Does India gain from the enlarged EU market? - II

Since quota has been completely phased out now, the effect of the open market on these groups of countries needs to be studied, say P Nayak & N Mahesh

The World Trade Organisations (WTO) has contained provisions for bilateral, regional and preferential trading arrangements for the countries. The EU has preferential trading arrangements with many countries as per the provisions contained in Article XXIV of General Agreement on Tariffs and Trade (GATT). Further, many of the countries within the EU manufacture textiles and clothing. Therefore, the EU applied extra precaution while phasing out of quotas so as to save their domestic industry and the market while importing from extra EU countries. As a support to the EU weaving industry, the EU extended duty-free garment import to a country, if the garments are manufactured from the fabrics produced in the EU. This treatment has been granted to Turkey, several Central and East European Countries (CEECs), North African countries (like Morocco and Tunisia), least-developed African Caribbean and Pacific (ACP) countries (signatories to the Cotonou agreement), Bangladesh and several Latin American countries. Since 1998, quotas have been phased out for CEECs. In spite of the differential situations prevalent in the EU market, some of the countries (Brazil for example) who have been provided quota are not able to supply to the level fixed for them and therefore even if the quotas were phased out, the countries in this category are unlikely to benefit from the globalised market. Some authors have established that an unutilised quota has little effect on countries’ ability to export because it would have continued to export to the quota limit in any case. On the other hand, the Asian suppliers like India and China has shown excellent performances in their quota utilisation, in many cases exceeded 100 per cent.

The EU differentiated the restrained countries into two categories as preferred group of restrained countries i.e. Least Developed Countries (LDCs), New Industrialised Countries (NICs) and small suppliers and non-preferred group of restrained countries i.e. India, China, Pakistan, Sri Lanka and others. The restraint was applied through differential export tax equivalent (ETE). On the basis of application of restraint, the countries were grouped as follows:

Group - I (Countries seriously held back, almost across the board, by quota today): China, Hong Kong, India, Indonesia, North Korea, Pakistan, Vietnam

Group - II (Countries held back in a few categories): Belarus, Macao, Malaysia, Philippines, Serbia, South Korea, Thailand

Since quota has been completely phased out now, the effect of the open market on these groups of countries needs to be studied.

EU trade relations

Regional integration has been an essential component of EU’s trade and political policies. The number of Regional Trade Agreements (RTAs) in which the EU is a party, has risen considerably in the past decade and has touched around 100. Besides, the EU is providing unilateral concessions under the Generalised System of Preferences (GSPs) to as many as 40 countries. The recent EU free trade agreement demonstrates a steady transformation of their scope and level of ambition of trade and investment liberalisation. From the EU view point, the free trade areas are the instruments of development. In Europe, trade agreements are part of broader political agenda, which aim at creating a large prosperous and stable democratic area. Co-operation is not limited to trade but political and economic stability of the EU with their partner countries.

The EU entered into association/co-operation agreements in 1995 with 12 Mediterranean countries which provide duty free access to EU markets for the industrial products and tariff concession for certain agricultural products. Turkey and Cyprus has formed customs union with the EU, the objective is to establish a free trade area between the EU and the Mediterranean countries by 2010. Under the Lome Convention in 1999, the EU provides free entry to 99.5 per cent of items originating in 70 countries of the African, Caribbean and Pacific (ACP) countries in its markets. Around 14 Latin American countries have specific regional and trade co-operation agreements with the EU.

Though the EU market has increased on account of accession, the extent of market access available for the third country exporters needs to be examined. Information suggests 61 per cent of EU trade is in the form of intra-regional trade and has increased further on account of accession of the 10 new countries who have comparative advantage of textiles and clothing manufacturing as compared to the old EU members besides being the low labour cost economies. The main concern of the garment industry is that of the low-cost producers in Central and Eastern Europe (CEECs). These will increasingly service the big markets of Germany, France, Italy and the UK, under the Outward Processing Trade (OPT) programme while Indian suppliers will have to grapple with the customs duties and procedures. In 1996, 68 per cent of EU exports to the candidate countries of CEECs were OPT, as well as 71 per cent of EU import from the CEECs. Clothing manufacturers in the high-cost “old” Europe have been taking advantage of this situation through outward processing, for example, supplying fabrics to these countries (like Tunisia and Morocco) to be made up into garments.

The textile and clothing have traditionally been a major sector in the manufacturing industry of the 10 acceding countries to the EU. The relative importance of the sector in total manufacturing, in some cases like Poland, is 4.4 per cent, Slovakia 5.5 per cent, Slovenia 9 per cent, Estonia and Latvia 11 per cent and Lithuania 14 per cent are well above the EU average of 4.2 per cent. All the 10 new members of EU are members to the WTO abide by this ATC and adopt the EU’s trade policy for textiles and clothing. The share of exports in the total merchandise of the countries is also high, for example, Poland is over 9 per cent, all other countries except Estonia have more than 3 per cent against world average of 3.1 per cent. The EU 25 extended the existing quantitative restrictions (QRs) in textile imports.

The methodology applied for calculating the quotas for the new members consists of (i) the average of the last three years’ imports into the new member states originating in third countries, adjusted pro rata temporis; (ii) imports of textile items up to May 1, 2004 into these countries would permitted for free circulation within the union; (iii) goods shipped before May 1, but reaching these countries after this date would be quota-free and (iv) goods sent for processing to a third country before May 1, but entering the acceding countries after May 1, would be quota-free. The candidate countries as a part of EU now have access to the modern production techniques available in the EU.

Besides accepting the EU accession criteria, as far as the textiles and clothing industry is concerned, there are two priorities in the preparation for accession: capacity to cope with competitive pressure and market forces and approximation of legislation with the acquis communautaire. These factors provide a better and much wider scope for the acceded countries to manufacture and market their products in the global as well as EU market.

EU has been extending tariff concessions to the manufactured items of developing countries under the GSP since 1971. The GSP is a key instrument to help developing countries to reduce poverty by generating revenue through international trade. In 2002, the volume of trade from developing countries covered by the EU-administered GSP amounted to 53 billion euros, accounting for 5.6 per cent of the community imports, representing more than all other developed countries taken together. India’s GSP utilisation rate, among beneficiary countries, is 11.5 per cent of the total volume of EU GSP imports, second only to China (33.1 per cent) and Indonesia in third (4.8 per cent), which were the main exporters to the EU in 2002. Bangladesh (3.6 per cent) ranked eighth as the first representative of the beneficiaries of the Everything But Arms (EBA) 15 initiative. As preferential entry exists for Indian textile and clothing exports to access the EU market under the EU’s Generalised System of Preferences (GSP).

The Indian exporters may face strict NTBs from the 10 new members as applied by the EU-15 members. These include azo dyes certification and quality standards for the textile and leather industries. This means that the EU is now open only to a few certified exporters, who are said to have reached the required standards. Indian companies should re-position themselves, especially in CEECs, keeping in mind that EU standards are often higher than the global standards and the EU-25 will also have the same standards.

Over the past few years, India’s textile exports to the European Union have been facing anti-dumping investigations from the European Commission (EC). Eleven anti-dumping cases in textiles and clothing initiated against Indian export to the EU, include the famous anti-dumping action against cotton fabrics (Cat 2), synthetic fabrics (Cat 3) and bedlinen (Cat 20).

(The authors are with the Textiles Committee)

(To be continued)