That shirt you are wearing where was it made? There are many possible countries, but many of them see their businesses under threat, now that the Multi-Fibre Agreement has come to an end.
What lies behind this story? At the end of 1994, the U.S., the European Union and Canada signed the Agreement on Textiles and Clothing, which was intended as a gradual transition from the old Multi-Fibre Arrangement to a world where textile trade would fall under the full WTO umbrella. The idea was to limit exports from China and India temporarily, thereby giving producers in the major economies time to adjust to a liberalised marketplace, and at the same time permitting textile industries to emerge in smaller developing countries.
The policy has had many of the intended effects. Many North American and European clothing producers have moved up-market in anticipation of the change, and most of the production that remains is either very high quality or high productivity, if not both. Meanwhile, many smaller countries have developed textile industries to fill the quota-induced gap between global supply and demand for low-cost apparel.
Like many well-intended government policies, though, this one has had some unintended effects. Some smaller countries are likely to find it very difficult to compete with China and India in the new, undistorted market, which is the same as saying that their development within the distorted marketplace was somewhat artificial. This could also be true for some producers in North America. Indeed, in North America, textile and clothing jobs are in steep decline and have been for some time down by 120,000 in the U.S., and 33,000 in Canada, in the past 2 years alone.
A surge in U.S. imports from China in the first two months of the year has frightened the industry, which wants quotas restored, and governments are examining the situation. But a closer look at the U.S. import data reveals that the large increase in imports from China is being offset partly by declining imports from Mexico, South Korea, Hong Kong, Taiwan, Philippines and Macau. This supports the view that keeping some sort of quota system is more likely to help the smaller developing countries than American or Canadian producers.
Further, there is not much attention being given to the consumer side of the story. Removing restrictions from the global textile and clothing market will do more than just redistribute global production between countries. It will reduce the price of clothing, perhaps by as much as 5-6%. North American consumers spend about 3.5% of their income on clothes, so a reduction in prices due to increased efficiency of 5-6% could mean as much as 0.2% in increased purchasing power something like $20 billion in extra spending power for the U.S., and $2 billion for Canada.
The bottom line? Facing the reality of a freer textile marketplace is likely to hurt small countries more than North Americans, who already face stiff competition from large and small developing countries alike. But the benefits of lower clothing prices world-wide should also enter the debate.
Stephen Poloz is Senior Vice-President and Chief Economist , Export Development Canada. His column on export-related issues appears weekly on www.ctl.ca.