The 10-year phase-out of import quotas under the Multi-Fiber Arrangement of the WTO was supposed to provide for an orderly transition for the world's textile industry to a more open, market-driven economy.
But in a classic case of the rule of unintended consequences, the phase-out, which is scheduled to be completed on Jan. 1, has been anything but orderly, according to the president of Globecot, Inc., a firm that specializes in analyzing the fiber and textile industry.
“I don't have to tell you how competitive it is out there,” said Robert Antoshak, speaking to a group of mainly Asian textile mill representatives attending the World Cotton Quality Summit in Singapore. “We have so many countries and so many companies trying to feed product into a small pipeline as a result of the MFA.
“It's a case of too many companies chasing too few customers.”
When the phase-out began in 1995, the MFA allowed for gradual increases in import quotas to give textile manufacturers in developed countries breathing room until they could become more competitive with those in low-wage, developing countries.
Thus, quotas for different categories of textile and apparel products were allowed to increase by a range of one-half to 7 percent per year under a formula using existing bilateral trade agreements.
“In the infinite wisdom of our friends in Geneva at the WTO, they thought the best way of eliminating the system was to grow out of it,” said Antoshak. “So, in effect, what they said was ‘We're going to take the growth rates in all these bilateral agreements although they're all different, and we're going to uniformly increase each of the growth rates.’
“If it sounds confusing, it is,” he noted. “It starts with this fascinating model that you have to build in order to be able to project who has what quotas by the time of the end of the MFA occurs in 2005. What that's done is create some inequalities in the trading system, which is not what they were trying to do but is, in fact, what happened.”
The MFA formula also has greatly accelerated the amount of available textile and apparel import quota in countries like the United States and in Europe with the result that “quota growth has totally outstripped the market growth” in those countries, he said.
The Association of Southeast Asian Nations countries — the Philippines, Thailand, Indonesia and others — have seen a growth rate of more than a billion square meter equivalents of fabric in quotas under their MFA bilateral agreements with the United States and the European countries.
That's far more than China's quota growth of 200 million to 300 million square meter equivalents, said Antoshak, who has worked as an industry advisor to the U.S. government on numerous bilateral trade agreements. The Indian subcontinent — India, Pakistan Bangladesh — also has seen large quota increases along with countries in sub-Saharan Africa.
U.S. textile decline
The U.S. textile and apparel market, meanwhile, has been declining since it peaked at around 10.5 billion square meter equivalents in 1994, he says. It rose slightly recently, but has remained basically flat for the past years. Quota growth from the MFA phase-out, on the other hand, just keeps going.
“What this does is create a situation in the market where there is far more quota than there is demand,” he said “In effect, the restrictive nature of the quota is really less in the latter than in the earlier stages of the MFA phase-out. So today there are quota categories that will fill, but, by and large, they don't fill them anymore.”
These staggering increases in quotas were encouraged, in part, because negotiators assumed that demand for textile and apparel products would continue to grow at the same rate it had since the 1950s.
“World textile and apparel consumption is now five times greater than it was at the end of World War II and per capita consumption has doubled,” said Antoshak, noting that much of the growth was due to tremendous advances in manufacturing technology and labor productivity.
“The common wisdom was that the market for textile and apparel would just keep growing and growing. But that's wrong. The growth is actually slowing now.”
All of those developments coupled with the massive investments in spinning and weaving equipment primarily in Asia have led to price deflation for textile and apparel around the world.
“One of the reasons we're getting those lower prices now rather than when all the quotas expire in January is because the quotas aren't as restrictive anymore,” Antoshak said. “And that is putting downward pressure on the supply chain and contributing to lower prices.
“Yes, it is a Wal-Mart effect, the Wal-Mart buying patterns, but it's also because the quotas aren't as restrictive as they once were.”
Import prices, as a result, have fallen from a high of about $3.80 per square meter equivalent of fabric in 1992 to less than $3.60 per square meter equivalent in 2000. “These are very crude prices I admit, but it shows how price deflation has occurred. And, of course, this is contributing to everyone having to scramble for dear life to be able to stay competitive in this market.”
As most farmers know, U.S. textile mills have been losing that scramble to foreign manufacturers with lower wage scales and, oftentimes, more modern spinning equipment. An industry that consumed 11 million to 12 million bales of domestically grown cotton is projected to use 5 million bales in 2004/05.
“It could be well under 5 million bales before we know it,” said Antoshak. “There is no demand there and, as a result, the only place U.S. growers have to go in the long run is to begin to sell on the world market.”
The phase-out of import quotas isn't the only area where efforts to improve the fortunes of U.S. textile mills appear to have produced unintended consequences. Another involves outward processing programs, according to Antoshak.
Cut here, sewn there
“By outward processing I mean a clothing company in the United States can arrange for U.S. fabric to be manufactured, take the fabric and cut it in Texas, export it to Mexico, have it made into clothing and imported back into the United States quota free,” he said. “The only duty will be paid on the value-added or the cost of labor.”
Such vehicles as the U.S. government's Section 807-A program, which was established to bolster U.S. domestic mills, have had the opposite effect as more competitive, non-regional piece goods have gained market share, according to Antoshak.
“What distinguishes 807-A fabric from 807 is that 807-A fabric has to be manufactured in the United States,” he said. “But 807 fabric can come from anywhere and be used to assemble garments that can be shipped into the United States duty-free. That's perfectly legal.”
Instead of providing another outlet for U.S. fabric, imports of 807 fabric, which uses non-U.S. fabric, are winning over imports of 807-A fabric, which does not have to be from the United States, according to figures from the U.S. Census Bureau.
“This is NAFTA's dirty little secret,” he said. “The people who were actively involved in the negotiations for the North American Free Trade Agreement thought NAFTA would be the savior of the American textile industry. What's really happened is that full package production has really taken off in Mexico.”
Full package production contains some Mexican-produced cloth. “But lots and lots of imported fabric are going into Mexico from all over the world,” he said. “Why? Because Mexico's manufacturers are forced to compete with other suppliers in Asia their only recourse is to lower their cost and to lower their cost they have to import more competitively priced fabric.
“And by doing so in many instances they can qualify for NAFTA's quota-free, duty-free access to the United States.”
The same situation is happening with the Central American countries that were similarly targeted for similar preferential treatment in the Caribbean Basin Initiative.
“This isn't really surprising when you consider the ownership of the mills in Central America,” he said. “A number of Asian firms have moved into the Caribbean. Having a partner in the Caribbean is very important if you're a mill in Asia is very important to be able to take full advantage of the program.”