Aftermath of End of Textile Quota Regime

Business Environment

Project Report

On

Aftermath of End of Textile Quota Regime

DECEMBER 4, 2006

* Table of contents

1. Introduction 1

2. Historical Prespective 2

3 Systemic Implications Of The Atc Expiry 3

4 The Agreement To Phase Out Mfa Quotas 5

5 Slow Pace Of Implementation 7

6 Objectives Of Quantitative Restrictions 8

7 Concern World Over Before The End Of MFA 9

8 Changes In Textile Industry Just After Quota Abolition 12

9 India's Position Vis A Vis Other Countries Before Mfa Abolition 12

10 India's Performance Post Quota Abolition 17

11 Reasons For The Growth In Indian Export 19

12 The Way Ahead 20

1. Introduction

During the last two decades, textiles and clothing were the second most dynamic products in world trade after electronic and electrical goods. Developing countries contributed significantly to this growth, and this sector continues to play a vital role in their economies on account of inherent and evolving comparative advantage. It is one sector that offers good prospects for diversification away from traditional commodity exports, for entry into the area of manufactures, for absorption of large pools of labor, for crossing the great divide between the rural and urban sectors, and for generating foreign exchange. Also, the economic performance of the sector has important implications for socioeconomic issues such as equitable distribution of income, employment opportunities for women, development of small- and medium-scale enterprises, spillover to the informal sector, integration of remote regions into the global economy, promotion of rural development and poverty alleviation.

Moreover, in many developing countries, textiles production is linked to traditional and cultural heritage, which points to the importance of maintaining the economic sustainability of the sector as a source of comparative advantage and economic vitality. Considerations of benefits from trade cannot be divorced from the larger issue, namely that there is an encompassing development dimension to the integration of textiles and clothing into the normal rules of the trading system. Certainly, the freeing of the textiles and clothing exports of developing countries from 40 years of restrictions by major developed countries has significant positive implications for trade and development.

2. Historical Prespective

Restrictions on developing-country exports

Exports of textiles and clothing from developing countries were the subject of special discriminatory and restrictive measures involving quotas that, although initially intended as temporary relief measures in favor of developed-country industries, were in force for over 40 years. In 1962 a Long-Term Agreement Regarding International Trade in Cotton Textiles (LTA) was signed, replacing the one-year Short-Term Agreement that existed at the time. The LTA was renewed several times until 1974, when it was replaced by the Multifibre Arrangement (MFA), which expanded its coverage to synthetic fibres and wool, thus affecting practically all fibres. While competitive developing countries gained an important share in the world trade of textiles and clothing, the full scope of opportunities for growth of their exports of these products was seriously constrained. The regime governed by the MFA lasted until 1994, when the Uruguay Round of Multilateral Trade Negotiations negotiated the Agreement on Textiles and Clothing (ATC). The ATC has a number of defining features. Some of these are:

a. The product coverage, encompassing yarns, fabrics, made-up textile products and clothing

b. A program for the progressive integration of these textile and clothing products into GATT 1994 rules

c. The liberalization process to progressively enlarge existing quotas (until they are completely removed) by increasing the annual growth rate at each stage

d. Establishment of the Textiles Monitoring Body (TMB) to supervise the implementation of the other provisions.

The TMB consists of a chairperson and ten members acting in their personal capacity. It monitors actions taken under the agreement to ensure they are consistent and it in turn reports to the Council on Trade in Goods, which reviews the operations of the agreement before the implementation of each new step in the process. The TMB also deals with disputes arising from the ATC. If these remain unresolved they are forwarded to the WTO's Dispute Settlement Body.

The ten members are appointed by WTO members according to an agreed grouping of WTO members into constituencies. Members of the TMB are expected not to act as representatives or lobbyists for their respective governments.

The ATC replaced the MFA and established an integration programme to phase out all quota restrictions over a 10-year transition period. It set minimum thresholds for "integration" of textile and clothing products in four successive steps: an initial 16 per cent of these products were integrated by 1 January 1995, a further 17 per cent by 1 January 1998, a further 18 per cent by 1 January 2002 and the remaining 49 per cent by 1 January 2005, thereby completing the ATC integration programme.

Up to 1 January 2002, 51 per cent of the products in volume covered under the ATC were integrated. However, products of real interest to developing countries were still largely restricted until 1 January 2005, and therefore the commercial significance of the integration for these countries was very limited until the very end of the ATC phase-out period. The ATC integration programme included unrestricted textiles and clothing products (i.e. products which were not limited by quotas) as well as ones restricted by quotas, and, in the process of the negotiation of the ATC, the selection of products for integration