TRALAC - Trade Law Centre

Southern Africa: Time to Tailor an Export Boom

Tuesday, 08 February 2005

Source: Business Day (Johannesburg)

The clothing and textile industry in the Southern African Customs Union (Sacu) has seen significant developments in the past four years. For many developing countries, including those in Sacu, the industry has been central to the development of their manufacturing sectors.

The sector provides low-cost job creation, absorbs relatively low skills, and often employs women. Hence, from a poverty-reduction and development perspective, the clothing and textile industry is important.

Clothing production, especially, has become a very mobile industry. Investment in clothing or garment production has in recent years been driven by market-access conditions or trade preferences.

Investment in Sacu countries' clothing industries, and to a lesser extent textile production, has responded to the incentives provided by specific market access arrangements.

The African Growth and Opportunity Act (Agoa), which offers duty-free access to the US market for eligible African countries, is credited with providing the impetus for investments in Lesotho, Swaziland, Botswana and Namibia, and some relocations from SA to Lesotho.

The least-developed countries (as defined by the US in Agoa) have specific preferences in that they can source inputs from any country, whereas other countries (such as SA) have to source inputs from eligible African countries or the US, making them less competitive than the least developed countries.

At the end of last year, the Multifibre Agreement expired, bringing to an end a long period of quota restrictions that were applied by developed countries to clothing and textile imports from developing countries.

The demise of the restrictions brings significant challenges and opportunities for developing countries, with countries such as China likely to be major beneficiaries, while small countries such as Lesotho and Namibia are likely to be significant losers.

With no more quota restrictions, price competition might increase significantly. Countries such as China that have big economies of scale, cheap inputs - including cheap and productive labour - and an export-supportive exchange rate, are likely to score well.

At the beginning of this year, reports of the closure of six Lesotho clothing firms appeared in the media. News of closures has also come from Swaziland.

The developments are particularly important for the preparations for trade negotiations with China, which Sacu will possibly undertake this year, as well as negotiations with the US, which ground to a halt late last year.

How can some preferential access arrangement for clothing and textile exports from Sacu be incorporated in a free-trade agreement with the US? What provisions related to the clothing and textile industry does Sacu want in a free- trade agreement with China?

Consideration of trade remedy action is also required. The World Trade Organisation (WTO) allows, for example, safeguards in response to a surge in imports, under certain conditions.

Assessing the best strategy to implement safeguards may be important for SA, but for smaller Sacu countries it may not be appropriate given that production is predominantly for the export markets. For the small countries, safeguards in key export markets may be of interest.

Even that may not provide the necessary salvage for such industries. While trade negotiations and preparations for negotiations with China are important, it is equally important to consider the scope and nature of investment provisions, which are either included in a free-trade deal or bilateral investment treaty between Sacu countries and China.

Provisions in investment treaties or free-trade agreements are important when factory closures, such as those reported in the press, take place.

Perhaps the most significant challenge that emerges from the recent developments relates to the domestic policy response. The competitiveness of the clothing and textile industries in Sacu needs to be assessed.

This is in the scope of industrial policy - an area with a dismal track record in Sacu, SA included.

The days of providing direct subsidies are over; WTO membership makes them illegal in terms of the Agreement on Subsidies and Countervailing Measures.

Supporting the development of globally competitive industries requires innovative policy-making and integrated infrastructure and support service development, labour market flexibility and a competitive local business environment with strong competition-policy enforcement.

Trade policy requires industry-level input, not just a focus on partner countries for strategic or political reasons. Government needs to talk to industry, and trade and industry department divisions have to be integrated as regards trade and industrial policy development.

In SA the media has reported on the textile industry's call - as expressed by industry association Textile Federation - for the implementation of safeguard measures in response to a surge in imports from China, and the department's response to the request.

The news items raise a number of important issues. First, there is a need to determine which products have seen a surge in imports. Effective safeguards need to be specific - applying for a blanket safeguard may mask product-specific import surges. And, of course, cheap imports benefit the consumer. Assessing the effect of a surge in imports is extremely important.

Second, a key question is whether a safeguard is the most effective response. There are a number of reasons for this. It may well be that very few companies producing for the domestic market are affected, and that the real challenge confronts local companies exporting to, say, the US. A safeguard imposed by the US, and how this affects SA's exporters, may thus be very important to examine.

Third, it is important to consider that domestic producers' uncompetitiveness may be the real issue, not the surge in imports. Trade policy instruments are not the most effective way to address the challenges facing uncompetitive firms. Industrial policy initiatives may help, but firm-level restructuring and productivity improvements are also important.

Of course, the rand's strong recent performance reduces the ability of South African exporters to compete on price. This is important, especially as far as basic clothing exports are concerned.

And it also raises industrial policy issues for the department, to the extent that it has to consider links between the clothing and textile industry and industries that can support higher value-added production.

Hartzenberg is executive director of the Stellenbosch-based Trade Law Centre for Southern Africa (tralac). Please see link at top right of page.