Consumer goods / Textiles / Regulatory environment 0 comments

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Any overview of an industry has to start with an assessment of demand and supply dynamics, and for the global textile industry the critical factor on the supply side has been the change in regulatory regime, and its transition in 2005. It is outlined below:

Multi-Fiber Agreement
This was a global quota regime imposed in 1974. Under this trade agreement, individual countries were issued quotas of apparel exports; there were quotas governing the various segments (bed linen, towels, apparel etc) and each country could only export up to the issued quota for the respective segments. These quotas could be traded; they could be bought from countries with surplus and sold to countries on quota deficit.

There are many reasons for imposing quota regimes: in fishing, it is to protect the ecology against overfishing; in oil(OPEC), it is to maintain a certain level of prices; in China's administrative regime, quotas are the most effective method to curb investments and prevent overheating. But for the textile quotas, the explicit intention was to protect the textile and apparel industry of developed countries from the low-cost competition of textile and apparel industries of developing countries.

The quota regime was to be phased out completely in 2005, and there was a 10-year transition period before then when permitted levels were progressively increased to avoid the cold turkey effect.

End of Quota System: Post-2005
The quotas were completely removed in January 2005. Note that this was for WTO members; non-members like Vietnam and Cambodia still faced restrictions. It turned out that many exporting countries had not used the transition period well, and were rather unprepared for the deluge of unfettered exports that poured out from now-unrestrained low-cost countries, in particular China. Consequently developed economies like the EU and the US imposed unilateral restrictions on China apparel exports which led to trade disputes in 2005; this affected both the apparel importers in the developed countries and the Chinese textile companies which had invested heavily in capacity in anticipation of the liberalised regime.

Managed Growth
I shall focus on China because it stands to benefit the most from the liberalisation and hence suffered the brunt of the emergency trade restrictions following the end of the quota regime. Furthermore, it is most relevant since the textile stocks listed on the SGX are mainly from China.

In 2005, final resolutions were separately negotiated between China and the EU and with the US on textile exports, as described below:

China-EU accord: Chinese textile exports into EU for 10 textile categories were limited to agreed growth levels ranging between 8%-12.5% per year for 2005, 2006 and 2007. The specified categories are for those which saw exceptional import growth rates in the first quarter of 2005 in the range of 51%-534 %. The agreed growth rate will be allowed to progressively rise over the 3-year period.

China-US accord: Chinese textile imports will be capped at growth rates of 8%-10% for 2006, 12.5% for 2007 and 15%-16% for 2008. The deal is one year longer than the MOU between China and EU signed in June 2005 and is of a broader scope, covering 34 clothing and textile categories.

China-ASEAN arrangement: Within the framework of the China-ASEAN Free Trade Area agreement, ASEAN member countries will progressively lower tariffs on textile imports from China. Exports of textile and apparel from China into ASEAN countries account for ~5% of China’s total textile exports in 2005. According to the China Chamber of Commerce for Import and Export of Textiles, the tariff rate for China’s textile and apparel exports into Thailand will fall from 16.9% to 10.6% on January 2007 while in Malaysia, the tariff will fall from 15% to 9.2%. Tariffs for textile exports into both countries will fall to zero in 2010. Indonesia too will lower its tariff for the same products from below 5% to zero in 2009. These reductions in tariffs are expected to stimulate stronger export growth of China textiles and apparels into ASEAN countries. It also offers an avenue for absorbing excess Chinese production capacity during the transitional ‘managed growth’ period for China textile exports into the EU and US markets.

Implications
The reason for highlighting the managed growth regime is that it sets an upper limit to the export demand growth for China textile/apparel exports. The good thing is that this rate of managed growth is allowed to accelerate (see the progressive rising permitted export rates stipulated in the agreements above) while the bad thing is that many Chinese textile companies might have invested heavily earlier based on export projections arising from full liberalisation.

The growth driver could well be Chinese domestic consumption. Perhaps the Beijing Olympics might be the main driver for increased domestic consumption of textiles/apparel.

References:
(1) Study by the Asia Foundation: The Phase-out of the Multi-Fiber Agreement: Policy Options and Opportunities for Asia
(2) Study by the International Trade Centre (WTO): The Multilateral Trading System and the New Poitical Economy for Trade in Textile and Clothing
(3) Study by the US Trade Office: Comparattive Assessment of the Competitiveness of the Textile and Apparel Sector in Selected Countries
(4) OCBC 10 May analyst report on Jishan
(5) DBS Vickers 1 Feb analyst report on China Sky