Multifibre Agreement - Case Study Example

Order No. 193105 ' ' Critically assess the potential benefits and problems which the removal of MFA presents to the European union as a whole. Introduction All countries in the world are dependent on trade and import and export of goods to fulfill the needs of their citizens. While one country might have a plentiful of one kind of resources, another country might be facing a shortage of the same, leading to the need for importing that particular good or service. As humanity evolved from gatherers to sophisticated, organized societies, so did the process of trade and exchange develop. While ancient societies were happy with the barter system, today's population is more aware of its rights and the risks that free and unrestricted trade of any commodity might lead to. The nineteenth century saw the beginning of the formation of unions, for the purpose of protecting the rights of the citizens. From then on, as each country gained freedom from colonial rule, it started to go in for organized employment and trade activities. There are unions and associations for employment, for domestic trade activities and international trade activities. To protect the rights of its people, some countries have agreed and signed pacts on the quantity of each commodity that can be imported or exported into a country. Multifibre Agreement Background Before we embark on a detailed analysis of the Multifibre agreement and its impact on international trade, let us have a look into the actions and agreements that were made before the Multifibre agreement came into force. The History of International Trade in Textiles and Clothing Date Action take 1957: January Five-year agreement reached with Japan on limiting overall textile exports to United States. 1958: November United Kingdom signs "voluntary" limitation on cotton T&C products with Hong Kong after threatening imposition at lower than prevailing volume levels. 1959: September United Kingdom signs similar restraint agreements with India and Pakistan. 1960: November GATT Contracting Parties recognise the problem of "market disruption", even if it is just threatened; serves as "excuse" for establishing future NTBs. 1961: July The Short Term Arrangement (STA) is agreed upon. 1962: February The Long Term Arrangement (LTA) is agreed upon to commence on October 1, 1962, and last for five years. 1966: June The United Kingdom implements a global quota scheme in violation of the LTA. (The LTA provides only for product-specific restraints.) 1967: April Agreement is reached to extend the LTA for three years. 1969-71 The United States negotiates VERs with Asian suppliers on wool and man-made fibres. 1970: October Agreement is reached to extend the LTA for three years. (It was later extended an additional three months to fill the gap until the MFA came into effect.) 1973: December It is agreed that the MFA will begin on January 1, 1974, and last for four years. 1977: July-December The European Economic Community and the United States negotiate bilateral agreements with developing countries prior to agreeing to extension of the MFA. 1977: December The MFA is extended for four years. 1981: December The MFA is renewed for five years. The United States, under pressure from increased imports resulting from dollar appreciation, negotiates tough quotas. 1986: July The MFA is extended for five years, to conclude with Uruguay Round. 1991: July The MFA is extended pending the outcome of the Uruguay Round negotiations. 1993: December The Uruguay Round (UR) draft final act provides for a 10-year phase-out of all MFA and other quotas on textiles in ATC. MFA extended until UR comes into force. 1995: January 1 1st ATC tranche liberalised by importing countries - 16% of 1990 import volume. 1998: January 1 2nd ATC tranche liberalized by importing countries - 17% of 1990 import volume. 2002: January 1 3rd ATC tranche liberalised by importing countries - 18% of 1990 import volume. 2005: January 1 4th ATC tranche liberalised by importing countries - 49% of 1990 import volume. Source: Based on D. Spinanger, "Faking Liberalization and Finagling Protectionism: The ATC at Its Best", Background Paper for the WTO 2000 Negotiations: Mediterranean Interests and Perspectives, Cairo. The Multifibre Agreement The textile and clothing industry is one which has constantly increasing trade flows all over the world. Globalization and liberalization had exposed the European Union industry to increased competition from a large number of low-labor cost countries (especially from Asia).This sector constitutes one of the most important sources of income and employment for various countries in Asia, esp. China, Bangladesh, Indonesia, etc. Despite the huge labour cost differential between those countries and Europe, EU industry remains competitive due to higher productivity, and competitive strengths such as innovation, quality, creativity, design or fashion. While, on their home market, EU operators are faced with intense (and increasing) competition from all over the world, many export markets remain virtually closed due to a wide variety of tariff and non-tariff barriers. Nevertheless, EU industry managed to export, in 1999, 17.4% of its turnover to third country markets, which made it the second largest world exporter of textile and clothing products after China. (If intra-Community trade is taken into account as well, the fifteen Member States even outperform China). Against this background, trade flows have developed as follows: Imports show a constant increase, reaching € 57 billion in 1999 (after € 55bn in 1998 and € 30bn in 1990). The EU's main suppliers were China (14% of all imports in terms of value), followed by Turkey (11%), India (6%), Hong Kong (5%) and Tunisia (4%). Exports went down slightly in 1999, reaching € 34.2 billion (compared to € 34.8bn in 1998, and € 20bn in 1990). The US was the main export market (13%), followed by Switzerland (9%), Poland (7%), Japan (6%) and Tunisia (5%). The commercial relationships of the European Union in textiles and clothing are mainly governed by the WTO Agreement on Textiles and Clothing (ATC), which provides for the progressive application of the entire range of GATT rules to the sector, including the gradual abolition of all remaining quotas by 1 January 2005. The EU applies quotas for the import of particular textile and clothing products from more than 20 third countries - either under the ATC (14 countries), or under bilateral agreements with non-WTO members (such as Vietnam and, for the time being, China and Taiwan). Nevertheless, about 70% of total EU imports (in value terms) are imported without any quantitative restrictions. None of the least developed countries (LLDCs) are subjected to quotas. Moreover, many third countries enjoy tariff-free access to the EU market, either under the various preferential trade arrangements/agreements (e.g. with the accession candidate countries, the Mediterranean countries, the non-EU countries belonging to the European Economic Area, the 69 Lom' countries, etc.), or under the Generalised System of Preferences, GSP (which provides for zero tariffs for least developed countries, and for tariff reductions of 15% for the remaining countries covered by that regime). The list of GSP beneficiaries comprises some 150 countries, 48 of which have been identified as LLDCs. As a result, in 1999 almost 50% of all EU imports were exempted from customs duties (compared to only 28% in 1994). After the Abolition of Multi-fibre Agreement Many nations are heavily dependent on trade in clothing and textiles sector for foreign exchange earnings and employment-generation. Trade in this sector accounts for nearly 6% of total world exports. It was valued at US$ 342 billion in 2001; with trade in clothing accounting for 60% of this total. Impact of removal of Multi-fibre Agreeement Impact on China China is the largest textile and clothing supplier to the US, with a share of 26%. Chinese workers, however, will not necessarily reap the benefits of quota removal, which will lead to a fall in prices. There is unemployment in China, so workers will be forced to compete more fiercely for work and wages are expected to fall. Other developing countries like India can compete with China, but it needs to invest substantially in this sector to modernise the industry and produce high-quality fabrics. Impact on African Countries The European Union (EU) has taken major steps forward, in cementing its relations with the African, Caribbean and Pacific (ACP) countries, by instigating multilateral arrangements for reciprocal preferential treatment, under the Lome Convention. These ties of international cooperation are however not new, and date back to the post-Independence era, when Europe was in search of adequate means of maintaining its relations with former colonies, and participate in their development processes. Thus, in the early Seventies, the Lome Convention was conceived, as a binding instrument in promoting trade relations, which would be mutually beneficial to all Parties concerned. Beneficiary countries of the Lome Convention, would maintain existing privileges, but in return, would accord the same preferential treatment to their EU partners. Such commitment to reciprocity in trade-related policies, and exchanges, constitute an essential component of the anticipated Economic Partnership Agreement (EPA), in Sub-Saharan Africa (SSA), which could pave the way to the creation of a Free Trade Zone (FTZ), in association with the EU countries, at a later date. The principle of reciprocity itself, raises important questions, as the removal of customs duties on imports from Europe, could have serious repercussions on national economies in Africa.. A fall in revenues, on customs' levies, would induce an increase in European imports, but to the detriment of the local producers as well as to those exporters from non-European countries. Furthermore, this reduction of customs tariffs, could trigger-off significant shortfalls in public revenues, and consequently, in public expenditure, bearing in mind that this could also mean lower prices of European consumer goods, available on African markets, translated into improved welfare in Sub-Saharan Africa. Global Impact In fact, the majority of studies find that the MFA phase-out would increase global welfare as well as world trade of T&C and developing countries as a whole will further gain market share in world total exports but not evenly at the level of individual developing country. Impact on European Countries The removal of quantitative restrictions eliminates the basis for quota rents. This could lead to a lowering of prices of textile by 2 percent and clothing prices between 5-10 percent. There are also efficiency gains from specialisation according to comparative advantage, which in the case of the US, the EU and other quota-constraining countries may imply increasing domestic consumption and reducing production. Some studies point out that removal of MFA quotas may influence the industrialised country composition of suppliers towards more concentration, with higher cost developing countries and small suppliers, for which the production of textiles and clothing might have been the first stage of the industrialisation process, possibly losing out. There could be an immediate adverse impact on employment in the developed countries. Jobs would be lost not only in Europe and North America but also in some countries in the South, especially those where the MFA allowed less competitive exporters to export more than their competitive shares. One possible effect mentioned by some studies is that the increase in competition at a global level may result in downward pressure on wages and working conditions, as the elimination of quota restrictions will be to further reduce labour costs which imply that the latter is likely to be an even more significant factor. ' References 1. Shubha Madhukar,29 December 2004 http://www.domain-b.com/industry/textiles/20041229_multi_fibre_agreement.html 2. http://ec.europa.eu/enterprise/textile/trade.htm Read More