 Implications of the Removal of
Quotas in Textiles and Clothing
Trade
by
Eckart Naumann*
tralac Trade Brief
No 8/2004
December 2004
*
tralac Associate
Abstract
This trade brief provides an overview of key developments in the
global textile and clothing trade regime in the context of the removal
of quotas under the WTO Agreement on Textiles and Clothing.
The views presented in this paper are those of the author alone and do
not necessarily reflect those of tralac (Trade Law Centre for Southern
Africa). Any errors are the author’s own.
tralac (Trade Law Centre for Southern Africa)
p.o.box 224, stellenbosch, 7599 south africa
c.l.marais building, crozier street, stellenbosch
(t) +27 21 883-2208
(f) +27 21 883-8292
(e) info@tralac.org
© Copyright Trade Law Centre for Southern Africa 2004
Table of Contents
1
Textiles and the WTO: The Multifibre Agreement ____________________________ 1
2
Removal of Quotas under the Agreement on Textiles and Clothing ______________ 2
3
Global Textiles and Clothing Trade _______________________________________ 4
4
Some Implications of an End to Quotas____________________________________ 7
5
Reaction to the Removal of Quotas _______________________________________ 9
6
Summary of key Issues _______________________________________________ 11
www.tralac.org
tralac Trade Brief No 8/2004
www.tralac.org
1 Textiles and the WTO: The Multifibre Agreement
For more than three decades the textile and clothing sector has been the subject of
special attention in the World Trade Organisation (WTO) and its trade in goods oriented
predecessor, the General Agreement on Tariffs and Trade (GATT). This is partly
because the textile and clothing sector – one of the most widely distributed industries in
the world and a key provider of employment – has long been recognised as an essential
factor for economic and social development and one where market interventions were
deemed to be necessary.
But since labour costs are an important differentiating component of this sector’s
competitiveness, a number of industrialised countries (who might otherwise have been
unable to compete) sought to shield this sector from foreign competition. This led to
quantitative restrictions being introduced especially by Europe and the United States, on
top of already high tariff-based restrictions.
Although quantitative restrictions had been in place even before then, 1974 saw the
inception of the Multifibre Agreement (MFA) which was a formalisation of quota
restrictions in textiles and clothing trade. The MFA succeeded the Long-Term
Agreement on International Trade in Cotton Textiles (LTA), which had been in effect
since 1962. While the MFA was not specifically time-bound, it signalled the beginning of
a long-term shift in the dynamics in the global textile and clothing sector. It was renewed
in 1977 and again in 1981, 1986 and 1991. The MFA also signified a major departure
from GATT principles, and could thus be classified as a derogation from GATT rules.
In the context of the MFA, quotas were determined on an annual and differentiated
basis. Quota-imposing countries set their own quantitative restrictions according to
domestic economic policies and local industry dynamics. This meant that many
countries remained entirely unconstrained by quotas (or faced restrictions in only a few
certain categories), while others faced across-the-range restrictions. Quotas can in
effect be seen as a tax levelled against the exporting country, with a 2001 study
estimating that quotas on India’s exports were equal to an equivalent tax in 1999 of 40%
and 19% for exports to the US and EU respectively.
Despite the MFA, new growth in the textile and clothing sectors took place mainly in
developing countries, attracted by lower overheads and even lower wage rates. But the
MFA also had the important effect of being responsible for a much wider diffusion of the
textile and particularly the clothing sector than would otherwise have been the case.
Since quota restrictions forced producers to seek new and less quota-constrained
1
tralac Trade Brief No 8/2004
www.tralac.org
locations, countries that would otherwise not have been the location of choice became
important production centres. Examples include Bangladesh and Mauritius, whose
producers compete mainly in otherwise constrained product categories.
Quotas not only led to a far wider dispersion of investment and related employment
opportunities, but also increased the real margin of preference that Europe and the US’
preferential trade partners enjoyed. Duty and quota-free market access thus took on far
greater significance than would have been the case in an unrestricted market, where
production would simply have gravitated towards lowest cost producing countries of the
world. For example, under the Lomé Conventions (which later became the Cotonou
Agreement), 77 ACP developing countries are able to access the EU market free of
duty and quota restrictions for textile products. These preferences were a key driver in
the development of the textile sector in Mauritius, having initially attracted investors from
quota-constrained Asian countries.
2 Removal of Quotas under the Agreement on Textiles and
Clothing
While the initial objective of the MFA was to prevent the “uncontrolled” expansion of
textile and clothing exports from developing countries, it took over twenty years for an
agreement to be concluded that would see the eventual removal of these quota
restrictions. While the textile and clothing sector had for a long time enjoyed a special
dispensation within the multilateral trade regime including the Uruguay round of trade
negotiations, the WTO Agreement on Textiles and Clothing (ATC) eventually became
the instrument that was to regulate quota phase-out. It was implemented in 1995, and
set specific targets over a 10-year period ending with the final tranche of quotas being
removed on 1 January 2005. The ATC is binding on all WTO member States.
At the first stage of quota phase-out, lasting from 1995 to 1997, 16% of developed
countries’ imports were freed from quota restrictions, with each subsequent period
seeing a larger proportion of quota being removed. However, since the quota removal is
heavily back-weighted (i.e. the largest proportion of imports – namely 49% - is to have
quotas removed only by 01 January 2005), the effective liberalisation of quotas will
occur mainly at the end of the 10-year period. Quota-removal percentages are based on
a country’s total textile and clothing trade in 1990, rather than trade in categories that
were quota-constrained. A quota is defined to be constraining when quota utilisation
levels are at least 85% (this being the US interpretation) and 95% (EU interpretation).
Countries would therefore have been induced to initially remove quotas in categories
where competing imports were not so much of a threat, for example instances where
actual imports were already well below quota limits. A study has shown that in 2001 (still
2
tralac Trade Brief No 8/2004
www.tralac.org
part of Phase 2 of the quota removal process) well over 50% of Asian countries’
aggregate textile and clothing exports to the US were still constrained by quotas.
Not only does the ATC set predefined quota removal targets, but also provides for an
increase in the remaining quota levels in the intervening years. In other words, existing
quota levels must not only increase in accordance with a certain percentage, but the
rate of expansion should also increase at each stage. The ATC also requires every
stage of quota removal to include goods from all four of the pre-defined categories,
namely “tops and yarns”, “fabrics”, “made-up textile products” and “clothing”. The table
below shows the general schedule for quota removal and quota growth rates.
Table 1
Quota removal under the ATC
Stage of quota removal
Percentage of products
to be brought under GATT
(including removal of any
quotas)
Annual increase in remaining
quota growth rates (%)
Stage 1:
1 Jan 1995 to 31 Dec 1997
16%
(minimum, taking 1990 imports
as base)
16%
Stage 2:
1 Jan 1998 to 31 Dec 2001
17%
25%
Stage 3:
1 Jan 2002 to 31 Dec 2004
18%
27%
Stage 4:
1 Jan 2005
49%
(maximum)
No quotas left
Full integration into GATT (and final elimination of quotas, termination of ATC)
The actual formula for import growth under quotas is:
by 0.1 x pre-1995 growth rate in the first stage;
0.25 x Stage 1 growth rate in the second stage; and
0.27 x Stage 2 growth rate in the third stage.
3
tralac Trade Brief No 8/2004
www.tralac.org
3 Global Textiles and Clothing Trade
Global export data covering the past four decades reveals that developing countries’
share of textile and clothing exports has been growing rapidly, while that of
industrialised countries has been in decline. In the late 1980’s, developed countries’
underlying fears were probably realised when their share of global textile and clothing
exports was overtaken by that of developing countries. A decade later, developing
countries were responsible for over half of global textile and nearly three-quarters of
global clothing exports, up from a less than 20% aggregate in the early 1960s.
In 2001, the last year for which complete cross-sectional data was available at the time
of writing, China was a clear leader in terms of aggregate textile and clothing exports.
Its share of world clothing exports in that year equates to almost 20% of the world total,
rising to 31% if one includes Hong Kong’s contribution. In textiles, China’s share of the
world export market is 11%, rising to 20% with Hong Kong. China has in recent years
become the new super-power among textile and clothing producers, and probably the
largest threat facing the existence of textile and clothing production in competing
countries. Not surprisingly, the country has also been the subject of the largest number
of quota restraints. To place this into context, China in 2001 faced export quotas on
almost 60% of its textile and clothing exports to the US, compared with 53% for Asia
overall, 13% for Sub-Saharan Africa (SSA) under AGOA and 0.5% for NAFTA
countries.
As the following table indicates, the world’s leading clothing exporters – with few
exceptions – are located in Asia. Many of these have shown significant export growth
over the past decade, with notable increases recorded not only by China, but also by
Mexico, Bangladesh, Sri Lanka and Morocco. Significantly, no countries from the SSA
region are among even the top 20 clothing exporting countries. The situation is similar
among the leading textile exporters, with China holding the top position. Other major
suppliers to the world market are located predominantly in South Asia, including India,
Pakistan and Indonesia.
4
tralac Trade Brief No 8/2004
www.tralac.org
Table 2
Top 10 Exporters of Clothing and Textiles in 2001 (excluding EU, US and Canada)
Rank
Clothing
WORLD total
1990
2001a
US$ mn.
US$ mn.
108,130
193,690
9,669
36,650
15,406
Textiles
WORLD total
1990
2001a
US$ mn.
US$ mn.
104,350
146,980
China *
7,219
16,826
23,446
Hong Kong, China
8,213
12,214
587
8,011
Korea, Republic of
6,076
10,941
1
China *
2
Hong Kong, China
3
Mexico *
4
Turkey
3,331
6,661
Taipei, Chinese
6,128
9,904
5
India
2,530
5,483
Japan
5,859
6,198
6
Indonesia
1,646
4,531
India
2,180
5,375
7
Korea, Republic of
7,879
4,306
Pakistan
2,663
4,525
8
Bangladesh
643
4,261
Turkey
1,440
3,943
9
Thailand
2,817
3,575
Indonesia
1,241
3,202
10
Romania
363
2,780
Mexico *
713
2,091
Source: WTO (2004c) based on various statistical databases
Notes: * includes processing zones, ** includes Secretariat estimates,
a
data for 2001 was used as 2002 data was not
available
The real importance of textile and clothing exports to each country is indicated by
contrasting the value of sectoral exports with total merchandise exports. While this
ignores the sometimes significant contribution to GDP of the services sectors (for
example, in the case of both India and Mauritius service exports are beginning to play
an increasingly important role), it nonetheless provides a good indication of the relative
importance that this sector plays in terms of general economic activity, employment,
foreign exchange receipts and so forth. It also provides an indication of a country’s
vulnerability or potential to benefit from the phasing out of textile and clothing quotas
under the ATC. Countries with a high correlation between direct quota restraints and
exports volumes are likely to benefit the most from quota removal, at least in absolute
terms.
5
tralac Trade Brief No 8/2004
www.tralac.org
While WTO estimates show that textile and clothing exports on average account for
2.4% and 3.2% of total merchandise exports respectively, large intra-country variation
exists. The following table quantifies this by listing the twenty countries having the
highest proportions of “export reliance” on this sector. Cambodia, Macao (China) and
Bangladesh show the highest reliance on clothing exports, whereas Pakistan shows the
highest reliance on textile exports. Ratios in the relatively more capital-intensive textile
sector are lower than in clothing. Mauritius (clothing exports) is the sole African country
featuring on the list. Under the MFA quota system and even under the current ATC,
clothing exports have generally faced stricter constraints than textile exports.
Table 3
Countries with largest ratio of clothing exports to total merchandise exports
(excludes EU, US and Canada)
Rank
Clothing
2002
2002
Exports
%
Textiles
US$ mn.
6
2002
2002
Exports
%
US$ mn.
WORLD
200,850
3.2
1
Cambodia * *
1,125 (a)
81.7
2
Macao, China
1,648
3
Bangladesh
4
El Salvador *
5
Mauritius
6
Dominican Republic *,**
7
World
152,150
2.4
Pakistan
4,790
48.3
70.0
Nepal
165 (a)
22.4
4,131
67.8
Macao, China
326
13.8
1,841
61.5
Turkey
4,244
12.3
949
54.1
India
(a)
12.1
2,712 (a)
50.9
Bangladesh
469
7.7
Sri Lanka
2,326
49.5
Taipei, Chinese
9,532
7.0
8
Tunisia
2,687
39.5
Egypt
290
(a)
7.0
9
Honduras
475
37.4
Korea, Republic of
10,586
6.5
5,375
10
Morocco *
2,413
30.4
China *
20,563
6.3
11
FYR Macedonia
319 (a)
27.7
Hong Kong, China
12,374
6.2
12
Romania
3,251
23.4
Latvia
131
5.7
tralac Trade Brief No 8/2004
www.tralac.org
13
Turkey
8,057
23.3
Indonesia
2,896
5.1
14
Pakistan
2,228
22.5
Belarus
407
5.0
15
Nepal
154 (a)
20.9
Sri Lanka
202 (a)
4.2
16
Bulgaria
1,066
18.6
Lithuania
227
4.1
17
Jordan
296 (a)
12.9
Slovenia
355
3.7
18
China *
41,302
12.7
Czech Republic *
1368
3.6
19
India
5,483 (a)
12.4
Tunisia
232
3.4
20
Hong Kong, China
22,343
11.1
Iran, Islamic Rep. **
(a)
2.8
674
Source: WTO (2004c) based on various statistical databases
Notes: * includes processing zones, ** includes Secretariat estimates, a 2001 figure, as 2002 unavailable
4 Some Implications of an End to Quotas
There is much divergence of opinion with regard to the likely implications of an end to
quotas. But never before has a WTO agreement caught so much attention, as the finalstage of the ATC drew near. Since this last stage of quota removal will not only see the
largest percentage of quotas being removed in absolute terms, but also the inclusion of
most sensitive categories (which were held back earlier), there is little doubt that the
lifting of quotas will have a significant and wide impact.
Since quotas were in the past applied differentially according to source country and
product line, there will very likely be winners and losers in the post-quota environment.
Already the often-seen unity between developing countries has been undermined as
2004 year-end drew near, with some developing countries likely to emerge as clear
beneficiaries, while others face major economic upheaval. Both proponents and
opponents of textile quotas have become more vociferous of late, with growing calls for
an extension of quotas resulting in an emergency meeting in the WTO’s Goods Council
in October 2004.
The pending removal of quotas is likely to have various dimensions. These include the
political dimension, which relates to the credibility of WTO agreements, their binding
status on member States, and the credibility of the multilateral rules-based trading
system in general; the consumer perspective, which relates to the gains in welfare
through lower prices that are likely to emanate from quota removal; the efficiency
7
tralac Trade Brief No 8/2004
www.tralac.org
dimension, relating to market distortions brought about by artificial trade barriers (which
distort production and inevitable world market prices), and the loss of benefits to
producers and employees (who benefited from indirect protection either through an
absence of quotas and / or through preferential trade agreements with industrialized
countries).
While it is difficult to make rigorous predictions, it is highly probable that there will be
substantial consolidation in global textile and clothing production, and with it changes in
the geographic location of producers. Some observers have predicted a substantial
reduction in the number of countries that the major textile and clothing producers will
buy from, and the emergence of bigger and stronger multinational buyers that are able
to base their purchasing decisions on a new set of market forces. A study conducted in
the US in 2003 found that leading US retailers predicted that they would “reduce by twothirds the number of countries they deal with at present in a post-quota era”. While there
may well be a shift in production from industrialised countries (mainly the EU and US) to
low-cost locations, the largest relative shifts are predicted to occur between developing
countries as producers seek to consolidate in the lowest-cost locations. This increasing
reliance and downward pressure on labour costs as a dominating factor for
competitiveness is therefore sometimes referred to as a “race to the bottom”.
A study that calculated levels of risk associated with quota removal (based on trends in
US imports) found that current ‘preferential’ regions of supply – namely NAFTA, SSA
(through AGOA) and the Caribbean Basin countries – were highly dependent (indirect)
beneficiaries on the quota constraints faced by China and other Asian-based exporters.
The following diagram shows that a large proportion of textile and clothing exports from
NAFTA countries, SSA and the South American / Caribbean countries (under the CBI)
took place in categories heavily constrained by quota restrictions in other parts of the
world. NAFTA, SSA and CBI countries are thus likely to face significant increases in
competition in the post-quota environment. In the diagram below, risk levels range from
‘low’ (product categories where the ATC has already eliminated quotas, or for which no
constrained suppliers exist), to ‘high’ (associated with products for which producers in
the given region are unconstrained by quotas, but producers in other regions face quota
restraints).
8
tralac Trade Brief No 8/2004
www.tralac.org
Fig. 1
Predictions of US apparel imports 2002-2005, by source and risk level (US$ mn.
and percent)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
NAFTA
SSA
CBI
ASIA
CHINA
8,461
802
12,768
7,662
304
Medium
47
129
1,311
12,768
3,189
Low
876
21
1,049
3,997
2,749
High
Source: Nathan Associates (2002), based on US Dept. of Commerce
China and India are both expected to be major beneficiaries of quota removal, both with
respect to the US and EU markets. There are numerous reasons for this, including
current quota constraints, the size of each country’s domestic textile and clothing
industries and installed capacity, and their attractiveness as a destination for investment
resulting from a relatively low-cost and productive workforce (which is largely nonunionized and subject to few minimum working conditions). Various sources also claim
that China’s direct and indirect export subsidies (in the form of low-cost loans to
manufacturers and a currency pegged to the US dollar at artificial levels) are a major
reason for that country’s substantial competitiveness. A recent WTO study forecasts
Chinese textile and clothing exports to the US to surge 3-fold in terms of market share,
and those from India record a 4-fold increase albeit off a lower base. The same report
predicts the greatest losses to accrue to African countries and Mexico. One analysis
shows that during Stage II of quota phase out China’s exports already doubled in 12 out
of 18 categories.
5 Reaction to the Removal of Quotas
With the pending threat of a major surge in Chinese textile and clothing exports to the
US authorities there are already determining safeguard measures to protect their local
industry. Upon China’s accession to the WTO in 2001, an agreement was also
concluded that would provide US textile producers with the right to request relief in the
form of safeguards until 2008. While China has lobbied hard for the last stage of quota
removal to go ahead as scheduled, it has recently bowed to US and EU pressure and
agreed to the imposition of a voluntary export tariff. Chinese authorities would levy this
9
tralac Trade Brief No 8/2004
www.tralac.org
tariff on its own exports, and be based on volume rather than value ostensibly to
encourage higher value-added manufacturing. As little is yet known about the level of
the proposed tariff, it is unclear whether it will have a dampening effect on the expected
surge in exports. Considering that China’s production costs are already only a mere
fraction of those in the EU and US, it is unlikely that anything but a draconian tariff will
do much to constrain its exports.
During the months preceding quota removal frantic last-minute efforts were made by
certain countries wanting to postpone the final implementation of the ATC. As could be
expected, dissenting voices were heard mostly from stakeholders facing negative
repercussions in a liberalised market. In some countries, for example the United States,
manufacturer associations have been lobbying against quota removal or at least the
imposition of transitional measures, while the retail sector (notably global branded
goods companies who manufacture mainly in China) has vehemently opposed any
postponement of quota removal or imposition of safeguard measures.
But on the whole, efforts to postpone the phasing-out have not been driven only by the
US and EU. Proponents of a postponement have emerged mainly from the ranks of
affected developing countries (Mauritius, Bangladesh etc.) and manufacturers’
organisations both in Europe and the US (for example ATMI, the American Textile
Manufacturers Institute). As is reflected in Table 3 earlier, the economies of Bangladesh
and Mauritius are among the most highly dependent on textile and clothing exports.
One initiative opposing the last stage of quota phase-out is the Istanbul Declaration,
which was initially endorsed (in March 2004) by leading American and Turkish textile
and clothing industry organisations. It has since been further supported by
approximately 130 industry organisations from almost 50 countries including
Bangladesh, Kenya, Lesotho, Mauritius, South Africa, Swaziland and Zambia. The
declaration called for an urgent meeting of the WTO to examine whether the phase-out
of quotas should be extended by three years to the end of 2007, or whether other
remedial action should be taken.
Opponents of a postponement of quota phase-out have been questioning the negative
impact that such a move would have not only on their industries, but also the multilateral
trading system in general and with it the credibility of the WTO. Their position is that any
remedies should be in the form of structural adjustments within the sector as it moves
towards greater competitiveness and away from a reliance on quotas. In this regard,
they argue, assistance should be sought from institutions such as the World Bank and
the International Monetary Fund. At the same time, existing trade remedies available to
10
tralac Trade Brief No 8/2004
www.tralac.org
WTO members are said to be sufficient instruments for dealing with any major structural
problems following quota phase-out. Of course, previous dispute settlement and
countervailing measures have in the past frequently been rendered ineffective by
onerous pre-conditions and time lags. But, it should be noted that China’s accession to
the WTO was subject to certain additional trade remedies should Chinese exports
unduly threaten the industries of its trade partners. Under the accession agreement, for
example, the US can limit Chinese export growth to an annual 7.5% per annum until
2008.
6 Summary of key Issues
It is clear that there is no simple solution to the concerns expressed by stakeholders
facing challenges relating to the removal of quotas. The ATC’s schedule for the removal
of textile and clothing trade quotas has been largely adhered to over the past decade,
and despite opposition from many quarters, its final stage is set to be implemented as
scheduled.
While it is impossible to accurately predict winners and losers of the changes happening
to global textile and clothing trade, the summary below outlines some of the main
results that can be expected while summing up the key issues. An awareness of the
possible impacts of quota removal will allow both industry stakeholders and policy
makers to respond appropriately to the challenges facing the sector.
The impact of quota elimination under ATC rules can thus be broadly summarized as
follows:

Beneficiaries of the final stage removal of textile and clothing quotas are likely to
be those countries currently facing high quota restrictions either in the US or EU
markets, or both. But the lifting of current quota restrictions is unlikely to be
sufficient to guarantee benefits in the post-quota environment; rather,
international competitiveness in the absence of quotas is required. For this last
reason countries like Bangladesh are likely to suffer, who despite preferential
market access to the EU faced restrictions in the US market. Without quotas,
global demand especially from large European and US retailers is likely to
gravitate towards currently quota-restricted yet competitive countries. Main
beneficiaries are likely to include China (incl. Hong Kong), India and Pakistan;
11
tralac Trade Brief No 8/2004
12
www.tralac.org

Consumers in general are likely to be major beneficiaries, as the removal of
market impediments should increase the competitiveness of the sector and drive
down the price of textiles and finished garments;

At the same time, employment in countries with higher labour costs is likely to
decrease as firms lose orders in favour of more competitively priced suppliers, or
as downward pressure on prices results in related downward pressure on wages;

Investors in textile and clothing enterprises in certain developing countries not
subject to restrictive quotas (i.e. those having benefited indirectly from quotas
imposed on competing countries) may find that their investments are less
sustainable when textile and clothing trade becomes based more on principles of
free trade rather than market distortions;

Manufacturers located in countries not benefiting from quota phase-out but with
strong and established commercial ties with buyers in the EU and US are likely to
be less adversely affected by quota phase-out, at least initially;

Countries with a high reliance on merchandise exports in quota-constrained
categories may find their goods uncompetitive in a quota-free trading
environment. Likely examples include Bangladesh, Mauritius and Lesotho;

At the same time, lead times and geographical proximity to major markets may
become increasingly important, especially for those countries located close to the
US and Europe (such as Mexico, the CBI countries, North African and East
European countries). In the post-quota environment, producers either have to be
internationally competitive, or at the very least located close to their market,
reactive to changes in fashion, able to supply niche market segments and
probably focused on non commodity-type and higher value-added textiles and
garments;

Preferential access arrangements available to unrestricted suppliers to the EU
and US markets (for example under the AGOA, EBA, Cotonou and the CBI
preference schemes) are likely to become less valuable over time. However,
duty-free market access to the EU and US will continue to be important mitigating
factors with respect to the negative impacts of quota-removal. In order to be of
real benefit, preference margins available to preferential trade partners will need
tralac Trade Brief No 8/2004
www.tralac.org
to be sufficiently large to counter the price-advantage that many of Asia’s lowcost producers have at their disposal;

The imposition of special tariffs and quotas as well as other safeguard
mechanisms will continue to be available to WTO members as a trade remedy
against severe market disruptions subject to certain conditions. The US is for
example also permitted to apply safeguard mechanisms against Chinese exports
at least until 2008 in accordance with the terms of China’s WTO accession
agreement.

The impact on Southern African countries is likely to be varied, considering that
wide differences exist in terms of regional production capabilities and capacities
as well as target markets (whether producing mainly for the domestic or foreign
market). A higher degree of reliance on exports to major world markets means
that countries are potentially more exposed to the negative impacts of quota
removal. For example, while South Africa exports only about one third of its
textile and garment production, Lesotho ships virtually all its output to the US.
13