Overview
In Part 1 of a series of articles on the textile and apparel industry, it presented with special focus on Malaysia. This is a huge industry with RM7.8 bln worth of exports in 2003 and employing over 65,000 workers. Part 1 looked at 1.0 Understanding the textiles & apparel industry, 1.1 Production process and 1.2 Global trade of textiles and apparel.

1.3 Development of world textiles & apparel regulations
The textiles and apparel industry can be considered as one of the highly, if not the most, regulated international trades there is today. In fact, it is the only industry that has rules of its own, without needing to comply with the provisions of General Agreement on Tariffs and Trade (GATT).

The restriction on the world textiles and apparel trade started as early as 1600 when the British parliament prohibited Indian cloth imports to protect its fledging industry. In the US, tariffs and embargoes were imposed on foreign textiles as early as 1900. Due to such restrictions, the US textiles industry witnessed a drastic expansion due to the substitution of foreign textiles with domestic textiles. During that same period, Britain represented 70% of the world textile trade.

1.3.1 Voluntary Export Restraint
Voluntary Export Restraint (VER) is a restriction on the quantity of goods that can be exported by a country for a specified time period upon the insistence of importing countries. Although it is termed ‘voluntary’, it is usually not. Also, VERs are typically implemented on a bilateral basis.

After the Great Depression, Japan became the leading exporter of cotton textile products. This led to import restrictions being imposed on Japan’s textile imports by Britain. Following that, in 1935, the US signed VERs with Japan to restrict her exports of cotton textiles to the US. After imports of cotton textiles from Japan were successfully restricted, cotton textiles from Taiwan, South Korea and Hong Kong began flooding the US market, prompting the US government to negotiate VERs on cotton textiles with Taiwan and South Korea. In the early Sixties, the US synthetic fibre industry experienced the same problem with Japanese exports that the cotton producers faced a few years earlier. So, VERs were negotiated on exports of synthetic fibres from Japan to the US. In the Uruguay Round in 1994, WTO members agreed not to implement any new VERs and to phase out any existing VERs over a four-year period.

1.3.2 General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade (GATT), a multilateral treaty, was signed in 1947 in Geneva, Switzerland by 23 states. It was not an international organization initially and functions as an agreement between states on rules of trade in the international markets. GATT signatory countries will negotiate new trade agreements periodically and each set of agreements was called a “round”. It is important to stress that the main concern of GATT is the reduction and abolishment of international trade tariffs. The rounds of GATT trade negotiations included the Geneva Round (1948), the Annecy Round (1949), the Torquay Round (1951), the Fourth Round (1956), the Dillon Round (1962), the Kennedy Round (1967), the Tokyo Round (1979) and the Uruguay Round (1993).

In Nov 1960, the “market disruption” concept was introduced into GATT out of the desire to limit low-wage textile imports by allowing countries to restrict imports from another country. Specific import restrictions can be imposed if any sharp and substantial increase or potential increase in exports of a particular product from any particular country was identified as the market disruption causing serious damage to the local industry. This brought 3 new important changes to GATT : [1]. Injurious increases in imports need not have already occurred – a potential increase could be sufficient to justify the added restrictions, [2]. Country-specific restrictions (discrimination) were allowed, and [3]. The existence of sizable price difference could be used to justify the additional restrictions imposed.

Among the rounds, Uruguay Round was the largest and most significant trade negotiation in history that took seven and a half years to complete (from Sep 1986 to Apr 1994). The Uruguay Round also established the World Trade Organization (WTO). Under the WTO, the first round was Doha Development Round in Nov 2001.

1.3.3 STA & LTA (Cotton Arrangements)
Textiles and apparel became the only products to be formally exempted from the GATT and were given a special regime of their own in 1961 with the birth of the Short-term Arrangement Regarding International Trade in Textiles (STA), signed by the US, the EU and another 17 developed countries. STA authorized restrictions on 64 categories of cotton textiles for one year. In 1962, the STA was replaced with the Long-term Arrangement Regarding Cotton Textiles (LTA). The LTA extended the scope of the STA by including the provisions for control over the growth of imports and it lasted until 1974 when the Multi Fibre Arrangement came into force.

1.3.4 The Multi-Fibre Arrangement
In 1974, the first Multi-Fibre Arrangement (MFA) came into force. The stated objective of the MFA is “to achieve the expansion of trade, the reduction of barriers to such trade and the progressive liberalization of world trade in textile products, while at the same time ensuring the orderly and equitable development of this trade and avoidance of disruptive effects in individual markets and on individual line of production in both importing and exporting countries”. The MFA included restrictions on products made from manufactured fibres and wood – extending beyond the provisions of the STA and the LTA, and further allowed recourse to quantitative restrictions in response to market disruption.

The MFA represents a series of bilaterally agreed quota restrictions on textiles and apparel trade between the importing and exporting countries. Under this quota restraint, the exporting country is only allowed to supply a certain volume of textiles and apparel products into the importing country and the allocation of quota allowance among domestic producers is solely based on the discretion of the exporting country. Therefore, the MFA can be seen as a discriminatory set of agreements because the product coverage and degree of restrictiveness of the quota differs from country to country.

1.3.5 Agreement on Textiles & Clothing
Initially, the MFA was only meant to be a short-term measure. However, the MFA has been extended 5 times since 1974, covering a period from 1974 to 1994. At the Uruguay Round in 1994, the Agreement on Textiles & Clothing (ATC) was introduced to phase out the MFA over a period of 10 years from 1995. Basically, the ATC is the same as the MFA but the major difference lies with the ATC’s Article 9 that stated that there shall be no extension to this agreement.

The main goal of the ATC is the progressive dismantling of quotas imposed by the MFA to achieve complete integration by 2005. The progressive integration plan is as follows: On 1st Jan 1995, WTO members were to integrate no less than 16% of the volume (in square meters equivalent or SMEs) of their textile and apparel imports in 1990 into GATT, including tops and yarn, fabrics, made-up textiles and clothing. In 1st Jan 1998, an integration of not less than 17% of the volume and products based on the 1990 level were to be integrated. At least 18% of the volumes of their 1990 imports in the 4 categories mentioned above were to be integrated on 1st Jan 02, and on 1st Jan 05, all the remaining 49% will be integrated. Figure 1 below illustrates the integration process:

Figure 1 : ATC Program of Integration

At each of the first three stages of integration, there has to be an annual increase in the quota level of 16%, 25% and 27% for each stage for those products still under the MFA. The list of the products to be integrated contains all textile items, irrespective of whether the items were under quota restraints. Any other restrictions that are not under the MFA or did not conform to the regular WTO agreements will also have to be phased out by 2005. A Textile Monitoring Body (TMB) was established to supervise the implementation of the ATC.

However, if one were to dig deep into the ATC, one will find some very disturbing details. First, the ATC is an end-loaded agreement with only 33% of the industry liberalized in the first six years and 51% after 7 years. It is not until the final phase that the major 49% are liberalized. Therefore, instead of smoothing the liberalization process, ATC in fact is pushing the liberalization to the final phase, thus risking a serious industry shake-up post 2004.

Secondly, as at the end of 1990, which is the base year, 34% of US textile and apparel imports and 37% of EU textile and apparel imports were not under restrictions. Therefore, these 2 major importers are able to meet their ATC obligations (ie to integrate 16% of the textile and apparel imports into GATT in the first phase and 17% in the second phase) without removing any existing restrictions that had been imposed.

Thirdly, the ATC only requires importing countries to integrate articles from yarns, fabrics, textile products and apparels; it does not specify the allocation percentages between the different articles. The findings of the WTO’s report on integration progress revealed that 20% of textile and apparel goods integrated by the major importing countries in the first 3 stages were non-quota products and most of the articles integrated were low value-added items (ie yarns). Under the US integration schedule, articles integrated in the 3rd stage were either non-quota articles or articles with low quota usage. For example, in the 3rd stage, US integrated bar mops and pile towels, which are low end products. Therefore, 67% of the total volume of US textile and apparel imports, such as T-shirts, men's shirts, jeans, etc that are globally sensitive products will only be liberalized after 2004.

Fourthly, like its predecessor, the ATC is also a discriminatory agreement. For instance, in recognition of Pakistan’s “contribution” in the war against terrorism, the US increased Pakistan’s base quota level by 15% in 2002 and specially shifted unutilised quota to other quota articles by 25% for 2002-04 for 14 categories of cotton and man-made fibre materials.

1.4 Rules of Origin in the textiles & apparel industry
Initially, textile and apparel exporters managed to overcome the quota barriers by shipping textiles and apparel items to other countries with unutilised quotas, processed and packaged it, and shipped out against the second country’s quota. Another solution was transshipment, where textile and apparels are shipped through countries with unutilised quotas. To put a halt to these activities, in 1984, the MFA signatories passed the Rules of Origin; requiring substantial transformation of textile and apparel products in the 2nd country in order to consider them as originating from the 2nd country. In the textiles and apparel industry, the country where the cutting is done is conferred origin. However, on 30 Jun 1996, the US abandoned the traditional ‘cutting’ rule and adopted ‘assembly’ as the main criteria. With this, the US adopted six sub-rules in determining the origins, namely, wholly produced rule, wholly assembled rule, multi-country rule, fabric rule, yarn rule, and knit-to-shape rule.