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French Version

Can regional textile industries cope with challenges ahead ?

In January 2005, Multi Fiber Agreement will terminate
End of key global trade pact will see China well placed to consolidate advantages

In January 2005, the Multi Fiber Agreement (MFA) which sets quotas on the amount of exports of textiles and clothing coming from developing countries to the markets of the U.S., Europe and other rich countries will come to an end.

The MFA was intended to be a temporary arrangement aimed at providing producers in developed countries enough time to restructure and adapt to competition. By the end of this year, exports of textiles to the developed countries will no longer be regulated by a complex import quota system, although tariffs on imports of textiles will remain. Textiles exports to Europe from Tunisia, Morocco, Lebanon, Syria and Egypt will now face stiff competition from Asian manufacturers. Jordan's Qualified Industrial Zones, which are currently producing textiles, with exports mainly to the U.S. market reaching $1 billion in 2004, will also face tougher competition.

The World Trade Organization (WTO) rules called on the U.S. and the E.U. to phase out some quotas on textile imports over the past decade. However, the two major importing blocs have done the minimum that is required legally, leaving almost half their textile imports to be liberalized at the end of this year. This is why the shake up of the garment industry, which employs at least 40 million worldwide and generates trade worth $350 billion annually, is likely to be a messy one. The biggest winner will be China. Its efficient, large-scale production and low costs are expected to give it a decisive advantage. Already China's share in global clothing exports have grown to about a quarter of the world's total since it joined the WTO in 2001.

Many small companies are still unaware of the implications of ending quotas on textile exports and the threat they are facing in the major export markets. The quota system has suited many developing countries. As textile exports from one Asian country hit their MFA ceilings, the companies controlling production shifted operations to other countries not yet covered by quotas. This has led to clothing industries being established in places that do not necessarily have a competitive edge especially in labor costs, such as Mauritius, the U.A.E. and several East European countries. The competition next year will not simply be on price because China is not the lowest cost producer in the world. Its biggest advantage is its industry's rapid response, its consistency in quality and its keen understanding of customer demand.

Although quotas on textile imports in the U.S. and Europe will end this year, nevertheless steep tariffs will continue to provide protection from cheap imports coming to these markets. These tariffs range from 12 percent in the E.U. to 33 percent in the U.S., and higher still in many developing countries. Besides, there are certain trade arrangements such as the E.U.'s agreement with its Mediterranean neighbors (Morocco, Tunisia, Egypt, Syria and Lebanon) and the U.S. free trade agreements with Jordan, Bahrain, Morocco and Israel that would give those countries preferential access to western markets. Such an advantage may shield them, at least for a while, from the full effect of Chinese competition.

China faces other commercial difficulties as well. Its WTO accession agreement entitles other countries to re-impose quotas on its exports until 2008. It is a safe bet to say that the politics of protection will not change on New Year's Eve, and once imports from China spike, American textile firms will invoke the protection clause.

When quotas on textiles are removed in January 2005, the producers' cost of production will play a much more significant role in determining who would be able to compete with the Chinese and other Asian suppliers. It is well known that fabrics constitute around 60 percent of the garment's cost of production, labor 15 percent and other costs such as housing, catering, electricity, depreciation etc. around 25 percent. Because fabrics are internationally traded commodities, their prices are market driven and are generally the same for all producers. It is labor and other costs of production that render one supplier more efficient than others.

Labor cost in countries such as Tunisia, Morocco, Egypt, Lebanon and Jordan is almost double that of the Asian countries, but these textile producing Arab countries are more or less competitive in other costs of production. The higher labor cost, added to it the transportation cost of raw materials to the region, will put those Arab countries at a competitive disadvantage. Their cost of production is estimated to be 15 percent higher than Asian suppliers. Only Jordan will continue to have a competitive advantage of around 15 percent because garments produced in its Qualified Industrial Zones (QIZ's) enter the US market duty free, while Asian suppliers have to pay duties of up to 33 percent.

Suppliers who are manufacturing garments in Jordan's QIZ's should, therefore, be able to cope with the global shake up following the end of the multi fiber agreement. This view is supported by a survey we conducted with five major foreign investors currently operating in one of the country's QIZ's. These clients believed QIZ's in Jordan will continue to prosper. They stated that after undertaking such a considerable investment it would be difficult to relocate elsewhere, and the competitive advantage of 15 percent to 20 percent associated with the duty free access to the U.S. market is conducive enough for them to stay. As a mater of fact, several large clients are currently expanding their existing facilities and many new ones are looking for premises in the various QIZ's to start production.

In Tunisia, textiles and clothing represent about 50 percent or $3.8 billion of the country's total exports, and the industry employs about 250,000 people in 2,000 companies. The World Bank has warned that nearly 100,000 jobs could be affected when the Multi Fiber Agreement ends this year. Morocco, Egypt, Syria and Lebanon will invariably suffer as well.

Several steps need to be taken to insure that the competitiveness of the region's textile producing countries will continue in the future. These include raising the productivity of nationals working is this industry through various training programs for them to become more cost efficient and eventually replace foreign workers. Arab countries need to reduce customs on imported fabrics for their garments industries, and establish direct shipping lines to the U.S. and Europe from the region's main ports. If all services supporting exports of textiles are exempted from VAT and income taxes this would give an additional boost to the region's textile sectors.

To conclude, the end of the Multi Fiber Agreement this year should not be looked upon as a threat to the region's garment industry but more of a challenge. Various steps need to be implemented to ensure the survival of this industry in much more competitive market conditions. The advantage of having QIZ products entering the U.S. market duty free and the benefits associated with the trade agreement between the E.U. and its Mediterranean neighbors should not be handicapped by a higher cost of production (especially labor), congested conditions in the region's ports and cumbersome government bureaucracies.

This sector has the potential to continue to grow only if quick actions are taken to reduce costs.

Henry T. Azzam is chief executive officer at Jordinvest in Amman

Beirut 15-11-2004
Henri T. Azzam
The Daily Star

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