Post-Quota Textiles and Apparel Trade in Developing Countries May 2009 This publication was produced by Nathan Associates Inc. for review by the United States Agency for International Development. Post-Quota Textiles and Apparel Trade in Developing Countries SUBMITTED BY DAI/Nathan Group 2101 Wilson Boulevard, Suite 1200 Arlington, Virginia 22201 703.516.7798 703.351.6162 (F) [email protected] UNDER CONTRACT NO. EEM-I-00-07-00009-00, Order No. 2 DISCLAIMER This document is made possible by the support of the American people through the United States Agency for International Development (USAID). Its contents are the sole responsibility of the author or authors and do not necessarily reflect the views of USAID or the United States government. Sponsored by USAID’s Bureau of Economic Growth, Agriculture and Trade (EGAT) under Contract No. EEM-I-00-07-00009-00 and implemented by the DAI/Nathan Group, the Worldwide Support for Trade Capacity Building project (TCBoost) helps USAID missions design and implement programs to harness the power of trade to promote growth. USAID Missions and Bureaus may request more information about TCBoost by contacting Cory O’Hara, Contracting Officer’s Technical Representative for the project, at co’[email protected] or Lisa Yarmoshuk, TCBoost Chief of Party, at [email protected]. This report was prepared by Peter Minor, Jane O’Dell, and Pooja Pokhrel of Nathan Associates. It was edited by Mary Miller, Matthew Reisman, and Lisa Yarmoshuk. Together, the authors have more than 30 years of experience working with the textile and apparel industries, including more than 15 years in a developing country context. The authors would like to thank Caroyl Miller of the Office of the United States Trade Representative and Judith Dean and William Powers of the United States International Trade Commission for helpful comments. For more information about the report please contact Kenneth Beasley, Senior Trade Economist, USAID/Washington/EGAT, [email protected] or [email protected]. Contents Executive Summary iii 1. Introduction 1 2. Impact of Quota Elimination 3 Winners and Losers 3 Increasing Importance of Large Suppliers 6 3. Assessment of Safeguards on China 9 Implementation of Safeguards 9 Prospective Impacts 10 4. Preferential Trade 15 5. New Challenges 17 Mass Customization and Faster Style Cycles 17 Short Lead Times and Lower Inventories (Cutting Costs Through Logistics) 18 Order Concentration 18 AD/CVD Cases and Market Disruption 19 6. USAID Assistance to Restructuring Countries 21 Sector Assessments 22 Workforce Development 22 Value-added Business Services 23 Labor Organization and Standards 23 Export Promotion and Diversification 24 Development of Support Services 24 7. Conclusions and Recommendations 25 Scoping Studies/Assessments 25 Workforce Development 25 II Business Support Services 26 Labor Organization and Standards 26 Bibliography 29 Appendix. Selected USAID Assistance Programs in Apparel Sector Illustrations Figures Figure 2-1. EU and U.S. Market Shares by Region 4 Figure 2-2. Market Share of Largest Suppliers in the EU and U.S. Markets, 2002–2007 6 Figure 3-1. U.S. and EU Textile and Apparel Import Categories Affected by Restraints on China, 2007 11 Figure 3-2. Safeguard Status of U.S. Apparel Imports as a Percentage of Exporters’ Trade (US$) 12 Figure 3-3. Safeguard Status of EU Apparel Imports as a Percentage of Exporters’ Trade (€) 13 Figure 3-4. Chinese Market Share for Products under Safeguards and Products Free of Safeguards, 2007 13 Figure 2-1. Share of U.S. Imports of Apparel by Preferential Suppliers to the U.S. Market 16 Tables Table 2-1. Selected Suppliers of Apparel with US$500 Million or Less in Exports to the United States 5 Table 2-2. Selected Suppliers of Apparel with €500 Million or Less in Exports to the EU 5 Table 2-3. Selected Suppliers of Apparel with More than US$ 500 Million in Exports to the United States 7 Table 2-4. Selected Suppliers of Apparel with More than €500 Million in Exports to the EU 7 Table 3-1. EU Textile and Apparel Imports from China Subject to Voluntary Export Restraint and Monitoring (June 2005–December 2007) 10 Table 3-2. Selected U.S. Import Categories Subject to Limits on Chinese Imports, 2006–2008 11 Executive Summary Many observers feared that the elimination of global textile and apparel quotas in 2005 would provoke rapid shifts in trade that would place the world’s most fragile economies at risk. In the three years since quotas were eliminated, there have indeed been important changes, but the results for developing countries have been mixed: • Since 2005, China’s share of U.S. and European Union (EU) apparel imports has grown from 20 percent to 35 percent despite quotas that restrain Chinese exports of key products. • The 28 countries that each exported more than $500 million in apparel to the United States and to the EU in 2004, accounting for less than 90 percent of the value of those exports, now account for 94 percent of the value of exports to the United States and 90 percent of the value of exports to the EU. • Among those 28 countries, however, market share is shifting; losers include Mexico, Honduras, and the Dominican Republic and winners include China, Vietnam, Indonesia, India, and Bangladesh. • Small suppliers—those exporting less than $500 million in 2004—have been the biggest losers, with only five countries gaining in the U.S. and EU markets. • Countries under the African Growth and Opportunity Act (AGOA) that had seen strong growth in export sales of apparel to the United States have struggled, on average losing 26 percent of those sales since 2004. The elimination of safeguards restricting China at the end of 2008 could put this region under additional pressure in the coming years. The period of realignment is not yet over. Countries highly dependent on textile and apparel exports continue to seek competitive advantages to protect jobs, investors, and export revenues and pursue trade agreements and government assistance to secure their future. In addition to common competitiveness factors, such as cost, efficiency, logistics, and services, major factors that have shaped trends in the textile and apparel trade since 2005 include rising volumes of Chinese exports (and countries’ restraints on them), evolving trade preferences and agreements, changes in buying patterns, and antidumping and countervailing duty investigations. China In 2005, China and the EU reached a bilateral accord to limit Chinese exports, while the United States imposed unilateral restraints (“safeguards”) on imports from China. These restraints apply to products that account for 50 percent of apparel imports into the United States and the EU, so IV POST-QUOTA TEXTILES AND APPAREL TRADE limiting China’s market share benefits smaller exporters significantly. The importance of the trade in restrained items makes vividly clear that distortions still exist in the market and that the end of the current restraint mechanisms will result in further adjustments. The restrained categories are particularly important to sub-Saharan Africa (SSA): 93 percent of SSA exports of textiles and apparel to the United States are products for which Chinese exports are restrained. Trade Preferences and Agreements Trade preferences and trade agreements have also played a significant role in the redirection of trade in textiles and apparel, allowing some countries to grow their market shares. However, few preferential suppliers have performed well in the post-quota era, which suggests that the duty benefit alone is not sufficient to ensure competitiveness in the new environment for textile and apparel trade. Products that qualify for reduced or zero tariffs are generally held to “rules of origin” that dictate the sourcing of materials and inputs. These rules can increase the cost of the materials and paperwork.1 Changes in Buying Patterns The commercial needs of buyers also determine which countries and suppliers are growing, and which face risks. For example, the need for faster “turns” in inventory drives buyers to suppliers with proximity to materials, reliable transportation and trade processes, and a workforce that is skilled, flexible, and dependable. Buyers also seek suppliers who offer an array of services including creative contributions, product research, procurement skills, and financial strength. These capabilities are rarely found in the least developed countries and are difficult to develop, especially when the “strategic partners” are often the parties passing orders to a factory and are in a closer relationship with the factory than is the U.S. or EU buyer. Antidumping and Countervailing Duty Investigations Antidumping and countervailing duty trade remedies, once rarely applied against textiles and apparel trade while quotas regulated the market, are increasingly applied, creating yet more uncertainty. With the elimination of restrictions on large suppliers such as China and Vietnam, the stage is being set for a further rise in the application of these actions in the textile and apparel industries. Smaller developing countries could easily be affected by these types of actions. Assistance to Restructuring Countries USAID has assisted a number of countries whose economies depend on trade in textiles and apparel. Activities and programs related to the industry are of six types: • Sector assessments that analyze the strengths, weaknesses, opportunities, and threats affecting the industry in a particular country or region. • Labor standards activities and activities that provide support for collective bargaining. 1 Alan K. Fox, William Powers, and Ashley Winston, Textile and Apparel Barriers and Rules of Origin in a Post-ATC World, U.S. International Trade Commission Office of Economics Working Paper, June 2007. http://www.usitc.gov/ind_econ_ana/research_ana/research_work_papers/ documents/ EC200706A.pdf, accessed January 12, 2009. EXECUTIVE SUMMARY V • Workforce development programs that focus on basic education and specialized training. • Business capacity building programs and activities to develop supply chains and marketing skills. • Export promotion programs and activities to diversify the export product base. • Peripheral businesses creation activities that enable small- and medium-sized enterprises (SME) to provide services and inputs to the industry. These activities provide flexible opportunities for USAID to contribute to strategic targets for jobs, income growth, competitiveness, and diversity in export products.