The Financial Express, 19th May 2003

Brussels, May 18: The elimination of quotas on 1 January 2005 will have a dramatic impact on world trade in textiles and clothing, according to both importers and exporters here. However, while countries like China and India are confident that they will be its leading beneficiaries, many smaller developing countries fear an uncertain future, with the expiry of the 1994 Agreement on Textiles and Clothing (ATC) in 17 months’ time. Bangladesh in particular has been pressing the 15-nation European Union (EU) to use its generalised system of preferences (GSP) to “protect” its share of the EU market for garments. The country’s commerce minister Amir Chowdhury, was not alone in expressing his concerns at the conference organised by the EU’s chief trade negotiator Pascal Lamy, on May 5 and 6. Mr Lamy felt obliged, in fact, to reassure the representatives of the least developed and other equally vulnerable developing countries, such as Sri Lanka, by pointing to the need for “a political response” to the threat they faced. This could be in the shape of GSP benefits specially targeted at least developed countries like Bangladesh, he said.

But how do those practitioners of the dismal science, the professional economists, view the prospects for countries like India after 1 January 2005? Now it so happens that a handful of economists and members of Mr Lamy’s staff did meet here, a day or so after Mr Lamy’s conference closed, to exchange views on the post-2005 scenario. The meeting was convened by the Jaipur-based Consumer Unity and Trust Society (CUTS), and hosted by the European Institute for Asian Studies. It brought together some of the authors of the five economic studies which had been carried out by Indian and European economists in a CUTS-sponsored project, the EU-India Network on Trade and Development

This article is limited to the presentation by Dr Dean Spinanger, of the Institute for World Economics, in Kiel, Germany, of the paper he and Dr Samar Verma, of Oxfam GB in New Delhi, are working on. (Dr Verma was not present.) The title of the draft paper says it all in a sense. It is: “The coming death of the ATC and China’s WTO accession: Will push come to shove for Indian textile and clothing exports?” In other words, should India be concerned at the undoubted impact of China’s accession on world trade in general? And, if so, what steps should it take to improve its competitive position?

Dr Spinanger used Sweden as an example of what can happen when quotas are eliminated. In 1991 the Swedish government decided to eliminate all non-tariff barriers on its imports of textiles and clothing. The result was an immediate surge in imports from East Asia, primarily China. But the surge was as quickly halted when Sweden joined the EU in 1995. At the same time Sweden, like other EU countries, began to import more from Eastern Europe and the Mediterranean countries.

The situation is somewhat different today in that overall demand in the EU and other industrialised countries has fallen because of the continued downturn in economic growth. The EU recorded zero GDP growth during the first quarter of this year, as compared to the last quarter of 2002, when it recorded growth of 0.1%. Other changes include the large number of bilateral trade agreements, notably those between the US and various countries in Asia.

The results of the computable economic model used by the two economists to assess the effects of the ATC liberalisation process and China’s accession to the WTO are clear. As regards textile exports, China is expected to record a sizeable increase in its exports. India, however, is expected to experience a decrease. The expected outcome is very different in the case of clothing, with India showing an increase of 217%, as compared to an increase of 168% in China’s case. But India has always been viewed as having a substantial export potential in numerous areas, provided its domestic policies do not come in the way.

India can profit from the elimination of quotas, despite strong competition from China, provided it can “get its show on the road” – in other words, increase its competitiveness (it ranked 42nd out of 49 countries in 2002) by reducing costs. Thus because of poor domestic transport infrastructure, Indian exporters face considerably higher costs than their Asian competitors. Other non-specific product input costs result from an inefficient energy infrastructure and an inadequate financial structure.

Product specific costs include the poor quality of the fabric supplied to the garment sector. This is because only 5% of the fabric is produced in organised mills. The sector also suffers from poor productivity, because of its extremely fragmented structure. As a result of this fragmentation, India’s textile and clothing industries have one of the longest and most complex supply chains in the world. Since the problems are not new, solutions can be found. But this must be done quickly, if India is to strengthen its competitive edge in time.

The five papers deal with textiles and clothing, competition policy, foreign direct investment, anti-dumping and movement of nationals. They are aimed at Indian and European trade officials, who will be attending the WTO ministerial meeting in Cancun, Mexico, in September. The only Indian economist present at the Brussels meeting was the head of CUTS, Pradeep Mehta.