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Adjusting to the MFA phase-out: Policy priorities

DEBAPRIYA BHATTACHARYA AND KIMBERLY ELLIOTT
(CONTINUED FROM YESTERDAY) Bangladesh, Cambodia, Laos, Maldives, and Nepalin addition to Sri Lanka--must pay these relatively high tariffs to enter the U.S. market, putting them on the same playing field as China and at a competitive disadvantage v i s - a -vis Caribbean basin and SubSaharan African exporters. The data in Table 3 also suggest that this margin may be important, since Bangladesh was able to increase the value of its exports to the EU by 19 percent from 2001 to 2004 while losing 6 percent in the U.S. market where it must pay duties. Moreover, access to the U.S. market is important even for those LDCs with preferences in the EU market. For four of the five apparel-dependent LDCs that do not have preferential access in the United States, exports to the United States still account for 40 to 86 percent of their total exports of textiles and apparel. Exports to the United States account for 60 percent of Sri Lanka's total.
The Impact of Safeguards Against China
The accession agreement negotiated between China and other WTO members when it joined the organization provides for safeguard measures in the case of marketdisrupting increases in imports of textiles and apparel. The mechanism was intended to cushion the costs of adjustment for firms and workers in importing countries, albeit at the expense of consumers,
but its use also provides a temporary respite for developing-country exporters competing with China.
US manufacturers successfully invoked the safeguard to slow the growth in imports of a few products liberalized in Phase 3 of the ATC implementation (Table 2). Producers followed with an attempt to pre-emptively block the much larger surge in imports that they expected once quotas were eliminated on January 1, 2005. Apparel retailers and importers, however, petitioned the US Court of International Trade for an injunction to prevent the US government from considering a safeguards petition based on expectations of a surge rather than on actual import data. But early in April 2005, the US. Department of Commerce announced that it would investigate several products based on preliminary data for the first quarter that showed increased imports from China ranging from 300 percent to 1500 percent. The European Union is also considering invoking safeguards against China.
In the longer run, China and India will move up the development ladder, and rising incomes will increase domestic demand for textiles and clothing, opening space for other exporters. But given the large pools of underemployed rural labor in both countries, the long run could be long indeed, and shorter-term adjustment measures are still needed. The safeguards mechanism is one measure, but executing it is likely to be too ad hoc and uncertain to provide much help to devel-
oping countries that need significant new investments to be able to compete with China. Mechanisms that provide more stable and predictable access, especially for the least-developed countries, would also be helpful.
Policy Recommendations
Policies to cushion the adjustment to the end of the MFA are needed on two levels. First, the international community, especially the United States, can do more to ease the transition for low-income countries that are dependent on apparel export by further opening their markets to these countries. It is equally important, however, for low-income exporting countries to take steps to improve their competitiveness through domestic reform.
Opening the US Market to the Least-developed Countries
The United States is currently the only rich country that does not offer tariff-free access for apparel and other imports from all LDCs. Restrictive rules of origin prevent LDCs from taking full advantage of these preferences in other markets, but the European Union recently announced that it would consider ways to simplify these rules and improve access. These efforts should be accelerated and implemented as soon as possible by other rich countries as well. But the single most important action that any country could take in the short run would be for the United States to extend tariff-free access to the LDCs that do not currently receive it under the Caribbean Basin Trade Partnership Act, the African Growth
and Opportunity Act (AGOA), or other regional preference programs. One proposal to do this is the bipartisan Tariff Relief Assistance for Developing Economies (TRADE) Act, which was introduced in the US Senate and House of Representative early in 2005.
If passed, the TRADE Act would authorize the president to grant limited duty-free access to 14 LDCs, plus Sri Lanka, which is just above the income threshold but highly dependent on apparel exports and one of the countries hardest hit by the December tsunami. The bill provides preferential access through 2014 but requires that country eligibility be reassessed annually. The rules of origin for apparel, like those under AGOA, require beneficiary countries to use American materials in order to gain duty-free access to the U.S. market for apparel. Recognizing that this would render exports from such distant countries uncompetitive, the TRADE Act allows beneficiaries to use local or third-country fabric, but only up to a collective ceiling of 11 percent of the volume of total U.S. apparel imports in the preceding 12-months, rising in equal increments to 14 percent in 2014.
A similar cap exists under AGOA, but African exporters are nowhere close to that cap. In contrast, the three largest TRADE Act beneficiaries -- Bangladesh, Cambodia, and Sri Lanka --already account for 10 percent of the volume of U.S. imports. Moreover, under the overall aggregate ceiling of 11 to 14
percent, there are individual country limitations based on size. "Small suppliers," accounting for less than 1 percent of total U.S. apparel import volume in the reference year, may increase their market share to a maximum of 1.5 percent (well above current levels for most). Larger suppliers, currently Bangladesh, Cambodia, and Sri Lanka, are allowed to increase their duty-free exports by only 0.33 per cent of total annual U.S. apparel imports, and only as long as aggregate exports from TRADE Act beneficiaries remain below the overall cap of 11-14 percent. The rules of origin appear to be designed to preserve existing market shares for these countries in the post-MFA world while limiting the opportunities for growth to the rate of growth of the U.S. market or the ability of these countries to improve productivity and export with the tariff in place. The bill would do more to promote development in these countries if the caps allowed greater opportunities for export growth.
In these countries, especially in the poorest, further development of the textile and apparel sectors will depend on inflows of foreign investment to expand and upgrade capacity. But a significant deterrent to investors is uncertainty of access to major markets. One basis for substantial certainty is concern that, after the quota phase-out, rich countries might increase their use of trade remedy measures, such as anti-dumping (AD) and countervailing duties (CVD). Therefore, if the United
States and the European Union commit to restraint in using such contingent protection measures against textile and clothing imports from LDCs, they would increase the value of the preferences they grant. Less restrictive and administratively complex rules of origin, including more flexible caps in the U.S. TRADE Act, would also reduce uncertainty and increase the value of trade preferences.
LDC Policy Reforms
Finally, the ability of vulnerable developing countries to grasp the opportunities offered by the end of the MFA and by any preferential market access they receive depends largely on the reforms that they make themselves to encourage investment and facilitate trade. In addition, even under the best of circumstances, some countries are likely to suffer severe dislocations as buyers and investors rationalize their supply chains. Far too little attention has been paid to targeted labor adjustment policies, either by developingcountry governments, which have limited resources, or by donor governments and agencies that might be able to help.
In the near term, policies to promote competitiveness in countries that depend on apparel export should focus on two key objectives: reducing turnaround time,
which is increasingly important to buyers following the "lean retailing" model; and reducing other costs of doing business. But cutting costs should not mean just squeezing wages. Success in this market
depends on finding ways to improve productivity, which should have positive spillovers for other sectors as well.
The twin challenges of reducing both turnaround time and transaction costs can be addressed in part through the type of reforms currently being negotiated in the Doha Round on trade facilitation and services liberalization. This suggests that developing countries should embrace rather than resist these negotiations. In exchange for
developing countries' undertaking new commitments in this area, however, the international donor community should step up to the plate and make binding commitments to provide financial and technical assistance. Trade facilitation reforms would benefit firms in rich as well as in poor countries and would include lower costs of doing business. Equally important in the apparel sector, however, such reforms lower transit time as a result of faster and less corrupt customs clearance and better transportation infrastructure, including more efficient port facilities. Liberalization of services could help 1) expand the use of information technologies (telecommunications and e-commerce) that are crucial to becoming a full-package supplier; 2) reduce the costs of public utilities (e.g., through increased investment in power generation); and 3) expand access to credit by strengthening financial markets.
One recent study estimates that a 20-percent improvement in transaction costsincluding time to
marketas a result of improved port efficiency, fewer days to deliver imported inputs, and improvement in customs quality and infrastructurecould increase apparel exports by 75 percent in Bangladesh, 59 percent in Indonesia, 80.5 percent in Vietnam, 42 percent in Pakistan, and 40 percent in Sri Lanka.
In the long run, domestic reforms will determine the future of developing countries currently threatened by competition with China and India. The industrialized countries should support these efforts by matching their rhetoric on the importance of trade facilitation and capacity building with adequate funding for this agenda. In the shorter run, the rich countries can ease the shock of adjustment by further opening their markets to the LDCs. For the European Union, this means further easing restrictive rules of origin. For the United States, it means passing legislation that provides duty-free access, also with flexible rules of origin, for the LDCs that do not currently have it, as well as for Sri Lanka.
(CONCLUDED) *Debapriya Bhattacharya is the executive director of the Center for Policy Dialogue, Bangladesh, and a visiting fellow at the Center for Global Development. Kimberly Elliott is a research fellow at the Center for Global Development and the Institute for International Economics.