The final year of the quota regime was filled with sound and fury, as executives in many of the 148 nations of the World Trade Organization realized the expiration of the three-decades-old system could pose an enormous challenge to their economies as well as threaten the jobs of some 30 million people worldwide.
But with the system counting out its final 24 days, it appears that all the noise has signified if not nothing, then very little.
The orchestrated campaign by industry associations in more than 50 countries — who signed a document called the Istanbul Declaration, though the movement itself was largely driven by U.S. organizations — marked a major change of heart on trade for many participants.
Early in the year, Farkul Ahsan, Bangladesh’s commercial counselor in Washington, said he feared the effect lifting the quotas would have on his country. “More than 80 percent of our export earnings are coming from this sector. A lot of people talk about going for diversification of exports, but in a country where poverty is pervasive and 40 percent of people live below the poverty level, diverting resources to diversify exports is a difficult task.”
When the signatories of the General Agreement on Tariffs & Trade, a predecessor of the WTO, agreed to the 10-year quota phaseout, they saw it as a major opportunity. The apparel trade, currently valued at more than $330 billion worldwide, over the past century has served as a bootstrap industry for world economies — many of today’s Asian industrial powerhouses, such as Japan, South Korea and Taiwan, used it as a point of entry into the world economy.
Importers welcomed the development, which they argued would simplify their supply chains — since they wouldn’t run the risk of having important suppliers in key countries run into embargoes late in the year — and because it would reduce their costs. A study released this year by the U.S. Association of Importers of Textiles & Apparel asserted that the quota system — as well as import tariffs, which will remain in place after quotas are lifted — costs U.S. consumers $80 billion a year in the form of higher retail prices. Import executives have said they expect lifting quotas will reduce their costs by 10 to 20 percent on average.
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Ten years ago, many developing nations looked at the import quotas imposed by the U.S. and wealthy Western European nations, which limited the kind and quantity of goods they could ship, as the main barrier to growing their exports. If the barrier was lifted, they reasoned, they’d be able to boost their exports and thus build employment.
That thinking overlooked one critical aspect of market economics: Lifting barriers to supply doesn’t necessarily influence demand. Factoring out strong growth in demand for garments, which has not been evident in the U.S. or EU in recent years, a gain by any one country must come at the expense of another.
The potential risk of one country’s gain becoming another’s loss was made strikingly clear when China was admitted to the WTO in 2001. Manufacturers in that country already dominate the world production of toys and footwear — two categories of goods that aren’t regulated by quotas. In each category, China provides more than 90 percent of the U.S.’s supply.
Even with quotas on most goods still in place, U.S. imports of Chinese textiles and apparel were up 24.9 percent through the year ended in September, to $13.79 billion, giving it a 17.1 percent market share and the number-one slot among the U.S.’s suppliers of imported textiles and apparel. By comparison, Mexico, which enjoys complete duty- and quota-free treatment under the NAFTA trade arrangement, holds the number two slot, with $7.77 billion in shipments, off 4.8 percent, for a 9.7 percent market share. Net U.S. apparel and textile imports for the period came to $80.49 billion.
Given the strong growth of Chinese exports, even with quotas still in place, exporters in many other countries early this year grew increasingly concerned that they’d be unable to compete with China after quotas are lifted. That resulted in the Istanbul drive, with trade associations calling for an extension of the quotas through 2007, or even as long as 2010.
Exporters in many countries with significant competitive disadvantages — such as those of sub-Saharan Africa, which are a great distance from major consumer markets in the U.S. and EU and have limited textile industries — realized that, rather than posing a restraint, the quota limits might have helped them to develop larger industries than they would have otherwise had.
Sourcing executives agreed that, in the first few years after quotas are lifted, they’ll reduce the number of countries in which they do business. Firms that today source in 50 or 60 countries will likely prune that roster back to 20. China is universally seen as a big winner, followed by India, Pakistan, Vietnam — which is not a WTO member — Indonesia, some Central American nations and Turkey, which is close to the EU and has a well-developed garment industry.
The governments of Bangladesh and Sri Lanka — which observers said stand to lose a combined 1.3 million jobs as a result of the trade liberalization — joined the drive in calling for the WTO to consider the effects of the quota’s end, though the two nations’ official submissions to the trade group stopped short of explicitly calling for the continuation of quotas.
The involvement of those governments raised the ire of U.S. importers, and in July, J.C. Penney Co. Inc. of Plano, Tex., fired back at Bangladesh with a letter threatening to pull its business from that country if it didn’t back down.
In any case, the petitions produced no significant outcome and in October, the members of the WTO’s Council on Goods met and reaffirmed their plans to go forward with the phaseout.
However, that does not mean that the trade in apparel will be entirely free of regulations on Jan. 1, or that Chinese imports will be entirely unregulated. When China joined the WTO in 2001, it agreed to a process known as the safeguard mechanism. That allows importing countries to reimpose one-year quotas on specific categories of Chinese imports that cause “market disruption” in the importing countries. The safeguard quotas are renewable through 2008.
The U.S. last year imposed safeguard limits on imports of Chinese bras, robes and knit fabrics — three categories that were freed of restrictions in 2002 under the phaseout. This year, a coalition of U.S. textile associations, joined by the union UNITE HERE, filed petitions covering an additional eight categories, and the U.S. government already has agreed to review five of them. The ongoing wave of petitions is expected to cover about $2 billion worth of Chinese imports.
In October, the European Commission said it was putting measures in place, including monitoring Chinese shipments before they even leave that country, to make it easier for European firms to file safeguard petitions if they become necessary.
The potential for wave upon wave of safeguard petitions, which could come at any time and affect any textile or apparel category, presents a significant challenge to importers, who need predictable sources of supply. As a result of the threat, many importer executives have said they don’t plan to move more of their production into China in the first months after quotas are lifted.
Some executives have acknowledged that they might prefer to see the U.S. and China negotiate some sort of blanket restraint agreement, so they didn’t have to navigate a crazy quilt of safeguards. The Chinese, however, have repeatedly rejected the idea of any voluntary restraints on their part.