Economic Impacts of the Multi Fibre Agreement expiration in the EU Countries - Essay Example

Macroeconomics Environment of Business Table of Content. Introduction Page 2. I. The consequences of the end of the MFA Page 3. 1. Among developing countries Page 3. 2. Within the European Union Page 4. II. European Protectionist measures in an economic perspective Page 7. 1. The predictable failure of the quotas Page 7. 2. The two sides of international Trade Page 8. Conclusion Page 10. References Page 12. Introduction On January 1st, 2005, the Multi Fibre Agreement (MFA) expired. The MFA was a measure taken regarding the world trade of textiles and garment from 1974 to 2004 which imposed quotas on the amount that developing countries could export to developed countries. It was first introduced in 1974 as a short-term measure to help developed countries to control imports from the developing world that has a strong advantage in textile production. The textile production is labour intensive and the developing countries have low labour costs. According to the World Bank and the IMF, the system has cost the developing countries 27 million jobs and $40 billion a year in lost exports.1 The World Trade Organisation admitted that the MFA was a special regime outside the GATT rules and that WTO members have committed to remove those quotas by 1st January 2005. Nevertheless, the MFA was not negative for all countries. The United States, for example, imposed no restrictions on imports from the poorest countries like Bangladesh, benefiting to a massive expansion of the textile industry there.2 We shall see in the following essay that dismantling the MFA, even if it was seen as complying to existing GATT rules, did not help all the developing countries to raise their textile imports and did not prevent some developed countries from suffering of the invasion of cheap textile. Our essay will present different cases where other forms of protectionism have been created in developed countries especially in the European Union and the gap between beneficiary and non beneficiary developing countries of the opening of the international textile market. We will focus on the economic side of this matter - rather than the politic - and we will examine the importance of international trade, the use of protectionist policies and we will use the concept of aggregate demand and supply to measure the impact of the changes on products and factors in the textile market. I. The consequences of the end of the MFA. 1. Among developing countries. Since the end of the quotas, the gap between developed and developing countries is not very clear. When some could believe that the dismantling of the MFA could have been a relief and a real opportunity for Southern countries, it appears that the situation is much more complex. There is one main reason for the difficulties facing the textile market within developing countries: competition. As the international market is now wide open, each developing countries wants to be part of this profitable business. However, not all of them can compete with giants like China. According to apublication from the OECD "A New World Map in Textiles and Clothing" when the MFA was still in place, smaller developing countries took advantage of the quotas because this system penalised the more competitive suppliers. When the quotas from a country like China was reached, importers turned to less competitive suppliers located in countries that had spare export quotas and whose only advantage was low wage. Today, the less competitive developing countries re not called as back up because countries willing to import textile can only be supplied by one and only exporter, the most competitive: China. As we stated before, the main issue here is competition. What separates China from other developing countries id not only the competitive advantages of low wages. In "China Shows the Way in a Quota-Free Market", Linda Lim presents six competitive advantages that China has over the other developing countries: First, Chinese workers are much more productive, probably because they are better-educated, better-motivated, and have better health status, given the legacies of the socialist state. Second, Chinese factories benefit from economies of scale, given the large production base and domestic market afforded by the country's huge population. Third, China's large, diverse, and increasingly integrated industrial base means that many materials required to make clothing are locally available, avoiding the added costs, risks, and longer delivery lead-times that imported inputs impose on other countries. Fourth, China's geographical location, close to Japan, Korea, Taiwan, and Hong Kong, allows it to readily import advanced equipment and high-tech textiles for its finishing industries. Fifth, the predominantly Hong Kong- and Taiwan-based manufacturers in the global industry may have language and cultural advantages managing Chinese workers, and thus may be willing to invest more in China. Sixth, China has also invested heavily in its physical infrastructure, allowing speed of delivery of both imports and exports. (China's currency, pegged to a now-declining US dollar, is not a significant factor in its cost competitiveness; the undervalued Yuan raises the cost of imported inputs, on which manufacturers rely heavily.). 2. Within the European Union. The importance of China in the textile market has not its boundaries set within developing countries. Since the beginning of the year imports of textile from China have exploded forcing Northern countries to take counter measures. The answers varied from countries to others. Foreseeing the predictable issues linked to the liberalization of the textile market, the United States implemented a product-specific safeguard mechanism that allows WTO members to restrict temporarily growth in specific textile and apparel imports from China through 2008 which was agreed when China joined the WTO in 2001. (CSIS, New Era Opens in Global Textile and Apparel Trade). This safeguard imposes quotas on 7 categories of Chinese textile production and limit to 7.5% annual growth of imports in each restricted categories. The European Union (EU) on the other side did not want to adopt such severe measures and preferred bilateral negotiations with China. The precautious steps taken by the EU have certainly caused the situation that the member countries have faced throughout the year and led to a crisis during the summer. In Portugal where the volume of employment in the textile market represents 4,2 % of the active population and 3 % of the GDP, the end of the quotas meant the predictable decline of the sector. Over the first trimester, the rise of the importation of Chinese T-Shirts has reached 187% and 100.000 jobs are threatened. The Portuguese textile production during this period has declined of 50%. (Humanit, Le Portugal dans de sales draps) Adri Saws, President of the Counsel Intertextil Spanish announced that the Spanish textile industry is predicted to lose about 115,000 jobs by 2010. Between January and July of this year, the textile importations from China have increased by 47%, the Spanish production has decreased by 15%, the exportations by 2% and that 20.000 jobs were lost. In Greece, the T-Shirt production decreased by 12% and 50.000 people resulted jobless. The countries described are only some members of the European Union like Italy or France that experienced a gigantic textile crisis this year due to the dismantling of the MFA. According to Euratex, the federation of European textile sector professionals, in January February 2005 Chines exportations have increased by 73% compared to the same period in 2004 (+893% for pull over, +210% for trousers, +542% for dresses and +1.400% for stockings with a decrease In prices of 37%, 8%, 38% and 57% compared to the same products produced in the European Union.). Since the beginning of the year, Euratex adds, the European Union is losing 1.000 jobs per day in the textile sector. This dramatic situation for the European Union textile sector, led in May of this year to an EU proposition of WTO consultation with China on different textile categories. The WTO did not have to intervene because China sought an agreement with EU members which led to the signing of an Agreement in Shanghai last June. This Agreement defined new quotas over the increase of importation from China to EU for the years to come. Chinese exportations should only be increased by a minimum of 8.5% and a maximum of 12% per year until the end of 2007. (Commission and China patch together textile quota deal, Euractiv). In the meantime 80 Million Chinese textile items were shipped before these new quotas were decided and were blocked at different ports in the European Union and led to another crisis. The items remained blocked for three months before the EU and China could reach an agreement. Finally, in September during the annual EU-China summit, both parties found a solution to this issue: half of the 80 Million items should enter the European Union without a license and the other half should be considered as a part of the 2006 quotas. As we have described the textile market and issues over textile opposing the European Union and China after the dismantling of the Multi Fibre Agreement we will present in the following part of our essay, the situation seen through an economic lens. II. European Protectionist measures in an economic perspective. 1. The predictable failure of the quotas. It is rational to believe that the European Union wants to protect its market from the Chinese textile invasion which at the same time implies to defend jobs within the member countries. In regards of the European Union move to protect its textile economy, we have to comment that comparing it to usual protectionist measures, it may fail. Modern protectionism in international trade has not been implemented through quotas but through high tariffs encouraging consumers to buy domestic products. In this case the EU has opened a path to Chinese imports that will widen through the years. It will not stop the importation of Chinese textile and consequently will not succeed in saving the jobs in the sectors. Nevertheless, the question concerning these measures is not whether it will help the European Union defend its economy but does the European Union profits from implementing such protectionist policies David Ricardo was the first to formulate the idea of comparative costs - named today comparative advantages - which is naturally one of the bases of the idea of free trade today. China has obviously a competitive advantage in producing textile according to the different points that we have seen in the first part of this essay. The European Union consequently will have no competitive advantages in continuing to compete with China on similar textile products. The EU needs to specialise its textile sector in a type of product that the Chinese do not produce or just turn the production and labour capacity to another sector. Guy de Jonquires argues that and European Union barriers to Chinese textiles imports are not a good idea ("Facing facts on China trade", Financial Times) First by presenting the simple idea that if some quotas are implemented, it will only benefit some other low cost countries like India. The by explaining that because of trade barriers China wins twice: "First, it would get to keep all the "rents" generated by voluntary restrictions. Second, limiting export volumes would induce its manufacturers to maximise profits by moving into the kinds of more sophisticated products in which western companies currently have a competitive advantage. That is exactly what happened in Japan, after the US strong-armed it into restraining voluntarily exports of cars and other products in the 1980s. Not only did the measures fail to save Detroit; they increased Toyota's incentive to attack the luxury end of the market by launching the Lexus..." Moreover, are the protectionist measures the right answers to ensure a domestic competitive advantage of the textile products As de Jonquieres pointed out, if we prevent Europeans from buying Chinese, they will but India. If the measures taken are not on tariffs but on volumes, than the domestic market within a country will be opened to all It will not stop the competition between the domestic textile sector and the rest of the world. 2. The two sides of international Trade So, why did the European Union allow that a certain amount of items would enter the market The reason is simple: international trade. The European Union with the dismantling of the Multi Fibre Agreement is forced to accept the "invasion" of textile from developing countries and comply with the rules of trade of the WTO. However the European Union is not forced to accept the destruction of its textile market without reacting. That is the reason why the EU asked for WTO consultation on Chinese product categories. Though the EU asked for the help of the organization, the matter was finally solved by an agreement between China and EU members. Again, we could ask ourselves why. To answer this question, we have to go back to David Ricardo once again and talk about competitive advantage. International trade is not unilateral. It is not only China that exports goods to the EU, but also the EU that exports to China. In consequence, even if it is a crucial matter for the EU to preserve its textile industry and market, the members also considered that the EU has other competitive advantages, different from China's. The EU has an economic interest in keeping China as an importer of products of different sectors. On the other hand, China decided to apply an export tariff on its textile sector to keep a good trading relation with the EU. The different measures taken by the EU and China shall be considered in terms of aggregate demand and supply to fully understand whether or not they are efficient. First of all, it may seems that regarding the quotas, the European Union may have adopted the notion of First-Come, First-Served which may lead, during the year to a fluctuation of the price and consequently the European textile sector could regain its losses during the year. (International Trade Theory & Policy, Steven Suravonic ) When measures such as quotas are taken, it has several effects on different actors of the economy such as the consumer the producer and on the welfare of the nations implied and the world welfare. In this case the Europe Union will cause a decrease of its consumer surplus but will on the other hand increase the producers' surplus and the National Welfare. However the country that suffers from the quotas will see its consumer surplus increase, because of the availability of the products in the domestic market, but will suffer from a decrease in national welfare and producer surplus. The sum of the increases and decreases will ultimately lead to a decrease of the World welfare. (ibid) Consequently the EU by using quotas will have increased the producer surplus because the price of textile inside the protectionist system would increase, and the Union welfare while scarifying the consumer surplus which is a consequence of the increase of the prices of domestic and imported textile within the Union members. This increase of the price of textile from the domestic market and imported is a consequence of the quotas. The quota will restrict the entering of textile from China causing a supply of textile not sufficient to the demand of the market. This will lead to an increase in the price of textile which will reduce demand. This will ultimately lead to a decrease of the domestic production in textile, going against the role of the protectionist measure. Conclusion As a conclusion, we shall remind that even though the European Union seems to have protected its textile market it is only temporary. In 2008 the new quotas implemented by the EU will no longer be and the members will face a situation which can be compared to what happened at the beginning of the year. It is also necessary to remind one universal aspect which should never be forgiven in the field of international trade: (lack of) good faith. Obviously the problems of the textile producers and employees of the EU are real. However, "Knickers in a twist" (Economist, August 27, 2005) fairly presents the situation where it is described that retailers had only a few months to adapt to the new quotas while Europe's textile producers had a decade to prepare to the end of the MFA. Event though we have presented the protectionist measures in an economic analysis, we shall never forget that they are part and parcel of a political process where in that case, the European Union wanted to compensate her failure to foresee a major change in the textile market by implementing quotas to please producers and workers. References Cebe, C (May 27, 2005) Le Portugal dans de sales draps Humanit http://www.humanite.presse.fr/journal/2005-05-27/2005-05-27-635193 CSIS, New Era Opens in Global Textile and Apparel Trade http://www.globalization101.org/news.aspNEWS_ID=78 EGI (September 9, 2005) Textile chinois: que peut faire l'Union Europenne http://www.eurogersinfo.com/actu1305.htm EurActiv.com (October 10, 2005) Commission and China patch together textile quota dea.l http://www.euractiv.com/Article_lang=EN&tcmuri=tcm:29-143863-16&type=News Jonquires, G. de (April 18, 2005) Facing facts on China trade Financial Times Lim, Linda (February 21, 2005) China Shows the way in a Quota Free Market, Yaleonline, http://yaleglobal.yale.edu/display.articleid=5310 OECD Observer (2004) A New World Map In Textiles and Clothing http://www.oecd.org/dataoecd/43/14/33824605.pdf Ricardo, D. (1817) On the Principles of Political Economy and Taxation Suranovic, S.M. (1997-2004) International Trade Theory & Policy The Economist (August 27, 2005) Knickers in a twist World Trade Organization, Textile Monitoring Body the Agreements on Textiles and Clothing: http://www.wto.org/english/tratop_e/texti_e/texintro_e.htm Read More