Import quotas have severely restricted the international trade in textiles and clothing for some 50 years. This can be compared to the distortion to trade caused by domestic subsidies and other tariff and non-tariff barriers in the global agricultural trade.

The quota-free trade in textiles and clothing became a reality on Jan 1 with the expiry of the World Trade Organisation Agreement on Textiles and Clothing. Dramatic changes can now be expected among producers and traders worldwide. In fact, huge media attention has been focused on recent factory closings and dislocations, job losses and increased social hardships in several Asian countries, among others.

The world trade in clothing reached $201 billion (7.76 trillion baht) in 2002, and in textiles $152 billion (5.87 trillion baht). The United States’ share of imported clothing went up from 30% to 35% between 1995 and 2002, while the European Union’s share fell from 32% to 30%.

Exceptionally, Japan does not impose quotas. This market, the world’s third largest, absorbed 8.4% of global clothing imports in 2002 and 3% of textiles imports.

Most observers agree that developing countries will increase their textiles and clothing export earnings by some $40 billion (1.54 trillion baht) annually from this year. These gains are not distributed evenly however.

Most strikingly, China’s share is expected to rise from 16% to 50% of clothing imported by North America, and from 18% to 29% imported by the EU. India’s gains are more modest: from 4% to 15% in North America, and from 6% to 9% in the EU.

Secondly, Indonesia’s and the Philippines’ foothold in North America’s clothing import market is to fall from 4% to 2% in each case. Thailand is likely to retain its 3% share in the same market.

Thirdly, the rest of the world will see their clothing share down from 30% to 24% in the EU, and from 28% to just 12% in North America. This is a matter for concern because these two markets are very important to the smaller or newer exporters from Southeast Asia such as Cambodia, Laos and Vietnam.

Fourthly, the main beneficiaries of various trade preferential programmes from the United States and the European Union are expected to lose out to other competitors. In the North American clothing market, for example, Mexico’s share is to fall from 10% to just 3%, while that from the rest of the Americas from 16% to 5%. Bangladesh’s share is halved from 4% to 2%.

Likewise in the EU clothing market, Turkey’s share is to decline from 9% to 6%, and that of Eastern and Central European countries from 14% to 10%. North African countries will see their supplies down from 11% to 9%.

Other problems

Certain suppliers have to face other problems as well.

Firstly, textiles and clothing exports from non-World Trade Organisation members such as Laos and Vietnam can still be subject to quota restrictions from this year. This is a decided disadvantage for them, given the quota-free status gained by other competing textiles and clothing exporters.

What are the prospects for membership?

The ongoing negotiations on WTO accession by Vietnam are very complex. It is far from certain the process can be completed during 2005, as desired by Vietnam. Negotiations on Laos’ accession started on Oct 28, 2004, and WTO accession by this country is several years down the road.

Secondly, exports from non-WTO members are also subject to very high import tariffs. Cotton shirts and pullovers are among the most common categories of exported garments. In the United States, for example, the most favoured nation tariffs on these garments are 17%-20%, compared to the non-most favoured nation tariffs of 45%-50%.

The importance of most favoured nation tariffs and favourable quota allocations in this largest global market for clothing cannot be underestimated. Cambodia, which normalised trade relations with the United States in May 2000, expanded its textiles and clothing exports to the US from $600 million (23.2 billion baht) in 1998 to $1.2 billion (46.3 billion baht) in 2003.

The trade relationship between the United States and Vietnam was normalised in December 2001. Subsequently, Vietnam’s exports of textiles and clothing to the US increased from just $49 million (1.89 billion baht) in 2001 to $952 million (36.8 billion baht) in 2002 and $2.4 billion (92.6 billion baht) in 2003.

In contrast, Laos’ textiles and clothing exports to the United States were less than $4 million (154.4 million baht) a year in the early 2000s. The country had completed a bilateral trade agreement with the United States, although a separate textiles and clothing accord has yet to be negotiated.

Thirdly, preferential quotas and tariffs are helpful but they can also be a double-edged sword. In fact, most of the largest beneficiaries of such trade preferences from the European Union and United States are expected to lose a significant share of their markets after 2005. There is simply no adequate substitute for ongoing improvements in efficiency, quality, flexibility and delivery timeliness in textiles and clothing production and trade.

Opportunities

Although there are potential opportunities in emerging challenges, what and where are some of these opportunities for textiles and clothing exporters in Southeast Asia?

Firstly, Canada’s market access initiative for quota- and duty-free exports from the least developed countries presents an attractive option for both Cambodia and Laos. A minimum of 25% of import content can come from Canada, other least developed countries, or all economies of Southeast Asia (except Burma) and East Asia (except Taiwan), among other developing countries.

Secondly, almost 90% of Laos’ garment exports go to the European Union. This market is another attractive option for duty- and quota-free exports from Southeast Asia’s least developed countries (except Burma). Most of the region’s countries are qualified for regional cumulation in the EU’s rules-of-origin requirements.

Thirdly, all these options raise the attractiveness as well as necessity of an integrated textiles and clothing supply chain among Asean-member countries. Individually, the least developed countries of Southeast Asia and several other regional economies simply cannot meet the relatively tight rules from the European Union.

Additionally, such a supply chain can tap a variety of external investment resources and expertise from the expected upsurge in the offshore relocation of textiles and clothing production facilities from many developed countries after this year. Another stimulus is that textiles and clothing is one of the 11 priority sectors which have been selected for accelerated integration among Asean-member countries.

Competitive

India’s share of the global trade in textiles and clothing is expected to rise significantly from this year. But there are reasons to expect the larger Southeast Asian economies to be as competitive as India in the world market.

Firstly, labour productivity in textiles and in clothing were both indexed at 107 in India during 2000, according United Nations c

alculations. Those were much lower than in Indonesia (158 for textiles and 148 for clothing), Malaysia (209 and 151) and the Philippines (140 and 145). In addition, labour efficiency has risen at a slower pace in India than in these Southeast Asian countries.

Secondly, the pattern of specialisation is also much different. Textiles provide almost 50% of India’s global exports of textiles and clothing. By comparison, Southeast Asia specialises mostly in the labour-intensive production of garments which account for more than 90% of textiles and clothing earnings.

Thirdly, according to most observers, India has to make substantial investment and sustain ongoing policy reforms. These are needed to better meet international quality standards, to shorten turnaround and lead times, and to foster leaner manufacturing and integrated distribution.

Shuttleless weaving looms are up to three times more efficient than shuttle looms. In 2001, there were some 27,000 shuttleless cotton looms in Indonesia, 21,000 in Thailand and 10,000 in India.

China

China is currently the world’s largest clothing supplier and second largest textiles producer. The country has out-performed Southeast Asia and other producers to become the principal supplier of clothing in Japan (77% market share), Australia (70%) and South Africa (56%).

The competitive edge lies, firstly, in China’s higher labour productivity, with an index of 182 in textiles and 224 in clothing in 2000. This has offset higher wages, which are much larger in China’s garment sector than those, for example, in Bangladesh, Cambodia, India, Indonesia and Vietnam.

China had 145,000 shuttleless looms for cotton and filament weaving in 2001, and most of the equipment was less than 10 years old. Such an investment in state-of-the-art machinery amounted to $15.9 billion (613.6 billion baht) between 1994 and 2002.

Secondly, a high degree of vertical integration also contributes to lower garment assembly time, as much as 30% less in many Chinese firms. Also, good infrastructure permits fast transport and quick turnaround of containers and ships in ports in China and Hong Kong.

The net result: China can make almost any textiles and clothing product at any quality level and at a competitive price: for Wal-Mart and K-Mart, and for upscale Burberry, Giorgio Armani, Hugo Boss, Nike, Polo, etc. In fact, various surveys show that China is the ”supplier of choice” for major retail groups and brand-name marketers in the United States.

But despite those significant commercial advantages, it cannot be taken for granted that textiles and clothing exports from China will be steady, orderly and uninterrupted in the coming decade.

Firstly, power shortages and emerging bottlenecks in the transport and distribution of oil and coal in China have disrupted textiles and clothing production, in 2003 for example.

The second uncertainty is China’s status as a ”non-market economy” at the World Trade Organisation for 15 years (or to 2016). This means that anti-dumping duties on textiles and clothing products from China can be higher than those from other market-economy members of WTO.

Indeed, government subsidies are a contentious issue. According to the Organisation for Economic Cooperation and Development, or OECD, state enterprises in China account for 35.7% of textiles output, 6.7% of garment production, and 32.8% of manufactured textiles and clothing machinery. However, state enterprise losses are equivalent to 1.8%-3.7% of the outputs in those three sectors.

The third uncertainty relates to the textiles safeguard provision (effective until the end of 2008) and the transitional product-specific safeguard provision (valid until December 2013). These provisions form part of China’s WTO accession.

The United States, for example, invoked on Nov 19, 2003, the textiles safeguard provision to limit the growth of imports of knitted fabrics, brasseries and dressing gowns from China for 12 months. How often these two safeguards are used by WTO members is an open question.

To minimise uncertainties, China announced on Dec 27 a series of export duties on six major textiles and clothing categories (coats, skirts, knit and non-knit shirts, pajamas and underwear) from the beginning of 2005. Duties to be levied over the next three years range from two to six cents per item, with most items taxed at the low end of that dutiable range.

Challenge

In sum, the smaller and less developed economies in Southeast Asia suffer from an acute lack of human expertise, financial resources and infrastructure. Thus, quota-free trading in textiles and clothing is becoming another formidable challenge while these countries adjust to the new requirements and more intensified competition.

The larger regional countries, too, need to make difficult and costly adjustments and improvements in their textiles and clothing production and trade. They can match the competitive strength of India although this is not always the case with China.

However, over-dependence on one principal supplier does not make commercial sense. Thus, an integrated supply chain from the region can serve as a supply source alternative to or supplementing China. Strengthening such a chain in Southeast Asia can also empower the region’s economies in competing more effectively with other suppliers’ major markets worldwide.

Thitapha Wattanapruttipaisan heads the studies unit at the ASEAN Secretariat in Jakarta. The views she expresses in this article do not necessarily reflect the views of the secretariat. Mention of any firm or licensed process does not imply endorsement by or for it.