South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Adjusting to Quota Free Environment
Published: The Kathmandu Post, 16 September 2005
By: Ratnakar Adhikari

As was expected, developing countries as a whole gained during the past eight months after the elimination of quota system that had not only distorted the international trade in textile and clothing, but also undermined the multilateral trading system for the past four decades. However, gains have been highly uneven, with a few highly competitive countries like China and India taking away the major chunk and uncompetitive players, mainly the least developed countries (LDCs), losing out. For example, LDCs like Nepal have been facing severe adjustment problems with the recent figures suggesting that her export of ready made garments (RMG) to the United States (US) market has declined to US$ 45 million during the first six months of the post-quota period, from US$ 74 million during corresponding period previous year.

Even among the LDCs, Asian LDCs are in a much more disadvantageous position, compared to African or Caribbean ones. This is because, despite the phasing out of the quota system, African and Caribbean LDCs continue to enjoy generous preferential access into the two largest markets for textile and clothing - the European Union (EU) and the US. While African, Caribbean and Pacific countries receive preferential access to the EU market under Contonou Agreement, African LDCs receive preferential access to the US market, thanks to African Growth and Opportunity Act (AGOA). Similarly, though Haiti is the only LDC in the Caribbean region, it also receives preferential access under the Caribbean Basin Initiative of the US.

While Asian LDCs too enjoy preferential access to these major markets, such preferences are highly generalized (applicable to all the LDCs), unlike specific ones, as explained above, which are over and above the generalized preferences.

Generalized preferences tend to come with conditionalities attached. One of the most severe conditionalities highlighted in almost all the literature is that of Rules of Origin (ROO). In order to prove that the goods have actually originated in the exporting countries, which would help prevent trade deflection, these LDCs are required to prove that certain percentage of value addition or certain stage of processing have been carried out within the preference receiving LDCs. Since most LDCs do not have their own textiles industry worth the name and textile import constitutes bulk of their value addition in LDCs' RMG exports, they find it difficult to fulfill the stringent ROO requirement. This results in LDCs' failure to utilize the preferential market access in their favour. For example, in 2003, preference utilization rate of LDCs in Quad countries (Canada, EU, Japan and USA) was merely 46.8 percent on an average.

Preferential market access, though a short term solution, cannot be considered a panacea, not least because they are likely to erode. Firstly, due to reduction in most favoured nations (MFN) tariffs, which could result from ongoing industrial tariffs negotiations at the WTO. Secondly, due to a spate of bilateral and regional trade agreements the EU and the USA have been signing with several developing countries, which inevitably provide more favourable market access terms to the countries signing such agreements with these economic superpowers at the cost of conventional preference receiving countries.

While the long term solution lies in enhancing the competitiveness of RMG exports through a set of policy and institutional reform measures, in the short run the cost of adjustment could be reduced only through preferential arrangements. Asian LDCs, including Nepal, should therefore, adopt the following advocacy plans:

First, at a more general level, building on the Doha Development Agenda and July Framework, these LDCs should mount an advocacy campaign to obtain binding duty-free quota-free market access into the developed countries' market. They should set the Hong Kong Ministerial Conference of the WTO to be held in December this year as the target date for achieving this objective.

Second, they should advocate for obtaining similar treatment in the US' market as provided to African LDCs under the AGOA. Some initiatives are already underway and these LDCs should build on them. For example, Tariff Relief Assistance for Developing Economies (TRADE) Act, which was introduced in the US Senate and House of Representatives earlier this year, if passed, would authorize the president to grant limited duty-free access to 14 LDCs plus Sri Lanka (which was hit by December 2004 tsunami). Apparently, some LDCs have taken the help of the lobbyists to ensure that the bill is passed. The momentum gained thus far should be continued.

Third, in order to increase the utilization rate of the preference granted, it is necessary to advocate for the reform of existing preferential schemes in the various donor countries' market including the USA, EU, Australia, Japan and Switzerland in line with the 2003 reform of Canadian scheme for LDC GSP. The Canadian reform has resulted, for example, in increase of Bangladesh's and Cambodia's RMG export to Canada by more than three and six folds respectively over a period of two years following the reform.

On the issue of relevance of RMG sector to the Asian LDCs, it must be mentioned that all the countries do not need to follow the same trajectory of export development. However, it is also important to note that most advanced developing countries of today (e.g., Korea, Taiwan, and Hong Kong) graduated from the exporters of technologically humble product like textile to other mid-tech and high-tech sectors. Due to low level of education, skills and productivity of the workers coupled with lack of technological capacity and requisite infrastructure, LDCs would continue to be locked into the exports of primary products or low value-added products like RMGs for a few more years to come.

While a number of behind-the-border supply-side issues need to be addressed by these LDCs as a long term solution to enhance the competitiveness of their exports in general and RMG exports in particular, they should, as a matter of priority, build on several of the on-going initiatives to address the problem of market access facing the RMG sector.

[Opinions expressed in this column are personal. For comments and feedback:ratnakaradi@yahoo.com]

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