Extending ATC may unravel UR accords, endanger Doha talks

Geneva, 30 Sep (Chakravarthi Raghavan) - While the impending end to the WTO Agreement on Textiles and Clothing (ATC), will increase competition in international trade in this sector, there are also a number of other determining variables with impact on the trade, and expectations of large trade gains for some major developing countries and large trade losses for others, based on GTAP modelling results need to be tempered, according to the UN Conference on Trade and Development.

Among the other variables, according to UNCTAD, are issues of supply capacity, competitiveness, market access, and market share of developing countries in exports to world markets.

Another element is the tariffs in the US, EC and Japan which are quite high - and even higher in a disaggregated way on some of the textile products.

The post Uruguay Round (UR) tariffs on this sector in the US are such that 52% of the US imports have tariffs of 15.7 to 35 percent, 9.1 percent in the EU and 7.6 percent in Japan - against average MFN duties of respectively 3.5, 3.6 and 1.7 percent.

And while estimations based on the Global Trade Analysis Project (GTAP) modelling, showing large trade gains for some developing countries and losses for others, are valuable for evaluation of likely outcomes, these are all estimations based on static gains, ignore the dynamic gains, as well as several other variables affecting the trade, says UNCTAD.

The GTAP data and modelling itself have attracted some critical notice, after the WTO and other studies based on it; but with UNCTAD, WTO, the World Bank etc being sponsors and funders of GTAP - they are all understandably perhaps defensive about GTAP and the data base methodologies.

Under the Marrakesh Agreement, the ATC expires automatically on 31 Dec 2004, when the 40-year old managed trade regime with discriminatory quotas against developing countries will end.

The WTO’s Council on Trade in Goods (CTG) at its meeting on 1 October is due to conduct its last review of the ATC and the integration process, as well as ‘post-ATC adjustment’ problems, where some of the present beneficiaries of the ATC regime are reported to be planning to ask for a WTO study and work programme, and ideas for ‘compensating’ the post-ATC losers by beneficiaries.

Some industry associations that have gathered in strength in Geneva to lobby also seem to expect one or the other WTO developing country members benefiting from the quota regime and the preferences to ask for extension of the ATC.

In March this year, the textile industry associations of the US, Mexico and Turkey met at Istanbul and took the lead in calling for an extension, and this was followed by a June meeting in Brussels, after which a communique was issued - of the endorsement of Istanbul declaration by trade and industry associations of 20 countries.

In August, the WTO brought out a staff discussion paper about the likely effects of the end of the ATC, but the study now seems to be proving an embarrassment for the WTO - because of the wrong modelling exercise, and conclusions about post-ATC without taking account of other factors governing this trade - some of which are alluded to in the World Trade Report that came out from the same WTO Research division in September.

At a more recent meeting in Lesotho, where the post-Adjustment problems were discussed, according to some participants and observers at the meeting, there were some suggestions for extension of the quota regime, and for the present beneficiaries (who would be losing by liberalization of the trade) to be “compensated” by China, India and some other Asians.

However, not all private sector groups favour extension - with 18 associations of retailing and importing companies, as well as consumer groups in the restricting countries support the end of the quota regime and have sought to counteract the protectionist lobbying, accusing the lobbying groups and their industries for failing to use the 10-year transition to prepare for the end of quota regime.

At the Lesotho meeting, there have also been suggestions from some of the countries benefiting from the current ATC regime and regional preferences, for special safeguard mechanisms against India and duty-free access by India, as also restraints against China through the special safeguard mechanisms it has agreed to with the US.

The UNCTAD secretariat study, in a conference room paper for its Trade and Development Board next week, notes that a number of least developed countries (LDCs) and small economies, which had established clothing industries since 1995, to take advantage of the quota restraints on China, India and other Asian exporters, regime and would be affected, and need adjustment assistance.

However, warns UNCTAD, any effort to extend the ATC or introduce a plethora of other protectionist non-trade barriers would unravel the Uruguay Round Agreements and its Single Undertaking, with potentially serious implications for the multilateral trading system and the Doha negotiations. The study cautions that such moves would have systemic implications for the WTO.

On the impact of China, and its entry into the WTO, UNCTAD points out under the terms it agreed to for accession, Chinese textiles and clothing would be subject to special textiles safeguards until 31 December 2008, and the US has already invoked this mechanism. From 2009 to 2013, WTO members could also apply safeguards selectively only against China, while application of the market economy principles for anti-dumping measures have been deferred for 15 years after China’s entry into WTO. China will also experience other restraining effects on its exports - due to diversification of supply sources in importing countries, Chinese currency valuations and increased costs of production reflecting increase in China’s standards of living.

The UNCTAD paper, and its annexes (drawing on data that was also available to the WTO, but ignored), brings out that over the last two decades, while many developing countries have contributed to the expansion of growth in this sector, with some of them registering high rates of growth in the clothing sector in the ATC era, this masks the opportunities foregone.

And contrary to the view that the textile trade is dominated by developing countries, says UNCTAD, the United States and several EU countries led by Italy, Germany, France, Belgium etc continue to play leading roles in the textiles and clothing trade.

The WTO studies do not take account of the intra-EC trade - of $25.746 billion in textiles trade and $26.308 billion in clothing trade.

This intra-trade is brought out in the annexes to the UNCTAD report.

The UNCTAD report shows that in 2002, the US exports of textiles, at $12.427 billion is second only to that of China at $16.889 billion, while the US clothing exports are $5.994 billion.

The 10-year ATC regime, the severe restraints on China, India and other exporters, led to setting up of clothing industries in a number of developing economies, where (as in Bangladesh) these exports became a major source of foreign earnings.

While a number of African LDCs and some small economies got the benefit of the US and EC preferential regimes, a number of Asian LDCs did not get such benefits. And in the period leading to the phase out in 2005, a number of regional and bilateral agreements have also been concluded between the US and EC on the one hand and their major trade partners.

As a result while in 1995, 64% and 22% of total imports of clothing into the US came from respectively Asia and Latin America, in 2000, this had become 55 and 30 percent respectively. The period has also seen the emergence of a number of transnational intermediaries and concentration of retailers (who have developed their own brands, and outsourcing their clothing suppliers), and have significant impact on international production.

These retailers, dominating the market in the developed countries with large distribution networks and considerable buying power, as well as the transnational intermediaries, with close business tie-ups, will be a prominent feature of the international garment business in the post-ATC era.

As a result, determining the performance of countries in this sector after ATC cannot be reduced to single calculations of winners or losers, but involves how countries will take advantage of the opportunities and overcome the challenges of the ATC expiry.

In this context there are a number of important central issues - including gains, costs and adjustment, competitiveness, the role of tariffs in the sectoral trade, and likely near-time changes in trade and investment patterns. The integration of the trade under normal rules will also produce large welfare gains - 42% under static models and 65% in the dynamic models.

The welfare gains could be as much as $18 billion a year in the US and 25 billion ecus in the EU, income gains of $24 billion a year in developing countries, export revenue gains of $40 billion and gains in employment of about 27 million jobs.

Though textiles and apparel account for less than 2% of total employment in the US, protecting them against import competition is resulting in 83% net cost to the US economy from all import restrictions. The high administrative costs of the complex customs regimes under the ATC would also be eliminated.

While the ATC had provided for a 10-year phase out to ease the impact of quota lifting, the restricting countries, by back-loading the liberalization, failed to make use of the transition and missed the opportunity for soft landing.

During the transition, and with full knowledge of the impending total elimination of the quota regime, a number of new exporting countries emerged, mostly among LDCs, taking advantage of the quota regime restrained on established suppliers and the preferential tariffs. Their increased participating in the garment export trade was based on the quota regime.

While several of the LDCs and small economies benefited by the preferential tariff regimes under the US and EC preferences, several others did not benefit - though for Asian LDCs too the sector accounts for substantial foreign trade revenues. But several who have benefited by the preferences will be affected by end to the quota regime, and have limited capabilities to adjust.

The study brings out that the US does not provide preferential tariffs for the Asian LDCs, creating a perverse situation. Cambodia’s clothing exports to the US face a total of $152 million in tariffs, while Norway’s exports, with five times higher value of Cambodia’s, face just $24 million.

Similarly, Bangladesh faced $314 million duties in the US in 2001 for exports of $2 billion, while France with a $30 billion in exports faced only $330 million.

Another element identified in the UNCTAD are the rules of origin which, after the WTO ruling in the dispute brought by India against the US (after the US accommodated the EU’s grievances over the post-1995 rules of origin by a bilateral accord, but did not do so for India).

This ruling UNCTAD points out will have serous systemic implications for developing country exporters of textiles and clothing, which are now covered by preferences, because it permits the non-preferential rules of origin related goalpost to be shifted at will and act as entry barriers.”

The UNCTAD paper also brings out the various other impending or proposed restrictions - under Sanitary and Phytosanitary (SPS) prescriptions and the Technical Barriers to Trade requirements, as well as competition and social-condition related restrictions.

Under the TBT/SPS non-tariff barriers, the EC’s proposed REACH system (Registration, Evaluation and Authorization of chemicals), if adopted, could make the EC textiles and clothing firms subject to a procedure of registration, evaluation and authorization and restrictions for a large number of chemicals.

The US Department of Commerce has noted that some 30,000 chemical substances would be subject to REACH measures, and the US textile industry widely be affected, with significant costs in complying - as the technical requirements are complex, time-consuming and costly.

If this be so for even the US, the extent of problems that will face developing countries could be severe, comments UNCTAD. In addition, there are also anti-competitive practices of the dominant firms - giving rise to significant entry barriers.

And under pressure from the protectionist trade unions and some NGOs which claim that labour conditions in the developing world are poor, tougher labour standards are being imposed. While developing countries must work to gradually assume the norms of the ILO conventions, some of these conditions are much higher, and aimed to equalise labour cost advantages, says UNCTAD.

The study also focusses on the extensive moves to use other trade remedy measures like anti-dumping duties, and supports the view of the International Textiles and Clothing Bureau (ITCB) that given the overnight integration and removal of quotas, and the competition among suppliers and possible price competitions, the importing countries should refrain from trade remedies like anti-dumping and safeguards for a period of two years after the end of the ATC to give time for trade.

Both developing and developed countries stand to gain by the end of the ATC regime, with consumers gaining much by the lower clothing prices - provided the major importing countries do not fill the ATC void through new barriers.

The present regime and the regional trade agreements have raised issues of gains for preferred countries and costs for the non-preferred countries. The challenges of adjustment involve adjustment costs, particularly among preference-receiving and non-preferred countries.  However, for a while the high MFN tariffs will remain, and some preferred suppliers would continue to enjoy margins. This would cushion for a while the impact of ATC expiry for the preference receiving countries while reducing the potential benefits of non-preferred suppliers.

Some of the developing countries who took advantage of the ATC quotas and the preference schemes, and now need to adjust, would need assistance from the international community. – SUNS5657

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