EXPORTING TEXTILES
& CLOTHING: WHAT’S THE COST FOR LDCs?
The end of quotas in the textiles and clothing industry
benefits large Asian producers. Yet other countries also have a stake in the
business. The sector plays a major economic role in many least developed
countries, especially in Africa, and in other small, vulnerable countries. To
avoid losing important business, their firms need to exploit duty-free
advantages to the full, diversify products and expand their supply chains.
WTO members abolished quotas on trade in textiles and
clothing on 1 January 2005. As a result, prices are falling and major Western
buyers are narrowing their sources. On a global scale, large Asian countries
with vertically integrated industries are becoming the world’s leading
suppliers. China in particular can produce virtually any textile or clothing
item at any quality and cost.
Within supplier countries, there are signs of industry
consolidation. Larger companies are increasing production capacity, often on
the advice of their major customers. Small and medium-sized firms (SMEs), on
the other hand, face a shortage of orders and some have already closed down.
It is not clear what will happen in many least developed
countries (LDCs) and small, vulnerable countries, with their low-value
products, fragmented industries resulting from past reliance on quota
protection and little regional cooperation. Since textiles and clothing account
for a high proportion of merchandise exports and jobs — for example, 82% of
merchandise exports in Cambodia and 83% in Haiti and Lesotho — it means
changing their strategies to prevent serious economic consequences.
A changing market
Competition is sharper, with successful textiles and
clothing producers setting new standards of service.
a)Mega companies or smaller, flexible firms. Major retailers in the European
Union (EU) and the United States foresee mainly two types of suppliers from
developing countries. The first can be described as “mega companies”, with
management headquarters in Asia and production networks around the world. They
use economies of scale to produce mostly basic articles — such as t-shirts,
sweaters, cotton trousers, underwear and woven shirts — at low cost and in
large quantities. The other type are highly skilled and flexible companies
located near buyers, which could also benefit from preferential market access.
These firms can supply smaller quantities of higher-value products at short
notice.
However, most firms in LDCs and small vulnerable countries
do not fit into either category.
b)Supplier has more responsibility. Much of what the buyer arranged in
the past, the supplier needs to do today, offering a complete package from
design to sourcing of raw materials and delivery of finished garments.
However, most LDCs concentrate on the end of the supply
chain — offering only garment-making facilities — and rely on buyers to provide
yarn, fabric and accessories.
c)Speed to market counts. The time and cost of delivering a
product to the store are becoming more important. Labour and production costs
are minor up to the retail point. This is true for both supplier types. While
the commodity-type supplier will have to focus on regu-lar and timely
replenishment, the fashion-oriented supplier will have to emphasize quick
response to changing fashion trends.
Trade policy helped
LDC exports
In the past, quota protection and duty-free access to rich
markets encouraged many LDCs to develop textiles and clothing exports. Trade
policy will continue to influence their export prospects. Most importantly,
LDCs will continue to benefit from preferential treatment from WTO member
countries. Sub-Saharan Africa’s share of the United States apparel market rose
from almost zero to 2.2% in 2004. The reason was duty-free market access under
the United States’ African Growth and Opportunity Act (AGOA), combined with
relaxed rules of origin requirements that allowed countries to use cheaper
fabric from Asia for their garment exports. Jordan’s exports to the United
States, or those of Bangladesh and Cambodia to Canada, skyrocketed for the same
reason.
Challenges to compete
in future
Yet, sharper competition is eroding the protected status of
LDCs. As many companies are now realizing, even preferential access to markets
is not enough.
a)Poor product and market diversification. Most LDCs have only developed
exports in clothing categories that used to be highly protected against Asian
competitors. With the removal of quotas and despite their duty-free advantage,
LDC producers will have difficulty competing with Asian suppliers. In
sub-Saharan Africa, for example, 77% of all clothing exports under AGOA in 2004
were based on two products: knit shirts and simple trousers. These are basic
articles, for which, for example, China’s quota tariff equivalent was almost
60%. This means that now the price of Chinese products could drop by 60%.
b)“Footloose” investors. Large investments from Asian manufacturers
characterize the sector in almost all LDCs, except those in South Asia. They
invested to avoid quotas and to benefit from duty-free market access — but they
could leave any time if business is no longer profitable. News from Lesotho in
early 2005 suggests that this is already happening. LDCs need to find ways to
link local industries to foreign investors in long-term partnerships.
Recommendations for
firms
Firms in Central America and North Africa that are near
North American and European markets and benefit from preferential access could
focus on products where speed to market and flexibility are important, provided
they develop the necessary skills.
But LDC firms, far from their main markets, have to compete
directly with the evolving mega companies over “traditional” products.
Therefore, they need to make special efforts to increase competitiveness.
a)Take part in developing a sector strategy. Firms, industry associations,
governments and other trade support players, such as banks, port handlers and
customs agencies, need to cooperate to develop a coherent strategy for the
sector. Strategies should take into account cross-border cooperation with
countries in the same region.
b)Improve sourcing skills. Since sourcing materials is the most
important skill that buyers demand, LDCs need to develop abilities in this area
to be competitive. Integrated industry and supply chains don’t exist in LDCs
and investment to develop them is not forthcoming, so firms need to look for
alternative solutions, such as regionally integrated value chains.
c)Focus on higher-value products. LDC firms need to diversify their
product mix away from commodity-type items. This involves knowing about the end
buyer — it is only possible to develop successful designs if one fully
understands the final consumer’s tastes.
Most LDC clothing exports are made out of cotton, which is
relatively less protected than man-made fibre apparel. The United States, for
example, imposes an average 20% duty on imports of cotton-knit shirts, but 32%
duty on shirts of man-made fibre.
To make the most of their duty-free access, firms should
therefore develop clothing exports of man-made fibre and improve their sourcing
skills to find man-made fabrics. Garment production skills are not very
different whether using cotton or man-made fabrics.
LDCs could also explore markets for “ethnic” textiles or
clothing.
a)Benchmark. Companies need to know their strong and weak points
vis-à-vis their competitors.
b)Use e-trade. E-facilitated trade is becoming a prerequisite to attract
buyers in textiles and clothing. Manufacturers need to find innovative
solutions on how to respond to buyers’ new “e” requirements — from
computer-assisted design to electronically-managed supply chains.
Increasing South-South
cooperation
Developing South-South trade has three dimensions: selling
to developing country markets; sourcing intermediary products for exports to
developed markets; and building relations with foreign investors. LDC
businesses and governments should consider them all. They should also look at
the possibilities for technical cooperation between developing countries in
these areas.
a)Explore emerging markets. There are new trade opportunities
in fast-growing developing countries. While traditional markets — Canada, the
EU, Japan and the United States — still account for almost 80% of world
imports, experts predict they will grow only marginally. In contrast, the
markets of larger developing countries are growing very fast. India and China
have high growth and thus export potential. China is already the world’s fourth
largest market for apparel, accounting for 5% of demand. Brazil and South
Africa also offer possibilities, although at a lower level.
However, LDC exporters selling to other developing countries
may experience drawbacks, such as high tariffs (India’s or Mexico’s average
import tariff for textiles and clothing is 35%), unfamiliar market structures
and distribution channels, as well as different cultural issues.
To lower tariffs and improve market access, effectively
negotiating and using the Global System of Trade Preferences among Developing
Countries is an option. If larger and more advanced developing countries give
preferential market access to LDCs, this could help them find new markets and
partly compensate for potential losses in traditional developed markets.
b)Source intermediary products in the region. Intermediary products — fibres,
fabrics and trims — are available on world markets, but sourcing them from
nearby countries can provide shorter delivery times. In addition, by working
with neighbouring countries that benefit from preferential market access, LDC
firms can continue to sell final products duty-free to the United States and EU
under regional cumulation rules. Jointly responding to market requirements for
the final product needs to be the central theme of such cooperation.
As it is unrealistic to assume that individual LDCs will
become vertically integrated at the national level, they can look at developing
regional and even inter-regional value chains to exploit complementarities.
Trade in intermediary products provides a lot of scope for
technical cooperation between developing countries. For example, Asian
counterparts could help African cotton producers to improve the quality of
their cotton and also to find new markets for it in Asia.
a)Improve relations with foreign investors. To stabilize
investment in textiles and clothing, LDCs need to develop long-term partnerships
between foreign investors, often from Asia, and local industry. They should
concentrate on win-win situations — in many cases, an answer is to develop
jointly local clothing training institutes. Local industry benefits from a more
skilled workforce and investors save costs by recruiting qualified local staff
instead of more expensive Asian expatriates. Moreover, local middle management
will be able to communicate better with machine operators and other staff,
which will increase productivity and reduce the risk of labour unrest.
The role of trade
facilitation
Improving trade facilitation services would bring
significant gains to LDCs and also increase investor confidence. According to
World Bank estimates, the average customs clearance time for sea cargo is more
than ten days in South Asia and Africa, nine days in Latin America and the
Caribbean and only two days in developed countries. China is setting new
benchmarks in trade facilitation. Its modern ports and fast customs procedures
reduce domestic lead time, while direct shipping services to all major markets
optimize sailing time.
Importing countries:
More flexible rules of origin
To help LDCs maintain clothing exports, major import markets
should offer them non-reciprocal preferential market access conditions,
including rules of origin requirements that are easy to fulfil. Canada’s
preferential scheme for LDCs or the “third country fabric sourcing provision”
under AGOA are good examples of flexible rules of origin. However, the “double transformation”
requirements under the EU’s Everything but Arms initiative or agreements with
African, Caribbean and Pacific countries do not improve market access. LDCs do
not have substantial textile industries to supply the fabric to fulfil these
rules.
Similarly in the United States, most preferential access
agreements stipulate “yarn or fabric forward” rules of origin. That means
everything from yarn or fabric onwards to produce the garment needs to
originate in the beneficiary country or the United States. As US yarn and
fabric are generally not competitive compared to Asia, these requirements
undermine ways to improve the competitiveness of LDCs.
Price tag to compete
In order to tackle increasing competition successfully, LDCs
need to address the following areas:
a)Firms need to gear up their efforts to take over
responsibilities along the textiles and clothing value chain.
b)Firms and countries should accelerate South-South
cooperation to tap markets in other developing countries. Moreover, increased
intra-regional trade of intermediary products improves competitiveness to
jointly exploit traditional markets in the North and to participate in global
production chains.
c)Look at closer regional cooperation to benefit as much as
possible from preferential and differential treatment. In importing countries,
meaningful rules of origin requirements can increase LDCs’ competitiveness and
at the same time foster South-South trade.
d)Countries should address trade facilitation to create the
necessary enabling environment for business. If LDCs address these areas
carefully and quickly, the clothing sector could continue to contribute to
economic development and poverty reduction. However, clothing exports might not
develop into a major sector in many LDCs, especially in Africa. These countries
need to diversify exports into other sectors until new opportunities emerge in
textiles and clothing.
Filling the fabric gap
in Africa
African countries produce raw cotton and finished garments,
but they rarely have domestic textiles industries that transform cotton into
yarn and cloth on a scale that meets export needs. At present, producing
clothing is
To overcome the disadvantage of size and to attract
investment, companies could cooperate in regional vertical relationships.
If a country exports US$ 5 billion in garments annually,
creating a local textile industry or attracting foreign textile investors is
feasible. However, for countries where these exports are less than US$ 2
billion (the case for all LDCs except Bangladesh), building a local textile
industry or persuading foreign textile mills to invest is difficult and costly.
To benefit from economies of scale, a vertically integrated textile industry
has to serve many clothing factories. Thus, even if they are located in
different countries of the same region and are competitors on the final market,
clothing factories need to cooperate closely to attract the necessary textile
investment.
Finally, bringing on board the final buyer of the garment
proves a clear commitment to establishing a textile mill. This situation begins
to resemble a joint venture between buyer and suppliers in a region. Some
importers, realizing the need to show their core suppliers that they are
serious about strategic relationships, are now planning to invest in factory
operations.While these more progressive importers are not interested in owning
factories, they realize that a 10%–20% investment increases their credibility
with the supplier. This relationship between cooperating suppliers and one or
two major buyers, willing to buy from them in a long-term relationship, could
attract the investment for a regional textile mill.
Another solution would be to develop inter-regional trade
along the cotton value chain. Firms in sub-Saharan Africa could export cotton
to Asia and import cotton fabrics back to Africa for exports of clothing to
Western markets under duty-free schemes, providing a win-win situation for all
participating countries.
ITC’s technical assistance response
Sector strategy. The “Shape”, a ten-step thinking process to
develop a national clothing strategy, applied in two workshops; assistance to
implement strategies.
Benchmarking. The “FiT”, a software-based benchmarking tool for clothing
manufacturers, implemented through national associations, which receive
training to apply it; management of and access to global benchmarking data.
Sourcing. Fabric sourcing textbook, Source It — Global Material
Sourcing for the Clothing Industry; training workshops for associations and
firms; sourcing missions to help firms diversify suppliers; regional databases
of suppliers in Association of Southeast Asian Nations and South Asian
Association for Regional Cooperation countries.
Market trends. New ITC textiles and clothing web site; workshops about
future competitiveness requirements; product and market development activities
in national projects.
E-trade. A guide on e-business applications in textiles and clothing
trade; training workshops; advice on tailoring solutions to meet buyer
requirements.
South-South trade. Tailor-made projects to promote South-South trade in
final products; increase trade in intermediary products; facilitate technical
cooperation among developing countries.
* Matthias Knappe, (knappe(at)@intracen.org,
ITC Senior Market Adviser on textiles and clothing, http://www.intracen.org/textilesandclothing)
** International Trade Forum, Issue 1/2005, pp.19-24.
*** Required permission for re-publication was taken from
the ITC. The translated Turkish version of the article is available at: http://www.akademiktisat.net/calisma/tekstil_konfeksiyon/tekstil_giyim_agu.htm