January 1, 2005 marked the end of textile quotas in the amount of textiles that North American countries and Europe can purchase from a single country, as per World Trade Organization agreements. This frees trade worth about $300 billion and throws open the lucrative Western markets. The complex 40 year old Multifibre Agreement (MFA) capped the textile exports of developing countries to resource rich nations. These were self defeating in their purpose and limited textile growth and competition. The challenges introduced, however, have far reaching implications.
Large textile producers like India and China have the most to gain, while smaller, yet significant producers such as Bangladesh and the Phillipines could see a big hit in their revenues from textile sales. A number of textile workers in these smaller countries have already lost their jobs,
Officially, India is aiming at a target of $50 billion in annual textile exports by 2010, about four times the current figure of $14 billion a year. Commerce minister Kamal Nath expects a 50 per cent growth in exports to the freed US and the European Union markets in the very first year. Textile minister Shankarsinh Vaghela projects India’s apparel exports to double in the next two years.
China has even larger aspirations, thanks to greater economies of scale. While most economic numbers out of the official Chinese apparatus are somewhat questionable, as proved by the Economist in 2003, there is no doubt that for much of the world's retailers, China has become the back end of the global supply chain. Chinese textile sales to the US alone rose 30% in 2004
As far as labor costs go, as a proportion of the total cost, the labor cost in India is only 6%, compared to 10% in China, 19% in Mexico, 22% in Thailand, 29% in Turkey, 51% in South Korea and 69% in Germany. Only Indonesia has a lower labour cost of 5%. India has a capital cost advantage as well. The proportion of capital costs to gross output is 6.7% in India in the textile industry and 7.8% in garment making, while those in China are 12.2% and 12%, respectively.
China excels in the manufactured, mass-produced sector. Design is however, a strong element in India's appeal to Western apparel manufacturers. The Indian National Institutes of Fashion Technology churn out nearly 1000 graduates a year. The US International Trade Commision sees India as a significant alternative to China as a source for textile goods. Large integrated mills have been set up across textile parks in India in preparation for this change over.
India has also, significantly, adopted the product patent regime as of Jan 1, 2005 for food, drugs, chemicals and embedded software, keeping safeguards for the common weal. A 'mailbox' application process has been established for patent recognition.
The US textile industry, fearing a flood of cheap Chinese imports when the quotas expire at the end of this year, has been leading an international effort to persuade the WTO to approve a three-year extension of the quota system.
However, WTO members recognise that extending the quotas would unravel a key portion of the 1994 Uruguay Round world trade agreement, which required countries to make difficult trade concessions in a number of sectors. Many of the agreements are perceived by developing countries to be in favor of developed nations, and the developed nations are loath to give up some of their competitive advantages.
Textile makers also expect to improve on their buying power by having to place orders with fewer countries and manufacturers as opposed to the current covert arrangements split across dozens of manufacturers to avoid the quota restrictions.
The significant shifts in the textile industry will take a few years to play out, although the negative effects will likely have their impact very soon, as is usual in economic dislocations.
Update: The WTO has a paper on the global textile industry post the end of quotas (pdf). An overview of textiles under the WTO is also available.
The agreement itself is part of the Uruguay round agreements.
Glenn Reynolds has some thoughts (and a ref to me - Thanks, Glenn) on the implications.
Spear Shaker has a brief from the frontlines of global outsourcing, via Dhaka, Bangladesh.
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