6 The Uruguay Round and International Trade in Textiles and Clothing
Author:
Ms. Naheed Kirmani
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,
Rupa Chanda
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, and
Mr. Clinton R. Shiells
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Language:
English
Print Publication Date:
20 Jun 1996
Keywords:
BOOK; country; Uruguay Round agreement; trade; liberalization; export; clothing export; Uruguay Round textile; European Union market; export-promotion policy; Exports; Tariffs; Imports; Trade barriers; Competition; Eastern Europe; Global
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Abstract

Textiles and clothing occupy an important position in the world economy. They contribute significantly to manufacturing production, employment, and trade. World trade (as measured by exports) in textiles and clothing was worth nearly $187 billion in 1992, some 7 percent of world merchandise exports (Table 1).

Textiles and clothing occupy an important position in the world economy. They contribute significantly to manufacturing production, employment, and trade. World trade (as measured by exports) in textiles and clothing was worth nearly $187 billion in 1992, some 7 percent of world merchandise exports (Table 1).

Table 1.

Value and Area Distribution of World Trade in Textiles and Clothing, 1992

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Source: GATT (1993b).

The importance of textiles and clothing in the economies of industrial countries has been declining, but textiles and clothing are still a significant contributor to employment and trade. A number of industrial countries are very large exporters and importers of textiles and clothing (Table 2). Trade in textiles and clothing products is of particular importance for developing countries, which account for more than half of world textiles exports and nearly three-fourths of world clothing exports (see Table 1). These ratios are much higher than developing countries’ share in world manufacturing exports as a whole (less than 20 percent), indicating their comparative advantage in the textiles and clothing sectors. In many developing countries, the share of textiles and clothing exports in their own exports is substantial (Table 3), and these sectors are a crucial element in these countries’ drive for industrialization and growth. Thus, the international trading regime governing textiles and clothing has far-reaching implications for the incomes and growth of developing countries.

Table 2.

Leading Exporters and Importers of Textiles and Clothing

(Value c.i.f. in billions of U.S. dollars; share in percent)

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Source: GATT (1993c).

World trade figures including re-exports are not available.

Includes trade through processing zones.

Imports f.o.b.

Retained imports are defined as imports less re-exports.

Table 3.

Exports of Textiles and Clothing

(In percent of own exports)

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Source: GATT (1993c).

Data on textiles are not available; total refers to clothing only.

The number for textiles refers to 1991.

Data on clothing are not available; total refers to textiles only.

However, the history of these sectors has been characterized by persistent and increasing protection over several decades, reflecting strong resistance to structural adjustment. Unfortunately, bilateral and multilateral agreements have, until recently, legitimized this protectionism. The Uruguay Round thus faced a tremendous challenge to integrate these sectors into the multilateral trading system. This chapter briefly describes past protection in the textiles and clothing sectors, and the implications of this protection for exporting and importing countries. It outlines the recent agreement on textiles and clothing in the Uruguay Round and its potential implications for different groups of countries, with particular reference to the Arab countries.

Protection in Textiles and Clothing

Restrictions on trade in textiles and clothing have taken the form of high tariffs, tariff escalation, and, most important, quantitative restrictions. The incidence of protection in these sectors is well above protection in other manufacturing and more labor-intensive product lines in industrial countries (Figure 1).

Figure 1.
Figure 1.

OECD Manufacturing Protection, 1990

(Goods excluding agriculture: in percent)

Source: Francois, McDonald, and Nordström (1995).Note: Tariffs reflect MFN-based tariffs and regional preferences. Regional preferences result in trade with weighted protection below MFN rates. “Other” protection is not comprehensive but represents a lower bound covering major industrial quotas and dumping actions.

Pre-Uruguay Round tariffs in industrial countries averaged over 15 percent compared with an average of some 6 percent on all industrial products (excluding petroleum) (Table 4). Tariffs on textiles and clothing products have also tended to increase with the stage of processing. For example, the average tariff on fibers in industrial countries is about 1 percent, while that on clothing is often more than 20 percent (see Table 4; see also Goto, 1988). Such tariff escalation is intended to protect higher-value-added production in industrial countries.

Table 4.

Pre-Uruguay Round Tariffs on Textiles and Clothing and Manufacturing

(In percent; weighted average)

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Source: Goto (1988).

While tariff barriers are clearly important, the principal obstacle to trade in textiles and clothing has been an array of quantitative restrictions that have persisted for decades. Before the 1960s there were many quotas and voluntary restraint agreements—known as the “hard core” residual restrictions—that had resisted the dismantling of quantitative restrictions in much of nonagricultural trade that occurred after the establishment of the GATT. The Short-Term Arrangement Regarding International Trade in Cotton Textiles covered 1961–62, and this was followed by the Long-Term Arrangement Regarding International Trade in Cotton Textiles for the period 1962–73. The purpose of these arrangements was to control trade so as to avoid “market disruption” in industrial countries. In some cases, certain developing country interests also saw them as a way to share in cartel-like rents. Developing countries reluctantly agreed to participate in these arrangements because they feared that the alternative would be even tighter restrictions by industrial countries imposed outside the multilateral trading system. But these arrangements proved neither temporary nor limited. They were followed by successive Multifibre Arrangements (MFAs), with restrictions spreading to more and more types of fibers and articles of clothing.

The MFA

The MFA is a system of bilaterally negotiated agreements under a multilateral framework that restricts textiles and clothing exports from developing countries to participating industrial countries. The MFA was intended to provide “temporary” protection to domestic textiles and clothing industries in industrial countries to allow them to adjust to foreign competition, and to provide developing country exporters with “orderly” access to industrial country markets. In practice, it became semipermanent through four successive phases: MFA I (1974–77), MFA II (1978–81), MFA III (1982–86), and MFA IV (1986-July 1991 and extended three times, until December 1994). The MFA has over 40 participants and covers 80 percent of world textiles and clothing exports, with around 100 bilateral restraint agreements. The extent of coverage has varied among exporting developing countries, with the severest restrictions applying to the most efficient producers. The aggregate bilateral restrictions of MFA quotas (based on estimated MFA quota price wedges) are approximately 15 percent to 25 percent for textiles and 25 percent to 40 percent for clothing (Centre for Economic Policy Research, 1994). Over time, the MFA has become both more restrictive and more complex.

In addition to the MFA, there are various other restraints that are imposed by importing industrial countries on exports of developing countries that are not participants in the MFA or on textiles and clothing products that are not included in the MFA. Thus MFA plus non-MFA restraint agreements affecting trade in textiles and clothing totaled 127 in 1992 (GATT, 1993a).

It is worth noting that while developing countries’ trade is restricted, intraindustrial country trade in these sectors is not subject to quantitative restrictions (though tariffs are applicable). Textiles and clothing are “special” sectors in this regard—they are the only areas where GATT has authorized the widespread use of quantitative restrictions against developing countries. However, not all industrial countries are equally restrictive within the MFA framework. Some participating countries have imposed few formal quantitative restraints (for example, Austria, Finland, Japan, Sweden, and Switzerland), while others (for example, the European Union and the United States) have more restrictive regimes (Kirmani and others, 1994). The MFA is a derogation from the fundamental GATT principle of nondiscrimination (and also violates the injunction against the use of quantitative restrictions). Its very existence has undermined credibility in the GATT, especially among developing countries, and has been a constant reminder of the GATT’s inability to discipline major trading nations.

It must be pointed out that many developing countries, including some of the major exporters of textiles and clothing, also resort to extensive and very high restrictions on their imports of textiles and clothing. Many apply both quantitative restrictions and high tariffs to limit foreign competition, notwithstanding that they have achieved efficiency in many product lines in these sectors. For example, developing countries such as China, Egypt, India, Indonesia, and Pakistan have long maintained very restrictive imports for textiles and clothing, as well as significant tariff escalation. In some cases the restrictions are imposed for balance of payments purposes, or on grounds of “reciprocity” for treatment of their exports in industrial countries. The high incidence of restrictions in developing countries in turn has provided a platform for textiles and clothing industries in industrial countries to resist dismantling their own trade barriers and to call for “reciprocity” in market opening. Some developing countries have embarked on programs to reduce protection in these sectors.

Effects of the MFA

An important rationale for the MFA was that it would provide time to domestic industries in industrial countries to adjust to increased foreign competition (although an approach using safeguards might have been sufficient in this regard). However, because protection has been viewed as if it were a long-term entitlement, adjustment has been sluggish, particularly in the clothing sector. The textiles industry has made some strides through productivity improvements and labor-saving mechanization. The demands for continued protection have arisen mostly from the clothing industry; but the textiles industry is politically closely aligned with the clothing industry and has supported the latter’s call for trade barriers.

Substantial welfare costs have resulted from the MFA in industrial countries. For example, De Melo and Tarr (1990) estimated that welfare costs attributable to MFA quotas amount to almost $12 billion (at 1984 prices) in the United States. The U.S. International Trade Commission (1993) has estimated that the welfare cost of each job protected by the MFA in the United States is about $270,000.

For efficient developing country exporters, the MFA has impeded the growth of textiles and clothing exports and has caused a substantial loss in potential export earnings. This loss is generally estimated to outweigh the quota rents that have accrued to developing country exporters under the MFA.1 One may question the effectiveness of MFA restrictions in the face of evidence that several developing country exporters have increased the value and market share of their textiles and clothing exports to industrial countries. However, it is valid to say that the MFA has restricted potential imports in major industrial markets, and that growth in the volume of textiles and clothing exports of developing countries has been lower because of the agreement (see Cline, 1990).

The MFA has penalized good performance; countries that were most successful at increasing their textiles and clothing exports were most vulnerable to the imposition or tightening of MFA quotas. Other effects of the MFA include trade diversion to less restricted countries away from more competitive suppliers. The MFA has also caused a diversion of foreign direct investment to the textiles and clothing sectors of these less restricted countries. It has resulted in product switching and quality upgrading as countries have moved toward higher-value-added product lines in order to overcome volume restrictions. The rigidities of the quota system under the MFA have also enabled traditional suppliers to maintain their market shares despite declining competitiveness (for example, Hong Kong and Korea) and thus have prevented more efficient new entrants from competing on equal terms. Moreover, the complexity of the MFA has imposed high administrative costs. In some cases it has resulted in corruption and excessive official intervention in these sectors, while in other cases it has led to circumvention of quotas through transshipment or fraud.

The Uruguay Round

Textiles and clothing trade played an important part in the Uruguay Round negotiations. This was an area in the negotiations that galvanized developing countries to take a united stand to demand that textiles and clothing be subject to normal GATT rules and that decades of discrimination and restrictions be ended. Developing countries had made similar demands during the Tokyo Round, but to no avail; their success this time during the Uruguay Round was a result of various factors. They were united and held firm. Also, industrial countries could not achieve their objective in the Uruguay Round to incorporate “new” areas (services and intellectual property rights) under multilateral disciplines without offering developing countries the possibility of integrating the “traditional” areas of textiles and clothing into the framework. But the opposition of the textiles and clothing sectors in industrial countries remained strong until the very end. This intense opposition explains the nature of the compromise agreement that finally emerged.

The Uruguay Round agreement on textiles and clothing envisages the phased elimination of the MFA over a ten-year transition period. The phasing is back-loaded, leaving the major part of the liberalization to the end of the period. It is in four phases, starting with the entry into force of the World Trade Organization (WTO) on January 1, 1995. Importing industrial countries must initially integrate products accounting for at least 16 percent of total (1990) import volume into the WTO, followed by an additional 17 percent and 18 percent, respectively, in the fourth and eighth years; the remaining 49 percent is to be integrated at the end of ten years. Table 5 summarizes the integration scheme for textiles and clothing under the Uruguay Round agreement.

Table 5.

Integration Scheme for Textiles and Clothing

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Source: Francois, McDonald, and Nordström (1995).

Developing countries feared that the liberalization of the more important and “sensitive” items would be pushed to the end stage of the transition. To mitigate this possibility, the final agreement requires importers to include at least one product from each of four groups (tops and yarns, fabrics, made-up textiles, and clothing). However, since the agreement does not specify how much from each of these four categories must be liberalized at each stage of the transition period, it still leaves substantial room for discretion on the part of industrial countries in structuring their quota liberalization.

Concurrent with the integration of products, outstanding quotas must be initially expanded by an additional 16 percent, over and above the growth agreed previously under the MFA; an additional 25 percent in the next four years, and 27 percent in the next three years. There are also provisions for redistributing quotas in favor of quota-constrained and efficient exporters, and flexibility provisions (to carry over quotas across product lines and time periods) will continue to apply. Exporting countries must also commit to take anticircumvention measures to deal with rerouting, false declaration of origin, and transshipment.

The agreement establishes transitional safeguard mechanisms in case of temporary surges in imports of products not yet integrated into the WTO or products not currently restrained under the MFA. Developing countries were concerned that this provision could be abused to retain restrictions, thereby effectively negating the intent of the Uruguay Round. Despite their efforts during the negotiations, they did not succeed in preventing the inclusion of this provision. But they were able to put time limits on these safeguards, which must be applied selectively and can be kept up to a maximum of three years. Also, there is less flexibility in the use of these safeguard measures against small exporters, the least developed countries, wool producers, outward processors, and cottage industries.

In addition to phasing out quantitative restrictions, the Uruguay Round agreement provides for an average reduction of 22 percent in industrial countries’ bound tariffs on textiles and clothing. However, products in these sectors will continue to have a considerable number of tariff peaks (tariffs in excess of 15 percent). After full implementation of the Uruguay Round, about 28 percent of industrial country imports of textiles and clothing will remain subject to tariff peaks, compared with 35 percent at the start of the Uruguay Round (GATT, 1994a). Thus, the proportional tariff cuts in these sectors will be limited relative to the average reduction (close to 40 percent) in bound tariffs on industrial products as a whole.

An interesting feature of the negotiations was the issue of access to developing countries’ own markets. Industrial countries, especially the United States and the European Union, wanted reciprocal liberalization by developing countries as a condition for terminating the MFA. After difficult negotiations, consensus was reached on the wording of the final agreement, which calls for industrial and developing countries alike to “achieve improved market access in textiles and clothing through such measures as tariff reductions and bindings and reduction or elimination of nontariff barriers.” The substitution of the word “achieve” for the initial phrasing in the Dunkel draft—which referred to “promote”—reflects the importance given to reciprocity during the negotiations. It was insisted upon by the United States and the European Union as a means to strengthen their ability to seek redress if developing countries failed to liberalize their own imports of textiles and clothing.

The manner of implementation of the Uruguay Round agreement will determine whether meaningful liberalization takes place during the ten-year period. Many developing countries are skeptical about this, and some of the early proposals by industrial countries appear to justify such skepticism. For example, none of the products integrated in the first stage (from January 1995) by the United States is currently under restraint; it appears that substantial liberalization will not take place until the third and fourth stages (from January 2002 and January 2005, respectively). Similarly, few items designated by the European Union for integration during the first three years were covered by bilateral quotas under the MFA. If industrial countries postpone liberalization of all the sensitive products to the end, this could make the final decisions on full implementation of the agreement even more difficult. Hence, it is important that industrial country governments give early signals to their domestic industries that this time the MFA will really be buried for good.

Implications of the Uruguay Round

Elimination of the MFA is expected to have profound effects on both importing industrial countries and exporting developing countries. The trade and welfare effects of liberalization have been estimated in several studies. With regard to trade effects, studies have shown that elimination of the MFA would lead to substantial increases in exports of textiles and clothing from most developing countries to industrial countries. Examples of such studies inelude GATT (1993b), Hertel and others (1995), Trela and Whalley (1990a), and Yang (1993). The estimated changes in exports of developing countries vary widely, from 10 percent to 36 percent in Yang (1993), to between 200 percent and 300 percent in Trela and Whalley (1990a), owing to different assumptions and methodologies. Hertel and others (1995) showed that most developing countries would experience substantial increases in exports of textiles and clothing as a result of MFA reform, but Latin America and sub-Saharan Africa may reduce their exports; imports of textiles and clothing into Canada, the European Union, and the United States would increase.

With regard to welfare (income) effects, the U.S. International Trade Commission (1993) estimated that abolishing the MFA (but not tariffs) would increase U.S. incomes by about $10 billion (at 1991 prices). Trela and Whalley (1990b) estimated that the elimination of tariffs and quotas would yield income gains of $8 billion for all developing countries. Francois, Mc-Donald, and Nordström (1995) estimated that industrial countries would gain substantially from liberalization of trade in textiles and clothing as a consequence of the Uruguay Round agreement, with results for the European Union and the United States ranging from around $10 billion to $24 billion (1992 prices) in each case; estimated gains to developing countries vary widely, from $6 billion to $79 billion (1992 prices), depending on modeling assumptions. Harrison, Rutherford, and Tarr (1995) found that developing countries as a group would gain nearly $4 billion (1992 prices) from MFA reform in the long run, with losses for some countries within the group, and that global income would increase by nearly $25 billion (1992 prices). However, they also showed that developing countries may lose from removal of the MFA in the short run if demand does not expand very much in previously quota-constrained markets, so that loss of quota rents outweighs gains from higher export sales; or if a country’s export share in previously unconstrained markets was low before the MFA reform, so that it does not gain much from higher prices.

Although the literature to date shows that importing industrial countries will likely gain from abolition of the MFA and tariff reductions under the Uruguay Round agreement, and that developing countries will generally gain, there may be adverse consequences for inefficient suppliers in some developing countries, especially in the short run, owing to the loss of quota rents. Quota rents, however, have been earned as a consequence of an inefficient system of managing the world market for textiles and clothing, and eliminating this system will yield substantial long-run benefits for producing and consuming countries alike, notwithstanding the losses to some inefficient producers.

Developing countries that are likely to gain the most are those efficient producers that are currently constrained by quotas and that will be able to generate an adequate supply response as the quotas are liberalized. These countries would be able to increase their market share in industrial countries significantly at the expense of other industrial or developing country exporters. These major beneficiaries are likely to be low-wage or high-productivity exporters (or both) with an indigenous base in operating skills, garment design, and marketing; with well-developed institutions; and with good transportation and delivery facilities (for example, China and India). New entrants that possess competitive industries (or are able to improve the productivity of their textiles and clothing industries in response to the creation of new market opportunities) will also be beneficiaries of the liberalization. Traditional exporters that enjoyed large quotas simply on the basis of historical trade trends are likely to further diversify out of these sectors or to move up the ladder to higher-value- added products (for example, Hong Kong and Taiwan Province of China). Countries that have attracted “quota-hopping” exporters or have gained a niche because of offshore processing and preferential arrangements could be adversely affected by the elimination of the MFA. These countries may lose to the bigger, more competitive suppliers to the extent that their own processing industries are artificial creations of the MFA. Some sub-Saharan African countries may also lose from elimination of the MFA because of more intense competition, although clothing and manufactured textiles do not constitute important exports for most of these countries. The impact is more ambiguous for Latin American and Caribbean countries that currently enjoy preferential access to the U.S. market via outward processing schemes, or for the African, Caribbean, and Pacific (ACP) countries with preferences in the European Union under the Lomé Convention or with special arrangements with Canada. Their net gains will depend on the extent to which their preferential access is eroded, the extent to which they have been utilizing preferences, and on other factors such as proximity to industrial country markets, transport costs, and their underlying competitiveness (including trends in labor costs and productivity).

Implications for Arab Countries

The implications of the Uruguay Round textiles and clothing agreement for Arab countries will depend primarily on the significance of these sectors in their trade flows and on future developments in competitiveness. With the exception of Egypt, Arab countries do not participate in the MFA. However, some of them face restrictions on their exports in industrial country markets imposed outside the MFA.

Textiles and clothing exports are particularly significant in the case of four Arab countries— Morocco, Egypt, Tunisia, and the Syrian Arab Republic—where exports of these products account for between 20 percent and 40 percent of their total exports (Table 6). For these countries as well as for the United Arab Emirates, textiles and clothing exports also constitute a significant part of manufacturing trade, accounting for between 20 percent and almost 60 percent of their total manufactured exports. Although recent data are not available, indications are that textiles and clothing exports are also potentially important for Sudan. In most other Arab countries, textiles and clothing constitute a small part of exports and imports. This is especially true of the oil exporting countries such as Kuwait, Bahrain, and Qatar, as well as others such as Jordan and Lebanon. Among Arab countries, Kuwait and Saudi Arabia are the two largest importers—textiles and clothing account for 9 percent or more of their total imports (see Table 6).

Table 6.

Textiles and Clothing Trade in Selected Arab Countries, 1990

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Source: United Nations commodity trade statistics.

Figures are for 1988.

Figures are for 1989.

The European Union is the main export market for those Arab countries that are significant producers of textiles and clothing. For example, the European Union accounts for about 40 percent of Egyptian exports of textiles and clothing, and for between 60 percent and 70 percent of Tunisian and Moroccan exports of these products. The United States accounts for less than 10 percent of Egypt’s textile and clothing exports, and for even less in the cases of Morocco and Tunisia.

Textiles and clothing exports from major exporting countries among Arab countries currently enjoy duty-free access to the European Union market. They are, however, subject to nontariff barriers in the form of quotas, monitoring, voluntary export restraints (VERs), and antidumping measures in both the European Union and U.S. markets. Among the Arab countries, Egypt faces the tightest restrictions on its textiles and clothing exports to these markets. Under their trade and cooperation agreements, Morocco and Tunisia have preferential access to the European Union market for their textiles and clothing products; the exceptions are one item for Morocco and two items for Tunisia, which are subject to VERs or quotas. These quotas in practice have not been a binding constraint. Morocco has often exceeded its ceiling by large margins without penalty, and Tunisia has not fully utilized its quotas. There are also special arrangements between the European Union and some Arab countries (for example, Tunisia and Morocco) whereby fewer and less restrictive quotas apply to textiles and clothing export items produced with raw materials originating from the European Union. Some Arab countries (for example, Morocco) can also take advantage of flexibility provisions in the European Union trade regime that allow them to substitute textiles and clothing exports within quantitative limits. Central and East European countries have in recent years negotiated association agreements that will eventually establish free-trade areas between them and the European Union; these countries constitute new competitive challenges for Arab countries in the European Union market, quite apart from the effects of the Uruguay Round.

The reduction in most-favored-nation (MFN) tariffs on textiles and clothing under the Uruguay Round will benefit Arab countries in markets where this was a constraint and where they did not enjoy preferential access. For example, Egypt is likely to gain in the U.S. market, where its textiles and clothing exports do not enjoy preferential duty treatment under the Generalized System of Preferences (GSP) and face high tariffs. Export opportunities will also expand with the elimination of MFA and non-MFA quantitative restrictions under the Uruguay Round agreement. The beneficial impact may be significant for Arab countries such as Egypt that face binding quotas in both the U.S. and European Union markets. It is likely to be less so for exporters such as Tunisia and Morocco that do not participate in the MFA and that have not faced binding quotas in their main export markets. The extent to which Arab exporters of textiles and clothing can effectively exploit the opportunities created by the elimination of the MFA will depend on their ability to improve competitiveness relative to other suppliers. Factors such as labor costs, transport costs, and the cost of capital will be important determinants in this regard. In particular, inflation rates and wages would need to be kept in line with, or below, those of competitors.

Some Arab exporters of textiles and clothing will experience an erosion of their preferential status in some industrial markets following the Uruguay Round agreement. Because several Arab countries have duty-free access to the European Union (Egypt, Tunisia, and Morocco), a reduction in MFN tariffs will lower the preference margin of these countries relative to that of other suppliers of textiles and clothing in the European Union. It is important to point out that this erosion of preferences applies to products that will be granted quota increases under the agreement. Since there is substantial discretion on the part of importing countries on the structuring of quota liberalization, the significance of preference erosion and its impact during the transition period will vary across these exporting countries and also across their different export markets. Given the phased and discretionary nature of liberalization under the agreement, it is difficult to generalize the implications of preference erosion for Arab exporting countries. The loss of preferential status is likely to result in increased competition from previously restricted, efficient low-cost suppliers in the European Union market. Hence, there is likely to be some displacement in the domestic textiles and clothing industries of Arab textiles and clothing exporters in the European Union market. The extent of this displacement will depend on their relative cost competitiveness and underlying structural factors. As noted earlier, competition from Central and East European countries in the European Union market may be a more important structural change facing some Arab countries than the Uruguay Round.

Preliminary evidence indicates that major Arab exporters of textiles and clothing may be at a cost disadvantage relative to their competitors in the European Union and thus are likely to be adversely affected by increased competition in this market. In the cases of Morocco and Tunisia, the World Bank (1994) has found that textiles and clothing exporters in these countries are not cost competitive relative to their main competitors in the European Union market, particularly those in Asia. The study attributes these cost disadvantages to various factors—low labor productivity (which, despite low real wages, results in relatively high unit labor costs), high energy costs, high transport costs, generally poor infrastructure, and lack of investment in human capital. Problems facing their textiles and clothing sectors include slow productivity growth; reliance on a few low-quality and low-technology products; dependence on a few markets; the small size of garment-producing firms; and weak linkages between spinning, weaving, and finishing and garment production. In some Arab countries, public investments have focused only on the spinning and weaving subsectors while neglecting the dyeing and finishing sectors; this has impaired the building of strong linkages within the garment-exporting industry.

Thus the Uruguay Round agreement, as well as the integration of Eastern and Western Europe, is likely to pose a challenge for a number of Arab exporters of textiles and clothing, especially in European markets. This challenge was evident even before the Uruguay Round agreement was reached; competing suppliers both from Eastern Europe and Asia were beginning to capture larger and more rapidly growing shares of the European Union market relative to exporters from Arab countries. Such competition is likely to intensify following elimination of the MFA and the MFN tariff reductions under the Uruguay Round. Some Arab countries (for example, Morocco) are attempting to negotiate association agreements with the European Union. In any case, these countries will need to improve their competitiveness if they are to meet the emerging challenges. Thus, it is important not to overplay the loss of preference erosion under the Uruguay Round—in most cases, general trends in competitiveness related to movements in labor costs and productivity have already been affecting the positions of Arab countries. Global liberalization under the Uruguay Round will accelerate emerging trends. Arab countries need to face the increased competition by adjusting to the emerging new realities.

Elimination of the MFA may also reduce the importance of subcontracting arrangements between Arab exporters of textiles and clothing and the European Union. For example, Tunisia and Morocco are among the most important “outward processing trade” partners of the European Union (European Union clothing manufacturers export European Union fabrics to these countries, which are re-exported in the form of finished clothing). Subcontracting dominates the clothing sector, especially in activities that do not require high technology or skills (such as garment assembly). Under current arrangements, textiles and clothing exports to the European Union that use European fabrics are partially excluded from quantitative restrictions.

Although such subcontracting arrangements may continue to confer certain advantages to Arab countries (for example, Tunisia and Morocco), in part because of their proximity to the European Union, the benefits arising from them may be temporary. This is because offshore enterprises engaged in subcontracting arrangements have very few linkages with the rest of the economy, simply importing raw materials from the European Union and using local manpower and infrastructure to re-export finished items to the European Union. Hence, they can easily relocate when conditions offered elsewhere are more favorable. In this context, textiles and clothing exporters in Eastern Europe present a serious challenge to Arab exporters such as Tunisia and Morocco; the former have favorable preferential trade agreements with the European Union and also enjoy the advantages of relatively cheap labor and proximity to the European Union. Thus, the Arab countries will find it more difficult to retain the particular benefits available through subcontracting arrangements.

Concluding Remarks

As with any major liberalization, the Uruguay Round will induce changes in the status quo—whether arising from protection received or preferences granted. In most cases, Arab countries are small exporters and importers of textiles and clothing and are unlikely to be significantly affected by the new agreement. Major Arab country exporters of textiles and clothing will be affected positively by the liberalization in industrial country markets, but possibly negatively by the erosion in their preferential margins and by increased competition from third countries. The net impact will depend crucially on their ability to compete and to adapt to the new, more efficient global structure that will ensue from the Uruguay Round.

Even before the Uruguay Round agreement, Arab countries were beginning to face increased competitive challenges in their main markets. The ultimate impact of the Uruguay Round reforms depends on the policies adopted by Arab country governments to facilitate adjustment in their economies in general, and in the textiles and clothing sectors in particular.

Governments need to maximize the opportunities opened up by the Uruguay Round and to minimize the adverse consequences arising from increased competition. More generally, Arab countries will need to maintain sound macroeconomic policies and provide an environment that is competitive and stimulates investment and the acquisition of improved technology. They must liberalize the external sectors of their own economies and strengthen the supply of exports by increasing the ability of firms to respond to changes in demand and by broadening and creating areas of comparative advantage. They must also improve cost competitiveness through higher productivity growth and the accumulation of human and physical capital. As regards the textiles and clothing sectors, steps are needed to increase productivity and competitiveness through improvements in labor skills, investment in new technology, and modernization and restructuring of the spinning and weaving sectors. Market-based policies may be needed to facilitate a shift into the more efficient product lines within the textiles and clothing sectors to overcome labor cost disadvantages if these countries do have a comparative advantage in these lines. This may require increased investment and deregulation, as well as better integration of the textiles and clothing subsectors. More broadly, efforts should be made to decrease product and geographical concentration to reduce vulnerability to changes in market conditions. Market-based export-promotion policies to diversify the economy could play an important role in this regard. A stable legal and institutional framework must also be created to facilitate the operation of markets.

In conclusion, the Uruguay Round agreement should be viewed in a global context and not simply from the point of view of any one group of countries or sectors. The overall package will provide global welfare gains and opportunities, provided that countries bring forth the supply response. Although there may be potentially adverse effects on some countries in some areas, the transitional costs will be spread over a long implementation period. Arab countries should utilize this time to promote industry-specific and more general adjustments, as required, to meet the challenges of the new world market structure that will arise from the implementation of the Uruguay Round agreement.

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*

The views expressed are those of the authors and do not necessarily represent those of the International Monetary Fund.

1

Harrison, Rutherford, and Tarr (1995), however, have shown that the reverse may be true for an exporting country if demand does not expand very much in formerly quota-constrained markets, or if the country does not gain much from higher prices in formerly unconstrained markets, following removal of the MFA.

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Cover The Uruguay Round and the Arab Countries
The Uruguay Round and the Arab Countries
ISBN:
9781557754974
Publication Date:
20 Jun 1996
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557754974.071
Pages:
211
  • Figure 1.
    View in gallery
    Figure 1.

    OECD Manufacturing Protection, 1990

    (Goods excluding agriculture: in percent)

Figure 1.

OECD Manufacturing Protection, 1990

(Goods excluding agriculture: in percent)