Mauritius: Background Papers and Statistical Annex

This Background Paper and Statistical Annex examines selected issues pertaining to the Mauritian economy, which are all related to the question of how Mauritius will be able in the future to sustain its export-led development and diversify its economy. The paper discusses the impact of the Uruguay Round agreement on the Mauritian economy. The paper also utilizes available data to assess Mauritius’s external competitiveness, which is a major issue as regards the sustainability of high export growth.

Abstract

This Background Paper and Statistical Annex examines selected issues pertaining to the Mauritian economy, which are all related to the question of how Mauritius will be able in the future to sustain its export-led development and diversify its economy. The paper discusses the impact of the Uruguay Round agreement on the Mauritian economy. The paper also utilizes available data to assess Mauritius’s external competitiveness, which is a major issue as regards the sustainability of high export growth.

Introduction

The background papers in this report examine selected aspects or issues pertaining to the Mauritian economy, which are all related to the question of how Mauritius will be able in the future to sustain its export-led development and diversify its economy. Four chapters are included.

The first chapter discusses the impact of the Uruguay Round agreement on the Mauritian economy. It attempts to quantify, where possible, the potential costs which the Round could entail for Mauritius in terms of higher cost of imported food, preference erosion, and adverse impact of the elimination of the Multi-Fibre Arrangement (MFA). It also tries to identify what benefits Mauritius could derive from the Round.

The second chapter utilizes available data to assess Mauritius’s external competitiveness, which is a major issue as regards the sustainability of high export growth. It concludes that Mauritius’s external competitiveness has indeed been eroded in recent years.

The third chapter examines the conditions of recent and future development of the offshore financial services sector in Mauritius, which is often referred to as the “Fourth Pillar” of the economy, and seen as the cornerstone of the authorities’ present diversification efforts.

The fourth chapter describes the new interbank foreign exchange market put in place in July 1994, in a move to liberalize further the exchange and payment system.

While all the mission members contributed to these background papers, the first two chapters were principally prepared by J. Toujas-Bernaté, while chapters III and IV were principally prepared by A.A. Selassie and R.A. Franks, respectively.

I. The Impact of the Uruguay Round on Mauritius

The conclusion of the Uruguay Round is considered by many countries as a positive achievement because of its potential beneficial impact on medium-term growth prospects, as it provides for increased market access for industrial products and more transparent trade rules (see Box 1). However, as regards Mauritius, some concerns have been raised by the Mauritian authorities about its potentially adverse effects. Mauritian exports, which have contributed much to the growth performance of the economy, are overwhelmingly dependent on preferential access to industrialized countries’ markets. Thus, the liberalization of trade in protected sectors by these countries is seen as eroding preferences for Mauritius. Also, as a net food importer, Mauritius is concerned about the possible negative impact of increased prices of agricultural products.

General Economic Implications of the Uruguay Round for Developing Countries

Liberalization of trade in goods

The main aspects of trade liberalization reforms agreed under the Uruguay Round include a reduction in tariffs, the elimination of nontariff barriers, and the integration of the agricultural and textiles and clothing sectors in the multilateral trading system (the latter aspect regarding textiles and clothing is discussed more specifically in Box 3).

Many developing countries have implemented unilateral trade liberalization reforms, including reduction in tariffs, in the past several years. Their commitments under the Round to bind tariffs will only result in increased predictability of their trade regime, but will not lead to actual trade liberalization as the newly bound tariffs generally exceed currently applied rates (see Kirmani and others (1994)).

The impact of the industrial countries’ tariff reduction for developing countries is expected to be mixed. Countries whose exports are biased toward products where tariff cuts are the largest, like metal, mineral products, wood, pulp, paper, and furniture, will gain most. Those whose exports earnings are dependent on industrial products where tariff cuts are limited, such as leather, rubber, footwear, travel goods, and fish products, will benefit much less.

The Round provides for the virtual elimination of “grey area measures”, such as voluntary export restraints and import surveillance. This will have implications for access to industrial country markets by developing countries. Some studies estimate that the average trade coverage ratio of nontariff barriers against imports from developing countries will decline from 18 percent at present to around 5 percent after the implementation of the Round. The main products concerned, apart from agriculture, textiles, and clothing, include fish and fish products, footwear, iron and steel, and consumer electronics.

For agriculture, the agreed reductions in domestic market supports and export subsidization will mitigate distortions in world markets and increase export opportunities for the most efficient producers. Developing countries with potentially strong agricultural sectors may benefit from this liberalization if they succeed in developing domestic production capacities. Reforms in industrial countries are expected to result in a decrease in the supply of temperate zone products, and so an increase in world market prices for some products. This aspect has been a major concern for developing countries, which are mostly net food importers, because they could experience adverse welfare effects. Recent quantitative studies, however, show that changes in world commodity prices are likely to be modest, as the actually agreed liberalization is lower than was previously expected.

Trade in services

The General Agreement of Trade in Services (GATS) set up a multilateral framework based on nondiscrimination and transparency, and instituted a forum for negotiations of market access among participant countries. Thus, the Most Favored Nation (MFN) principle has been extended to services and service suppliers. However, much flexibility has been left to member countries to indicate exemptions. The transparency obligation requires that all relevant laws and regulations be published by each member. Aside from these general obligations, market access and national treatment binding commitments have been recorded by each member country in its national schedule.

In the past, developing countries have increased their share of exports of services, and some of them became relatively specialized in services. Therefore, developing countries will have a significant stake in liberalization of trade in services, and this was reflected by the large number of developing countries (77) that have submitted schedules of commitments in services under the Round. However, the sectoral coverage of these commitments was generally quite limited.

Intellectual property rights

Developing countries were reluctant to agree to higher Intellectual Property (IP) protection, because, as net importers of technology, they were concerned about its potentially adverse impact on prices and welfare. Although these concerns are likely to materialize in the short term, the incentives for higher R&D provided by higher IP protection could more than offset these negative effects in the long term. Also, higher IP protection may serve developing countries to attract foreign investment in the related sectors.

This chapter attempts at quantifying, where possible, the potential costs that the Uruguay Round could entail for Mauritius. It also tries to identify what benefits Mauritius could derive from the Round.

The chapter is organized as follows. The trade structure and trade regime of Mauritius are presented in sections 1 and 2, and the trade relations with Mauritius’s main partners are discussed in section 3. Section 4 presents the commitments of Mauritius under the Uruguay Round, while sections 5 and 6 provide assessments on the impact of the Round on imports and exports.

1. Trade structure

Trade is of particular importance for Mauritius’s open economy: total of exports and imports of goods represented about 90 percent of GDP in 1993/94. Mauritius exports mainly clothing and sugar. In 1994, these two categories represented 53 and 24 percent of total exports of goods, respectively (see Statistical Annex, Tables XLIV and XLV). This makes Mauritius one of the countries whose exports are largely dependent on clothing, along with Macau and Bangladesh. Other categories of exports include fish and fish preparations, watches and clocks, and pearls and precious stones, each representing around 2 percent of total exports.

The direction of exports is concentrated as well. The main destinations for Mauritius exports are the EU and the U.S., which received 65 and 15 percent, respectively, of total exports over 1991-93. For exports of the Export Processing Zone (EPZ) only, the EU and the U.S. received 67 and 25 percent, respectively, of the total in 1994 (see Statistical Annex, Table XLVI).

Imports consist mainly of intermediate goods, which usually represent more than 50 percent of total imports. This category includes in particular textiles (21 percent of total), chemical products (7 percent of total) and petroleum products (6 percent of total). The rest of imports is divided almost equally between consumer and capital goods, which represented 26 and 23 percent of total, respectively, in 1994. Imports of food and beverages, in particular, accounted for around 14 percent of total imports in the same year.

2. Trade regime of Mauritius

Mauritius maintains a fairly open trading system, as a result of a far-reaching, unilateral liberalization process of its trade policies predating the Uruguay Round.

Prior to 1984, most of the goods imported into Mauritius were subject to import controls. The restrictions on imports were considered necessary by the authorities to protect and promote local infant industries and to prevent the outflow of foreign exchange. In 1985, the importation of all goods was liberalized in the context of the authorities’ commitments under a stand-by program with the Fund. An import licensing system continued to operate until July 1991, for monitoring purposes as well as for the compilation of trade statistics. Since then, only a limited number of goods require an import permit for health, security, environmental, and national interest purposes.

A major reform of the import tariff rate structure was also made in July 1994. The number of tariff rates was reduced from 90 to 8, and the maximum rate was reduced from 600 to 80 percent. 1/ On this occasion, the general tariff rate, the preferential rate, and the customs rate were consolidated into one single customs rate, resulting into a simplified and more transparent import tax structure. The simple average tariff is now 29 percent, with two thirds of tariffs being 20 percent or less. However, there is a significant tendency toward tariff escalation, and high tariffs occur, particularly on clothing. 2/

The export system has also been streamlined. Exports of almost all goods now can be conducted freely, except for a few controlled items for which export permits are required. This concerns products of strategic importance, products sensitive to the economy, and products whose market access is restricted by quotas applied by importing countries. There are no direct export subsidies, but Mauritius grants special tax treatment to promote investment in export-oriented sectors.

3. Trade relations with the main partners

Trade relations with the EU, which is the main destination of exports, are governed by the Lomé Convention (see Box 2). This convention provides Mauritius with nonreciprocal, duty-free, and unrestricted access to the EU market for all industrial and most of agricultural products. Sugar exports are governed by the Sugar Protocol, annexed to the Lomé Convention (see also Box 2). This protocol binds the EU to import, and Mauritius to provide each year an agreed quantity of sugar at a fixed price. Mauritius is the main African-Caribbean-Pacific (ACP) producer covered by this protocol, and the annual quota allocated to Mauritius of 507 thousand tons represents about 40 percent of the total quota. In addition, a new agreement, known as the Refiners’ Deficit Agreement, has been signed this year between the EU and the ACP sugar producers, for a period of six years, providing Mauritius with an additional annual quota of 85 thousand tons.

Mauritius has bilateral textile agreements with the U.S. and Canada, which have been concluded under Article 8 of the Multi-Fibre Arrangement. These agreements stipulate quotas for around 15 categories of clothing. Another bilateral agreement has been signed with the U.S. fixing a yearly quota for exports of special sugar of 15 thousand tons.

Mauritius belongs to four regional groupings. The first of these is the Preferential Trade Area for Eastern and Southern African States, which was transformed in November 1993 into the Common Market for Eastern and Southern Africa (COMESA). 1/ The second regional grouping is the Indian Ocean Commission, which was set up in 1982 with a view to promoting economic, social, and cultural cooperation between the islands of the Indian Ocean, including the Comoros, Madagascar, Mauritius, Réunion Island, and Seychelles. A program aiming at promoting intra-regional trade by providing for the removal of trade barriers and the facilitation of payments is expected to enter into force in 1995. Thirdly, Mauritius is also signatory to the treaty establishing the African Economic Community, concluded in June 1991 in Abuja, Nigeria, which provides for the gradual establishment of an African Economic Community by the year 2025. More recently, Mauritius became the twelfth member of the Southern African Development Community (SADC) in August 1995. In addition, Mauritius has decided to implement the Cross Border Initiative (CBI) reform agenda, in a regional effort to promote cross-border economic activity in Eastern and Southern Africa, and is taking part actively in another initiative aimed at setting up an Indian Ocean Rim.

All these efforts by Mauritius to take part and be in the forefront of the regional integration process indicate that Mauritius is positioning to take advantage of any new opportunity that may arise in the region from the Uruguay Round, most notably in India and South Africa.

The Lomé Convention

The Lomé Convention defines the principles and objectives, as well as the areas, of cooperation between the EU and ACP countries. 1/ The convention, originally signed on February 28, 1975, has been renewed four times. The last version of the convention, known as Lomé IV, was signed on December 15, 1989, effective March 1, 1990, for 10 years.

The areas of cooperation covered by the convention are numerous and diverse, including environment, agriculture and fishing, commodities, industry, energy, services, trade, cultural and regional cooperation. The EU committed to contribute to development efforts of ACP countries by providing adequate financing and technical assistance.

Of particular interest for this paper is the cooperation for trade development. The principle of this cooperation is that products from ACP countries can be imported into the EU duty free and without any quantitative restrictions. Some specific arrangements apply, however, to agricultural and fisheries products, and services. Agriculture and fishing are the only sectors for which trade restrictions and duties are still applied by the EU on products from ACP countries. In addition, two specific protocols are still effective, regarding rum and bananas, and sugar. Nevertheless, the EU trade regime has been substantially liberalized under Lomé IV, with the elimination of duties and quantitative restrictions on many products of interest for ACP countries, like fruits and vegetables, cereals, and beef. The cooperation in the area of services is covered in a separate chapter of the Convention, aimed at facilitating the development of services in ACP countries.

The Sugar Protocol

Since Lomé I, the EU (then EC) committed to import from some ACP countries specified quantities of sugar cane at guaranteed prices, quantities which in turn the concerned ACP countries committed to provide. The Sugar Protocol will remain effective beyond the end of Lomé IV, until it is denounced by the EU or one of the ACP countries, with 2 years’ notice.

The protocol presently concerns 16 ACP countries. Agreed quantities of sugar cane should be delivered each year between July 1 and June 30 of next calendar year, with some flexibility in terms of carry-forward and over. If a particular ACP country is unable to provide the required quantity, the difference is reallocated to the other countries, apportioned according to their respective shares of quota. The guaranteed price, calculated in ECUs, is negotiated each year within the range of prices observed on the domestic EU market.

Mauritius is the main ACP country concerned by this protocol, as the annual quota of 507 thousand tons granted to Mauritius is around 40 percent of the total quota granted to ACP countries.

In 1995, an additional protocol was signed, known as the Refiners’ Deficit Protocol, to provide adequate quantities of sugar to European refiners, following Portugal’s entry into the EU. This protocol became effective July 1, 1995, for a limited period of 6 years. Under this protocol, Mauritius has been granted an additional quota of 85 thousand tons per annum.

1/ The ACP group of countries includes 69 countries from Africa, Caribbean, and Pacific regions.

4. Commitments of Mauritius under the Uruguay Round Agreement

Mauritius’s liberalization commitments under the Uruguay Round agreement for the trade of goods fall exclusively into the category of tariff bindings for all the agricultural products and a few industrial products (see Table 1). As discussed below, these commitments will not affect Mauritius’s current trade policy regime, because committed bound rates substantially exceed currently applied rates. In fact, these commitments were made before the recent import tax reform was implemented in July 1994. Thus, Mauritius still has the possibility, in theory, to reverse partly the tariff reduction achieved on this occasion, although the authorities did not show any intention in this regard during the last Article IV consultation discussions. As Mauritius does not apply nontariff concessions and does not subsidize its exports, the schedules of commitments do not contain any reference to these areas.

Table 1.

Mauritius: Tariff Bindings under the Uruguay Round Agreement

Schedule CXVIII - MAURITIUS Part I - Most-Favored-Nation Tariff Section I - Agricultural Products Section I-a - Tariffs

Schedule CXVIII - MAURITIUS Part I - Most-Favored-Nation Tariff Section II - Other Products

Tariff bindings entail a commitment by Mauritius not to raise the level of its tariffs beyond the “bound” level, without consulting and/or compensating its trading partners. This contributes in principle to greater predictability of trade policies. As required for all developing countries, Mauritius has bound 100 percent of its tariff lines in agriculture. The bound tariff has been fixed at 122 percent, except for a list of 25 items. This general bound tariff is well above the current maximum tariff rate of 80 percent, following the tariff reform in July 1994. The bound tariffs for the list of 25 are either 82 or 37 percent, which are also above the currently applied rates for the products concerned. As regards industrial products, Mauritius has committed to binding tariffs only for a short list of 10 products, including mostly capital goods. The bound tariff for these 10 products is 65 percent, again above the currently applied rates. As also required under the Uruguay Round, Mauritius has had to bind other duties and charges applied to imports. A bound rate of 17 percent has been committed. This corresponds to the import levy of 17 percent, which was chargeable under the 1990 Import Levy Act when the Uruguay Round was concluded, but which is no longer payable since this act was repealed in June 1994.

As regards trade in services, in addition to general obligations of most-favored-nation treatment and transparency imposed by the General Agreement on Trade in Services (GATS), Mauritius has made token specific commitments to bind two services sectors, namely, tourism and telecommunications. These binding commitments consist of not putting limitations or restrictions other than those enunciated in the schedules. In the case of Mauritius, as for many other countries, the schedules for the two sectors concerned include existing laws, meaning that Mauritius committed only not to introduce limitations or restrictions beyond those imposed by the current regime. 1/ Mauritius did not make any commitment in the financial services sector, although this sector already operates in a liberalized framework, including the absence of exchange controls since July 1994, and a conducive environment for international financial services such as offshore banking, fund management, insurance and other related activities.

5. Impact of the Uruguay Round on Mauritius’s imports

As the above discussion shows, the Uruguay Round agreement will not entail further liberalization of Mauritius’s import regime. As a result, it is not expected that imports will grow significantly in real terms due to the Uruguay Round. However, as in other net food importing countries, the Mauritian authorities expressed concerns about the possible negative impact on the food import bill that could result from the liberalization of agriculture in developed countries. Changes in the prices of some agricultural products are expected as a result of the Uruguay Round, as very serious market distortions in this sector will be removed. In particular, declining export subsidies in developed countries will tend to lower agricultural production in these regions, while declining tariffs in third countries will increase demand for these products. The result could be substantial world price increases and a decline in food aid from developed countries. This concern was specifically acknowledged during the Uruguay Round negotiations, and the final agreement, indeed, includes a “Decision on measures concerning the possible negative effects of the reform program on least-developed and net food-importing countries.” In this context, measures are envisaged to provide adequate food aid and financing from international financial institutions for countries experiencing short-term difficulties in food imports.

Various studies have attempted to quantify the possible impact of the Uruguay Round on world agricultural products prices. Most of them, however, were made before the final agreement was known, and thus were based on some assumptions of worldwide liberalization in the agriculture sector, which proved to be overstated. Thus, changes in prices now appear to be overestimated in these studies, because a careful analysis of the final commitments of developed countries in the agriculture sector shows that the extent of agricultural liberalization in the Round was more limited than previously envisaged. A more recent study by Goldin and van der Mensbrugghe (1995) (G.vdM.), which is based on the final agreement, indicates indeed that the impact of the Uruguay Round on prices of agriculture products would be rather small, within the range of -1.7 to +3.8 percent. It uses a general equilibrium model, and compares a baseline scenario including the Round effects with two counterfactual scenarios under the assumption that the Uruguay Round had failed. Counterfactual Scenario I and Scenario II assume that levels of protection in agriculture in the absence of the Round would have been the average level between 1982 and 1993, and the average level between 1991 and 1993, respectively. As the average level of protection was higher between 1991 and 1993 than between 1982 and 1993, the effect of the Uruguay Round is larger when comparing the baseline scenario with Scenario II than with Scenario I.

A detailed analysis of the possible impact of the Uruguay Round on Mauritius’s agricultural products import prices (including agricultural commodities) is presented in Table 2, based on estimates of G.vdM., using the specific composition of Mauritius’s agricultural imports, and assuming full pass-through of the world price changes to the domestic market. In essence, the impact of the Uruguay Round on agricultural import prices for Mauritius is estimated to be negligible, and will likely be swamped by price fluctuations due to other factors, such as the recent increase in world market prices for a number of food products. Specifically, the average impact of the Uruguay Round on food import prices for Mauritius would be between a decrease of 0.6 percent (based on Scenario I of G.vdM.) and an increase of 0.6 percent (based on Scenario II of G.vdM.). For nonprocessed agricultural commodities, including in particular textiles, the impact would be in the range from a decrease of 0.9 percent to a decrease of 0.3 percent. For total agricultural products, the estimated impact ranges from a decrease of 0.7 percent to an increase of 0.4 percent.

Table 2.

Mauritius: Effects of the Uruguay Round on Agricultural Import Prices

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Based on the COMTRADE data base.

Estimates for individual products are based on Goldin and van der Mensbrugghe (1995). Estimates for totals are weighted averages using import values shown in the first column.

In any case, a strong domestic supply response to changes in world food prices is very unlikely in Mauritius, owing to structural factors, most notably the relative scarcity of cultivable land. Today, over four fifths of Mauritius’s cultivable land is occupied by sugar, which is one of the most profitable agricultural activities in Mauritius. Moreover, given the recent new agreement with the EU, which will allow Mauritius to export 85 thousand additional tons, the prospects are that land under sugar cultivation will increase further in the near future.

6. Impact of the Uruguay Round on Mauritius’s exports

In view of Mauritius’s trade structure and its relations with its main partners discussed before, the impact of the Uruguay Round on Mauritius’s exports entails four main aspects: i) the prospects for exports of sugar; ii) the preference erosion due to tariff reductions in partner countries where Mauritius has preferential access; iii) the phased elimination of MFA; and iv) possible new opportunities. Since about three quarters of Mauritian exports benefit from preferential duty treatment, or are subject to specific bilateral agreements, Mauritius should not expect to benefit directly from tariff cuts in partner countries under the Uruguay Round, in contrast to most other developing countries.

a. Prospects for sugar exports

Immediately following the conclusion of the Uruguay Round agreement, many Mauritian representatives expressed concerns about the potentially adverse impact this would have on the sugar sector. The fear was that commitments made by the major importing countries, including the EU and the U.S., to reduce subsidies to agricultural products would affect the sugar sector, as it was a very protected and subsidized sector. This in turn would affect Mauritius’s exports to these markets, as guaranteed export prices, in particular, are dependent on the conditions in the importing countries’ domestic market. Today, the situation appears much less worrying for Mauritius, although uncertainties remain. Indeed, the schedules of subsidy reductions in agriculture in both the EU and the U.S. show that the sugar sector will not be subject to cuts in subsidies, and will remain, at least in the short to medium term, highly protected. The EU and the U.S. managed to comply with their Uruguay Round commitments by cutting subsidies in sectors other than sugar, reflecting the relative strength of the sugar lobby in these countries. As a result, the reduction in sugar prices on these markets previously envisaged are now unlikely to take place. However, its durability would be affected by unpredictable political decisions. As regards the quantities, the Sugar Protocol under the Lomé Convention was recognized by the World Trade Organization (WTO), and will continue to apply indefinitely, until it is abandoned by one of the participating countries. In that respect also, uncertainty for Mauritius remains in the longer term: if it is considered as a newly industrialized country at the end of the current Lomé Convention in the year 2000, then Mauritius’s eligibility to benefit from opportunities offered to developing countries may be questioned.

b. Preference erosion

Given the preferential duty treatment that Mauritius receives on its exports to the EU, it will face an erosion of preferences as a result of tariff reductions under the Uruguay Round. This will lead to the loss of market shares for Mauritian products in total EU imports, as the relative competitiveness of nonpreferred suppliers will increase.

In what follows, a partial equilibrium approach is used to estimate the quantitative effect of preference erosion. Given the small size of the Mauritian economy, general equilibrium effects, taking into account the effect of the Mauritius’s supply response, can be omitted. Thus, the reduced exports from Mauritius to the EU due to preference erosion can be expressed, using relations from consumer theory and making certain simplifying assumptions, as the product of the initial value of exports, the price elasticity of demand, and the change in tariff calculated as dt/(1+t), the latter representing the change in price of nonpreferred suppliers exports. 1/ Table 3 presents quantitative estimates of this reduction in exports from Mauritius to the EU (equivalent to imports of the EU from Mauritius) for the leading 20 categories. These leading 20 categories represent 93 percent of total imports, excluding sugar and clothing. 2/ The estimates are based on 1991-93 average import values of EU, shown in the first column. Overall, the effects of preference erosion on Mauritius suggested by this analysis are quite small, as changes in prices of nonpreferred suppliers’ products are also small. This reflects the limited scope of EU tariff changes. The total drop of Mauritius’s exports of products, excluding sugar and clothing, is only about 3.3 percent of the 1991-93 base period value. These estimates, however, should be viewed as providing only rough indications of the effects of preference erosion, as the methodology used here includes some caveats. 3/

Table 3.

Mauritius: Effects of Preference Erosion on the European Union’s Imports from Mauritius.

(Excluding Sugar and Clothing)

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Source: United Nations COMTRADE database for import values; elasticity figures from Stern and Others (1976).

c. Phased elimination of the MFA

The Agreement on Textile and Clothing (ATC) under the Uruguay Round provides for the phased integration of these products into the GATT/WTO (see Box 3). Before all the products are integrated, which should happen at the latest in 2005 (and for most quota-constrained products, not before that date), quota growth rates will be expanded. This means that exports of textile and clothing from quota-constrained countries will grow faster under the ATC, but also that countries like Mauritius, which currently enjoy unconstrained access, are very likely to experience an erosion of their export market shares as a result.

Quantifying the effects of the complete liberalization of textile and clothing markets is very difficult, if not impossible. Indeed, this is likely to result in profound changes in the international market, which will depend on the relative competitiveness of all exporters. For a small producer like Mauritius, these effects may not be substantial if Mauritius is able to improve its competitiveness in order to offset the impact of the preference erosion resulting from the liberalization. If it fails to do so, the textile sector could, in principle, gradually disappear. However, the reality is likely to be between these two extremes, with some of the most efficient Mauritian firms being able to take advantage of their know-how and their commercial networks to maintain their presence on the world markets.

Thus, below we only attempt to quantify the impact of expanded quota growth rates. The methodology consists of estimating the effect of the ATC on exports from constrained suppliers, on the one hand, and the effect on total imports into the importing country, on the other hand, and then determining the effect on unconstrained suppliers like Mauritius as a residual, eventually making rough assumptions on the relative competitiveness of these suppliers. 1/ A study by Hertel and others (1995) provides estimates of the increase in total imports of wearing apparel into the EU under the ATC assumptions, relative to what imports would have been under existing MFA quota growth rates. Using a general equilibrium approach, it estimates that imports of these products into the EU will be 13 percent higher in 2005 under the ATC relative to the existing MFA. It also provides estimates of cumulative quota growth rates for the period 1992-2005, under the ATC and the existing MFA, for the major quota-constrained suppliers. These cumulative growth rates are presented in Table 4. These estimates have been used to shed light on the possible impact of the ATC on Mauritius’s exports of clothing to the EU, as presented in Table 5. Two scenarios are shown, depending on the assumptions regarding the evolution in market shares of unconstrained suppliers. In the first scenario, it is assumed that half of these suppliers would be able to maintain their market shares in EU imports of clothing under the ATC, relative to the existing MFA. Imports from the remaining unconstrained suppliers, including Mauritius, are calculated as a residual. For Mauritius, this could be interpreted as if half of unconstrained suppliers would be more competitive than Mauritius over the period 1992-2005. In this scenario, EU imports of clothing from Mauritius are 19 percent lower under the ATC, relative to the MFA. In the second scenario, it is assumed instead that three quarters of unconstrained suppliers would be able to maintain their market share under the ATC relative to the MFA, corresponding to a situation where Mauritius would be less competitive. In this case, EU imports of clothing from Mauritius would be 32 percent lower under the ATC, relative to the MFA. One can see how sensitive the results are, depending on the competitive position of Mauritius relative to other suppliers. These estimates should, again, be seen as illustrative, rather than as a robust quantification. However, they indicate that it is not unreasonable to consider that the effects of the Agreement on Textile and Clothing under the Uruguay Round may be significantly adverse for Mauritius.

Table 4.

Increase in EU Clothing Imports Between 1992 and 2005.

(In percent)

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Source: Hertel and others (1995), Table 4.

Morocco, Poland, Tunisia and Turkey are not MFA–constrained suppliers. Cumulative growth rates under the MFA given for these countries are those assumed for the rest of the world in the source table. Cumulative growth rate under the ATC for Poland and Turkey are also those assumed for the rest of the world in the source table. For Morocco and Tunisia, it was assumed that they would maintain their market shares under the ATC relative to the MFA.

Cumulative growth rate for other suppliers under the MFA is the one assumed for the rest of the world in the source table. MFA–constrained suppliers represent one third of those other suppliers. Their cumulative growth rates were calculated as a weighted average based on 1991–93 import values and growth rates in the source table. The growth rate for non–MFA was calculated as a residual.

Mauritius is assumed to maintain its current market share under the existing MFA.

Table 5.

Impact of the Agreement on Textile and Clothing (ATC) under the Uruguay Round on EU Imports of Clothing.

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From the United Nations COMTRADE database (SITC, Rev. 2, Category 84); in thousands of dollars.

2005 imports have been calculated by applying cumulative growth rates presented in Table 4 for each 3–digit 84. category to 1991/93 import values.

In scenario I, one half of other non–MFA–constrained suppliers (equivalent to one third of others) is assumed to maintain their market share under the ATC relative to the MFA. The other half, together with Mauritius, is calculated as a residual, apportioned in proportion to the 2005 imports under the MFA.

In scenario II, three quarters of other non–MFA–constrained suppliers (equivalent to one half of others) is assumed to maintain their market share under the ATC relative to the MFA. The other quarter, together with Mauritius, is calculated as a residual, apportioned in proportion to the 2005 imports under the MFA.

The Multi-Fibre Arrangement and the Uruguay Round

Trade in textiles and clothing has been largely regulated by international agreements since the early 1960s. Following two arrangements in the 1960s, the MFA came into existence in 1974, and was extended until end-1994. In 1993, there were 44 participating countries to the MFA, accounting for around 80 percent of world textile and clothing exports.

The MFA’s objectives were to achieve expansion and progressive liberalization of trade in the textile sector, while avoiding disruptive effects in individual markets and line of products. The MFA allows for bilateral restraint agreements on exports of textiles and clothing, where quotas for very specific categories are specified, as well as annual growth rates limiting the increase in each of these quotas over the period covered by the agreement. In 1993, more than 100 such agreements between participating countries were effective. The EU and the U.S. were among the most restrictive participating members, and the restraints applied almost exclusively to exports from developing countries.

The Uruguay Round Agreement on Textile and Clothing (ATC) provides for the phasing out of the MFA. It includes a schedule covering a 10-year period, according to which the sectors are to be integrated into GATT 1994. There are four stages to this process, dated January 1995, January 1998, January 2002, and January 2005. The process includes two components at each stage.

Example of Quota Increases under the ATC

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The first component is the full integration of a list of product categories into GATT 1994, for which MFA quotas are to be eliminated. At each stage, this liberalization should affect a minimum percentage of the 1990 import volume (16, 17, 18, and 49 percent, respectively). The analysis of the schedules of the main importing countries, in particular the EU and the U.S., shows that they chose to integrate product categories that were not restricted to begin with, meaning that most of the categories under MFA quotas will not be liberalized before the final stage in January 2005. The second component is the increase in the MFA growth rates for the nonliberalized product categories. Growth factors will be applied to MFA growth rates, as shown on the table above using the assumption of a 6 percent MFA growth rate.

In this case, the difference in the quota at the end of the third stage (just before all product categories should be liberalized) between the Uruguay Round agreement and the counterfactual MFA, assuming the UR had failed, is 55 percent. However, this difference is very sensitive to the base period MFA growth rate. With a 1 percent growth rate instead of 6 percent, this difference is only 5 percent.

d. New opportunities

In contrast to the challenges that Mauritius will face following the Uruguay Round, as discussed above, the new opportunities that will be offered to Mauritius cannot be identified easily. However., it is instructive to consider what some of these new opportunities (which would apply to countries in Mauritius’s similar circumstances) could be.

The Uruguay Round is expected to provide for the opening up of some very protected markets, including major developing countries like India or China. This could create for Mauritian firms new markets for exports, particularly for high-quality clothing products, as the increasing number of middle-class people in such countries would raise demand for such products. Already, some Mauritian firms apparently have started the groundwork for accessing these potentially lucrative markets. At the same time, the implementation of the Uruguay Round provisions should also increase the availability of raw material in the textile sector.

The General Agreement on Trade in Services is also expected to provide for the opening up of markets in this sector. Given that Mauritius already has a well-established tourism sector, and, to a lesser extent, a financial services sector, it may have a significant stake in the liberalization of trade in these sectors. The performance of Mauritius will clearly be determined by the quality as well as the price of these services. The commitments that Mauritius made for the tourism sector (see Section 4), although not representing further liberalization of this sector, may constitute a positive signal to foreign investors. For this reason, Mauritius should seek to make similar commitments for the already liberalized financial services sector in order to promote foreign investment. The Mauritian authorities indeed place much hope in Mauritius becoming a major financial hub in the region, and the financial services sector becoming a fourth pillar of the economy.

7. Conclusion

Given that Mauritius already has a liberalized trade regime, one of the benefits from the Round, often cited for developing countries, namely, gaining from their efforts to bind tariffs and make their trade regimes more transparent, does not apply to Mauritius. Commitments made by Mauritius under the Uruguay Round Agreement will not require it to make any further tariff reductions or undertake further liberalization of its trade regime.

Liberalization by its trading partners, in particular in agriculture and textiles and clothing, entails more potentially negative aspects than positive ones. The phase out of the Multi-Fibre Arrangement may have a significantly adverse impact on the clothing sector in Mauritius, which represents more than half of exports of goods earnings, if Mauritius is not able to improve its competitiveness in order to offset the impact of the preference erosion resulting from this liberalization. Other negative impacts, due to preference erosion and increased food prices, however, are likely to be small. Moreover, the fears about adverse prospects in the sugar sector have dissipated, as it appears that this sector will remain quite protected in the main importing markets, although this depends heavily on the power balance between the different agricultural interest groups in the EU and the U.S.

Mauritius is likely to see the composition as well as the destination of its exports changing significantly over the medium to long term, as potential new opportunities may materialize. First, with the progressive liberalization of the world trade of services, Mauritius’s exports of services may gain importance relative to exports of goods. Tourism and financial services could be the cornerstones of such a development. Second, while Mauritius’s exports of goods to developed countries are likely to decline relatively, new, more open markets in developing countries may offer new opportunities, particularly in Eastern and Southern Africa and the Indian Ocean regions. The active role of Mauritius in the different regional integration initiatives will help it to benefit the most from these opportunities.

Nevertheless, given the large uncertainties surrounding these prospects, efforts should be made to monitor closely all the developments related to the implementation of the provisions of the Uruguay Round Agreement. Policies should also aim at preparing the Mauritian economy to respond quickly to any major shock in its external environment. In particular, efficient allocation of factors of production, especially labor, should be facilitated by making the factor markets as flexible as possible.

References

  • Goldin, I., and D. van der Mensbrugghe,The Uruguay Round: An Assessment of Economywide and Agricultural Reforms”, presented at a World Bank conference on the Uruguay Round and the Developing Countries, January 26-27, 1995.

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  • Hertel, T., and others,Liberalizing Manufactures Trade in a Changing World Economy”, presented at a World Bank conference on the Uruguay Round and the Developing Countries, January 26-27, 1995.

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    • Export Citation
  • Kirmani, N., and others, International Trade Policies: The Uruguay Round and Beyond, Volume II, Background Papers. (Washington. International Monetary Fund, 1994).

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  • Shiells, C., and othersEffects of the Uruguay Round on Egypt and Morocco”, IMF Working Paper (forthcoming).

  • Stern, R.A., and others, Price Elasticities in International Trade (London: Basinstoke, 1976).

1/

Goods subject to rates of 55 or 80 percent imported from “nonscheduled” suppliers (including Japan, Switzerland, and Korea) bear an additional duty of 20 percentage points.

2/

The simple average tariff for raw materials is 14.8 percent, for semi-manufacturers 17.2 percent, and for finished goods 39.5 percent.

1/

A program of tariff cuts has been adopted by the 22 PTA/COMESA Member States with a view to the elimination of tariffs applied to trade among themselves by the year 2000.

1/

The current regime provides for a relatively liberalized framework and has been conducive to the growth of tourism and telecommunication sectors.

1/

See Shiells and others (forthcoming) for a more detailed presentation of the methodology.

2/

Sugar and clothing have been excluded, because exports of sugar will not be affected by preference erosion, as discussed above, and exports of clothing will be affected by changes in EU quotas rather than preference erosion, as discussed below.

3/

Most notably, price-elasticities of demand are subject to considerable uncertainty.

1/

Assumptions on relative competitiveness can be partly derived from the analysis of relative unit labor costs presented in Chapter II, which shows that unit labor costs in Mauritius have grown faster than in the selected competitor countries since 1985.