IMF Survey: End of Quotas Hits African Textiles

IMF News, July 5, 2007

Source details

Multifiber Arrangement (MFA) negotiated under GATT came into force at the start of 1974, permitting bilateral quota restrictions on textile imports.
The Agreement on Textiles and Clothing (ATC), reached in 1995, stipulated phasing out MFA quotas over 10 years ending on January 1, 2005.
Quotas were phased out on January 1, 2005; consequences began to manifest immediately and continued through 2006 and beyond.
The U.S. African Growth and Opportunity Act (AGOA) from 2001 granted duty-free access to the United States and included a "third-country fabric provision" for least developed countries.

Between 2000 and 2004, textile exports from Swaziland, Lesotho, and Madagascar increased from $444.0 million to $1,063.5 million.
For Lesotho:
- Textile exports represented about 75 percent of total exports.
- Number of factories rose from 21 to 47.
- More than 50,000 workers were employed in the sector.
For Swaziland:
- More than 32,000 workers found employment in newly opened factories.
Post-quota phaseout impacts:
- 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.
- In Swaziland, 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 lost their jobs.
- About one-fourth of factories in Lesotho shut down.
Madagascar:
- Only 3 firms out of 124 shut down.
- Impact mitigated by investment in quality and reorientation of export destinations from the U.S. to the EU market.

Largely Asian-owned textile companies relocated operations back to their countries of origin once quotas were removed.
Significant currency appreciation hurt competitiveness:
- The South African rand (to which Lesotho and Swaziland peg their currencies) appreciated from R 12 to $1 (around 2003) to about R 7.3 to $1 by the time of reporting.
- Since the second half of 2006, Madagascar's currency appreciated substantially.
Additional competitive challenges:
- Rampant expansion of Chinese exports to U.S. and EU markets, especially after 2008 when bilateral agreements restricting Chinese exports expire.
- Unit labor costs in Swaziland, Lesotho, and Madagascar are higher than in Asian textile-producing countries.
- Possible reductions in most-favored-nation tariffs under the Doha Round could reduce preference margins for African exports.
- No guarantee AGOA benefits will last beyond 2012; third-country fabric provision was recently extended to 2012 instead of expiring in September 2007.

Lesotho measures:
- Granting rebates of import duties on imported raw materials.
- Initiating discussions with major U.S. buyers such as The Gap and Levi Strauss on doing business in Lesotho.
Swaziland measures:
- Vigorous efforts to safeguard the remaining sector and to attract new investment.
Madagascar measures:
- Prospect of greater access to the South African market through the Southern African Development Community (SADC) Free Trade Area (FTA) scheduled to be implemented later in 2007 prompted new investment.
- Four new textiles and clothing firms were created in the export processing zone in 2006.
International policy development:
- The U.S. government extended the third-country fabric provision under AGOA to 2012.

Key policy aims to mitigate quota removal effects:
- Increase worker productivity.
- Address labor skills.
- Facilitate increased trade within the SADC FTA and with the EU.
Strategic focus:
- Investment in quality and market reorientation (as in Madagascar) can limit job and firm losses.
- Maintaining and negotiating trade preferences and rules of origin remains critical given higher unit labor costs.
- Engagement with major buyers and targeted incentives (e.g., duty rebates) can help retain and attract textile investment.

Source: IMF Survey: End of Quotas Hits African Textiles