The End of Enchainment

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The End of Enchainment:

Will the Removal of Textile and Clothing Quotas

Bring Us Enchantment?

A Paper for a Seminar on

The WTO and the Doha Development Agenda

A PREM/WBI Training Course

The World Bank, Washington, D.C.

April 25–26, 2005

by

Dean Spinanger

Kiel Institute for World Economics

Duesternbrooker Weg 120

24105 Kiel, Germany

Tel/Fax: +49-431-8814 207/500

E-mail:

The author would like to express his appreciation to numerous unnamed individuals for their valuable and productive comments made during the procreation of this paper. He of course exonerates all of them, as well as well as the Kiel Institute for World Economics for any statements he has made that run counter to their beliefs or convictions. He alone accepts responsibility for the contents, even if they might counter what he might have thought or even written at an earlier point in time.

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Contents

I. Introduction and Overview

II. Liberalizing the ATC: Where Do We Stand?

III. What Might the Enchanted World Look Like Beyond Eternity?

Some Background

The Data Used in the Model

A Brief Overview of the Analytical Structure

The Policy Experiments

Some Limitations of the Model

IV.The Effects of THE aTC and CHINA’S WTO Accession

Introduction

The Macroeconomic Effects of Accession

V. How Did poorer CountrIES Fare?

VI. Summary and Conclusions

VII.After Cancun – Will New Thoughts Be Given to ATC Implications?...... 35

LIST OF OVERVIEWS

Overview I —From the STA to the ATC: A Long Chronology on Deliberalizing Textiles and ClothingTrade and a Short One on Its Liberalizing

Overview II —Regions/Economies and Sectors

Overview III — Experiment Definitions

Overview IV — Shares of Various Country Groupings in EU Textile and Clothing Imports

Overview V —Changes in US Clothing Imports from Major Suppliers: 2000–2005

Overview VI —Ranking of Factors Influencing Investment/Sourcing Decisions in 2003/2000

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I. Introduction and Overview

There can be little doubt that the Agreement on Textiles and Clothing (ATC) was perceived by many back then in April of 1994 as being one of the major achievements of the Uruguay Round (UR). This having been the largest multilateral trade negotiations (MTN) round that had ever taken place till then (see Table 1), the inception of the ATC was considered to be "no small accomplishment," as succinctly noted in Raffaelli's and Jenkins's study on the drafting history of the ATC (1995: ix). And actually many considered the ATC, along with the General Agreement on Trade in Services (GATS), to be the crowning achievements of the UR.

For sure the ATC was an eternity in coming, knowing that, at the very beginning of our time, textile and clothing production is said to have been in the hands of a monopolist.[1] Or rather, knowing that, by the time the ATC is due to induce the final elimination of quotas on textile and clothing (T&C) products as of 31/12/2004, some 50 years earlier non-tariff barriers were already beginning to be placed on imports of textile and clothing (T&C) products by industrialized countries on ever more Asian countries. And these quotas then began to proliferate profusely, virtually procreating themselves at a rate that was dictated by the ability of the T&C producing developing countries to discover new, unprotected product niches for their exports, their ability to penetrate new markets and the ability of new production locations in other developing countries to come on stream. But the quotas enchained the T&C exports to given levels. Now this enchainment as well as new attempts in this direction are supposed to have come to an end, as it was agreed upon in the Uruguay Round to eliminate non-tariff barriers (NTBs) in four quota liberalization steps (i.e. tranches) over a ten year period beginning on the first of January, 1995 and ending as of December 31, 2004 (see Overview I).

We are now experiencing the moment of truth as to whether the agreed-upon conditions for the dissolution of the Multi Fiber Arrangement (MFA) from way back when will be abided to, so we can hopefully be enchanted by free trade. Straightforward questions need to be addressed:

• Will that bewitching date of 31 Dec. 2004, when all quotas on T&C products covered by the Multi-Fiber Arrangement (MFA) must come to an end, and which – according to the text of the ATC – cannot be extended, prove to be the start of a new era of trade with T&C products no longer hindered by non-tariff measures?
• Will these products indeed then be subjected to the same overriding conditions – that is, most favored nation (MFN) principles – as all other industrial products are supposed to be?

If these questions can be affirmatively and unequivocally answered, then countries and consumers around the world could finally profit from the T&C trade flows generated by an efficient utilization of their factors of production, rather than by some whimsical, irrational or even malicious allocation of T&C quotas put into place some time ago by protectionistic interests in industrialized countries. If so, then perhaps the large welfare gains predicted by the initial estimates of the Uruguay Round liberalization package will finally be able to be harvested (see Table 2). It was namely this sector from which the largest welfare gains (on average) were expected to originate from the UR agreements.

Unfortunately the pattern of quota liberalization revealed through the third liberalization tranche for the USA, the EU and Canada (as of 01/01/2002, did not bespeak of an approach aimed at ensuring that by the beginning of this year trade in T&C products will be fully under MFN treatment. Specifically, as noted in the WTO major review of the implementation of the ATC (WTO, G/L/556, 26/07/02) of the 1271 quotas initially in existence in these three economies less than 13% (i.e. 165) have been eliminated for all those countries within the MFA (see Table 3).[2] Thereby the United States had eliminated less than 9%, Canada almost 21% and the EU about 27%. In volume terms it can be assumed that these quotas represent a considerably smaller amount of liberalization than in actually value terms.

This paper will attempt to portray where we are now in trying to get from enchainment to enchantment and tap the potential that trade liberalization in the crucial area of textile and

Overview I —From the STA to the ATC: A Long Chronology on Deliberalizing Textiles and ClothingTrade and a Short One on Its Liberalizing

Date / Action taken
1955: December / Japan (MITI) unilaterally restrains exports of cotton fabrics and clothing to USA "to promote mutually beneficial relations".
1957: January / Five year agreement reached with Japan on limiting overall textile exports to USA.
1958: November / United Kingdom signs "voluntary" limitation on cotton T&C products with Hong Kong, by threatening otherwise imposition at lower than prevailing volume levels.
1959: September / United Kingdom signs similar restraint agreements with India and Pakistan.
1960: November / GATT Contracting Parties recognize the problem of "market disruption", even if it is just threatened; serves as "excuse" for establishing future NTBs.
1961: July / The Short Term Arrangement (STA) is agreed upon.
1962: February / The Long Term Arrangement (LTA) is agreed upon to commence on October 1, 1962, and last for five years.
1963–64 / The United States tries and fails to secure an international agreement on wool products.
1965: June / The United States tries and fails to negotiate restraints on Japanese wool products.
1966: June / The United Kingdom implements a global quota scheme in violation of the LTA – the LTA providing only for product-specific restraints.
1967: April / Agreement is reached to extend the LTA for three years.
1969–71 / United States negotiates VERs with Asian suppliers on wool and man-made fibers.
1970: October / Agreement is reached to extend the LTA for three years. It was later extended three months more, to fill the gap until the MFA came into effect.
1973: December / The MFA is agreed to commence on January 1, 1974, and to last for four years.
1977: July–December / The European Economic Community and the United States negotiate bilateral agreements with developing countries prior to agreeing to extension of the MFA.
1977: December / The MFA is extended for four years.
1981: December / The MFA is renewed for five years. The USA, under pressure from increased imports resulting from dollar appreciation, negotiates tough quotas.
1986: July / The MFA is extended for 5 years, to conclude with Uruguay Round.
1991: July / The MFA is extended pending outcome of the Uruguay Round negotiations.
1993: December / The Uruguay Round (UR) draft final act provides for a 10-year phase-out of all MFA and other quotas on textiles in ATC. MFA extended until UR comes into force.
1995: January 1 / 1st ATC tranche liberalized by importing countries – 16% of 1990 import volume.
1998: January 1 / 2nd ATC tranche liberalized by importing countries – 17% of 1990 import volume.
2002: January 1 / 3rd ATC tranche liberalized by importing countries – 18% of 1990 import volume.
2005: January 1 / 4th ATC tranche liberalized by importing countries – 49% of 1990 import volume.

Source: Based on Spinanger (1999: Table 1).

clothing products can offer to help promote growth and alleviate poverty. After all, some of the poorest economies in the world exhibit export dependency ratios of up to 85% for textile and clothing products, while other underdeveloped economies have recently revealed an increasing tendency to profit from a rapidly expanding demand for clothing products.

It will start with a brief overview of the state of liberalization of T&C trade. It then looks at what the world might be like when quotas are removed, given in particular the accession of Greater China to the WTO, before turning to how Free Trade Agreements (FTAs) or other preferential treatment have influenced trade flows and to what degree other forms of protection have been substituted for the quota elimination and tariff reductions. It ends with a summary as well as some conclusions about where we seemed to be headed and how we are getting there.

II. Liberalizing the ATC: Where Do We Stand?

The Uruguay Round (UR) Agreement on Textiles and Clothing (ATC), which laid down the framework and the procedures to phase out the Multi-Fiber Arrangement (MFA) by the year 2005 (after being in existence nearly a third of a century and even being preceded by two decades of contingent protection on textiles and clothing products – see Overview I), was initially billed as a major negotiating achievement. Nonetheless, it didn’t take very long before skepticism crept into the evaluation, particularly after the first tranches of liberalized product categories – containing no relevant items under quota restrictions – were submitted to the WTO by the USA, the EU, Canada and other OECD countries (see Baughman et al. 1997). And since then the most recent submissions likewise did not show a tendency to include the particularly sensitive clothing items. Likewise, the largest importers of T&C products from developing countries, the USA and the EU, which imported an ever increasing share of T&C exports from developing economies since the inception of the ATC in 1994, did nothing to ensure that a truly gradual liberalization of quotas occurred.

Thus in the case of the USA, where (as dictated by the ATC) 49% of all MFA imports were freed from quotas in the final tranche, it turns out that as much as 100% of this liberalized tranche (as in the case of Macau's exports to the USA) is made up of sensitive clothing products. In the case of the EU it could even be shown that the quota elimination was structured in a manner so as to minimize the degree to which the Mediteranean countries (even those just associated with the EU) would actually be subjected to quota elimination in the initial phases (call it “backloading” liberalization).[3] Furthermore, given the past performance in connection with the ever-widening spectrum of protection applied in the course of the MFA, the ATC soon began to be viewed as way of faking liberalization and finagling protection for as long as possible (see Spinanger 1999).

For sure – with some hindsight – the loopholes permitting a frontloading of protection and a watering down of the ATC’s effectiveness should have become apparent right from the beginning. But aside from this, various other distortions have arisen (e.g. regional trade agreements – RTAs), affecting an efficient allocation of resources in a world economy. Such issues will be touched on this paper.

As is well known, the initial UR mandate to reach an agreement on trade in T&C products was worded in very general terms.[4] Nonetheless the results of the negotiations were first considered to be quite an achievement. Let us recall:

• the MFA was to be phased out in four tranches over a ten-year-period (1/1/95–31/12/2004);
• products not liberalized but under quota, elsewhere restrained or merely on the list of ATC products, had their growth rates increased during the phase-out period;
• each of the four types of textile products (i.e. tops/yarns, fabrics, made-ups and clothing) had to be included in each of the 4 liberalization tranches during the ten years;
• the liberalization process for all members was binding and final; that is, there is to be no postponement of the quota phase-out process beyond the year 2004

In the real world of protecting one's interests, the “modalities” to “permit the eventual integration” of T&C products into MFN treatment obviously allowed substantial leeway:

• While the amount of ATC products to be integrated was specified and declared to be binding, there was no stipulation that T&C products not under quota or other restraints would be more quickly reintegrated into MFN principles.[5] Hence the number of ATC products (in essence 8, 10 or even 10+ digit HS tariff lines) put up for liberalization was larger than the number specified in the UR Agreement and considerably larger than the number covered by actual restraints in the EU, the USA and other ICs. Furthermore, nowhere in the ATC agreement was it stipulated that for those MFA products under quota but with only minimal quota utilization (i.e. quota redundancy) integration should be effected more quickly. Finally, the fact that volumes of ATC products ensured that the economic value of the products liberalized is only loosely correlated with the actual amount liberalized.
• The agreed-upon increase in growth rates during the course of the liberalization period means very little if the actual growth rates were small.[6] Knowing that the assigned growth rates for major suppliers are quite low, little can be expected from this stipulation.[7] Generally speaking, for most Asian countries growth rates below 5% prevailed.
• The fact that there was no agreed-upon, more than just minimal distribution of the four types of T&C products to be liberalized, aside from the statement that some amounts from each group must be included, left the door open for a most perverting development. Most of those sensitive products (to a large degree clothing) have been shifted to the final liberalization tranche, i.e. 31/12/04. As noted above, only 13% of the quotas had been removed in the first three liberalization tranches up to 01/01/02.

The consequences of the above bode not well for the future of trade liberalization of those crucial sectors. The EU, the US and Canada have put themselves in a position where it was not easy to liberalize the final 49% as of 31/12/04 all at once, particularly in light of the foreseeable economic situation of some industries. Looking at the current protection data, it seems that the original strategy of eliminating the MFA was based on the philosophy, "don't liberalize today what can be liberalized mañana".

After putting the figures of the T&C industry into a proper perspective it can easily be seen why it is almost a special case. Whereas the average unweighted pre-UR tariff rate (in the EU) is 5.7% for all manufactured products, the rate for textiles is 10.1% and for clothing 12.3%.[8] And a glance at the distribution of the pre-UR tariff rates shows that about 80% of the textile tariffs are equal to or above 10%, and in the case of clothing 80% are equal to or above 13%. This backloading of the most sensitive products to the very end is likewise reflected in the US and EU tariff rates for the final tranches (Table 4): In the case of the US they are 200% higher than those prevailing in the first tranche and 55% higher in the case of the EU.

And how have the exports of the T&C industry been faring over the years? Glancing back over time, and using as a basis of comparison the 25 largest T&C exporters in 2001 (Table 5), it can quickly be seen, that both the major textile exporters as well as the clothing exporters have kept have roughly maintained their shares since the MFA went into effect in 1974. A further examination of the data reveals that whereas textile exporters from industrial and developing countries (ICs and DCs) merely changed shares among themselves over the period 1973–1998, clothing exporters showed major shifts out of both the listed ICs and DCs since 1973.

Basically these 25 economies accounted for roughly the same amount of trade in T&C products in 2001 as they did across all other years. However, almost half of the exporters of clothing products were not among the top 25 back then, while only a quarter of the textile exporters were not on the 1973 list. In other words, given the much more labor intensive process of sewing, changes in competitiveness in the clothing industry occurred much faster than in the capital-intensive textile industry. Furthermore, it can be seen that the textile industry is tending to move closer to where clothes are produced, since growth rate differences between the clothing exports and textile exports are increasing (see Diagram 1). Table 6 allows a comparison between total export growth rates and shares and those for T&C exports. In most cases it can be seen that higher textile and/or clothing growth rates for the period 1994-2001 coincided with higher GDP growth rates.