NEW YORK — The end of quotas on textiles and apparel in 2005 is expected to be a boon for apparel manufacturing industries in only a handful of the 146 World Trade Organization nations, according to industry and government experts.
This story first appeared in the November 25, 2003 issue of WWD. Subscribe Today.
Speakers at a meeting of major garment importers last week kept turning to the question of which countries are poised to gain market share when the quotas end. Three countries were mentioned by all: China, India and Pakistan, while 10 made the maybe list: Bangladesh, Thailand, Indonesia, Guatemala, Nicaragua, Costa Rica, El Salvador and Honduras, as well as non-WTO members Vietnam and Cambodia. The inclusion of the Central American countries was conditioned on the successful negotiation of a Central American Free Trade Agreement.
Members of the U.S. Association of Importers of Textiles & Apparel also argued that American retailers and consumers would benefit through sharply lower prices. The joint annual meeting of the USA-ITA and American Import Shippers Association was held at Manhattan’s Chelsea Piers on Nov. 18.
“When quotas are phased out in 2005, we can expect China’s prices to drop by 40 percent to 57 percent,” said Peter McGrath, president of purchasing at Plano, Texas-based J.C. Penney Co. Inc., who also serves as chairman of the USA-ITA.
The reason for the expected price decline is that in China, and most other major apparel exporters today, quotas are essentially traded as commodities. McGrath estimated that by the time they went through wholesalers’ and retailers’ markups, quota costs on Chinese goods represented $1 billion outlay for U.S. consumers last year.
According to Commerce Department data, the U.S. imported $5.59 billion worth of Chinese apparel last year. Normal markups would multiply the value of those goods at retail by about four times.
Quotas have already been lifted on some categories of merchandise under the 10-year phaseout schedule agreed upon by WTO members. As reported, last week the Bush administration agreed to impose temporary safeguard quotas on imports of Chinese bras, robes and knit fabric. Quotas on those categories were lifted at the beginning of 2002.
Julia Hughes, vice president of international trade and government relations for the USA-ITA, noted that the average price of imported bras over the year ended Aug. 31 dropped by $10 per dozen, to about $28 a dozen.
“The elimination of quota charges from China will have the same effect as price deflation,” she said.
Sources have noted that two factors will serve to drive prices down after quotas are lifted. While the elimination of quota charges will have an obvious direct effect, increased competition will likely boost supply, which would also tend to drive prices down.
Other than China, Hughes’ candidates for retaining or growing market share in 2005 were Pakistan, India, Bangladesh, Vietnam and possibly five Central American nations if CAFTA goes through.
The State Department has also been studying this question for well over a year. Deborah Malac, deputy director in the office of agriculture, biotechnology and textile trade affairs at State, said, “Our list of winners is even shorter.”
It encompassed China, India, Bangladesh and Pakistan.
While the study is said to be complete, Malac said it has not yet been released because it is still going through security-clearance procedures. She said when the quotas are lifted “people are going to have to look for who their most efficient suppliers are and China certainly wins.”
Apparel importers have spread their sourcing networks widely as a result of the quota system, she noted. Commerce Department data shows the U.S. having imported textiles and apparel from almost 90 nations during the past year.
When the quota system is removed, she said, “from a logistical business standpoint, there is no reason to do that.”
Malac noted that the nations of sub-Saharan Africa, which have gained apparel business recently because of the African Growth & Opportunity Act, will particularly face difficulties in 2005.
Industry sources have said that AGOA production is particularly vulnerable because the region has minimal textile infrastructure. Currently, many of the garments are made of fabrics shipped from Asia — a system that is used in the poorest countries in the region because those garments are then allowed to enter the U.S. free of duties and quotas. Sources have agreed there will be little reason to keep up that Asia-Africa-U.S. trade pattern in 2005.
“Most of these governments have not a clue of what they’re going to do,” Malac said. “They just don’t react that quickly. It’s going to be an interesting couple of years from 2005 to 2008, 2009.”
Chiedu Osakwe, director of the WTO’s textiles division, also said Africa will likely be hard hit when quotas are lifted.
“There will be a shock for those countries on the first of January 2005,” he said. “There is a major, major cost adjustment for many of the exporting countries.”
He predicted that China, Cambodia, India, Pakistan, Vietnam, Thailand and Indonesia would be well positioned to compete after quotas are lifted.
But he acknowledged that many other countries are heavily dependent on textile and apparel exports to generate foreign currency earnings. He noted that 83 percent of Lesotho’s exports are textiles and apparel, as are 64 percent of El Salvador’s.
He noted that China is far less dependent on apparel and textile exports than many other countries. They represented 19 percent of its exports last year, and 25 percent of India’s. He said nations that are not competitive in 2005 will need to find another source of foreign earnings.
“Textiles is one sector in a national economy,” he said. “Countries will need to change their trade priorities. There will be no other way of doing business. That is how the market works.”
He said the WTO believes that, overall, the end of quotas will be good for the global economy. But, he admitted, “there will be losers in the long term.”
Another speaker who raised concerns about Africa was Brian McNamara, principal investment officer on the textile sector team for the International Finance Corp., a unit of the World Bank that focuses on loaning money to small businesses in developing nations.
“Africa is clearly a very important trade market for IFC,” he said. “Regrettably, in textiles, I think there is a general consensus that much of the progress and development of the last couple of years is at risk.”
Carlos Arias, executive vice president of the Guatemala City-based garment maker Koramsa, said he believes many developing world manufacturers are only now coming to the realization that 2005 might be a tough year for them.
“There is increasing awareness,” he said. “We fear that some companies are recognizing this too late.”
But he argued that Central America’s proximity to the U.S., which allows goods made there to reach American retailers much faster than Asian goods, should help maintain a niche for local producers.
“We can be a very good balance to China, a very good balance to Asia,” he said. “There is a tremendous opportunity to reduce markdowns by having the right product at the right time in the right color and the right wash.”
That, he said, is easier to do if one can order the products later because of faster turnaround.
The rapid growth of Chinese exports in many sectors have made it a political target in recent months, with its rigid exchange rate, which some have claimed amounts to an unfair trade boost, attracting a lot of attention. But Penney’s McGrath emphasized that people should not underestimate the competitive intensity of Chinese manufacturers.
He said the idea that Chinese exports are growing quickly only because of low prices is a “big misconception,” and said that some other countries have lower wages. He said that importers have also come to realize that China has “a workforce that sets the standard for productivity.”
That, he said, sets the stage for a brutal trade environment in 2005.
“Prices will tumble,” he said. “It’s essentially going to be the law of the jungle. Only the strongest will survive.”