The End of Textile Quotas Will Redistribute Pain and Gain

WASHINGTON: The WTO's Doha Round opened almost three years ago with a vision of extending trade and growth to the developing world. Since then, countries like India, Egypt, South Africa and Brazil have asked for abolition of rich-country farm subsidies, and an end to tariffs on labor-intensive goods. They are right to say the rich should do more. But one of their past successes – the abolition of textile quotas at the end of this year – shows that rich-country reform may not be enough.

The commitment to lifting textile quotas dates to 1994, with the successful close of the 'Uruguay Round' talks that created the WTO. On January 1, 2005, the United States, Europe, and other rich economies will abolish their quotas systems. The event is still awaited with enthusiasm in China and India – but in many other countries it arouses more apprehension than hope, as the livelihoods of over ten million workers across the developing world could be affected.

Unique in manufacturing trade policy, the quotas set limits on the number of clothes developing countries can send the US. Filipinos, for example, can sell Americans all the bicycles, yo-yos, and computer chips they can make. But they can sell no more than 4,198,176 cotton sweaters to the United States this year. Fifty-four other countries face similar limits.

Economists have long derided this approach to trade, and for good reason. For Americans, the quotas are drags on the standard of living. A recent analysis by the International Trade Commission suggests the quotas may raise clothing prices by 25 percent across the board, meaning Americans pay $50 to $60 billion more for clothes than they should.

Developing-country governments, meanwhile, considered the quotas an obnoxious barrier to growth and job creation. The reasons are obvious. Every day, U.S. ports take in a million sweaters, six million pairs of socks, 1.3 million brassieres, and much more. In 1994, Asian, Latin American, African, and Middle East governments alike assumed that ending the quotas would mean more American imports, and that more American imports would mean more jobs.

In 2004 it doesn't seem that simple. The quotas have certainly limited imports. But they have done so mainly for the countries that can make the most clothes – China in particular, and to a lesser extent India and other large Asian countries. These limits seem in turn to have created a 'space' of demand which factories in Nepal or Haiti could fill. So when the quotas vanish this January, some countries fear China and India will recapture the space left to others and do it so well as to squeeze them out completely.

A second ITC report, released last January, provides evidence that their fears may have some foundation. It predicts that China will emerge as the 'supplier of choice' of clothes for the United States; India will be a primary alternative; and other big Asian countries such as Pakistan, Indonesia, and Vietnam may also succeed. Middle-income countries like Mexico, the Philippines and Malaysia, by contrast, will lose sales fast. Their costs are higher, and their infrastructure is not strong enough to compensate. Large Muslim states like Bangladesh (which relies heavily on textile exports to earn foreign exchange) and Turkey have unclear prospects. The Caribbean, Latin America, and Africa need special help through free trade agreements or extended tariff benefits to keep pace.

Practical evidence is equivocal, but seems to bear out the ITC's forecasts. Baby clothes, where quotas came off in 2001, are the largest single example. As Chart 1 shows, Chinese firms used the end of the quotas to triple their sales of baby clothes, while exporters in other regions struggled to keep up.

If the same trends emerge when quotas vanish for sweaters, blue jeans, and other heavily traded goods, the consequences may be considerable. Garment factories employ more than three million people in Southeast Asia, four million in Bangladesh and Pakistan, half a million in Egypt, and well over a million in Turkey. Smaller countries often rely even more heavily on the garment industry, with clothes making up about 98% of Lesotho's exports and 80% of Cambodia's.

Some middle-income countries are less vulnerable than they may think, though. As Chart 2 shows, China's opening up through WTO membership is helping them make up their potential losses. Turkey's exports to China, for example, have grown from $40 to $400 million since 1999, in areas like steel, fabrics and auto parts. The Philippines, Thailand, South Africa and Indonesia have done nearly as well.

The chart also shows, though, that the poorest countries may have fewer options. Least-developed Asian states such as Bangladesh, Cambodia, Nepal and Mongolia are examples; so are poorer African nations. Both seem less able to benefit from Chinese growth, and some large Muslim countries may find themselves in similar straits.

What can be done?

First, the US should ease the transition for the most vulnerable countries. The Muslim world and low-income Asian countries like Cambodia and Nepal face not only quotas but permanent tariffs ranging up to 19% for a cotton T-shirt and 32% for a polyester sweatshirt. Nearly seventy countries in Africa and Latin America have been exempted from these tariffs, and use the advantage to good effect. Similar exemptions for the least-developed Asian countries and the Muslim world would presumably have similar effects, easing the transition to a quota-free world.

But rich-country reforms won't be enough, at least in the long run. If textile liberalization or more general trade reform simply channels developing-country goods to the rich world, the result will always be to make Cambodia compete with China, and Paraguay with Brazil. The poorest and least competitive countries may struggle even if the rest of the world benefits.

This doesn't mean rich countries should keep saying 'no' to farm subsidy reform and more open manufacturing trade. But it does mean that the big developing countries have to accept their own responsibility to help their poorer and smaller neighbors. India, a natural market for light goods from Bangladesh and Nepal, is one example. Egypt and Nigeria are two more. China's emergence as one of the main export markets for the ASEAN countries, meanwhile, indicates how much reform in these countries could mean.

Finally, leaders of countries who currently benefit from textile quotas need to plan ahead to upgrade infrastructure, improve education and the rule of law, and thus help their economies diversify. If they act soon, the reforms they sought ten years ago could prove to be a long-term benefit rather than a coming crisis.