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WASHINGTON — U.S. officials are sounding words of caution about the phaseout of apparel and textile quotas.
This story first appeared in the November 27, 2002 issue of WWD. Subscribe Today.
The Bush administration has begun “a dialogue” with 18 countries it has identified as being “overly dependent” on textile and apparel exports, with a goal of encouraging them to diversify into other industries as 2005 approaches.
At the same time, U.S. Trade Representative Robert Zoellick has asked the International Trade Commission to investigate the longterm effect the elimination of apparel and textile quotas will have on foreign suppliers.
In some aspects, the U.S. policy doesn’t square with that of some developing countries, however, since some of them don’t want to wait until 2005 and have been pressing for immediate quota elimination.
In the current round of World Trade Organization talks, a group of developing countries called for speeding up the phaseout of quotas as embodied in the Uruguay Round of GATT, which established a 10-year phaseout of quotas on textiles and apparel set to expire on Dec. 31, 2004.
WTO members were supposed to make a recommendation on whether to increase apparel and textile quota growth rates to the WTO General Council in July as part of the ongoing negotiations, but officials missed the deadline. The status of the issue is uncertain.
“I think the reason they are doing this is they feel if they can nail down market share now before quotas go away, it will help after quotas go away,” said a U.S. official, who spoke on condition of anonymity. “Whether or not that is true is highly problematical because they are not making wide-bodied jets, they are sewing shirts, and a contract can move quite easily.”
U.S. officials have said publicly they are concerned a dramatic consolidation in apparel and textile sourcing in 2005 will hurt many countries, which have tied economic development to that type of low-wage, low-skilled production.
Zoellick, speaking recently on the benefits of a sub-Saharan African trade bill passed in 2000, acknowledged the administration’s concerns about the impact on developing countries. “I have a worry about apparel [production],” he said earlier this month at a business forum comprised of U.S. companies and African officials and executives. The administration is particularly concerned about trading partners tied to the U.S. through preferential trade agreements, as well as bilateral and regional free-trade pacts.
China represents the biggest threat to developing countries, including the sub-Saharan African nations that are eligible for apparel and textile benefits under the African Growth & Opportunity Act. China has dominated textile and apparel imports for the past several months. Imports from China rose 144 percent in the month of August and increased 101.6 percent for the first eight months of the year, according to the Commerce Department. Eight categories where quotas were lifted at the beginning of the year boosted imports.
Zoellick questioned whether sub-Saharan African nations could remain competitive with China. Once quotas are removed, “Africa will face zero tariffs [through the apparel and textile breaks in the trade bill] versus the 10 to 12 percent China faces,” said Zoellick.
He asked rhetorically, “Will that be enough of an advantage for Africa to compete with China, which will be the number-one apparel supplier?”
Zoellick raised the question in the context of urging African nations to lower tariffs on agricultural imports — a move he claimed will strengthen competitiveness.
U.S. trade officials aren’t limiting their message of diversification to African nations, however. The Bush administration’s interagency task force, known as the Textile Working Group, which was set up to aid the flagging domestic textile industry, has held discussions with nine of 18 targeted countries on diversification.
In its first report to Congress in September, the task force said the least-developed countries “will face a serious downturn in their textile and apparel sectors, or possibly their economy as a whole, when textiles quotas are eliminated.”
“These countries are highly overdependent, which means textiles and apparel account for a very high percentage of their export earnings or account for a certain percentage of GDP,” said the U.S. official, who refused to identify the 18 countries.
He insisted the task force is merely holding discussions with the countries and not launching new initiatives. U.S. embassies are charged with the task of evaluating economies and industries around the world.
The multiagency task force is currently looking at successful transition models to help other countries, particularly less developed countries, or LDC. Officials said they are reviewing cases in Hong Kong and Korea, which are developed economies that have faced the transition from low-wage industries to other industries. They are also exploring ways in which U.S. aid and development agencies can provide assistance.
Citing one example of diversification, officials said in the report they encouraged Turkey in recent bilateral economic consultations to look at other product sectors beyond apparel, and also informed the country that the U.S. could not consider the inclusion of textiles in a Qualified Industrial Zone — designated manufacturing areas which receive tariff or quota breaks.
The State Department, which chairs this particular subgroup on “diversification,” has also conducted interviews with U.S. textile and apparel companies to determine what international trade patterns will be like, post-2004.
“It is clear that sourcing decisions by American textile and apparel importers and retailers have been and are currently driven to a large degree by quota restraints,” state officials said in the report. U.S. importers currently purchase goods from as many as 40 to 60 countries, but will quickly cut that sourcing in half by late 2005 or early 2006, according to the report.
“The number could drop to one-quarter to one-third the present number of countries by 2010,” the report said. “This information is being used to inform countries of the seriousness and urgency of the diversification issue.”
The U.S. official said while he doesn’t think China will leach all of the trade out of the market, he does recognize the “awesome strength China has as a competitor.”
Some of the major suppliers to the U.S., such as Pakistan, however, have been preparing for the quota phaseout for the past eight years and welcome it, despite the potential loss of business.
“Quotas were a distortion of international free trade,” said a Pakistani government official, who spoke on condition of anonymity. “If the most competitive country [such as China] takes away most of the market, that is exactly how trade works, and we have prepared for that.”
He said the Pakistani textile and apparel industries have a “vision 2005,” in which they invested significantly in certain segments, such as fabric finishing and upgrading worker’s skills.
He noted Pakistani officials and executives are more concerned about the trade breaks some countries enjoy through preferential trade agreements and bilateral pacts with the U.S.
“The U.S. has very high import tariffs, particularly on apparel, and when some exporters have tariff-free entry, that puts us at a competitive disadvantage,” he said.
Textile and apparel import trade groups and lobbyists don’t deny China’s power, but they disagree on how sourcing patterns will change in 2005. Industry groups will have a chance to weigh in on the impact of a quota-free world in January at the ITC hearing.
“Here’s what other countries don’t have in relation to China,” said Charles Bremer, vice president of international trade at the American Textile Manufacturers Institute. “They don’t have the world’s largest cotton crop, world’s largest textile industry, world’s largest man-made fiber industry and an unlimited supply of low-priced labor.” Bremer, citing China’s clear dominance in the first half of this year, said he will tell the ITC that China will control apparel and textile trade.
“The only way countries will have continued access to our market in 2005 is with duty-free entry [through trade pacts],” said Bremer. “If you do not have duty-free entry into the U.S. market after 2005, you are out of business, unless you are China, India or Pakistan.” He claimed countries like the Philippines, Malaysia, Indonesia and Bangladesh will completely lose their apparel and textile sectors.
Stephen Lamar, senior vice president at the American Apparel & Footwear Association, said it is too early to predict trading patterns in 2005. He conceded there will be consolidation in sourcing, but he noted manufacturers will not place all of their production in one or two countries.
“China will be a big supplier, and it may be number one,” said Lamar. “But people want a diversity of sources, and I think the West Coast port strike reminded people that having everything in Asia is not a good idea.”
Lamar said social responsibility, quality, proximity and timely deliveries also factor into the equation. “Looking at it through just the prism of quotas gives you an inaccurate picture,” he said. He added that in some countries that people might “write off” now could find a competitive advantage in niche markets.
Julia Hughes, vice president of international trade at the U.S. Association of Importers of Textiles & Apparel, said the “simplistic answer” is to claim China will get all of the business, but she claimed the picture is much more complex.
“On an annual basis, $69 billion of [apparel and textile] imports comes into the U.S., and there will be a lot of changes, but there will also be plenty of business to go around,” she claimed. “I don’t think we’ll see a concentration in just a few countries because there are so many different reasons why companies source overseas.”
She added those reasons might include special benefits in trade agreements, proximity and price. Hughes said there are currently 23 countries that supply more than 1 percent of the U.S. import market. Mexico, currently the number-one supplier, has the largest annual market share at about 12 percent.
“It’s really spread out,” she said. “That’s why even if China increases substantially, there will still be plenty of competition.” She conceded some of the smaller countries among the 140 that currently ship apparel and textiles to the U.S. won’t be able to maintain their competitiveness.
“Some countries are worried they will lose business because of quota [removal],” said Hughes. “That may be true for some without substantial industries, but those countries with strong relationships with U.S. companies won’t lose business. They will just have to sell themselves a little differently.”