TRALAC - Trade Law Centre

End of WTO Rag Treaty Rips into Poor

Wednesday, 26 January 2005

Source: Business Report (South Africa)

A few years ago, the tiny kingdom of Lesotho appeared to have a lot on offer for investors: cheap labour, generous tax incentives and proximity to the regional powerhouse, South Africa.

Textile manufacturers certainly seemed to like what they saw.

Taiwanese entrepreneurs started arriving in Lesotho in 2000. By investing in the country, they were also able to take advantage of the African Growth and Opportunity Act (Agoa).

This US programme was set up to allow duty-free access to the American market for a wide selection of exports from countries in sub-Saharan Africa that met certain conditions, such as respect for human rights and the rule of law.

After the Taiwanese, came Chinese, Mauritian and Malaysian textile firms. By 2003, Lesotho had become a major textile manufacturer in Africa, producing 31 percent of textiles exported to the US under Agoa.

According to official statistics, about 50 000 people depended on Lesotho's textile industry for their livelihood in 2004, compared with 20 000 two years before.

During a four-day visit to Lesotho in December 2004, US trade representative Robert Zoellick told journalists that his country had "a great respect for what Lesotho had accomplished".

Towards the end of last year, six textile factories shut down, leaving 6 650 employees without work.

Union leader Billy Macaefa blamed the closures on the expiry of the multi-fibre agreement (MFA), which was introduced by the World Trade Organisation (WTO) about 30 years ago.

The initial aim of the MFA was to protect the textile industries of developed nations that were facing competition from low-cost producers in poorer states.

Thanks to the MFA, nations were allowed to impose quotas on textile imports. This gave countries like Lesotho the proverbial "foot in the door" in markets that might otherwise have been dominated by manufacturing behemoths such as China.

The MFA expired on January 1 this year. A WTO study released in September last year showed that China and India would probably dominate about 80 percent of the global textile market in a post-MFA era, while the remaining 20 percent would be shared by the rest of the world.

Lesotho still has the advantage of duty-free access to US markets under Agoa, while other producers are subject to tariffs.

However, the six company owners who closed shop last year clearly believed that the low wages, economies of scale and efficient engineering of factories in China and India would eventually crowd them out of the market.

In a new report titled Rags to Riches to Rags, the UK-based Christian Aid quoted statistics indicating that 27 million workers around the world could lose their jobs as a result of the MFA's expiry.

In South Africa, 300 000 textile workers have lost their jobs in the past two years due to the influx of Chinese goods.

"We need some sort of quota placed on China," said Walter Simeoni, the president of the SA Textile Federation.

"It will be a short-term solution, but it will give the textile industry a breathing space to reorganise itself.

"Chinese clothing now represents 86 percent of the total garments imported into South Africa. Items like towels, blankets and curtains represent 60 percent. All this was achieved within the past three years."

Simeoni rejected the argument that slapping quotas on Chinese textile imports would violate WTO rules.

"Brazil, Turkey and the US have introduced some quotas on some of their products. The EU is also looking at it. I think the [South African] authorities have not been convinced of the urgency of the problem. And they are reluctant to upset the Chinese."

This, Simeoni added, stemmed from the fact that China supported the struggle to end apartheid.

Currency fluctuations have worsened the crisis in the textile industry. The rand has strengthened from the historic low it reached in December 2001, when $1 traded for R13.85. The dollar is now worth about R6.

"No textile firm in the world can compete in an environment where the currency appreciated against the US dollar and the Chinese currency by 30 percent in 2002 and a further 25 percent between January 2003 and October 2003," said Simeoni.

"In fact, all our competitors in the East depreciated their currency ... against the rand, as they linked themselves to the US dollar in order to stay competitive. This is one of the reasons they create jobs, while we destroy them," he noted.

An exchange rate of R9 to the dollar is apparently needed for local textile exports to regain their edge.

Manufacturers also complain that labour costs in the country are pricing them out of the market.

Simeoni claimed that monthly salaries for the industry had increased from about $215 (R1 290) a month in January 2002 (excluding overtime and shift allowances) to $500 in September last year.

South Africa's competitors in the Far East, he added, paid between $40 and $100 a month.

Christian Aid said WTO intervention was needed to prevent the textile industries in several developing countries from being gutted.

"The scrapping of the MFA was undertaken without proper weight being given to the impact on those people most likely to be affected," said Andrew Pendleton, Christian Aid's head of trade policy.

"Changes in global trade policies, especially those as seismic as the MFA phase-out, should put the interests of poor people first - rather than simply aiming to liberalise markets at any cost."

While some parts of the developing world will undoubtedly reap benefits from the expiry of the MFA, this is cold comfort to a continent struggling to find its place in global markets.