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AGOA Can Make Up for Defunct ATC Fabrics Pact

Published date:
Thursday, 03 March 2005

Recent press coverage has focused on the consequences for developing countries in Sub-Saharan Africa, particularly COMESA countries, with the end of the Agreement on Textiles and Clothing (ATC) formerly referred to as the Multi-fiber Agreement (MFA) on January 1, 2005.

The post ATC world poses definite challenges for COMESA countries and other Sub-Saharan African countries, but the situation is far from being dire or hopeless.

Any producer willing to undertake measures to improve the productivity of its competitively priced workers should be able to prosper and grow in the post-MFA environment. Similarly, any country willing to pursue improvements in infrastructure to reduce relatively high transaction costs, particularly transport and energy, will also see benefits.

The MFA went into effect on January 1, 1974 and provided rules for the imposition of quotas when surges of textiles and apparel imports caused or threatened to cause market disruption.

Under the terms of the Agreement on Textiles and Clothing negotiated in the Uruguay Round of multilateral negotiations, ATC Quotas ended on January 1, 2005. Essentially, it was designed to achieve progressive liberalisation while controlling trade to avoid excessive disruption to domestic markets in developed countries.

The fear regarding the end of the ATC by COMESA and other African countries is that there will be a surge of Asian, particularly from China and other South East Asian countries, of textiles and apparel exports to the United States and other developed countries.

The current conventional wisdom is that the only small suppliers that will survive are those that have the possibility of moving up market with more sophisticated niche production or those located in close proximity to markets such as Mexico and the Caribbean basin in relationship to the United States.

If we accepted this argument, the future of the AGOA apparel industry would be bleak for Sub-Saharan Africa.

If however, effective restraints continue to be applied on China and others, COMESA Least Developed Countries (LDC) will be able to take advantage of a small window of opportunity.

Although there will be other competitive suppliers not subject to quantitative restraints, none are benefiting from the generous duty-free treatment provided under AGOA.

Although AGOA has it critics, it has proven to be one of the most beneficial trade programs for Sub-Saharan Africa, particularly regarding its apparel provisions.

As a result of AGOA, one can see the development and expansion of an almost non-existence apparel industry in a number of COMESA countries.

Largely as a result of AGOA, Kenya re-entered the market and Madagascar and Uganda became new exporters.

Ethiopia has devoted resources to upgrading and expanding its textile production and actually has a firm exporting sportswear.

Mauritius has focused on maintaining its market share by upgrading production and on providing investment, training and strategic advice to least developed countries in Africa that are better able to compete.

In any case, following the end of the ATC there will be room for exports from smaller suppliers such as those in COMESA.

The fastest growing source of apparel into the United States, china and Vietnam, are still subject to quantitative restraints.

In the case of Vietnam, it will remain subject to bilateral quotas if and when it becomes a member of the World Trade Organisation and even after its accession it could still be subject to a special restraint protocol.

China will remain subject to a safeguard protocol for a few years. The United States government is currently considering petitions from US textile producers to restrain Chinese exports and China is imposing stiff export taxes on some of its exports.

Even if more competitive countries significantly increase exports to the US, there will be a need for second-tier suppliers in the post-ATC world.

US buyers will want to balance costs, flexibility, speed and risk in their sourcing strategies.

They will reduce their risk by diversifying sources of supply so they will not be overly reliant on a small number of suppliers.

In addition, they will want to continue to take advantage of preferential entry into the United States.

Retailers have discovered that a small although increasing number of consumers are attracted to African textile products and garments.

Apart from the tariff and niche market opportunities, US apparel buyers already have established relationships with COMESA producers.

These companies are not liable to easily switch their sourcing patterns in the short to medium-term.

From an analysis conducted for the COMESA Secretariat by the USAID-supported East and Central Africa Global Competitiveness Hub of the impact of the end of ATC quotas on COMESA textile and apparel exports under AGOA (in Kenya, Uganda, Ethiopia, Mauritius and Madagascar), the following themes emerge: in comparison to several Far Eastern countries, COMESA suppliers are more price competitive with AGOA duty-free treatment, even if the removal of quota charges is taken into account; and a comparison of China and India with five COMESA suppliers of a popular style of trousers (five pocket jeans) indicates that both China and India can produce and deliver jeans at a lower price.

However, when AGOA preferences are taken into account, the COMESA countries are less costly with Kenya and Madagascar having a 60 or 70 per cent margin over the Far East countries.

In conclusion, even in the post-ATC world, AGOA will continue to provide a short-term window of opportunity for those COMESA suppliers that have the capacity to remain low-cost suppliers to the United States market in textiles and apparel.

However, in order to take advantage of this window, COMESA countries and suppliers will have to address key measures to improve their productivity. It is advised that a major effort by donors, the COMESA secretariat, COMESA governments and the private sector should be undertaken to improve productivity output of garments per machine and assure the availability of working capital at competitive rates if these countries are to take advantage of the breathing space that AGOA affords and remain competitive.

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