The impact on other countries

Sixth of a series

Editor’s Note: The following is a Deloitte Research study that looks at the changing landscape of the worldwide garment industry in the face of the lifting of trade restrictions in January this year and the potential reverberation of such action on global trade. The report was written by Ira Kalish, the Global Director of Consumer Business at Deloitte Research. The Saipan Tribune is re-printing the study in a series of articles, with permission from Deloitte Touche Tohmatsu.

While China will undoubtedly gain from the end of quotas, the impact on other countries will vary, depending on their mix of competitive advantages and also depending on the actions of importing governments.

India

When the WTO did its analysis of the impact of the ATC on export volumes, India was the only country other than China that figured prominently as a beneficiary of the ending of quotas. Specifically, the WTO predicted that India’s share of U.S. apparel imports would increase from 4 percent in 2002 to 15 percent after quotas are eliminated. This analysis was based on the fact that India has a relatively efficient industry with low wages yet onerous quotas. The IMF estimates that India’s apparel quotas were equivalent to an export tax of 34percent, similar to their estimate for China (33percent). Thus ending quotas should allow export prices to come down considerably.

India’s apparel and textile industry is already quite large. Exports were roughly $12 billion in 2002 and producers are responsible for millions of employees. The industry is more vertically integrated than most given that India is the world’s third largest producer of cotton. Although productivity is lower than in China, wages are low enough that, if China’s costs should rise precipitously, India could become a far more attractive place to produce. India certainly benefits from the great availability of cheap, skilled, English speaking managers. Finally, India has the advantage of being a good place to protect intellectual property given its strong courts and cultural respect for the rule of law.

On the other hand, India has some serious disadvantages it must overcome:

• First, the apparel and textile industry has had a much smaller volume of investment than China. It is, therefore, less technologically sophisticated and its workers are thus less efficient.

• Second, the transport and utility infrastructure is poor and the level of investment insufficient. Such investment accounts for 9 percent of China’s GDP but only 3 percent of India’s. Moreover, India has far fewer highways than China and much less port capacity (see Figure 8). The result is that the transportation lead time for apparel produced in India is much greater than in China.

• Third, India has onerous labor laws. It can be difficult to dismiss workers. Therefore, some producers are reluctant to hire new workers unless they perceive a permanent rather than temporary increase in the demand for their output.

• Fourth, India’s government has encouraged small-scale industry (SSI) as part of a larger policy to maintain a fragmented rather than concentrated industrial system. The goal is to develop many small, family owned enterprises. This policy has entailed trade barriers to imported raw materials and capital equipment. The result has been to discourage entrepreneurs from investing in large-scale, capital-intensive production which might benefit from the ending of quotas. On the other hand, tariffs have lately been reduced. The current government is cognizant of the requirements of a world-class industry. However, it faces political obstacles to enacting needed reforms.

Bangladesh

As mentioned earlier, Bangladesh is the most extreme example of a country where the apparel industry came about purely due to quotas. As such, it stands to suffer a dramatic loss in employment following the end of quotas. The WTO estimates that, all other things being equal, the removal of quotas will lead to an 18 percent decline in Bangladesh’s apparel exports within three years. The problem is that the country has a number of impediments to competitiveness. These include an unreliable and expensive transportation, telecommunications, and electricity infrastructure; poor ports; widespread corruption; and an uninviting investment climate. If these supply-side problems were to be addressed, the country might salvage some of the anticipated loss.

Others

Pakistan

Pakistan has also benefited from the quota system. Yet unlike Bangladesh, it is perceived as a strong player. This is due, in part, to a large cotton producing industry which enables a degree of vertical integration. Today, Pakistani producers are optimistic that the ATC will do more good than harm. Consequently, Pakistan’s exports of apparel and textile products to the U.S. rose 12.5 percent in 2004.

Mexico, Central America, and the Caribbean

Mexico and its neighbors have the advantage of being adjacent to the U.S., the world’s largest apparel purchaser. There are two reasons why this is important. First, the cost of transporting apparel to the U.S. is substantially lower than in the case of China (see Figure 9). This fact partially offsets the labor cost advantage of China. Second, apparel can be transported to the U.S. much more quickly than sea-based goods sent from China. This is important for fashion oriented retailers seeking a quick and frequent turnaround of merchandise.

Mexico also has the advantage of being a member of NAFTA (North American Free Trade Area!fi Free trade with the U.S. means that, unlike China, Mexico is relatively immune to new forms of protection. The same could eventually be true of Central America if CAFTA (Central America Free Trade Area) is passed by the U.S. Congress.

Central and Eastern Europe, North Africa

These countries benefit from close geographic proximity to the EU. That fact should partly offset the gains for China. Also, several Central European countries have recently joined the EU and thus have completely free access to the European market. This should stimulate some investment in the apparel and textile manufacturing sector in these countries. Moreover, now that the EU has committed to membership negotiations with Turkey, there could be greater investor confidence there as well.