency is certainly under-valued by between 40% and 45%.

China also operates an export incentive, so in effect textile and clothing manufacturers have got a 40% advantage on currency and a 13% direct export subsidy.

Many loans from the banks to Chinese industry are underperforming and in many instances, estimatedat about half, never get paid back, equating to a free investment.

Additionally a big part of the textile and clothing industry in China is either State-, province- or municipality-owned and services, such as water and electricity, are free.

China has a non-unionised workforce, so wages are much lower.

“In South Africa the labour rate, even in the outlying areas, is $250 to $300 a month; in China the rate of $50 to $100 a month towards the east is seen as very high and China is losing some business to Cambodia and Vietnam where there is labour specifically for garment manufacture,” says Loubser.

“Chinese companies also tend to sell their equipment somewhere else in the world when it gets to be about four years old, and invest in the latest state-of-the-art equipment, withinterest rates at 1,5%,” he says Even with subsidies and free utilities, there is no explanation as to how the prices of goods that land in South Africa are so far below the raw-material prices.

“As an example, the world cotton price is R8 a kilogram,” says Brink.

“China does grow a lot of its own cotton, but it has to import about 30% of its requirements from the rest of the world, and pay the price of R8/kg, as we do.

“China can then convert that cotton into a yarn, knit it into a fabric, convert that fabric into a T-shirt, ship it across the Indian Ocean and land it in Durban at R2/kg in the form of a T-shirt,” he says.

To counter the final removal of quotas at the end of December there has been a move over the last year,initiated by Turkey and supported early on by the US, to try and get the WTO to postpone the removal of the remaining quotas over another three to four years.

The Istanbul Declaration, as it is known, is supported by the private sector in about 50 countries. “There is absolutely no doubt that South Africa and sub-Saharan Africa will be better off if quotas remain,” says Kipling.

“It is for this reason that CloTrade and the Export Council for the Clothing Industry in South Africa joined 14 other sub-Saharan countries in signing the Istanbul Declaration calling on the WTO to reconsider its decision. “While there seems to be little chance of a reversal, at least the world has been alerted to the potential danger,” he says.

“Our salvation is to get some safeguards in place on particular areas that are hardest hit, try for some antidumping duties and keep on working at becoming more competitive,” says Brink A safeguard, just a quota by another name, can be initiated by individual countries and, while it is a very lengthy process, will provide some measure of relief. Safeguards are enabled by a clause in China’s accession protocol to the WTO that provides for the protection against textile and apparel imports from China in particular countries.

Again, America is first off themark and applied for four safeguard measures last year, of which it got three, and is applying for another seven items at present.

“After much to-ing and fro-ing South Africa will also be moving along these lines,” says Brink.

“We’ve lost six months because of the naíve belief that initiating talks with China would lead to an agreement of some sort of easing back on its export push into SA – that’s not going to happen,” he says.

In textiles we would be looking to safeguard fabrics like denim, shirting, sheeting and some knitted fabrics, and hope to get the safeguards in place soon into the new year.

Brink points out that, in this way, South Africa will retain a portion of the domestic market, but safeguards are not going to help retain or improve exports into the US.

“There we can only rely on the US erecting quotas; if it’s successful in getting a quota against China on cotton trousers, for example, then it holds China back in that particular area and gives South African exporters a bit of breathing space.” It is also just a stopgap; the provision makes allowances for the safeguard to be in place for about three or four years, then it has to be removed and reevaluated.

Satiec executive director Martin Viljoen says that because the safeguards allow China to increase its volumes into the US by only 7% next year, this year the country is chasing volume so that it can get a base.

In order to do this, it has dropped prices on clothing and home textiles by about 35% to 45% over the last two years.

“The other measure open to South Africa to protect it against cheap imports from China is antidumping provisions; when goods are landedat R2/kg and the raw material costsR8/kg, it’s not too difficult to prove dumping, although it’s a very lengthy process,” says Brink.

The removal of quotas is also threatening jobs in local companies.

About 50 000 people are employed in textiles at present and about100 000 in clothing.

Last year the Textile Federation lost seven members, and early in November this year, Kwazulu-Natal textile exporter David Whitehead, which employs 760 workers, closed.

The company has stopped trading while it tries to hatch a rescue plan and will take a decision as to its future in March next year.

Loubser also believes that there are going to be far more job losses in the textile industry.

“SANS Fibres, for example, cut almost 500 people out of its 1 900 workforce over the last year and going forward I can’t see the company ever going above that level,” he says.

Kipling says that if South Africa’s exports of apparel fell away al-together an estimated 20 000 jobs would be lost. If Lesotho’s and Swaziland’s exports also declined, the region could lose upwards of 50 000 jobs.

“China seems to have a job-creation dynamic and priority while South Africa has three major initiatives: job creation, transformation and SMME development, and I’m not too sure that job creation is the first priority,” says Viljoen, who believes that the bene-ficiation of raw materials should be pursued as a means of creating millions of jobs in the textile and clothing industry.

“Compared to China, which does not export raw materials, of the 1,8-million tons of cotton that we grow in sub-Saharan Africa, we export more than 90% raw,” he says.

Seventeen-million Merino sheep in South Africa produce about 50 000 t of wool a year; of which about 92% is exported in nonbeneficiated form.

Similarly more than 90% of mohair is exported nonbeneficiated.

South Africa produces 5 000 t of mohair and imports 70% of the excess mohair crop from Texas, US, cleans it and sends it to India, China and Japan.

“We are beneficiating less than 10% of all the raw textile input that we have got on the African continent,” says Viljoen.

If you include synthetics, the figure does improve because companies like Hosaf Fibres, which makes staple fibre to blend with cotton for various apparel applications and for fibre-filledcushions, and the filament yarn manufacturers, like SANS Fibres, export 50% of their partially-beneficiated product.

“It’s pretty bad out there, but it’s not just all gloom,” says Loubser.

There are certain textile manufacturers that are specific enough in niche areas or that have built up a tradition or a level of service, design or quality that will set them apart and less easy to target by a mass producer like China.

“We cannot always compete with China on size and large volumes in the textile industry, but we can have successes with orders that are so small that China is not interested, or where we have technology, knowledge or market relationships that it doesn’t have.

“In the Western Cape we have a tradition of excellent tailoring; the suits that Monatic makes are something to be proud of.

“Perhaps a company like this could work its way through the cracks into a smaller market in the US that wants top-notch suits, for example, and maybe the volumes are so low that the Chinese will not be interested.

“And if it’s not suits, let’s look for something else,” he says.

Kipling says the whole of sub-Saharan Africa’s market share of the US apparel market is slightly over 1% and, while this should put Africa at considerable risk, if a longer-term view of 10 to 15 years is taken the situation looks more promising.

“Apart from quotas, the other factor driving the spread of the clothing industry globally is labour costs,” he says. Logically, Africa is set to begin its rise as a location for investment in clothing production.

“Risk reduction plays a role in the sourcing strategy of most companies and the world of apparel sourcing would greatly value an alternative to China if for no other reason than risk reduction. “Ideally they would like another‘China’ – a zone of excellence for apparel production – but just not in China,” he says.

“This is the challenge for the clothing industries in other countries with the removal of quotas.” Logistics, both cost and speed, are increasingly playing a larger role in sourcing of apparel, and South Africa is logistically not badly placed, and a number of West African countries are extremely well-placed for trade with the EU and the US.

More positive news is that a rescue strategy, put together for the textile and clothing industry by Dr Justin Barnes, of the University of Kwazulu-Natal, is being taken further through the Department of Trade and Industry’s customised sector programmes Trade and Investment South Africa chief director Thulani Mkhwanazi.

The customised sector programme plans to take five projects from each industry that will develop a new or an existing product from raw material to the customer.

In the process, objectives such as BEE, exports, innovation and competitiveness will be achieved.

“This is very positive for our industry and we will agree on projects in clusters that we can take forward,” says Loubser.

For example, a project could start off in the textile industry with a company like SANS making the yarn, another company would weave that yarn into an in-rubber application, which would then go to Dunlop to make conveyor belts which would be used by the mining industry.

Some projects could involve the apparel and textile industry and even retail companies or hotel groups could be pulled in.

Kipling says the one positive benefit arising from all the debate taking place around the removal of quotas is the growing recognition that the rules of origin for market access under the various free-trade agreements (FTAs) and other opportunities such as Agoa, have been far too restrictive. There is strong support for a single-stage rule of origin to apply to developing countries to ensure that they have access to third-country fabrics of the widest choice at competitive prices to help them compete against China. “In this regard, the South African clothing industry could be a significant beneficiary if the opportunity is taken during the current US/Southern African Customs Union (Sacu) FTA and SA/EU FTA review to secure a single-stage conversion rule of origin,” says Kipling.

Brink, however, holds the view that for meaningful development of the clothing and textile pipeline in an economy, a two-stage rule of origin is essential.

“A single-stage rule of origin, coupled with the recently-announced extension of the duty credit certificate scheme (DCCS) and a review of other supply-side measures to underpin a productivity improvement drive, should ensure that the clothing industry has a fighting chance of competing in the global market in a post-quota era, particularly if a 10- to 15-year horizon is considered,” says Kipling.

Regularly updated trade statistics on include (Click to follow the links):

  • All Countries’ AGOA and GSP Trade Overview

  • AGOA Trade by Industry Sector

  • Apparel Trade under AGOA’s Wearing Apparel Provisions

  • Latest Apparel Quotas under AGOA

  • Bilateral Trade Data for all AGOA-eligible countries individually.

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