Cover Story (Spotlight Weekly)

GARMENT QUOTA PHASE OUT
Clothed In Uncertainty

The garment business watches with trepidation as the world moves into a quota-free regime beginning January 1, 2005. For a country that had thrived in the guaranteed ‘quota’ market provided by the single largest buyer the United States, the transition into liberalized regime could spell disaster, particularly because of its poor trade infrastructures and lack of preferential trading arrangements of apparels with the US. Since Nepal lacks a textile base and big units that provide economies of scale, it could easily fall flat in the face of growing expectations that China and India would swamp the global textile exports. Moreover, Nepal’s internal problems – bandhs, blockades, instability – could deny its industries any competitive edge, which is so important in the WTO era. As entrepreneurs push for some sort of bilateral agreement (with the US) and massive trade facilitation measures, it remains to be seen how the year 2005 unclothes for the Nepalese garment sector, which employs 50,000 persons most of who are uneducated and unskilled with half of them being women

By SANJAYA DHAKAL

You will be forgiven if you think Udaya Raj Pandey is an economic analyst. Anyone who steps into his office these days will find him pouring into trade journals, post-MFA textile trade analysis and sundry other documents.

For someone who is a leading garment exporter, it is, indeed, strange that Pandey is found engrossed in WTO mumbo jumbo at his office instead of going through his correspondences with the importers or overseeing the operation of his factory.

“This is because we are really very anxious about the expiry of Multi Fiber Agreement (MFA) beginning the New Year,” said Pandey, owner of Sirin Garment Industries Private Limited and general secretary of the Garment Association of Nepal (GAN).

On January 1, 2005, the world will witness a total lifting of quota regime that had governed the textile trade for centuries. In fact, the quota for textiles and clothing were gradually being withdrawn since 1970s.

However, as per the WTO’s Agreement on Textiles and Clothing (ATC), countries had agreed to eliminate quotas applied on trade in textiles and clothing in four phases – 16% of quotas (on 1990 imports) in 1995; 17% in 1998; 18% in 2002; and 49% in 2004.

Although, the process of quota elimination had begun way back, Nepal will face its consequences all of a sudden because the items of interest to Nepal like cotton categories were back-loaded/end-loaded by the quota imposing nations like the US. Therefore, the final/fourth phase out is going to have the greatest effect on Nepal.

Nepalese garment industries had thrived on the guaranteed market ensured by quota regime. Although its share of total US apparels market was less than one percent, the industry grew handsomely throughout the 1990s becoming one of the most important foreign exchange earner and employment-provider in manufacturing sector. And this happened even when Nepal was never really able to fully exploit the quota granted to it. Apart from almost 90% utilization of quota on certain cotton items, its rate of utilization of quotas on most other items were fairly low.

Extent Of Impact On Nepal

Although everybody agrees that Nepal will be negatively affected by the lifting of quota regime, they differ about the extent.

“We are going to be seriously affected. If measures are not taken immediately, the whole industry could collapse,” said Pandey.

From private sector to government officials to experts, there are varying opinions regarding the degree of its impact. While some claim that Nepal will not be affected much, others fear a total collapse.

“It is very hard to tell what impact it will have. The quota system had guaranteed a certain amount of production and a certain level of employment in the garment-manufacturing sector. We have to remember that Nepal is producing garments, which are low value. Therefore, Nepal operates at the very low-end of the entire range of garment products that are traded around the world. I am not sure that Nepal is competing with Vietnam or China in this sector. My hunch is that given the range in which Nepal is competing with other countries, we may not be that much affected,” said Sultan Hafeez Rahman, country director of the Asian Development Bank (ADB) Nepal Resident Mission (NRM).

Most of the naysayers argue that Nepal and other similarly placed LDCs like Bangladesh will bear the brunt because China (particularly) and India will eat into their market in the post MFA era.

China threat has particularly been posed as the major reason why other smaller countries would suffer. A recent study by the WTO on the phase-out of quotas has predicted that China and India would grab 56 and 15 percent of the US apparel market, respectively (from the current level of 15 and 7 percent).

The quota-free regime provides China with unprecedented opportunity to grab the global market. “Competitiveness to China comes from its requirement to meet internal demand by building a massive garment industry, resulting in the economies of scale. China has a totally vertical industry with the largest textile base and a huge capacity to produce cotton and synthetics. Big Chinese factories are creating a supply-chain city, having engineers, fabric experts and technicians, production staff and everyone in between who can get together with buyers to supervise and operate the entire supply-chain process on one location. That would allow Chinese manufacturers to dominate global textile trade not only on the basis of price and quality, but also in terms of time-to-market resulting from great control over the entire production chain,” writes Bijendra Man Shakya in his recent theme paper titled “Nepal’s Apparel Sector At Crossroads.”

Many others, however, dismiss the Chinese threat as being over-exaggerated. “The importers can impose other Trade Remedy Measures to block the Chinese surge if it happens,” said Posh Raj Pandey, a leading expert on WTO. As per the Chinese protocol of accession to WTO, other countries can slap anti-dumping duties on its goods till 2008. In fact, the US has already taken safeguard measures to curb import of Chinese knitted fabrics, dressing gowns, bras and socks.

“Moreover, China’s non-market economy status as per its Protocol of Accession (which will continue till 2016), will make China susceptible to higher anti-dumping duty,” said Ratnakar Adhikari, Executive Director of South Asia Watch on Trade, Economics and Environment (SAWTEE).

“Others may have to face Chinese threat but not us. Over 80% of our garments are exported to the US. At present, the LDCs like Nepal (together) have less than 2% share of the American apparel market. If we can convince them to provide up to 5% market, we can gain a lot,” said Prachanda Man Shrestha, joint secretary and chief of the WTO Cell at the Ministry of Industry, Commerce and Supplies. “Along with the quota phase-out we have been diversifying our export market as well. Earlier, US represented 90 percent of our export market and now we are making progress in the EU market too,” he told SPOTLIGHT.

But the real situation could emerge only after March this year. “Things will become more clear by the first quarter of next year. Till now we can see that whatever adjustments had to be made were made over the last one and a half year. The spring orders have already been produced. Summer order will be produced between January and March. The summer order is still looking OK. But the fall order, which will come during spring will determine the extent of the impact,” said Rahman.

Agrees Pandey. “We do have orders till February/March. We will have to wait and see what happens after that,” he added.

Nepal’s Challenges

Nepal’s challenges are multifold. Poor infrastructure, lack of backward and forward linkages, lack of textile base, hardships of trade, distance from export destination, lack of trained manpower and most importantly the perennial domestic instability are the major handicaps.

“Imagine how we have to function. In this competitive world where importers cancel their orders on slight pretext we have to make do with all these difficulties. Early this week a number of trucks carrying my garments were stuck in Kathmandu because of blockade. Now tell me how am I going to convince my importer,” asked an exasperated Pandey.

In the international trade, ‘lead time’ is of prime significance. It is the time taken for an exporter to manufacture the goods ordered and deliver them to the buyers’ place. Take this example; when a typical Nepalese garment manufacturer receives order for particular design of apparel, he will have to first import raw materials (like yarns and fabrics) from lets China. It will take around a month for those raw material to arrive to Kathmandu from China via Kolkata port. Actual production or stitching will take another month or so. Then to pack them and deliver them via Kolkata to the US will take another 40 days or more. Typically, it takes them 120 days to deliver the goods. And in apparels and clothing market 120 days are like light years. Fashion will have changed by then. “Compare this to around 35-60 days of lead time for Chinese exporters and you can gauge our hardships,” said Pandey. “Imagine what we have to go through when there are bandhs and blockades in between.”

Required Measures

There are a number of measures that Nepal needs to take to safeguard its garment export business. At the national level, it has to first clear the deck by facilitating the trade and doing away with hassles associated with documentation and custom clearance. Setting up Garment Processing Zones nearby Inland Container Depot in Birgunj could be a beginning. The end of bandhs and blockade, which appear far-fetched at this point, are absolutely necessary to inject confidence among the exporters.

Upgradation of technology, training of manpower and quality control are other areas that need urgent attention.

At the international level, Nepal could gain by aligning with other like-minded LDCs and demanding better market access through zero tariff entry into the US market. Bilateral preferential trading arrangements, particularly with the US, would also guarantee the success of the garment trade. “But such bilateral arrangements has to be bound to WTO so that none of the partner can unilaterally withdraw from it,” said Ratnakar Adhikari.

“No sensible businessman will put all his eggs in one basket. Therefore, Nepalese garment entrepreneurs should also start swiftly diversifying (their destination) and enter into EU, Canada and other markets in a big way,” said Posh Raj Pandey.

Otherwise, the expiry of MFA will mean RIP (Rest In Peace) for Nepal’s garment industry. And this is not desirable at all because it is one industry that provides job to most unskilled and uneducated persons – particularly the women.

Global Garb

World clothing and textile exports now total about $400 billion, or roughly 6 percent of the $7.7 trillion in annual global exports. The main users of quotas are the United States, the European Union, and Canada, which together account for $56 billion in textile imports and $136 billion in clothing imports (excluding intra-EU trade.) The quota system uses agreements between importers and exporters to set detailed limits on imports of shirts, suits, bedsheets, lengths of yarn, square meters of fabric and other products. The U.S. agreement with Nepal, for example, limited 2004 imports of Nepali-made goods to 9,876,850 towels; 1,235 tons of dishrags, pillowcases and other miscellaneous goods; 369,322 dozen dresses; and similar figures for shirts, skirts, and pants. The United States now has 49 such agreements covering about $60 billion in imports. According to the WTO's 2004 trade statistical report, eight countries -- Bangladesh, Cambodia, the Dominican Republic, El Salvador, Mauritius, Nepal, Pakistan, and Sri Lanka -- rely on these products for more than 40 percent of export revenue.

The United Nations counts 50 least-developed countries, with a total population of about 640 million. (An "LDC," by U.N. definition, is a country whose per capita income is below $900 a year, and meets a depressing set of human development and economic vulnerability criteria. The list includes 34 African states, five Pacific island nations and eight Asian countries, plus Haiti and Yemen.) From these countries, last year the United States imported $11 billion worth of goods -- mostly oil and clothes -- charging tariffs averaging 5.5 percent. Meanwhile, Americans bought about $872 billion worth of semiconductors, cars, planes, medicine, and other goods from the 31 developed economies. These include 29 OECD members plus Taiwan, Hong Kong, and Singapore, with a total population of about 800 million, slightly above the LDC total. Tariffs on goods from these countries averaged about 1.1 percent.

Why the disparity? Tariffs on typical rich-country goods are low, set at 2.5 percent for cars and zero percent on planes, medicine, and computer chips. But tariffs on clothes typically range from 8 percent to 32 percent. The AGOA program thus puts low-income African states at parity with rich countries (while Haiti gets similar though somewhat less extensive benefits through the Caribbean Basin Initiative). But poor countries in Asia, the Pacific, and the Muslim world are singled out, albeit unintentionally, for very severe treatment. Most of them participate in a duty-free program known as the Generalized System of Preferences or "GSP" (the exceptions are Burma, for human rights reasons; and Laos, still under an anomalous Vietnam War-era trade restriction). GSP does them little good, though, because it excludes clothes, shoes, and almost all farm products. In 2003, all of Cambodia's top 50 exports -- accounting for 99 percent of the country's exports -- were varieties of clothes and so excluded from GSP benefits. Bangladesh had a similar experience, with GSP benefits on only two of its top 100 exports (pup tents and golf bags.) This is why tariff rates on Cambodian and Bangladeshi goods average 15 percent or more. Nepal and Afghanistan, as well as low-income Asian countries not on the LDC list -- Mongolia, Pakistan, and Central Asia -- get similar treatment. (Courtesy: Trade Fact Sheets prepared by Progressive Policy Institute, Washington DC, USA).

Bill In A Limbo

As the date for the final phase out of quotas under the Multi-Fiber Agreement (MFA) approached, garment entrepreneurs of LDCs like Nepal groped for ways to ensure their export market. One way to do so was to reach into some sort of preferential trading arrangement with the number of one importer – the United States.

The countries of the Caribbean and the African countries have already reached similar preferential agreements whereby they are assured of quotas even after the textiles and clothing trade becomes a part of the normal GATT discipline beginning January 1, 2005. The US provides duty free access to clothing imports from the Caribbean countries under the Caribbean Basin Trade Partnership Act (CBTPA) and to the Sub-Saharan African developing countries under the African Growth and Opportunity Act (AGOA).

In view of such preferential trading arrangements, Nepal, too, began to explore ways to ensure its US market – which consumes 80 percent of the total garment exports of the country.

Following the meeting between the officials of Nepalese Embassy and officials at the Office of Senator Dianne Feinstein, the Californian senator, on March 19, 2003, introduced a bill to extend to Nepal certain preferential treatment with respect to apparels, and referred the same to the Finance Committee.

The bill is still under the consideration of the US legislative body. However, of late, the bill seems to be in a limbo in the absence of active lobbying both in the US and in Nepal. And, it, in fact, seems to have hit a snag.

According to Udaya Raj Pandey, general secretary of the Garment Association of Nepal (GAN), ‘the Nepalese delegation was clearly told that the bill would move only if the Nepal government helped in the current payment dispute between the Nepal Electricity Authority (NEA) and the US-based Panda Energy, which has invested in Bhote Kosi project in Nepal.’

“We, at GAN, believe that the government should resolve this dispute from cost-and benefit point of view, if nothing else. If we get duty and quota free access to the US, the whole country will stand to gain,” he said.

However, there are detractors to this line of thinking as well. “If the government settles the dispute by paying to the Panda energy against the Power Purchase Agreement (PPA), this will set a bad precedent. That would be a gross misallocation of resources for a sector that does not have a true comparative advantage for us. And what is the guarantee that they would then pass the bill. Besides, even such bills will not be without problems. Take for instance the AGOA – which is clearly WTO-incompatible. And there is also risk of provisions like yarn forward in the Rules Of Origin – which means only those apparels made out of yarns imported from the US are eligible for preferential access,” said an economist.

The government, on the other hand, has remained silent on the issue. “We are trying from our level to lobby to pass the bill,” was a short reply Dr. Prakash Sharan Mahat, Minister of State for Foreign Affairs, had for SPOTLIGHT.

In fact, during his visit to Nepal two years ago, the US Secretary of State Colin Powell had replied in positive tone when asked about the problems of Nepalese garment sector. “Nepal is at something of a disadvantage as a developing nation with a need for a relief of our quotas. And it is competing with other nations that have gained some relief and that are closer to our shores, so that the cost of transportation is a lot less so that’s a double hit,” Powell had said during the visit.

“Best Strategy Will Be To Strike A Bilateral Agreement With The US”

— Udaya Raj Pandey

Udaya Raj Pandey is the general secretary of the Garment Association of Nepal (GAN). He owns Sirin Garment Industries Private Limited – one of the biggest garment factories in the country. But thanks to the domestic instability and declining order, Pandey, of late, has been compelled to manufacture garments in smaller factories because ‘running the big factory will only draw huge overhead expenditures.’ He spoke to SANJAYA DHAKAL on issues related to the garment sector post 2005. Excerpts:

To what extent will the expiration of quota system affect Nepal?

It will, indeed, affect us. But, at this point, one cannot say to what extent. We do have orders till February/March. What happens after March, we do not have clear idea. Even in the international sectors, experts are still puzzled as to what actually will happen.

Many say that countries like China and India will displace other developing countries?

At present, China’s share in the US clothing market is around 16% while India has 7-8% share. May experts have predicted that given its sound infrastructure and remarkable economies of scale, China will corner over 50% of US market after the lifting of quota system. But one is not sure because there are possibilities that China could be slapped anti-surge measures. If that happens then the extent to which other countries would be affected could lessen.

What about Nepal’s position?

We are always behind in gaining benefits. If China and India are able to garner huge market share as predicted, Nepalese garment would virtually collapse. Besides, for the last couple of years our total exports have been declining. Last year, we exported garments worth US$ 150 million; this year this dropped to US$ 80-90 million; and in the coming year this could further drop to US$ 70-80 million.

What should be Nepal’s strategy then?

There could be three strategies. The first (and the best one) is to reach a bilateral agreement with the US – which will happen if the US legislative passes the bill that is pending there. If passed, the bill could bring our costs down by 18% and make us more competitive. The second strategy is to initiate and join the campaign of LDCs within the WTO to get preferential facilities. Third is to support the idea recently offered by the US to the Asia Pacific developing countries (to give them preferential access) – and here Nepal should push for softer Rules of Origin.

What should be done at the domestic front?

First of all, the government should start looking at this sector from employment perspective. It should provide relief to the exporters. The custom hassles and document procedure should be simplified. The GAN has demanded for Garment Processing Zone (GPZ) near the Birgunj Inland Container Depot to facilitate the trade.

Garment At A Glance

Contribution to Forex: In its heydays, during 2000/01, Nepalese garments used to export their products worth around 14 billion rupees – mostly to the US. Now, the garment industrialists say, this export has dwindled down by around 50 percent.

Employment: 50,000 – half of them women (direct employment). Employees mostly constitute unskilled and uneducated masses. This accounts for 12% of the employment in manufacturing.

Investment: Rs 6 billion. Just over 200 factories operating in Nepal.

Contribution to Export Trade: 18%

Export Market: United States (80%), EU, Canada etc.

EU Market

The European Union (EU) market has been providing LDCs including Nepal Generalized System of Preference (GSP) with quota-free and tariff-less access on all imports including textiles and apparels since 2001 under the Everything But Arms (EBA) initiatives.

“It gives preference to Nepal for an unlimited period and is not subject to periodic review. As such, the EBA should provide exporters and investors with greater certainty of market access to the EU,” writes Bijendra Man Shakya in a paper assessing the impact of quota lifting to Nepal.

Besides, Nepal stands to gain more from the EU market as it enjoys derogation from the EU GSP Rules of Origin for apparels allowing it greater flexibility in choosing raw materials. After the offering of this facility, EU’s share of garment exports from Nepal grew substantially. “If the derogation facility, which will expire in December 2004, is extended even after 2004 (Nepal has already formally requested the EU for extension)

and nothing changes in favor of Nepal in the American market, the EU market will be of more value for market diversification and sustainability post MFA,” writes Shakya.

But making inroads into EU market is easier said than done. “We have been catering to the US market for the last 22 years and so we know a lot about it and understand their tastes. But tastes of European consumers are very different – they have different tastes from individual to individual on color, design, texture etc,” said Udaya Raj Pandey. “Having said that we have to accept that EU does provide us with huge opportunities. We need to cash it just as we need to cash the opportunity provided by Canada, which is also a duty free market for us,” he added.