TNCs and the Removal of Textiles and Clothing Quotas

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TNCs and the Removal of Textiles and Clothing Quotas
TNCs and the Removal of Textiles and Clothing Quotas

Contents
Page
Foreword .............................................................................................1 .1.1.
Acknowledgements. ................................................................. iv
. . List of Figures and Tables ............................................................. v11
Executive Summary .............................................................................v 1.1.1.
Introduction ................................................................................................... l
Apparel and textile exports from developing economies. ................................................. 3
A . Trade patterns ................................................................................................................ 3
B . The changing geography of apparel sourcing ............................................................... 5
Large retailers and foreign producers ............................................................................... 7
A . A value chain driven by large retailers ...................................................................... 7
B . The emergence of TNC producers in apparel and textiles ........................................ 8
Trade arrangements affecting the location of textiles and clothing production .......... 13
A . The Multifibre Arrangement ...................................................................................... 13
B . The Agreement on Textiles and Clothing ................................................................... 14
C . Quotas and tariffs in preferential trade agreements .................................................... 15
D . Factors mitigating the effects of quota removal .......................................................... 16
The impact of quota elimination ....................................................................................... 19
Conclusions and policy options ......................................................................................... 27
A . The impact of quota phase-out .................................................................................... 27
B . How the emergence of large producers affects policy making ................................... 28
C . National economic policies ......................................................................................... 28
D . Industry-level policies ................................................................................................. 30
Annex: Case Studies ................................................................................... 31
1. Africa .........................................................................................................3 3
a . South Africa ....................................................................................................... 33
b . Lesotho ............................................................................................................... 34
c . Madagascar ........................................................................................................ 35
d . Kenya ................................................................................................................. 35
e . Mau.r itius .................................................................... 36 
f . Tunisi.a ................................................................................................................ 37
2 . Latin America and the Caribbean ..................................................... 37
a . Mexico ..............................................................................................................3..8
b . Dominican Republic ........................................................................................... 40
c . Guatemala ........................................................................................................4 1
d . Honduras ...........................................................................................................4. 1
3 . Asia ...............................................................................................4..2
a . Bangladesh ......................................................................................................... 42
b . Nepal .................................................................................................................4. 4
c . India ..................................................................................................................4..5
d . Pakistan ..............................................................................................................4 6
e . Sri Lanka ...........................................................................................................4. 6
f . Cambodia ........................................................................................................... 48
Notes ................................................................................................................... 50
References .............................................................................................................. 55
Selected UNCTAD publications on FDI and TNCs .................................. 61
Questionnaire. .............................................................................................7 1

List of Figures and Tables

Figure
Labour costs in the apparel industry, selected economies, 2000 ........................................ 1
Tables
The 20 largest apparel exporters, 2003 ................................................................................3..
20 economies with high dependence on apparel exports, 2003 ........................................ 4
20 largest textile exporters, 2003 ........................................................................................... 4
20 economies with high dependence on textiles exports, 2003 ........................................5
Exporters that are highly dependent on exports of apparel and textiles, 2003 ...................... 5
FDI projects in textiles and clothing manufacturing, 2002-2004,
by host region.. . .................................................................................................... 9
FDI projects in textiles and clothing manufacturing, 2002-2004,
by host economy.. . ............................................................................................ 9
FDI projects in textiles and clothing manufacturing, 2002-2004,
by source region.. . ..................... ...... ......... . . . .. .................................. ................ . . 10
Top 20 investors in FDI projects in textiles and clothing manufacturing,
2002-2004. ........................................................................................................................... 10
Stages of integration of textiles and apparel into GATT under ATC, 1995-2005 .............. 14
Regional differences in quota constraints of US apparel imports, 200 1 . . . . . . . . . . 15
US apparel imports, by source and risk level, 2002-2005 ................................................... 21
Largest exporters of textiles and clothing, China, 2003 ....................................................... 22
Number of FDI projects in textiles and clothing in China, 2002-2004,
by source economy ............................................................................................................... 23
Lesotho: largest foreign affiliates in garments and footwear, 2002 ..................................... 34
Share of total apparel exports from CBI countries to the United States that
fall under the CBTPA shared production arrangements, 200 1 . . .. . . . . . . . . . . . . . . . 3 8
Textile and apparel firrns in Honduras, 2003 ....................... 42

Executive Summary
For developing countries, the textiles and clothing industries have traditionally been an important gateway to industrialization and increased exports. With the expiration of the Agreement on Textiles and Clothing, the quota system originally set up through the Multifibre Arrangement was phased out. This has important implications for the allocation of export-oriented production and is likely to affect in various ways a large number of developing countries that rely heavily on such exports.

Drawing on a wide range of studies as well as on original research, this volume shows that transnational corporations (TNCs) are likely to play a critical role in determining the future global production structure in these industries. First, the sourcing strategies of a small number of very large retailing companies (based in the United States, Europe and Japan) place stringent requirements on the locations in which textiles and clothes will be produced. Second, the investment strategies of large transnational producers (mostly based in East Asia) will also affect the final outcome. Foreign affiliates of such developing-country TNCs already account for the bulk of exports from many developing economies.

The growing role of TNC producers is still not well understood, and more research is needed on their strategies and the impact of their international investments. As TNCs become more important at the production stage, their bargaining power increases vis-a-vis retailers in developed economies.

With the removal of quotas, sourcing and investment decisions are affected more by economic fundamentals. But low labour costs alone will not be sufficient to attract investment. There is likely to be more consolidation of production into larger factories in a smaller number of locations. China and India are likely to be in a particularly strong position in this new geography of production, but various factors may also work against too much consolidation. Proximity to markets continues to play an important role for some product categories, and some producers have signalled that they will retain several production bases in order not to become too dependent on a single source country. Moreover, various trade policy measures also influence sourcing and investment decisions. Data on foreign direct investment (FDI) projects in textiles and clothing manufacturing show that China, Bulgaria, the United States, Hungary, Brazil and India attracted the largest number of such projects in 2002-2004.

The removal of quotas generally means intensified competition for FDI in textiles and clothing. To become or stay competitive as host locations, countries will need to develop their ability to move away from simple assembly to "full-package" production and eventually original brand manufacture. But replicating the success of East Asia will be difficult. Key policy areas in this regard include identification of specialized niches; skills training and technological upgrading; investment in information technology; improvement of infrastructure such as ports and export processing zones; and leveraging of existing tariff preferences in the global trading system. Moreover, investment promotion agencies may identify some of the major transnational producers as key addresses for future marketing activities.


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