Apparel Sourcing Intelligence - Worldwide

The Bali Package 4: History shows how most “experts” get big trade initiatives wrong

We’ve had 20 years of global agreements like the Bali Package offering to revolutionise the textile and garment industries. They all did – but never as experts predicted.

Public reception of the worldwide 1994 agreement that revolutionised the garment industry – and of all its successors – should teach us to treat first reactions with caution.

The 2013 Bali Package did get onto most mainstream TV news bulletins and newspaper front pages, even if it was hardly the main conversation topic in my local pub. But when in 1994 the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), announced a General Agreement on Textiles and Clothing (GATC) it got into hardly a single business page, or even the specialist apparel retail press.

Textile and Clothing globalisation: 1994- 2005

The GATC announced that rich countries would phase out quota limits on garment and textile imports from poorer ones, eliminating them altogether by 2005, though there were a few “transitional” let-out clauses applying till 2013. Most commentators thought rich countries would find many ways of wriggling out of the promise, but those views rarely got beyond mumblings in the bars of industry conferences.

By 2004, as the last days of quotas loomed, trade commentators and self-styled “pro-poor” activists (a group I’ll call the PPAs) agreed on what would happen:

– Quotas would go, but the West would still manipulate all the “transitional” clauses in the deal to keep Western textile and clothing (T&C) jobs
– The big beneficiary would be China, which would probably suck in all the T&C production the West didn’t find some clever way of keeping
– The only countries whose T&C industries would survive would be those with substantial upstream spinning and weaving, like India, Brazil and (in some particularly deranged consultants’ forecasts) Russia
– The T&C industry in the world’s 49 poorest countries (known in the jargon as Least Developed Countries, or LDCs) was almost certain to be ravaged.
– Pro-trade enthusiasts believed the West would lose lots of garment making jobs no-one wanted, which would be more than compensated for by lots of new jobs making jet engines China would buy.
– And the EU and US would keep on subsidising their cotton industries, making it impossible for cotton farmers in developing countries to earn a decent price.

By 2005, the GATT had morphed into the WTO, and at a meeting in Hong Kong, pledged action to minimise the damage vulnerable countries would suffer. In particular, WTO members agreed that rich countries would give unrestricted duty-free access to products from the LDCs, and agreed to eliminate cotton subsidies.

What happened to quotas

However uninterested the world was in the GATC back then, just about everyone in the West now knows all their clothes are now made abroad, probably in China – and most have pretty strong views about it.

The EU and US have followed their commitment to eliminate quotas meticulously. This wasn’t at all clear in 2005, since no-one thought they would. So in the first six months, garment exports from China soared because both Western importers and Chinese exporters believed a quota re-imposition was inevitable. Both the EU and US activated the transitional rules, slowing down import growth in some categories (above all lingerie, which is why the period became known as the Bra Wars) until 2008/9.

This “proved” to aid activists that the West had no intention of removing quotas. This naïve cynicism proved unfounded. As the EU and US promised, lifting the transitional restrictions followed exactly the timetable promised.

Some consequences are clear: in the case of the US, domestic production (on this chart, in $) fell 55%, while imports overall (measured in square metres of fabric) grew 18.7%. This growth was heavily concentrated in China, Vietnam, Indonesia and the Least Developed countries. Imports from the rest of the world fell 45%.

Appaerl sales to US

There’s no doubt who’s lost out most: the over 2 million people in European and North American T&C manufacture who’ve lost their jobs.

Or about the winners: the people of China, where more people have moved from abject poverty to relative comfort, faster, than anywhere ever in the history of mankind – which is why their government can afford to send a rocket to the moon, but is so worried its people might not be comfortable enough it’s become the world leader at inventing reasons for not buying foreign-made high tech. So there aren’t that many Western jobs selling them jet engines.

In between: The T&C industry in some “middle income” countries with strong upstream manufacturing – especially in countries neighbouring rich countries, like Mexico, has been severely damaged – but not in others like Turkey or Indonesia.

It’s been badly damaged in a couple of LDCs, but you can’t really blame the GATC. In Nepal it’s mostly been killed by domestic Maoist terrorists, combined with barriers to its production imposed by India: in Burma it’s been destroyed by Western PPAs, who argued it didn’t matter much if a few hundred thousand Burmese garment workers were made destitute, as long as the PPAs didn’t get offended by seeing “made in Burma” labels on their shirts.

Or who, as a group, neither gained nor lost. Western retailers’ net profit as a percentage of sales, scarcely changed during this period. Competition meant the savings they made by moving their sourcing to Asia generally got passed through to their customers, as retail prices fell. The process probably accelerated retail consolidation (polite jargon for “a lot of small retailers went out of business”) – but garment retailing certainly did not consolidate any faster than, say, food retailing  between 2000 and 2012. By almost any standards, garment retailing is an exceptionally fragmented industry – and one where foreign retailers and brands rarely have a significant share.

The garment-making industry exploded in a few countries with no upstream textile manufacture. Most spectacularly, and with the greatest ever improvement on the incomes of the really poor, in LDCs Bangladesh and Cambodia – but also in slightly less badly off Vietnam and Honduras.

One thing particularly hit us while all this was going on. We were forever having to explain to traders – buyers and sellers – how committed the EU and US (and China) were to the process. They often interpreted bits of the process to the advantage of whichever lobbying group was shouting loudest – but the rules were meticulously observed, to the letter. This was because, underneath everything else, the US and EU recognised that China needed quotas to go, and that they’d never sell China a jet engine if quotas didn’t. So the three were bound in an unspoken agreement to follow the rules.

Cynical traders who didn’t grasp this were just wrong. So were any naive optimists who thought the US would be equally meticulous in observing the 2005 Hong Kong agreement on LDCs and cotton subsidies

Least Developed Countries

Governments in all the major garment importers accepted the 2005 agreement to accept duty-free imports from LDCs. But the process took longer in America, where the absence of a social security blanket meant job losses in T&C manufacture were felt more harshly than in Europe. Then, in 2007, as the US Administration started trying to steer legislation for duty-free LDC access, developing countries like Mexico and South Africa started lobbying against the proposal – because they didn’t want their competitive advantage on the US market undermined.

The damage was done: all Congresses since then have been opposed to handing out any more duty-free access unless there was a compelling benefit to the US. For example, the impoverished citizens of Haiti, the only LDC in the Americas, need every possible inducement not to try sailing to the US. So the US grants Haiti the same duty free access arrangements (no duty on garments, even if all their fabric is Chinese) that the EU and Japan give Cambodia, Bangladesh – and Haiti.

Cotton farmers

Many cotton farmers in poor countries are no better off, though. World cotton prices at the end of 2013 are virtually the same as in 2005, though they surged from briefly from 2010, as this chart from shows

cotton prices
But in Burkina Faso, Africa’s largest cotton producer and the poster child for impoverished cotton farming, they didn’t even benefit from the brief surge in global cotton prices from $0.85 to $2.20 a pound between 2010 and 2011.

Not because of big bad America, though. China’s $3 billion subsidies to its cotton farmers in 2011/12 now dwarfs America’s $800 mn.  Worldwide, it’s no longer American subsidies depressing prices, but the market’s fear of what will happen when China sells off its 10 million tonne stockpile

The problem for the really poor is the Burkina Faso government which during the 2010-2011 price explosion allowed its farmers to receive just one-tenth of the global price. The rest went to a partly French company, SOFITEX, which holds the exclusive right to buy the country’s cotton crop from its farmers.

The LDC/cotton price paradox

On both LDC access and cotton subsidies, the US has failed to honour its 2005 commitment. But garment sales to the US from Bangladesh, Cambodia and Haiti have soared, in spite of that. It’s no longer US subsidies holding prices down, but China’s. And it’s not world prices impoverishing farmers in Burkina Faso but its government’s too-cosy deal with a partly French-owned monopoly buyer.

No activist group mentions any of this.

On textile and clothing trade issues, the argument isn’t between “pro poor” and “anti poor”. It’s between those concerned with developing healthy trade and those still obsessed with the issues of the 1990s: those who, after the fastest two decades of poor-country economic growth in history, have neither learned nor forgotten anything.