WTO members abolished quotas on trade in textiles and clothing on 1 January 2005. As a result, prices are falling and major Western buyers are narrowing their sources. On a global scale, large Asian countries with vertically integrated industries are becoming the world’s leading suppliers. China in particular can produce virtually any textile or clothing item at any quality and cost.

Within supplier countries, there are signs of industry consolidation. Larger companies are increasing production capacity, often on the advice of their major customers. Small and medium-sized firms (SMEs), on the other hand, face a shortage of orders and some have already closed down.

It is not clear what will happen in many least developed countries (LDCs) and small, vulnerable countries, with their low-value products, fragmented industries resulting from past reliance on quota protection and little regional cooperation. Since textiles and clothing account for a high proportion of merchandise exports and jobs — for example, 82% of merchandise exports in Cambodia and 83% in Haiti and Lesotho — it means changing their strategies to prevent serious economic consequences.

A changing market

Competition is sharper, with successful textiles and clothing producers setting new standards of service.

• Mega companies or smaller, flexible firms. Major retailers in the European Union (EU) and the United States foresee mainly two types of suppliers from developing countries. The first can be described as “mega companies”, with management headquarters in Asia and production networks around the world. They use economies of scale to produce mostly basic articles — such as t-shirts, sweaters, cotton trousers, underwear and woven shirts — at low cost and in large quantities. The other type are highly skilled and flexible companies located near buyers, which could also benefit from preferential market access. These firms can supply smaller quantities of higher-value products at short notice. However, most firms in LDCs and small vulnerable countries do not fit into either category.

• Supplier has more responsibility. Much of what the buyer arranged in the past, the supplier needs to do today, offering a complete package from design to sourcing of raw materials and delivery of finished garments. However, most LDCs concentrate on the end of the supply chain — offering only garment-making facilities — and rely on buyers to provide yarn, fabric and accessories.

• Speed to market counts. The time and cost of delivering a product to the store are becoming more important. Labour and production costs are minor up to the retail point. This is true for both supplier types. While the commodity-type supplier will have to focus on regu-lar and timely replenishment, the fashion-oriented supplier will have to emphasize quick response to changing fashion trends.

Trade policy helped LDC exports

In the past, quota protection and duty-free access to rich markets encouraged many LDCs to develop textiles and clothing exports. Trade policy will continue to influence their export prospects. Most importantly, LDCs will continue to benefit from preferential treatment from WTO member countries. Sub-Saharan Africa’s share of the United States apparel market rose from almost zero to 2.2% in 2004. The reason was duty-free market access under the United States’ African Growth and Opportunity Act (AGOA), combined with relaxed rules of origin requirements that allowed countries to use cheaper fabric from Asia for their garment exports. Jordan’s exports to the United States, or those of Bangladesh and Cambodia to Canada, skyrocketed for the same reason.

Challenges to compete in future

Yet, sharper competition is eroding the protected status of LDCs. As many companies are now realizing, even preferential access to markets is not enough.

• Poor product and market diversification. Most LDCs have only developed exports in clothing categories that used to be highly protected against Asian competitors. With the removal of quotas and despite their duty-free advantage, LDC producers will have difficulty competing with Asian suppliers. In sub-Saharan Africa, for example, 77% of all clothing exports under AGOA in 2004 were based on two products: knit shirts and simple trousers. These are basic articles, for which, for example, China’s quota tariff equivalent was almost 60%. This means that now the price of Chinese products could drop by 60%.
  

• “Footloose” investors. Large investments from Asian manufacturers characterize the sector in almost all LDCs, except those in South Asia. They invested to avoid quotas and to benefit from duty-free market access — but they could leave any time if business is no longer profitable. News from Lesotho in early 2005 suggests that this is already happening. LDCs need to find ways to link local industries to foreign investors in long-term partnerships.

Recommendations for firms

Firms in Central America and North Africa that are near North American and European markets and benefit from preferential access could focus on products where speed to market and flexibility are important, provided they develop the necessary skills. But LDC firms, far from their main markets, have to compete directly with the evolving mega companies over “traditional” products. Therefore, they need to make special efforts to increase competitiveness.

• Take part in developing a sector strategy. Firms, industry associations, governments and other trade support players, such as banks, port handlers and customs agencies, need to cooperate to develop a coherent strategy for the sector. Strategies should take into account cross-border cooperation with countries in the same region.
  

• Improve sourcing skills. Since sourcing materials is the most important skill that buyers demand, LDCs need to develop abilities in this area to be competitive. Integrated industry and supply chains don’t exist in LDCs and investment to develop them is not forthcoming, so firms need to look for alternative solutions, such as regionally integrated value chains.
  

• Focus on higher-value products. LDC firms need to diversify their product mix away from commodity-type items. This involves knowing about the end buyer — it is only possible to develop successful designs if one fully understands the final consumer’s tastes. 

Most LDC clothing exports are made out of cotton, which is relatively less protected than man-made fibre apparel. The United States, for example, imposes an average 20% duty on imports of cotton-knit shirts, but 32% duty on shirts of man-made fibre.

To make the most of their duty-free access, firms should therefore develop clothing exports of man-made fibre and improve their sourcing skills to find man-made fabrics. Garment production skills are not very different whether using cotton or man-made fabrics. LDCs could also explore markets for “ethnic” textiles or clothing.

• Benchmark. Companies need to know their strong and weak points vis-à-vis their competitors.


• Use e-trade. E-facilitated trade is becoming a prerequisite to attract buyers in textiles and clothing. Manufacturers need to find innovative solutions on how to respond to buyers’ new “e” requirements — from computer-assisted design to electronically-managed supply chains.

Increasing South-South cooperation

Developing South-South trade has three dimensions: selling to developing country markets; sourcing intermediary products for exports to developed markets; and building relations with foreign investors. LDC businesses and governments should consider them all. They should also look at the possibilities for technical cooperation between developing countries in these areas.

• Explore emerging markets. There are new trade opportunities in fast-growing developing countries. While traditional markets — Canada, the EU, Japan and the United States — still account for almost 80% of world imports, experts predict they will grow only marginally. In contrast, the markets of larger developing countries are growing very fast. India and China have high growth and thus export potential. China is already the world’s fourth largest market for apparel, accounting for 5% of demand. Brazil and South Africa also offer possibilities, although at a lower level.

However, LDC exporters selling to other developing countries may experience drawbacks, such as high tariffs (India’s or Mexico’s average import tariff for textiles and clothing is 35%), unfamiliar market structures and distribution channels, as well as different cultural issues. To lower tariffs and improve market access, effectively negotiating and using the Global System of Trade Preferences among Developing Countries is an option. If larger and more advanced developing countries give preferential market access to LDCs, this could help them find new markets and partly compensate for potential losses in traditional developed markets.

• Source intermediary products in the region. Intermediary products — fibres, fabrics and trims — are available on world markets, but sourcing them from nearby countries can provide shorter delivery times. In addition, by working with neighbouring countries that benefit from preferential market access, LDC firms can continue to sell final products duty-free to the United States and EU under regional cumulation rules. Jointly responding to market requirements for the final product needs to be the central theme of such cooperation.

As it is unrealistic to assume that individual LDCs will become vertically integrated at the national level, they can look at developing regional and even inter-regional value chains to exploit complementarities (see box). Trade in intermediary products provides a lot of scope for technical cooperation between developing countries. For example, Asian counterparts could help African cotton producers to improve the quality of their cotton and also to find new markets for it in Asia.

• Improve relations with foreign investors. To stabilize investment in textiles and clothing, LDCs need to develop long-term partnerships between foreign investors, often from Asia, and local industry. They should concentrate on win-win situations — in many cases, an answer is to develop jointly local clothing training institutes. Local industry benefits from a more skilled workforce and investors save costs by recruiting qualified local staff instead of more expensive Asian expatriates. Moreover, local middle management will be able to communicate better with machine operators and other staff, which will increase productivity and reduce the risk of labour unrest.

The role of trade facilitation

Improving trade facilitation services would bring significant gains to LDCs and also increase investor confidence. According to World Bank estimates, the average customs clearance time for sea cargo is more than ten days in South Asia and Africa, nine days in Latin America and the Caribbean and only two days in developed countries. China is setting new benchmarks in trade facilitation. Its modern ports and fast customs procedures reduce domestic lead time, while direct shipping services to all major markets optimize sailing time.

Importing countries: More flexible rules of origin

To help LDCs maintain clothing exports, major import markets should offer them non-reciprocal preferential market access conditions, including rules of origin requirements that are easy to fulfil. Canada’s preferential scheme for LDCs or the “third country fabric sourcing provision” under AGOA are good examples of flexible rules of origin. However, the “double transformation” requirements under the EU’s Everything but Arms initiative or agreements with African, Caribbean and Pacific countries do not improve market access. LDCs do not have substantial textile industries to supply the fabric to fulfil these rules.

Similarly in the United States, most preferential access agreements stipulate “yarn or fabric forward” rules of origin. That means everything from yarn or fabric onwards to produce the garment needs to originate in the beneficiary country or the United States. As US yarn and fabric are generally not competitive compared to Asia, these requirements undermine ways to improve the competitiveness of LDCs.

Price tag to compete

In order to tackle increasing competition successfully, LDCs need to address the following areas:

• Firms need to gear up their efforts to take over responsibilities along the textiles and clothing value chain.
  

• Firms and countries should accelerate South-South cooperation to tap markets in other developing countries. Moreover, increased intra-regional trade of intermediary products improves competitiveness to jointly exploit traditional markets in the North and to participate in global production chains.

• Look at closer regional cooperation to benefit as much as possible from preferential and differential treatment. In importing countries, meaningful rules of origin requirements can increase LDCs’ competitiveness and at the same time foster South-South trade.

• Countries should address trade facilitation to create the necessary enabling environment for business. If LDCs address these areas carefully and quickly, the clothing sector could continue to contribute to economic development and poverty reduction. However, clothing exports might not develop into a major sector in many LDCs, especially in Africa. These countries need to diversify exports into other sectors until new opportunities emerge in textiles and clothing.
  

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Filling the fabric gap in Africa

African countries produce raw cotton and finished garments, but they rarely have domestic textiles industries that transform cotton into yarn and cloth on a scale that meets export needs. At present, producing clothing is a better fit for LDCs, being labour-intensive rather than capital-intensive. But filling the “fabric gap” in the chain could help them reduce costs and boost their competitiveness. Cotton growers, ginners, fabric manufacturers and clothing manufacturers in different parts of the continent should consider collaborating in a regional value chain, from cotton to clothing, to offer competitive products to major markets.

To overcome the disadvantage of size and to attract investment, companies could cooperate in regional vertical relationships.

If a country exports US$ 5 billion in garments annually, creating a local textile industry or attracting foreign textile investors is feasible. However, for countries where these exports are less than US$ 2 billion (the case for all LDCs except Bangladesh), building a local textile industry or persuading foreign textile mills to invest is difficult and costly. To benefit from economies of scale, a vertically integrated textile industry has to serve many clothing factories. Thus, even if they are located in different countries of the same region and are competitors on the final market, clothing factories need to cooperate closely to attract the necessary textile investment.

Finally, bringing on board the final buyer of the garment proves a clear commitment to establishing a textile mill. This situation begins to resemble a joint venture between buyer and suppliers in a region. Some importers, realizing the need to show their core suppliers that they are serious about strategic relationships, are now planning to invest in factory operations.While these more progressive importers are not interested in owning
factories, they realize that a 10%–20% investment increases their credibility with the supplier. This relationship between cooperating suppliers and one or two major buyers, willing to buy from them in a long-term relationship, could attract the investment for a regional textile mill.

Another solution would be to develop inter-regional trade along the cotton value chain. Firms in sub-Saharan Africa could export cotton to Asia and import cotton fabrics back to Africa for exports of clothing to Western markets under duty-free schemes, providing a win-win situation for all participating countries.

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ITC’s technical assistance response

Sector strategy.
The “Shape”, a ten-step thinking process to develop a national clothing strategy, applied in two workshops; assistance to implement strategies.

Benchmarking. The “FiT”, a software-based benchmarking tool for clothing manufacturers, implemented through national associations, which receive training to apply it; management of and access to global benchmarking data.

Sourcing. Fabric sourcing textbook, Source It — Global Material Sourcing for the Clothing Industry; training workshops for associations and firms; sourcing missions to
help firms diversify suppliers; regional databases of suppliers in Association of Southeast Asian Nations and South Asian Association for Regional Cooperation countries.

Market trends. New ITC textiles and clothing web site; workshops about future competitiveness requirements; product and market development activities in national projects.

E-trade. A guide on e-business applications in textiles and clothing trade; training workshops; advice on tailoring solutions to meet buyer requirements.

South-South trade. Tailor-made projects to promote South-South trade in final products; increase trade in intermediary products; facilitate technical cooperation among developing countries. Research paper outlining possible ITC assistance to develop the cotton sector.

For more information, contact Matthias Knappe (knappe@intracen.org) ITC Senior Market Adviser on textiles and clothing

or visit http://www.intracen.org/textilesandclothing