Report No. 39994 - AFR
VERTICAL AND REGIONAL INTEGRATION
TO PROMOTE AFRICAN TEXTILES AND CLOTHING EXPORTS
A CLOSE KNIT FAMILY?
July 2007
Poverty Reduction and Economic Management 1
Southern Africa
Africa region
______
Document of the World Bank
______
ACRONYMS AND ABBREVIATIONS
ACP / African Caribbean and PacificAGOA / African Growth and Opportunity Act
ATC / WTO Agreement on Textiles and Clothing
CMT / Cut, make and trim
COMESA / Common Market for Eastern and Southern Africa
EBA / Everything but Arms
EPZ / Export Processing Zone
FTAs / Free trade agreements
GATT / General Agreement on Tariffs and Trade
GSP / Generalized System of Preferences
LDCs / Least Developed Countries
MFA / Multifiber Arrangement
MMTZ / Malawi, Mozambique, Tanzania and Zambia
MUB / Manufacture-under-bond
ROOs / Rules of origin
SACU / Southern African Customs Union
SADC / Southern African Development Community
T&C / Textiles and clothing
TCF / Third-country fabric
TMB / Textiles Monitoring Body
WTO / World Trade Organization
Vice President / Obiageli K. Ezekwesili
Sector Manager / Emmanuel Akpa
Task Team Leaders / Ian John Douglas Gillson, Caglar Ozden
TABLE OF CONTENTS
Acknowledgements
Executive Summary
1. Introduction 1
2. Protection and preferences in the global market for textiles and clothing 3
2.1 The Agreement on Textiles and Clothing: quotas have gone but high tariffs remain 3
2.2 EU GSP and Everything but Arms 4
2.3 The EU ACP/Cotonou Agreement 5
2.4 US GSP and the African Growth and Opportunity Act 5
3. Trade patterns in textiles and clothing 7
3.1 China dominates in world exports of textiles and clothing 7
3.2 Textiles and clothing exports are important to some AGOA countries 9
3.3 Developed countries are the main markets for imports of textiles and clothing 9
3.3.1 The US market for textiles and clothing is growing strongly but the sources of imports are changing 10
3.3.2 The EU market for textiles and clothing is fragmented and rules of origin are a constraint 11
4. Apparel exports from Africa under AGOA – past, present and the future 13
5. Vertical and regional integration in African textiles and clothing trade 20
5.1 The rationale for vertical and regional integration 20
5.2 Intra-AGOA trade in cotton, yarn, fabric and clothing 21
5.2.1 Cotton 21
5.2.2 Yarn 22
5.2.3 Fabric 23
5.2.4 Clothing 24
5.3 Constraints to vertical and regional integration 25
5.3.1 Competitiveness and production capacity 25
5.3.2 Quality and service delivery 27
5.3.3 Lead times 28
5.3.4 Costs of production 29
5.3.5 Rules of origin 33
5.3.6 Other policy constraints 36
6. The textiles and clothing sector in selected African countries 38
6.1 South Africa 39
6.2 Mauritius 43
6.3 Madagascar 47
6.4 Lesotho 50
6.5 Kenya 54
6.6 Zambia 58
7. Conclusion 61
References 63
List of experts consulted 69
TABLES
Table 1: African Growth and Opportunity Act eligible countries 6
Table 2: Potential regional supply chain for T&C for African countries 25
Table 3: Wage costs in the T&C sector among selected African countries 30
Table 4: Electricity costs among selected countries 31
Table 5: Freight costs among selected countries 32
Table 6: Water and telecommunications costs among selected countries 33
Table 7: Number of workers and firms by product in Lesotho: 2004-2005 52
Table 8: The impact of AGOA on clothing exports from Kenya’s EPZ 57
Table 9: Phase-out of quotas under the ATC 74
FIGURES
Figure 1: Apparel exports to the US ($ millions) 13
Figure 2: Relative prices of apparel exports (weighted by export value) 15
Figure 3: Relative prices of exports (weighted by US import value) 16
Figure 4: Market shares of apparel exporters to the US 16
Figure 5: Average relative prices 17
Figure 6: Market shares 18
Figure 7: Market share of the China region in export categories 18
Figure 8: Market share of quota countries in export categories 19
Figure 9: Main intra- and extra-regional flows of AGOA trade in cotton 21
Figure 10: Main intra- and extra-regional flows of AGOA trade in yarn 22
Figure 11: Main intra- and extra-regional flows of AGOA trade in fabric 23
Figure 12: Main intra- and extra-regional flows of AGOA trade in clothing 24
Annexes
Annex 1: The WTO Agreement on Textiles and Clothing 73
Annex 2: MFN tariffs on international trade in textiles 75
Annex 3: MFN tariffs on international trade in clothing 76
Annex 4: The EU’s GSP 77
Annex 5: EU tariffs on textiles and clothing products 2005 79
Annex 6: List of Least Developed Countries 80
Annex 7: EU trade arrangements with the ACP countries 81
Annex 8: US tariffs on textiles and clothing products 2005 83
Annex 9: The African Growth and Opportunity Act 84
Annex 10: Trade data availability 85
Annex 11: Major exporters of textiles 1994-2005 (excluding intra-EU trade) 87
Annex 12: AGOA exports of textiles 1994-2005 88
Annex 13: World exports of clothing 1994-2005 (excluding intra-EU trade) 89
Annex 14: AGOA exports of clothing 1994-2005 90
Annex 15: The importance of AGOA exports of T&C, 2004 91
Annex 16: World imports of textiles 1994-2005 (excluding intra-EU trade) 92
Annex 17: AGOA imports of textiles 1994-2005 93
Annex 18: World imports of clothing 1994-2005 (excluding intra-EU trade) 94
Annex 19: AGOA imports of clothing 1994-2005 95
Annex 20: US imports of textiles 1994-2005 96
Annex 21: AGOA exports of textiles to US 1994-2005 97
Annex 22: US imports of clothing 1994-2005 98
Annex 23: AGOA exports of clothing to US 1994-2005 99
Annex 24: EU imports of textiles 1994-2005 (excluding intra-EU trade) 100
Annex 25: AGOA exports of textiles to EU 1994-2005 101
Annex 26: EU imports of clothing 1994-2005 (excluding intra-EU trade) 102
Annex 27: AGOA exports of clothing to EU 1994-2005 103
Annex 28: Seed cotton production in AGOA countries 1994-2005 104
Annex 29: AGOA cotton lint production and exports 2003 105
Annex 30: Intra AGOA Cotton Trade 2003 (US$ 1000s) 106
Annex 31: The importance of AGOA regional trade in cotton, yarn, fabric and clothing (2003) 108
Annex 32: Intra AGOA Yarn Trade 2003 (US$ 1000s) 109
Annex 33: Intra AGOA Fabric Trade 2003 (US$ 1000s) 111
Annex 34: Intra AGOA Clothing Trade 2003 (US$ 1000s) 113
Annex 35: Costs of doing business 115
Annex 36: Seed cotton yields in Southern and Eastern Africa 1994-2005 116
Annex 37: Cotton lint exports from Southern and Eastern Africa 1994-2004 117
Annex 38: Cotton lint imports for Southern and Eastern Africa 1994-2004 118
ACKNOWLEDGMENTS
This report presents the results of research undertaken by the World Bank and close dialogue with the private sector and researchers in six African countries: Kenya, Lesotho, Madagascar, Mauritius, South Africa and Zambia.
The report was prepared by a team consisting of Ian Gillson (Task Team Leader, AFTP1), Caglar Ozden (Task Team Leader, DECRG) and Fahrettin Yagci (AFTP1). The team received strong support from Robert Keyfitz (AFTP1), Marie Sheppard (AFTPS), Mombert Hoppe (PRMTR), Lolette Kritzinger-van Niekerk (AFCRI), Shirley Faragher (AFCS1), Beatrice Abade (AFCE2) and Paula Lamptey (AFCS1). Matilde Bordon (AFTPS) provided outstanding advice for the Kenya component of the work. The peer reviewers were Sonia Plaza (AFCRI) and Paul Brenton (PRMTR).
The report was prepared under the supervision of Emmanuel Akpa, Sector Manager for AFTP1. He offered conceptual guidance, provided critical analytical advice and ensured quality control and management support. Assistance with editing, dissemination and budget management was provided by Rose Kumsinda (AFTP1).
On the private sector side the team would like to thank all of the textile and clothing firms we visited on field interviews in Kenya, Mauritius, South Africa and Zambia as well as business associations and local experts who provided important insights for this study. An exhaustive list of those consulted is included at the end of the report. The field interviews were facilitated by Joop de Voest who kindly provided details of firms in the region to approach.
iv
EXECUTIVE SUMMARY
Introduction
1. Export diversification into higher value-added products and away from primary commodities with their associated price risks (volatility and long-term decline) remains a major trade policy objective for many African countries. Textiles and clothing (T&C) are sectors that provided an opportunity for a few African countries for export diversification. Clothing production is labor intensive, involving relatively low start-up costs and easily transferable technology. Labor requirements can be met with low and semi-skilled workers, especially women. Consequently, countries with competitive labor costs, especially in South and East Asia, have been able to capture significant shares of the world market. Despite the potential benefits and their various sources of comparative advantage, few African countries, until recently, have managed to establish a meaningful presence in the world clothing market. Consequently, despite being a net exporter of cotton Africa remains a net importer of textiles and clothing.
2. Nevertheless, clothing exports from sub-Saharan Africa have expanded rapidly during the past decade mainly due to the unilateral market access preferences granted by the US and the EU. Since most other developing countries faced restrictive access to the European and US markets, due to quotas and high tariffs, the quota-free and duty-free access granted to African exporters of clothing led to rapid export growth. A main feature of these preferences, especially the Africa Growth and Opportunity Act (AGOA) of the US, has been the permission to use imports of third-country yarns and fabrics in the production of exports while maintaining eligibility for preferences. This allows cheap fabrics, often sourced from Asia, to be processed in Africa and exported to the US. Over 85% of the clothing exports currently eligible for AGOA preferences in the US market are made from third-country fabric. As a result, apparel exports from eligible AGOA countries to the US have increased threefold.
3. For the AGOA countries, the share of T&C exports in their total exports is rather low, at 0.5% and 2.8%, respectively. This is mainly due to the large share of raw materials, minerals and oil in the exports from the region. But for some individual countries, T&C form an important share of manufactured exports. These are Lesotho (accounting for 97% of total exports), followed by Mauritius (51%), Madagascar (41%), Cape Verde (39%), Swaziland (25%) and Kenya (12%).
4. The future of clothing production for export in sub-Saharan Africa is rather uncertain as it faces two major challenges:
· increased competition from large and competitive producers such as China, Bangladesh, India, and Pakistan following the phase-out of the quotas after the expiration of the WTO Agreement on Textiles and Clothing (ATC); and,
· expiration of the third-country fabric derogation under AGOA scheduled to occur in 2013.
5. After the expiration of the ATC in 2005, AGOA countries have seen their recent growth of exports turn into a decline. Many factories have closed, resulting in the loss of tens of thousands of jobs in Kenya, Lesotho, Madagascar, Mauritius, Namibia, South Africa and Swaziland. Producers in sub-Saharan Africa can no longer depend on displaced production from quota-bound countries to boost their exports. Instead, they need to be more cost competitive, deliver their products to market on-time, and, be prepared to meet higher quality and service requirements. The expiration of the third-country fabric derogation under AGOA will generate a further significant decline for the African clothing industry unless the region is able to supply all of the various yarns and fabrics that US buyers demand.
6. This study explores the options the region has to overcome these two challenges. In particular, it assesses the potential for and identifies challenges to the regional and vertical integration in the sector. Timing is crucial since both the EU and the US have recently imposed limited trade restrictions on China (until 2008) to protect certain domestic T&C industries. These safeguards might provide a brief opportunity for sub-Saharan African producers to integrate their T&C sector both domestically and regionally.
7. In terms of policy recommendations, in addition to sector-specific policies, the report suggests that African countries should implement economy-wide reforms for long-term competitiveness that would benefit all sectors. These would include i) addressing infrastructure and regulatory weaknesses that limit access to and raise the cost of backbone services: electricity, water, transport, telecommunications, ports and finance; ii) reviewing trade, tax and labor market policies that limit the incentives to invest in productive activities including external tariffs and rules of origin in regional trade agreements that limit access to the most appropriate and lowest cost inputs; and, iii) developing pro-active export and investment promotion policies to overcome informational barriers that limit access to foreign markets and investors.
8. For developed countries, the EU should implement non-restrictive rules of origin that support exports of clothing from Africa under the available preference schemes by allowing efficient sourcing of inputs. The US should broaden its coverage of textiles under AGOA (for all beneficiaries not just those classified as lesser developed) to encourage investment in African spinning and weaving. And all industrialized countries should provide aid for trade to support countries that implement well-defined competitiveness reform programs that address the key infrastructure and policy constraints that limit exports and investment in goods and services.
Protection and preferences in the global market for textiles and clothing
With the removal of the ATC, quotas are gone but high tariffs remain
9. On January 1 2005, the ATC expired. The quotas that once shaped the global apparel trade were removed and tariffs were left as the only trade restrictions in place. The ATC and its predecessor, the Multi-Fiber Arrangement (MFA), had governed world trade in T&C by providing a framework for bilateral and unilateral restrictions and limiting imports into developed-country markets whose domestic industries were facing decline. Preferential access to protected markets favored exports from some developing countries (e.g. Kenya) while quotas restricted exports from others (e.g. India and China).
10. A key impact of the ATC is that restrictions on imports from the more competitive East and South Asian manufacturers (such as China, Japan, South Korea and Hong Kong) led to a displacement of clothing production to less developed but less competitive locations such as Mexico, Central America, Bangladesh, Sri Lanka and Mauritius. The initial driving force behind this process was large retailers such as Wal-Mart and brands such as Nike who began to outsource production to low-wage countries. For example, in the 1990s Korean and Taiwanese producers expanded their operations to the Caribbean and Sub-Saharan Africa.