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 comprises 1.0 Understanding the textile & apparel industry, 1.1 Production process and 1.2 Global trade of textiles and apparel. In Part 2, it looked at 1.3 Development of world textile & apparel regulations, 1.3.1 Voluntary export restraint, 1.3.2 General Agreement on Tariffs and Trade, 1.3.3 STA & LTA (Cotton Arrangements), 1.3.4 The Multi-Fibre Arrangement (MFA), 1.3.5 Agreement on Textiles & Clothing and 1.4 Rules of Origin in the textile & apparel industry.

1.5 Impact of the MFA

1.5.1 Birth of new players
Among all the “trade barriers” imposed, the MFA has the most significant impact on the textile and apparel industry. Though the essence of the MFA is to provide breathing space for developed countries to adjust for competition from the low-cost producers, it had indirectly created economic growth for the lesser developed countries. Being discriminatory in essence, the major players in this industry, such as South Korea, Taiwan and Hong Kong, were imposed quotas far lower than their export capabilities. Being constantly short of quotas, these players sourced new areas to start their manufacturing operations. Lesser developed countries were always the choice because these countries do not have quota restrictions imposed on them and possess the advantage of having comparatively low labour cost, which is important in view of the labour intensiveness of the apparel industry. When the exports of textiles and apparels in a lesser developed country flourished and increased substantially, developed countries imposed quotas on that particular country, since it has become a new threat to them. When this happened, these manufacturers will again source new manufacturing locations that meet the previous cost criteria. This operation ‘hopping’ leaves trails of development in the lesser developed countries.

A typical case would be Bangladesh. In the Sixties, Bangladesh was one of the poorest and most densely populated countries in the world. Her economy had relied on the exports of raw jute and jute products. In 1980, South Korea had reached its quota limits. At the request of the American and European buyers, South Korea looked for locations with no quota restrictions to set up her operations. With abundant cheap labour and a quota-free status, Bangladesh’s comparative advantage fit South Korea’s criteria well. With less than 12 apparel concerns in 1978, the textile and apparel industry in Bangladesh flourished to 450 companies, generating 140,000 jobs and capable of producing 3 million garments per annum. Table 1 below shows the role of textile and apparel industry in Bangladesh’s economy. Currently, 85% of Bangladesh’s economy is tied to textiles and apparel, contributing more than US$3.3 billion in exports.

Table 1: Bangladesh’s exports

1.5.2 A web of protectionism
There are numerous academic studies that argued that the MFA had restrained exporting countries ability to grow and caused loss of jobs to their economies. There are 2 sides to this claim. Quotas have impaired their ability to mass export and thus caused them a loss of export revenue. At the same time, it is the same quota constraint that prevented more efficient producers such as China and India from flooding and dominating the international markets, thus protecting their exports. Thus, the MFA has been protecting the less efficient textile and apparel players from competition from the efficient producers. Do they have the ability to compete internationally after being protected for 40 odd years ? This is the basis for fearing the phasing out of quotas. As an example of a world without quota, Japan and Australia are 2 countries having no quota restrictions. China’s textiles and apparel dominated more than 70% of textile and apparel imports in these 2 countries.

The irony when talking about protectionism is that it is easy to forget that the initial reason for quota restriction was to protect developed countries from competition, not developing countries. Most of the trade agreements that the US made with preferential suppliers such as the Caribbean Basin Initiatives, African Growth Opportunity Act (AGOA), Mexico, etc required the use of US raw materials in their textile and apparels before preferential access can be given. Take the AGOA for example. The AGOA was signed on 18 May 2000 as part of the US Trade and Development Act 2000 and it provided duty free and quota-free access to the US market without limits for apparels made in eligible Sub-Saharan African countries from US fabric, yarn and thread. Thus, if the MFA and other trade barriers were to be taken out from the picture, the US firms that sourced their apparels from the US preferential suppliers will have strong economic incentives to source from the Asian countries, which uses little US content. Thus, without the MFA, the US will be hit with a double whammy - [1]. loss of the domestic apparel market, due to the flood of imported apparels and [2]. loss of textile raw material exports, due to decreased demand from the preferential suppliers.

Why are the developed economies not complaining about the phasing out, since they stand to lose the most ? The main reason is that most of them have evolved from the labour intensive manufacturing phase in this industry to the trend setting, designer and higher-end segment.

1.5.3 Quotas: Hidden form of tariffs and tax
Basically, the economic consequences of quota and tariff are the same. The main difference between tariff and quota is that tariff generates revenue for the government of the importing country, whereas quota creates quota rent in the exporting country. So, why do the developed countries choose to impose quota and not tariff? The reason is that since quota is in a quantitative form, it is easy for the developed countries to work out how much the industry wants to sell and the size of the quota needed. Using tariff is not that straight forward. Demand and supply curves would have to be known in advance before the sums of quota can be worked out.

In terms of tariff equivalent of quota (TEQ), the EU applied TEQ ranging from 1.3% to 21.6% for textiles and 3% to 34.8% for clothing in 1997. The lower percentages of TEQ for both textiles and apparels apply to Central and Eastern Europe, whereas the higher percentages are applied to Asian countries such as China, India, Malaysia, Indonesia and the Philippines. In terms of tax on exports in the exporting country, India bore an average export tax of 24% in 1997 and 40% in 1999 for exports to the US and 14% in 1994 and 19% in 1999 for exports to the EU.

However, like tariff, quota increases the price of textiles and apparels in the importing country, thus causing the consumers of the importing country to pay more for these products. Studies have shown that the total cost of quota and other restrictions on textiles in the US amounted to a hidden tax of US$400 per year per family. Without the quota and tariff, each family in the US would pay US$400 less a year in purchasing these items.

1.6 Factors affecting demand for textiles and apparels
Although the textile and apparel industry generally moves in tandem with the major economic factors (like changes in the level of income, etc), major demographic shifts also form a major factor that influence textiles and apparel demand.

The demographic shift that impacts the demand of this industry the most is generation shift. In the developed countries, the population of the older age group is increasing whereas the younger groups are decreasing as a percentage of total population. Such shifts impact the industry in the sense that the group that spends the biggest portion of disposable income for apparels is young adults under the age of 25. If the rate of growth in the older age population rises faster than the younger generation, the demand for textiles and apparels is expected to fall.

On another level, increase in birth rate also increases the demand for children’s’ apparels and non-woven products such as diapers.

Seasonal changes also affect the demand for the types of textiles and apparels. In winter, demand for knitted or closely woven apparels made of fur or wool, jackets and coats will increase. In summer, people tend to go for open weave apparels made of cotton or linen, which allows perspiration and airflow. The type of season also affects the colour of the textiles and apparels, with bright colours being the trend during summer.

However, factors that affect the demand for textiles and apparels of a certain country consist of a set of totally different factors altogether. What affect most are economic and political factors. Economic factors come into play because all buyers are looking for the cheapest source of goods available. Thus, a country that is able to produce quality textiles and apparels at comparatively lower prices will be the sourcing target. At the political level, major international trade agreements (such as the MFA) also affect demand. For instance, as quotas under the MFA limit the textile and apparel imports from a certain country, importers are forced to find other sources. Tariffs and preferential trade agreements (NAFTA, AFTA, etc) between countries also affect demand of a country. Since import tariffs are a burden of buyers, countries with preferential tariffs given by the importing country will usually be the choice of imports, pari passu.