A woman with a suitcase waving goodbye and with a speech bubbleBid Farewell to Quota System

There are different responses to quota elimination beginning 1st January 2005. Some follow the whole story closely.  Some feel unbelieving whereas some are confused. This article presents a very brief story of the whole issue.

1. Brief Quota History

Protection of the textile and clothing sector has a long history. For more than 40 years, trade in this sector was governed by special regimes as follows :

1.1              The Short Term Arrangement Regarding International Trade in Cotton Textiles (STA) in 1961.

1.2              The Long Term Arrangement Regarding International Trade in Cotton Textiles (LTA) in 1962-1973.

1.3              Multifibre Arrangement (MFA) 1974-1994. The MFA, as the name suggests, extended restrictions on trade to wool and man-made fibres in addition to cotton. Under this agreement, industrialized countries were allowed to negotiate complex quantitative restrictions with textile and apparel producing countries on a country-by-country basis, contrary to guidelines set forth in the General Agreement on Tariffs and Trade (GATT).  As of 1990, 65.3 percent of all U.S. textile and apparel trade was under quota. The MFA was renegotiated four times, the last time in 1991, and it finally expired in 1994. Six developed countries applied quotas under the MFA during the final years of the agreement (the EU, Austria, Canada, Finland, Norway and the United States), and the quotas were applied almost exclusively to imports from developing countries.

1.4              Agreement on Textile and Clothing (ATC) 1994-2004. The expiration of the MFA did not mean the end of quotas on textile and clothing exports from developing countries. Instead the MFA was followed by the Agreement on Textiles and Clothing (ATC), which came into force with the establishment of the WTO in 1995. Four countries carried the MFA restrictions into the ATC (Canada, the EU, Norway and the United States). Austria and Finland, which had applied quotas within the MFA in 1994 became EU members on 1 January, 1995.

2. The Integration Process

The new agreement requires a gradual phase-out of quota restrictions over a ten year transition period. The first stage required countries to eliminate quotas on at least 16 percent of the total volume of textile and apparel imports by January 1, 1995. The second stage and third stage required the integration of an additional 17 and 18 percent by January 1, 1998 and January 1, 2002, respectively. All quotas must be eliminated by January 1, 2005.

Although technically we are already in the third-stage of liberalization, in reality the bulk of the liberalization will not occur until 2005. Not surprisingly, importing countries first integrated the least sensitive products, or those that were quota-free even prior to the Uruguay Round.  Survey found that 67.3 percent of U.S. textile and apparel imports under quota in 1990 would not be integrated until the fourth phase. The most sensitive products and the products with the highest value-added have been left to the final stage of integration.

3.  Possible Impacts of Quota Elimination  

3.1 Retailers reduce Sourcing Countries
Eliminating quotas will likely consolidate production into larger companies and a smaller number of supplying countries. Large retailers and manufacturers such as the Gap, JC Penney, Liz Claiborne, and Wal-Mart  once sourced from 50 or more countries now source from 30-40; when quotas are eliminated, it is predicted that the number will fall to 10-15. Competition among garment-producing countries will increase. 

3.2 Price Fall
Quotas add to the cost of production, both indirectly, through restricting supply and thereby raising prices, and directly, since quota are frequently sold and thus become a cost of doing business. Price reductions of anywhere from 50 cents to $2.00 per unit are predicted 

3.3 Benefit to Consumers
The immediate beneficiaries of quota elimination are predicted to be consumers, who will experience declining costs of textile and apparel products. Eliminating quotas is predicted to lower costs, increase efficiency, and reduce risks. 

3.4 Job Loss
Quotas protect jobs in the industrial countries. Indeed, this is the purpose for which they were originally intended. Mass job losses are happening and anticipated both in the importing countries and less competitive supplying countries. 

3.5 Dominating Countries
One recent review of existing research offered a straight-forward summary: “The lion's share of these benefits will accrue to India and China”, with Indonesia, Viet Nam, Mexico and Turkey moving into the second tier at the global level. Republic of Korea and Taiwan Province of China will continue to exploit their niche as suppliers of textile input to the major Asian apparel exporters, and they are likely to retain smaller but still significant exports of relatively high-value apparel items in which quality, product development, timely delivery and related services are at a premium. 

3.6 Declining Countries
Most of rest of the developing world will likely experience a decline in apparel exports. This includes Countries in which more than three-quarters of all apparel exports are in highly constrained quota categories, countries that sell a limited range of products, and that compete on the basis of price rather than quality. 

4. Factors Mitigate the Impact of Quotas

It should be noted that quotas are only one form of non-tariff barriers that constitute a “hindrance to trade.” Elimination of quotas will not by itself result in a fully competitive global market for textile and apparel production. This is for several reasons: 

4.1 Preferential Trade Agreements Already Weaken the Impact of Quotas and Tariffs
The U.S., EU, and Japan all have preferential bilateral and regional trading agreements with selected trading partners. Such agreements, typically have rules of origin exempting apparel that uses the importing country’s yarn, fabrics and dying from quota and tariff restrictions. Preferential access to US and European markets has been an important mechanism for selected developing countries to improve their competitive position. Given that the average U.S. tariff for apparel is around 13%, preferential treatment can make a large difference in the ability of a country to export to the U.S. 

4.2 Regional trading blocks may become more important. 
The relaxing of quota constraints will increase the relative importance of geographical proximity (which reduces delivery time), contributing to the strength of trading blocks such as NAFTA, an expanded EU and ASEAN. 

4.3 Tariff barriers 
Favorable tariff treatment will continue to play a role (although tariffs are less restrictive than quotas); indeed, pressures to increase tariffs may increase. Tariffs currently vary considerably across countries (see Table one):  

 

4.4 Anti-dumping measures.
Anti-dumping measures will doubtless continue to be invoked by importing countries as a way to protect their domestic industries from low-cost imports. The EC, for example, has repeatedly initiated such measures on behalf of industry associations, with significant impact on the exporting countries. Between 1993 and 1998, the volume of cotton fabric imports was reduced from 59% to 38% for Egypt, India, Indonesia and Pakistan, all of which were involved in anti-dumping investigations. 

4.5 The growing power of large contractors.
Large retailers who import are likely to develop “mega-relationships” with big suppliers. To the extent that giant contractors squeeze out smaller competitors, concentration of production in a handful of giant companies. 

4.6 Safeguards Measures
China's accession agreement to the WTO included a safeguard to protect trade from possible “market disruptions”. Under the terms of China’s accession to the WTO, this consultation mechanism is to be in place for four years following the elimination of quotas (through the end of 2008), although actions taken under the mechanism are limited to one year’s duration.

Confusion over Quota Lifting 
The MFA was initially welcomed by textile and apparel producing countries, albeit with concern that the bulk of the liberalization was being delayed until 2005. However, as we quickly approach the date of complete quota elimination many small international producers are becoming nervous that the elimination of quotas will actually have a negative effect on exports.

Although the Global Alliance fro Fair Textile Trade (GAFTT) consisting of 91trade groups from 49 countries was formed to persuade  WTO to extend the quota system. However, as we approach the end of year 2004, seems that we have no choice but to wave farewell to the Quota System. Let be prepared to face a liberalized world of post quota era.

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