IMFSurvey Magazine: In the News
End of Quotas Hits African Textiles
By Thomson Fontaine
IMF African Department
July 5, 2007
- Swaziland, Lesotho, Madagascar favored for textile investments in 1990s
- Textile exports of some sub-Saharan African countries boomed 2000-04
- Phasing out of textile quotas in January 2005 hurt these countries' economies
When quotas maintained under the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC) were phased out on January 1, 2005, Swaziland, Lesotho, and, to a lesser extent, Madagascar appeared unprepared for what was to follow.
Exports dipped, several textile factories were shut down, and thousands joined the ranks of the unemployed in these sub-Saharan African countries as the largely Asian-owned textile companies moved operations to their countries of origin. Two years after the end of the agreement, the countries continue to struggle in their efforts to mitigate its impact.
How it all started
Following about 20 years of bilateral agreements restricting trade in textiles and clothing, the Multifiber Arrangement (MFA) negotiated under the auspices of the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO, came into force at the start of 1974. The MFA allowed textile- importing countries (primarily industrial countries) to negotiate bilateral restrictions on imports from exporting countries (primarily developing countries).
The United States, Canada, and most other industrial countries moved to impose quota restrictions on imports from a number of developing countries. The ATC, reached in 1995 as part of the GATT's Uruguay Round Agreement, stipulated the phasing out of MFA quotas over 10 years ending on January 1, 2005.
For several years beginning in the late 1990s, many sub-Saharan African countries, including Swaziland, Lesotho, and Madagascar, benefited greatly from heavy investments in the textile sector (see chart), mainly from Asian and South African companies. These countries were particularly favored for investments in textiles because of they had not met their quotas under the MFA.
In addition, these countries had relatively stable political environments, favorable exchange rates and, beginning in 2001, duty-free access to the United States under the African Growth and Opportunity Act (AGOA). Also, because they were classified as "least developed countries," they were able to import fabrics from Asia under the "third-country fabric provision" of AGOA to use in the manufacturing of garments that could be exported duty free to the United States and the European Union. In Madagascar, the export processing zone was expanded to accommodate new textile factories.
Between 2000 and 2004, textile exports from Swaziland, Lesotho, and Madagascar more than doubled, from $444.0 million to $1,063.5 million. For Lesotho, this represented about 75 percent of total exports, and the number of factories in this country rose from 21 to 47 with more than 50,000 workers employed. In Swaziland, more than 32,000 workers found employment in newly opened factories.
However, the phasing out of the MFA quotas on January 1, 2005, under the ATC, combined with significant currency appreciation, had a damaging effect on the textile sectors of these three countries and, consequently, on their economies. No longer constrained by quotas, several Asian companies left to return to their countries of origin. (The United States and the European Union subsequently negotiated new, temporary quota arrangements with China.)
Textile exports from the three countries dipped an average of 12 percent during 2005 from the previous year's level and fell again by 6 percent in 2006. The impact on employment was particularly severe in Swaziland, where more than half of those employed in the textile sector lost their jobs. In Lesotho, about 15,000 of the 50,000 workers employed in that sector also lost their jobs, and about one-fourth of the factories shut down.
In Madagascar, the impact was less severe: only 3 firms out of 124 shut down. This limited impact was due in part to investment in quality as well as to a reorientation of exports' destination from the U.S. to the EU market.
In Lesotho and Swaziland, the continuing appreciation of the South African rand, to which their currencies are pegged, posed another obstacle to the growth and expansion of the garment sector. Between 2000 and 2002, when most of the companies set up shop in the two countries, the real exchange rate of the rand was depreciated sharply. Since 2003, it has appreciated from a level of R 12 to $1 to its current level of about R 7.3 to $1.
The currency's appreciation could not have come at a worse time for Lesotho and Swaziland, which battled to save their textile sectors after the quotas were phased out. Since the second half of 2006, Madagascar's currency has appreciated substantially, which may also prove to be a challenge for the country's textile industry in the future.
How countries responded
In Lesotho, the government attempted to stem the flow of textile firms from the country. Among the measures undertaken were the granting of rebates of import duties on imported raw materials and the initiation of discussions with such major U.S. buyers as The Gap and Levi Strauss on doing business in Lesotho.
Similar efforts are also under way in Swaziland, where the government is engaged in vigorous efforts to safeguard what is left of the sector while at the same time trying to attract new investment. In Madagascar, the prospect of greater access to the South African market as part of the Southern African Development Community (SADC) Free Trade Area (FTA), which is scheduled to be implemented later in 2007, prompted new investment, and four new textiles and clothing firms were created in the export processing zone in 2006.
In addition, the U.S. government recently agreed to extend the third-country fabric provision under AGOA to 2012 instead of allowing the provision to expire as previously agreed in September 2007. This provides exporters with additional breathing room for the moment.
Facing up to competition
The challenge for Swaziland, Lesotho, and Madagascar will be to achieve international competitiveness in their textile sectors in the face of the rampant expansion of Chinese exports to their traditional export markets in the United States and the European Union, especially after 2008, when the bilateral agreements restricting Chinese exports expire.
Given that unit labor costs in those countries are higher than those in the Asian textile-producing countries, trade preferences have so far been a key advantage. Although these countries continue to enjoy the benefits of AGOA, there is no guarantee that it will last beyond 2012.
Already, Israel, Jordan, and Mexico benefit from similar agreements. Under the U.S.- Central America Free Trade Agreement, duty-free benefits were also extended to Central America although the rules of origin for garments are quite strict. Moreover, possible reductions in most-favored-nation tariffs in industrial countries under the current Doha Round of multilateral trade negotiations could further reduce the preference margin for Africa's exports and adversely affect its garment sector.
Policies aimed at increasing worker productivity, addressing labor skills, and facilitating increased trade within the SADC FTA and with the EU could go a long way toward mitigating the impact of the removal of textile quota preferences on the economies of those countries.