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Flexibility: The key to market access

D K Nair

Textile trade has always been regulated outside the GATT framework, from the inception of GATT. Until early 1960s, there were the so-called Voluntary Export Restraints, which were GATT-inconsistent, informal, bilateral and anything but voluntary. From 1961 onwards the Short-Term Arrangement and Long-Term Arrangements on cotton textiles operated until 1973. From 1974 to 1994, the Multifibre Arrangement regulated international trade in cotton, manmade and woolen products. With the establishment of WTO in 1995, the MFA quotas migrated to its Agreement on Textiles and Clothing, with a provision to remove the separate trade regulation arrangements for textile products completely by December 31, 2004 and apply regular GATT/WTO disciplines to textile trade, from 1.1.2005 onwards.

India has been one of the worst victims of MFA/ATC quotas. Our export of textiles and clothing assumed significant dimensions only by the mid 1970s and on every product that could generate demand in the international markets, we were brought under quantitative restraints by North America and West Europe. Since they accounted for around 70 per cent of world imports, the possibility of diverting our exports to other markets was also limited, especially for made-ups and garments.

Under MFA and ATC, most of our competitors were given special, favourable treatment, which we were denied. China, which had exports more or less comparable with ours in the 1970s, was given huge quotas under MFA by both USA and EU for political reasons, in spite of the fact that it was not a member of GATT and we were among the founding fathers of GATT. The spectacular rise of the Chinese textile and clothing industry on the world horizon began on the wings of these special treatments in access rights. EU has been operating a scheme called ’Outward Processing Traffic’ (OPT) for a long time, under which the neighboring countries are allowed to export textile products made from European raw material, without duty and against special quotas. After prolonged negotiations, India has also been given a very limited OPT window, but because of the distance factor that adds to the cost and time, it has not benefited us.

A number of our competitors, especially in the clothing sector, are Least Developed Countries (LDC), which have been given quota-free and often duty-free access in EU during the MFA-ATC period. Pakistan and Sri Lanka, which are not LDCs, have been given special concessions under GSP and a bilateral agreement, respectively. EU has given quota-free and duty-free access to Turkey on the basis of a Customs Union. Similar concessions have also been extended to several East European and Mediterranean countries on the basis of bilateral arrangements. And now, the EU itself is being expanded from 15 countries to 25 later this year and the 10 new entrants include several major players in the textile field. There has been a virtual stagnation in our exports of clothing to EU, because of unequal competition from the beneficiaries of concessions.

The situation in USA, which is the largest single importer of textile products in the world, is no different. China has been achieving large increases in its exports of textiles and garments to USA, since the quota levels provided to it allowed such growth. Hong Kong, South Korea and Taiwan were provided huge quotas on the basis of their exports during 1960s and 70s and in spite of significantly lower exports from the mid 80s, their quota levels remain intact.

Under North American Free Trade Agreement (NAFTA) established in the last decade, Mexico was allowed quota-free and duty-free access in USA and Canada, for all textile products. The result was that Mexico became the number one supplier of apparel products to USA, until China could overtake it in 2001. Since USA removed quota restrictions on 1.1.2002, under third stage of quota phase-out, on several products in which China was its only major supplier, China has been able to sustain the lead over Mexico beyond 2001 also. USA has been operating an arrangement for several decades, which is generally referred to as ‘807 trade’. This is similar to the OPT arrangements of EU and allows specified countries to supply garments free of import duty and often free of quotas, on condition that fabrics of USA should be used for such garments. The beneficiaries of this arrangement include Honduras, Dominican Republic, El Salvador, Costa Rica and several other countries in the region and all of them have increased their market share for garments in USA substantially, under this arrangement. In many cases, there have also been relaxations to the condition that US fabrics should be used for getting this concession.

Caribbean countries have been enjoying duty-free and quota-free access in the US under an arrangement called Caribbean Basis Initiative (CBI). USA has extended similar treatment to the whole of Sub-Saharan Africa by introducing a legislation called Africa Growth and Opportunities Act (AGOA). USA has entered into bilateral preferential trade arrangements with certain countries and is in negotiation with some others, providing concessional or nil import duties and quota-free access. Currently, USA is working on a proposal to establish a Free Trade Agreement of America, which would remove all restrictions and duties on trade within the entire American continent. These concessions have heavily impacted our exports.

Most of these agreements and arrangements are general in nature, in the sense that they cover all or several product groups. However, they are all textile-centric in effect, because textiles and clothing are the only major products that most of the participants are capable of supplying to EU and USA!

Thus, South/Latin America, Africa, East Europe, Mediterranean countries, South East Asian countries including China and South Asian countries excluding India have been receiving special access rights for textile products during the MFA-ATC period in the major markets of USA and EU. In other words, India is perhaps the only major exporter of textile products, which has not received any special consideration from either North America or West Europe during the MFA-ATC period. In fact, we have been specifically discriminated against. As an industry and as a country, we need to seriously examine the reasons for our getting isolated like this in the international markets for textiles, which are our largest export products. While the industry would like to blame the government and the negotiators and wash its hands off, the fact is that Government or its negotiators would not be able to achieve any trade concessions unless they have some concessions to offer in return and they would not offer something unless they have a mandate from the industry to do so.

In December 1994, when India signed bilateral agreements with USA and EU, providing for significant additional access for our textiles, in return to our committing reduction of import duties and removal of import restrictions on some specified textile products, most segments of our industry felt threatened by imminent import floods. The concessions offered were the removal of import restrictions in stages and reduction of import duties for some products to 65/70 per cent in 1995, coming down to 20-35 per cent by 2002. There were also provisions for specific duties to keep off low cost imports.

Eventually, the government reduced import duties much lower and removed import restrictions much faster on several of these products. Today there are no import restrictions on any textile products and the peak rate of customs duty has come down to 20 per cent. In spite of all this, our imports in the textile sector continue to be mostly in raw materials for export production and imports are less than 10 per cent of our exports! If the levels of duty reduction and removal of QRs that have eventually been allowed could be committed in 1994, we could have got much better access for our textile products, for which there were offers from both USA and EU!

When the WTO agreement was being finalised, there were whispers in the corridors of power that nobody in our government was prepared to take the responsibility for saying ‘yes’ or ‘no’ to several of its elements. After the agreement was finalised, the process of ratifying it also went through a long drill. This entire dilly-dallying was a reflection of the apprehension of the decision makers that they could face the ire of the industry and the public for the trade liberalisation commitments incorporated in WTO. The textile package was, of course, not one of the most contentious issues in the agreement, but it was an issue all the same! Even today, one hears calls for getting out of WTO, though that will result only in our losing the advantages of WTO, while most of our obligations under WTO would still continue to apply!

In Geneva, it is often heard that India is not a country of traders, but a country of crusaders. There are also light-hearted comments that with less than one per cent share in international trade, we occupy more than 10 per cent of WTO time, because we have firm opinions even on matters which have no serious implications for us!

All this obviously needs to change. While upgrading our competitiveness and technology to face the emerging competition is very important, adjusting our approach in tune with the emerging scenario in international markets is also an area that deserves attention. We need to give and take market access so that there is less resistance to our exports and we are able to achieve export competitiveness through imports, where necessary. Scoring points in WTO debates is no substitute for a pragmatic approach for pursuing our long-term trade interests. The removal of quotas is not going to be the end of anti-import measures. In fact, it will only increase other forms of trade defense actions such as anti-dumping and anti-subsidy investigations. Since these are products in which we have some comparative advantage, exposure to international competition in the domestic markets should help us to upgrade our competitiveness, though there can also be a shakeout affecting some of the overprotected domestic segments and uncompetitive units. But will such a shakeout not be in our long-term interest? This is not to say that there should be a free-for-all in our textile markets. The suggestion is only that there is room for a more flexible approach. An industry consensus on market access offers in this sector had been worked out by the Textile Commissioner and forwarded to the government some time back. That could be a starting point for initiating a flexible approach to market access negotiations.

Intolerance to imports engendered by real and at times even imaginary apprehensions has been severely limiting our export growth in textiles. And what we have protected through such rigidity is substantially less than what we have lost in market access. The results of China’s liberal textile imports are reflected in the magnitude of its exports. Our textile industry has been repeatedly asking the government to learn a lot from China. Should the industry also not learn some lessons from China?

(The author is Secretary General, ICMF. The views expressed in this article are personal).