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Textiles and Clothing Summary Papers Links

Textiles and Clothing Summary

Textiles and clothing products together constitute one of the most contentious issues at the WTO. While many developing countries have made textiles production a major part of economic output, developed countries have put in place complex systems of quotas and tariffs to protect their domestic industries from international competition. At first blush, it seems the elimination of textile quotas and tariffs would benefit developing countries. But China's accession into the WTO has left many developing countries wondering what will happen to their industries in the future.

Agreement on Textiles and Clothing

For decades, international trade in textiles was subject to discriminatory quantitative restrictions put in place to protect domestic textile industries, particularly in the US, EU, Canada, and Norway. Under the WTO, these quotas fell under the auspices of the Multi-Fibre Arrangement (MFA).[1] While some nations with strong political ties to developed countries benefited from preference agreements that raised their quota levels or eliminated them, many developing countries suffered from severely restricted market access. During the Uruguay Round WTO Members signed the Agreement on Textiles and Clothing (ATC) [2], effective in 1995, that established multilateral rules and subjected the textiles trade to the basic WTO principles of non-discrimination and national treatment. The agreement mandates that WTO members implement the ATC over a period of 10 years, from January 1, 1995 to January 1, 2005.

The Agreement on Textiles and Clothing requires the progressive elimination of all quantitative restrictions according to four stages. Members were required to bring no less than 16% of the products in question into conformity with multilateral trade rules, followed by an additional 17% by 1998 and another 18% by 2002. At this point, 51% of products will have had their quantitative restrictions eliminated. By 2005, members must bring the remaining 49% of their textiles trade policy into full conformity with the Agreement, at which point the textiles sector will be fully integrated into the multilateral trading system. While the first three stages of implementation have been completed, in the last stage, almost half of the process must still take place in just three years.[3] Developing countries, particularly members of the International Textiles and Clothing Bureau, have criticized the European Union and other developed countries for designing the implementation period so that most of the liberalization of these key sectors if left for the very end. Developing countries are also concerned that the developed countries are only meeting the minimum requirements of the ATC, and that they may use other protectionist measures, for example, subsidizing domestic products or raising tariffs.[4]

The Impact of ATC on Producers

While developing countries should be enthusiastic for the implementation of the ATC, India, Egypt, Pakistan, and some Latin American countries are concerned that the removal of quotas and the impact of China in the WTO will actually harm their textile industries. First, countries that have preferential trade agreements with developed countries will lose the edge they had when they were granted higher quotas than their competitors. Once quotas are removed completely, market share will go to countries with the cheapest labor and the cheapest raw materials.[5] Second, since China has arguably the cheapest labor and one of the strongest textile industries in the world, developing countries are concerned that their products will not be able to compete in the global marketplace if China can export without limit. Even with quotas, Chinese textiles have ballooned on the US market, taking 30-40% of the market share in areas like brassieres and dressing gowns.[6]

The main hope for textile producing countries is that the US, and other developed nations, will take advantage of an exception in the ATC that allows for 'safeguard' tariffs to be placed on Chinese textile goods until 2008 as a mitigating measure for market disruptions. China agreed to the exception as a way to assuage fears that its accession would harm WTO members. The US has been the first country to announce its intention to place tariffs on textiles from China in 2004, and again in 2005. For developing countries, this exception will provide a three-year window to take advantage of the quota-free trading environment and win precious market share in the US and EU before China is able to fully compete.[7]

Liberalization is expected to be beneficial to consumers who will be able to pay less for textile goods as producers drop the premium they charge to make up for the costs of quotas. However, retailers are doubtful that the drop in prices will be significant enough to increase demand. As large corporations like Wal-Mart create competition by selling at lower prices, retailers will also cut prices but will not necessarily sell more, resulting in deflation in the clothing industries of many countries.[8]

Cotton

In a decision heralded by developing nations, the WTO ruled against the US in a case initiated by Brazil challenging US cotton subsidies. According to the WTO decision, the US will have to reduce cotton subsidies or face steep penalties. While the US is expected to appeal, it is unlikely the WTO will change its decision. This ruling has the potential to break the deadlock in Doha round agriculture negotiations by requiring the US, the EU, and Japan to dismantle enormous agriculture subsidy programs as demanded by developing countries.[9]

Agriculture subsidies have become an even more contentious issue as developing countries amass data on the extent to which their economic growth and development is stunted by subsidy programs. In terms of cotton, West African, Latin American, and Asian countries argue that subsidies stimulate excess production, depress world prices, and decimate the value of cotton as a cash crop. In particular, Brazil claims that due to US cotton subsidies, its economy lost out on over $600 million in cotton exports.[10] More generally, the World Bank has estimated that 140 million people could be lifted out of poverty by 2015 if WTO members agree to end subsidies and lower barriers to agricultural trade. The WTO's recent decision against US agriculture subsidies signals an important shift in WTO rules. Subsidies that were previously considered controversial but allowable may now be considered illegal.[11]

Doha Round

Although talks have not begun on further liberalization of textiles, the US has tabled a proposal for reducing tariffs multilaterally, and bringing them within a narrow common range to eliminate extremely high tariffs. Tensions on other issues like agriculture, TRIPs, and services have kept the focus of the Doha round away from textiles, but with the ATC implementation about to be completed and the emergence of safeguard tariffs on Chinese textile products, the issue will likely come into the spotlight after January 2005.[12]

Last updated May 2004.

[1] Kheir-El-Din, Hanaa, "Implementing the Agreement on Textiles and Clothing," in English, Philip, Bernard M. Hoekman, and Aaditya Matto (Eds.), Development, Trade and the WTO, Geneva: World Trade Organization, 2002, p. 186. [online: web] URL: http://publications.worldbank.org/catalog/content-download?revision_id=1526169.
[2] See http://www.wto.org/english/tratop_e/texti_e/texintro_e.htm for an overview.
[3] Kheir-El-Din, p. 187.
[4] Kheir-El-Din, p. 191.
[5] http://www.icac.org/icac/meetings/trade_conf_2003/leonard.pdf The Impact of the WTO Talks on Textile Trade, James C. Leonard, Deputy Assistance Secretary for Textiles, US Dept. of Commerce.
[6] Shih, Toh Han. "US may raise 'safeguards' next year." South China Morning Post. March 23, 2004. Woo, Eva. "US threats extend rips in textile industry." South China Morning Post, Business. March 18, 2004.
[7] "Is the wakening giant a monster?" The Economist, London: The Economist Newspaper Ltd., 13 February 2003 [online: web] URL: http://www.economist.com/displayStory.cfm?Story_ID=1576567.
[8] Carr, Nancy. "Retailers brace for tighter margins as clothing-impot quotas set to end." The Gazette, Montreal. March 16, 2004.
[9] "WTO Rules Against US on Cotton Subsidies," New York Times, April 27, 2004.
[10] Unpicking Cotton Subsidies. The Economist, April 30th, 2004.
[11] Unpicking Cotton Subsidies. The Economist, April 30th, 2004.
[12] See Kheir-El-Din, p. 194, and also Gresser, Edward, "Toughest on the Poor: Tariffs, Taxes and the Single Mom," Progressive Policy Institute, 10 September 2002 [online: web] URL: http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=250828.