2008 management briefing

Impact of regional trade

deals on clothing and textile
sector – a global assessment

April 2008
Page i

Impact of regional trade deals on

clothing and textile sector – a global
assessment

Management briefing

April 2008

By International News Services

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Page ii

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Page iv Contents

Contents

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Contents.......................................................................................................................................... iv

Introduction ..................................................................................................................................... 1

The US .............................................................................................................................................. 2

Latin America .................................................................................................................................. 5

The European Union ....................................................................................................................... 8

Russia ............................................................................................................................................ 10

Japan, ASEAN and China............................................................................................................. 13

South Korea................................................................................................................................... 15

The Middle East............................................................................................................................. 17

South Africa ................................................................................................................................... 19

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 1 Introduction

Introduction

With the World Trade Organization’s (WTO) Doha Development Round being
slow to proceed since its 2001 launch – and only this year approaching
something resembling an end-game – free traders wanting to encourage
global commerce have looked to bilateral and regional trade deals.

There have been a lot of these, with the US being particularly keen to secure
agreements with key trading partners. And why not? After all, most countries
are keen to trade with the world’s biggest economy. And generally, even
protectionists have to admit that, in an ideal world, a reduction of tariffs and
subsidies does tend to increase trade and hence wealth.

However, for the clothing and textile sector, life is not quite that simple. For
rich, high-wage economies, the reduction of tariff barriers has tended to reduce
the amount of domestic textile and clothing production, by opening the doors to
cheaper imports. Even low-wage producers, such as those in South Asia, have
found free trade to be risky, where cheap and high-quality competition from
producers such as China has eroded even local market share.

Furthermore, when looking at regional or bilateral trade deals rather than a

global agreement brokered by the WTO, there are always going to be local
effects that bear detailed examination. Just how have these deals impacted on
the clothing and textile sector around the world?

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 2 The US

The US

Last year, US textile producers suffered the largest drop in output since the
government started publishing data on the topic in 1972, and free trade deals
are getting the blame. According to the Federal Reserve, ‘US textile mill’
(companies transforming fibre, such as wool, cotton or polyester, into yarns
and fabrics) production decreased by 12.1% in 2007.

Other sectors of the industry saw declines, too. The output of ‘US textile
product mills’ (manufacturers of non-apparel products, such as curtains,
sheets, towels, canvas products, carpets and rugs) fell by 4.9% and apparel by
2.5%. US apparel is down some 59.8% since 1994.

Ask just about any textile manufacturer the reason for such devastating figures
and they will answer with one word – China. Many Chinese imports are now
entering the US through the backdoor as a result of a plethora of bilateral and
regional trade agreements signed under the Bush administration (with
countries other than China). Loopholes allow components to be sourced from
outside the free trade areas, and China – with a high capacity to produce and
transport – is happy to supply.

“A flood of subsidised imports, especially those from China, is crippling the US

textile industry,” said American Manufacturing Trade Action Coalition (AMTAC)
executive director Auggie Tantillo. ”The decline in US output directly is tied to
the loss of market share, and the loss of market share then directly is tied to
the loss of hundreds of thousands of US textile and apparel manufacturing
jobs,” he added for good measure.

Despite its unilateralist image, the promotion of free trade has been a
consistent aspect of the Bush administration. In 2002, President George W
Bush pressed Congress to enact the Trade Act, granting him fast-track
negotiating authority, with the resulting deals getting a straight ratification vote
in Congress without having to be mauled and amended by committees. The
result was a profusion of trade pacts drawn up in record time.

Fast-track was used to negotiate the CAFTA-DR (Central America and-

Dominican Republic free trade agreement), liberalising US and Central

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 3 The US

American markets, which was implemented between 2006 and 2007. While
the admittedly more important North American Free Trade Agreement
(NAFTA) took seven years to negotiate, this deal took just one.

Meanwhile the Bush administration has also struck free trade agreements
(FTAs) with Chile and Singapore (in 2003), and Australia, Bahrain and
Morocco (in 2004), and there are others in the works. FTAs with Oman and
Peru are waiting implementation. FTAs with Colombia, Panama and South
Korea are pending congressional approval.

Some of these agreements have had little effect on textile producers. The
Australia deal has even delivered opportunities. However, CAFTA-DR has
been a “dead loss”, according to the National Textile Association’s David
Trumbull. “We have not seen it deliver for the US in the way it was promised…
It was badly written, and is going to take years to sort out,” he said.

Loopholes allow Chinese fabric (for example that used in boxer shorts, bras
and nightwear) to enter the US, via finished product imports assembled within
CAFTA-DR member countries, he added. At the same time, US textile
producers cannot import Chinese yarn, which would make their product
cheaper. The pocketing fabric industry thought pocketing material would be
required to originate in the CAFTA-DR zone but a change to the deal entailing
that concession was only passed in December. In the meantime, the pocketing
business had moved to China, resulting in redundancies in the US. North
Carolina-based Copland Industries has laid off 40 people in its pocketing
division since 2005, for instance.

Only high-end textiles producers who make quality and design paramount are
thriving, says Karl Spilhaus, president of the Cashmere and Camel Hair
Manufacturers Institute. “Bilateral agreements have opened the floodgates to
lower-positioned goods…but for our one cashmere sweater maker in the US,
people trust his product, and continue to buy it,” he said.

Rhode Island-based Cranston Print Works, which dates back to 1824 and is
the US’ oldest textile printer, was battered in the 1990s, as a result of NAFTA.
Having shifted to serve the home sewing market (making materials for quilts
and other craft items), the company has been less affected by the latest
agreements.

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 4 The US

But Cranston’s president, George W. Shuster, describes the deals as “more

platforms for imports”. He explained: “It’s not true two-way trade. Textile
producers used to get accused of spending all their time at the country club
and not reinvesting. I don’t hear that anymore. All industries are getting
hollowed out by this trend to import.”

But there have been winners in the free trade rush. The National Retail
Federation “broadly welcomes” the agreements, as members can import more
cheaply and expand abroad. CAFTA-DR has allowed Wal-Mart to become one
of Central America’s largest chains – the retailer is now a leading lobbyist for
quick approval of Latin America FTAs.

But Laura Jones, executive director of the Association of Importers and

Textiles and Apparel, is less enthusiastic about this pact, given that one aim
was to help US clothing manufacturers secure cheap supplies of textiles from
neighbouring countries. The problem: “CAFTA countries don’t have much of
their own fabric supplies, so fabric still has to come from the US [which is
expensive for Central American producers],” she said. “It hasn’t done what a
lot of people hoped for.” She noted that a denim plant is to open in Nicaragua
(in the Jorge Bolanos Abaunza Textile Park in Managua) some time in 2008,
which will supply fabric throughout the region. She said that this was a start but
more fabric production plants need to go online for the situation to improve
significantly.

Former US trade representative Robert Zoellick (now president of the World

Bank) has said trade agreements “foster powerful links among commerce,
economic reform, development, investment, security and free societies”. On
the ground, in the US textile and clothing sector, it would seem, not everybody
agrees.

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 5 Latin America

Latin America

Latin America has been buffeted by numerous regional and international trade
deals in recent years, many of which have affected the textile and apparel
industries. In September 2007, the Southern Cone Common Market Group
(Mercosur), including Argentina, Brazil, Uruguay and Paraguay, issued draft
regulations proposing the establishment of certain labelling requirements for
textile and apparel products produced in, or imported for, consumption into a
member country. Such requirements enable the group to protect and unite
member nations while regulating outside investment. In September 2007, the
trade bloc also adopted an increase of applied tariffs on selected textile
fabrics, clothing products, and textile made-ups and carpets. The move,
encouraged by the Brazilian government, is widely seen as an attempt to curb
further imports from China. Analysts also suggest that a new ‘experimental’
safeguard regime introduced in 2006 will reduce unilateral restrictions within
Mercosur and aid regional integration.

This aim of limiting competition from Asia was also seen as a key benefit for
the Latin American members of 2006’s CAFTA-DR. However, the pending
removal of US temporary restrictive import quotas on Chinese clothing and
textiles, due to expire at the end of 2008, may have been responsible for a
drop in imports to the US from CAFTA-DR countries during the third quarter of
last year, according to a report by EmergingTextiles.com1. The fall was mainly
attributed to a sharp decrease in apparel imports from the Dominican Republic,
which lost 41% in volume terms and 35% in US dollar terms, according to the
report. Meanwhile, imports from Honduras rose 2.18%, where the trade deal
has helped the apparel generate international investment, said the report.

Meanwhile, the European Union (EU) has been involved in a lengthy

negotiation process with Latin America trade blocs including Central America
and Mercosur, although it has reached individual agreements with countries in
the region. Since 2002, the EU has had a cooperation agreement with Brazil
that includes a Memorandum of Understanding on Textiles. The EU agreed to
lift all textile quotas on Brazil, while Brazil, in return, agreed to respect
minimum tariff levels, refrain from applying non-tariff barriers to EU imports,

1
US Apparel Imports from CAFTA-DR Countries in 3rd Quarter 2007, published in January 2008

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 6 Latin America

and remove an additional textile and clothing imports tax. The EU and Mexico
have an FTA that has liberalised trade in a number of sectors, including
textiles and clothing. In the six years following the entry into force of the FTA,
bilateral trade between the EU and Mexico grew by nearly 90%, according to
both parties’ imports data.

The US is also negotiating individual agreements with Latin American nations.

Peru recently entered into a new FTA with the US that should come into force
in mid-2008. Trade between the US and Peru amounted to US$8.8bn last year
– of that, textiles and apparel constituted US$23.6m in US exports to Peru and
US$864m in US imports from Peru. The FTA agreement will replace a
temporary Andean Trade Preference Act giving Peruvian exporters some
privileged trade access to US markets. The US is also in the process of
negotiating FTAs with Panama and Colombia, but talks have been stalled for
political reasons.

Chile, which prides itself on being the nation with the most free trade
agreements, has FTAs with many foreign nations, including both the US and
the EU. In the textile industry, this has brought in foreign investment. “There is
a list of some 25 businesses that have been installed in the last two or three
years,” Mario Rosales, head of the Chilean negotiating team, told the Spanish-
language magazine Textiles Panamericanos in the spring of 2006. “I am
convinced that with the agreement with the US, as with the agreement with
Europe, there will be new incentives for other businesses to invest in Chile.”
Local manufacturers are also exploring opportunities abroad. Monarch, a
Chilean manufacturer of socks and stockings with annual sales of more than
US$15m, has embarked on an ambitious investment plan to offer products that
will appeal to outside consumers.

The Andean Community of Nations (CAN), which includes Colombia, Ecuador,

Bolivia and Peru, has opened trade talks with the EU. However these have
been complicated by these governments’ need to involve labour
representatives in the approximately three-year-long negotiation process. Latin
American workers have traditionally suffered under the FTAs, which – while
providing employment – offer low wages and, workers’ organisations argue,
have increased illegal immigration northward to the US. While textiles and
apparel are generally duty free in major trade agreements worldwide, they are
often the last to be subjected to duty-free trade in Latin America. “These are
the most sensitive, [but the] least internationally – let alone regionally –

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 7 Latin America

competitive sectors [within Latin America],” says Tom O’Keefe, president of the
Washington-based Mercosur Consulting Group, “that usually employ unionised
and therefore highly vocal workers.”

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Page 8 The European Union

The European Union

There is only one bilateral trade agreement devoted exclusively to textiles

involving the EU in existence at present – the successor agreement to the
Memorandum of Understanding with China negotiated late last year, noted
Peter Power, the European Commission (EC) trade spokesman. This
comprises a system of joint import surveillance that will operate for one year, in
2008, and will help in avoiding massive swings in trade flows. “It allows for
increased trade flows and there are no limits but at least we will know what’s
happening in a much more secure sort of way,” Power said.

However several bilateral general trade agreements with important textile

components have been negotiated by the EC in recent years, mostly but not
always in the form of free trade areas providing for full liberalisation of trade
over a long period. These take a reciprocal form in which access rights to the
EU market are traded for the abolition of tariff or non-tariff barriers in the
participating country or region. It follows that the push for such deals in the EU
usually comes from retailers and clothing and fashion good exporters with
European textile manufacturers taking a much more suspicious approach in
general.

The latter viewpoint was expressed by Francesco Marchi, director of economic

affairs at EURATEX, the voice of the European textile and clothing industry,
which says its main objective is “to create an environment in the European
Union conducive to the manufacture of textile and clothing products”. His view
is that: “Our exports in most of the non-OECD [Organisation for Economic
Cooperation and Development] rich developed countries are hampered by
heavy, mostly non-tariff, trade barriers; therefore what we’re looking at through
the bilaterals is to increase access to the final market, that is consumption by
the consumer.”

At present the EU has free trade agreements (FTA) with South Africa, Mexico
and Chile which Marchi complains have “been imposed on us by the EU
Commission”. Similar FTAs are being negotiated with South Korea, India, and
the Association of Southeast Asian Nations (ASEAN). The EU is expected to
press for reforms in investment, services and intellectual property in the

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 9 The European Union

ASEAN countries, which in turn will be looking for improved market access in
the EU.

Discussions are still underway, nominally at least, between the European

Commission and Central American and Latin American non-Mercosur
countries but Marchi said: “Brazil is blocking all the negotiation until there is a
DDA [Doha Development Round, of the World Trade Organization] agreement
which they expect will give them more market access, which clearly the EU
can’t afford.” However an FTA is on the verge of completion between the EU
and the Gulf Co-operation Council, representing most oil-rich Gulf states, and
may well be signed this year, after a speeding up of negotiations last year.

Elsewhere, moves to improve trade relations between the EU and the

Mediterranean countries continue, building upon a number of existing bilateral
deals providing for duty-free imports with countries in North Africa and the
Levant.

Also, a European Partnership Agreement has been reached with the African,
Caribbean and Pacific (ACP) which will allow increased EU market access in
those countries, though Marchi said: “We won’t gain a lot of tariff cuts, even in
15 years.” Discussions leading towards a “deep and comprehensive free trade
area” have begun with the Ukraine.

EU retailers have a different take on matters at present. Alessandro Bedeschi,

secretary general of the European Association of Fashion Retailers, which
represents over 400,000 fashion retailers in EU countries, said the present
focus was on oncoming proposals to change the rules associated with trade
defence instruments (TDIs) such as antidumping duties and countervailing
duties. These had been drafted by the EC after consultation and are expected
to be proposed shortly. “We hope the outcome will be better protection for
professional retailers and a balanced approach to suppliers and traders’
interests and needs,” he said. Bedeschi said the association was satisfied with
present EU trade arrangements, adding that the double licensing system
agreed with China “is not posing any special problems for our members and is
working fine”.

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Page 10 Russia

Russia

The bilateral basis for EU relations with Russia is the Partnership and Co-
operation Agreement (PCA) which came into force on 1 December 1997
initially for ten years, and is now extended beyond 2007 on an annual basis.
Textiles and clothing, however, are excluded from the most favoured nation
(MFN) regime established by the PCA, which effectively ensures EU duties on
Russian exports are kept as low as those of countries with which the EU has
the closest trade relations. Instead, a separate Textiles Agreement was
concluded in 1998, providing for the lifting of all quantitative restrictions applied
to trade in textile products, a liberal situation that now applies to all WTO
members – which as yet does not include Russia.

According to a spokesman for the European Commission’s directorate-general

(DG) for trade, this agreement is still formally in place: “There are no
quantitative restriction or surveillance measures in place,” he said. “Textiles
are now treated as any other industrial sector.” Matters may alter in the near
future, as DG Trade is waiting for a mandate from the EU Council of Ministers
to negotiate a new broader Framework Agreement with Russia covering all
trade matters, but it is hard to imagine quotas being re-introduced.

However, importers and exporters trading clothing and textile goods between
the EU and Russia do still pay duties. According to DG Trade, the average
Generalised System of Preferences (GSP) duty for fabrics on imports into the
EU from Russia is currently 6.4%. For imports of fabrics from the EU into
Russia a 10% duty is applied on average. So there is room for improvement.

Complete data for 2007 is not yet available but according to the EC, imports
into the EU of textiles and clothing from Russia shrunk by 6% between 2005
and 2006, when they were worth EUR181.2m. They were expected to fall
sharply again in 2007. EU exports to Russia of textiles and clothing rose by
29% between 2005 and 2006 to EUR3.1bn, however. The export figure for the
first ten months of 2007 had already succeeded the 2006 figure at EUR3.6bn
making clothing and textiles a useful counterweight to the huge EU balance of
payments deficit with Russia, mainly because of energy exports.

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 11 Russia

Francesco Marchi, director of economic affairs at EURATEX, said that the

swathe of previous bilateral agreements that were made obsolete by the
accession of ten Eastern European states in 2004 (plus Bulgaria and Romania
last year) had provided huge benefits through the resulting complete freeing of
trade between them and resulted in a shift in textile production patterns. “The
larger EU family of 27 countries has changed the nature of textile production,”
he said. “The accession countries of 2004 are slowly changing their pattern of
trade. You see links between Poland and Lithuania who export to Russia, and
the Baltic countries exporting semi-finished products to Belarus and Ukraine.”
Lithuania and Poland also export fabrics for completion to EU candidate
countries, such as Serbia, Montenegro, Croatia and Kosovo.

Uncertainty still remains: while textile trade between the EU and Croatia
remains duty free, the level of, or absence of duty with – for instance – Serbia
– is subject to what Marchi described as “political will”.

For the past five to eight years textile goods and exports from Western Europe
to Russia have witnessed double-digit growth. “Russia is a peculiar case,” said
Marchi. “Despite the big difficulties that exporters to Russia face in terms of
bureaucracy this is a very profitable market. It is booming in both sales of
finished products and raw materials – Russia is the most important market for
EU textile manufacturers right now.”

Russia, meanwhile, as in other sectors of industry, is looking to play its own

game. Last year Rostextile – the Russian Union of Textile and Light Industry
Entrepreneurs, which represents more than 400 textile production and
commercial companies – negotiated a bilateral agreement with Turkey that
incorporated a common strategy and intention to act together in the textile,
ready-to-wear, carpet and leather sectors in securing new export markets.
Domestically, the Russian industry takes a decidedly ambivalent view of trade
with the European Union. While the increase in semi-finished products and
fabric imported into Russia to be converted into end-products has created work
for the hard-pressed local manufacturing industry, the increasing presence of
high-quality western textiles has attracted more affluent consumers. “Around
two-thirds of Russians continue to buy their clothes and shoes in discount
stores or in open markets,” said a spokeswoman for Rostextile. “But these
goods tend to be manufactured in Asia, so do not represent a market for local
producers. There is a sentiment to buy Russian goods which means some

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 12 Russia

upmarket companies flourish, but the reality is that most of the benefits are
seen by EU producers.”

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 13 Japan, ASEAN and China

Japan, ASEAN and China

Chinese-made goods dominate the Japanese market and this neighbouring

nation and historic competitor is now Japan’s second-largest trading partner,
following the US.

China’s low labour prices have kept companies manufacturing clothes based
in the country, with many exports destined for Japan. But as the Chinese
industry moves upmarket, and demand for quality increases, this trading
relationship could change, with other Asian countries also supplying Japan
with clothes and textiles – and an impending free trade deal could make this
happen faster.

In May 2008, the Association of South East Asian Nations (ASEAN) and Japan
are expected to sign a trade agreement which will result in the immediate
repeal of tariffs on 90% of imports from ASEAN. In return, ASEAN members
will eliminate their tariffs on 90% of imports from Japan, but these reductions
will be phased in – possibly over 18 years for some ASEAN members.

“China used to sell in bulk but Japanese companies don’t want to buy in large
quantities,” said Loic Bizel, a Tokyo based fashion consultant. “Trends are
constantly changing here and companies are doing six to seven collections a
year. Because of this they need to import smaller quantities.” The reduction in
import duties, from proposed trade agreements, will help Japan source goods
from other nations.

At the higher end of the Japanese market, top European brands look set to
reap the benefits of a proposed European Union (EU)-Japan deal. “The
strength of the euro has raised the prices of designer brands here,” explained
Bizel. “They have been forced to raise their prices as the [strong] euro is killing
their margin. If an FTA is reached the retailers will benefit.”

Within the clothing and textile sector the gift towel market and leather market
are the most protected within Japan. The reason behind the high level of
protection of the domestic leather trade is not typically disclosed formally, as it
is more of a social reason than an economic one. High tariffs protect the
Burakumin, descendants of Japanese outcast communities, who work in the

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 14 Japan, ASEAN and China

leather business. To help them, the country has put in place an import quota
system for leather goods, which makes it difficult for foreign countries
exporting leather to compete here.

Meanwhile, a Japan-Mexico FTA, which came into force in 2005, gives

preference to Mexican leather goods being imported into Japan over other
nations without an FTA in place.

As for the towel market Bizel commented: “The gift towel market is a big
industry here and Japan wants to protect it by manufacturing here and selling
towels here. But companies are going to China as it is cheaper.”

India and Japan hope to sign an FTA by mid-2008, while South Korea and
Japan also expect to resume talks (which have been at a standstill since 2004)
this year.

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 15 South Korea

South Korea

South Korea continues to whittle away at international trade barriers impeding

its textile and clothing importers and exporters, with a number of trade
agreements in the works. Negotiations are underway for bilateral free trade
agreements with the EU, Canada, Mexico, India, Japan and South Africa. A
deal with the US was signed in June 2007. However, the agreement needs to
be ratified by Congress and so has not yet been put into force.

Bilateral South Korean-EU trade reached US$89.8bn in 2007, making it South

Korea’s second-largest trading partner. This is only likely to increase if a free
trade deal is sealed with Brussels. On 1 February 2008, the country’s Yonhap
News reported: “An unofficial study suggests a free trade agreement would
boost that figure [US$89.8bn] by up to 40% in the long run.” Seung Woo Lee,
from the Korea Federation of Textile Industries, believes the proposed deal will
boost South Korean market access to EU countries as well as increasing
market diversification. However, he noted: “On the downside in Korea, there
may be possible market domination of European clothes, especially luxury
brands.” There is a lot of protection to cut, however. The South Korean textile
and fashion market is protected by high tariffs compared to other sectors under
negotiation, he noted.

As for the US market, South Korea is currently vying for space between high
quality Japanese and cheap Chinese products, reported financial paper Donga
on 12 February 2008.

In 2006, South Korea’s exports to the US were down by 7.8% compared to

2004, while neighbouring Japan and China had increased their level of
exports, according to the Korea Institute for Industrial Economics & Trade.

Assuming it is finally ratified by a Congress that has tepid enthusiasm for free
trade deals, the Korea-US FTA should increase Korea’s textile and apparel
exports to the US by US$180m in the short run, says the Korea Trade
Investment Promotion Agency (KOTRA). It has also stated that if the FTA
comes into effect, current US tariffs on textiles will be stopped, contributing to
an anticipated 8% growth in South Korean exports.

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 16 South Korea

South Korea currently has trade agreements with Singapore, Chile, the
European Free Trade Association (EFTA, comprising Norway, Switzerland
Liechtenstein and Iceland) and ASEAN. All the existing pacts have largely
boosted the level of exports of Korean textile and apparel, although the record
is not 100% every year. The Korea-Chile pact came into affect in 2004 for
instance, and South Korean exports have been unsteady, having decreased
by 10.4% in 2006 before increasing by 27% in 2007 (according to Korean
International Trade Association [KITA] statistics). Exports to Singapore, EFTA,
and ASEAN have increased since signing, while imports from EFTA and
Singapore have decreased.

The ASEAN agreement has been beneficial to both parties with South Korea’s
textile and apparel exports increasing by 10.1% in 2007, and ASEAN by 12.3%
in the same year.

© 2008 All content copyright Aroq Ltd. All rights reserved.

Page 17 The Middle East

The Middle East

Bilateral and regional FTA agreements have been a mixed bag for the Middle
East clothing and textile sector. Turkey has benefited greatly from its formal
membership applicant status with the EU (a customs union has been in place
since 1995), as well as bilateral trade agreements with Syria and Egypt, where
the Turkish sector is sinking money into both countries to establish factories.
For Turkey this cuts overheads and allows manufacturers to export products
from Syria to Europe with ‘Made in Turkey’ labels. In Egypt, where there are
some 200 Turkish-owned factories, this allows manufacturers to utilise Egypt’s
FTA with the US, which allows goods from Egyptian economic zones to enter
the US duty-free.

Lebanon is still negotiating its membership of the World Trade Organization

(WTO), but has signed a raft of free trade agreements, namely the Greater
Arab Free Trade Agreement (GAFTA), which came into existence in early
2005, and covers the 17 Arab League members: Lebanon, Saudi Arabia,
Tunisia, UAE, Jordan, Bahrain, Syria, Iraq, Oman, Qatar, Kuwait, Libya, Egypt,
Morocco, Sudan, Yemen and the Palestinian territories. And there is also the
European Union-Lebanon Association Agreement, (informally known as the
Euro-Med agreement) which came into force in 2003. This swept away import
duties on both sides, but Lebanese clothing manufacturers have felt the sharp
end of EU high quality competition.

“For the EU there is an advantage to export finished goods, but for me, I don’t
feel the usefulness of this Euro-Med agreement,” said Charles Arbid, vice
president of the Association of Lebanese Industrialists.

Naji Mezannar, a board member of the Beirut Chamber of Commerce, Industry

and Agriculture, said that although in his view such agreements have not
negatively impacted on the textile sector, the Lebanese government’s decision
to adopt free market policies has: “The Government decided to reduce
customs protection for textiles and left 5% protection on cloth, which means
more or less nothing.” This has signalled the end of Lebanon’s clothing sector,
bar high-end products and haute couture, he complained.

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Page 18 The Middle East

He claimed free trade has also not benefited much of the clothing sector in the
Arab Middle East, with the exception of retailers. “China has benefited, but not
the Arabs,” said Mezannar, citing the problem of dumped goods from the Far
East.

However, trade statistics are not so gloomy. The end of the WTO’s Agreement
on Textiles and Clothing and the subsequent disappearance of import quotas
among member states from 2005 has been a boon for Arab nations,
particularly for Tunisia, Turkey, Egypt, Morocco and Jordan, which saw exports
to the EU in 2007 increase around 20% on 2006 figures.

The recently created Gulf Cooperation Council Common Market could also
boost Arab clothing manufacturers and retailers, with barriers to be removed
as the GCC moves towards an EU-style policy of freedom of movement of
goods.

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Page 19 South Africa

South Africa

The introduction of four bilateral and regional trade agreements since the turn
of the century have had a mixed effect on South Africa’s clothing and textile
exports over the past seven years, according to industry experts.

Statistics for the period show that despite the abolition of a wide range of
textiles and clothing tariffs for lines traded between South Africa and its
neighbouring countries, as well as the EU and the US, exports in the former
category have risen moderately while the latter have fallen dramatically.

The South African government had hoped that signing the March 2001 Africa
Growth and Opportunity Act (AGOA) with the US, the January 2000 FTA with
the EU, and the September 2000 Southern African Development Community
trade protocol would actually increase exports.

However, according to the country’s Textile Federation, while last year’s South
African textiles exports amounted to US$562.6m compared to US$392m in
2001, exports of clothing fell, being recorded at US$95.6m in 2007 compared
to US$222.4m in 2001.

The problem, said Textiles Federation spokesman Brian Brink, was that while
his industry had indeed benefited from South Africa’s trade agreements, the
fluctuating nature of the South African rand compared to the US dollar had
weakened the competitiveness of exports, even as their prices were reduced
through the removal of duties.

“There have been some advances in terms of greater exports under these
agreements, especially under AGOA, but when the rand strengthened
between 2003 and 2007 our competitive edge was taken away,” he said.

Meanwhile, a spokesman for the Textile Federation’s clothing section, Jack

Kipling, said that for his sector there was an additional problem, namely that
clothing exporters had failed to benefit from the agreements because their
newly favourable access to foreign markets had been negated by excessively
restrictive rules of origin for such market access. For instance with AGOA, the
rule of origin for apparel is a three-stage conversion rule, meaning that to

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Page 20 South Africa

qualify a garment needs to be produced from fabric woven or knitted in South

Africa, or another AGOA-eligible country which in turn had been produced
using yarns of regional or US origin. In the case of the EU/SA FTA, the rule of
origin for apparel is a two-stage conversion rule, requiring garments
manufactured in South Africa to use only South African or EU-produced fabric.

“Although exports of apparel from South Africa to the US did grow 38% in the
first year after the introduction of AGOA in 2001, export growth was limited by
the restrictive rules of origin. Once buyers realised the limitations, their interest
declined,” he explained, before adding that currency volatility was also an
added factor.

But Dr Ron Sundry, a senior research fellow at the Trade Law Centre for South
Africa said there were also other reasons for the industries ongoing problems.
“Our regional agreements are a joke really. South Africa signed up – to drop its
tariffs – early as a sign of good faith. But many of the other countries, like
Angola, DRC [the Democratic Republic of the Congo] and Zimbabwe, are so
messed up they have been unable or unwilling to follow suit.

“But the real problem is why can Asian producers expand and South African
ones cannot? The answer is productivity. We are not as productive as other
countries and until we get that right we will remain behind,” he concluded.

© 2008 All content copyright Aroq Ltd. All rights reserved.