Does quota-free world mean destruction for RMG sector?

Introduction of MFA: Blessings for Bangladesh

The MFA was introduced in 1974 to work as a short-term protection measure for the textile and clothing industries in developed countries against the competitions and trade imbalances created by the low-priced apparel manufactured in developing countries.

According to the MFA, every year countries agree quotas -- the quantities of specified items which can be traded between them. The MFA does not apply to trade between rich industrialised countries themselves.

After introduction of the MFA, Asia has become the world's foremost exporter. Initially production was concentrated in the East Asian countries Korea, Hong Kong, Singapore, and Taiwan, but by the middle of the 1980s other Asian countries became major producers. Bangladesh, Cambodia, Nepal, Haiti, Laos, Lesotho, Madagascar, and Myanmar emerged as major exporters of garment manufactures.

Bangladesh is a good example of a country who was benefited from quota restrictions on other countries' exports under the MFA. Both MFA and General System of Preferences (GSP), introduced in 1971, gave Bangladesh generous access to European Union (EU), Canada, and USA markets. Within ten years, RMG had overtaken the country's leading exports of jute, tea, shrimp and leather and developed into the country's single most important industry for employment and foreign exchange earnings (export earnings of this sector reached $5.2 billion in 2004 from $31 million in 1983). The GoB's fiscal and financial support such as duty drawback facilities, tax holidays, cash assistance, income tax rebate facilities, zero tariff on machinery input, rebate on freight and power rate, bonded warehouse facilities, provision of import under back-to-back L/C, credit at concessional rate, export credit guarantee scheme, and retention of foreign exchange earned by the exporters, also facilitated growth of this sector.

Predicted Losers and Gainers

Calculations about who will survive and who will lose are going on all over the world. China, India, Pakistan, Korea, Mexico, Turkey, Central American, and Eastern European countries are expected to gain from free trade. China is anticipated to be the most benefited, as they have quality with strong linkages, and their labour is skilled and cheap. Many countries depend on them for accessories such as cotton etc. Bangladesh, Thailand, Sri Lanka, Philippines, Greece, and Portugal are predicted as the countries losing most. Big retailers such as Wal-Mart and brand based companies like Nike and Adidas and other multinational companies (these companies own no production facilities themselves, but manage an international network of suppliers) are predicted to benefit from the quota free world. With the phase out of MFA they will be able to move more freely to the most profitable locations. There is a possibility that the major textile and clothing buyers will half the number of countries they source from in 2005 and another third by 2010. This is supported by a survey of the US Commerce Department, that firms currently sourcing from 40 to 50 countries have a plan to consolidate sourcing in 12-15 countries.

The Case of Bangladesh: Problems and Potential

To face the post MFA situation Bangladesh has establish a national council, but no proper plan of strategy has been finalised. The RMG industry in Bangladesh has lots of backwardness and cheap labour is still her main strength, but things may not be as bad as predicted if the government and others related to RMG can work together to identify Bangladesh's weaknesses and strengths and take the necessary steps to overcome the weaknesses. The major problem of Bangladesh garments is lack of backward linkages, and this creates problems like unavailability and inadequate supply of inputs, and consequently higher production cost. A 1996 Ministry of Textiles study feared that after 2005, there might be shortages of fabrics, as countries which currently export fabrics will instead use their fabrics to produce and export clothing to North America and Europe. Those who have built their own linkage or have ensured linkages may not face too much difficulty and have a good chance of flourishing. The Ministry of Textile in their Textile Policy 1995, announced a target of 242 new spinning mills, 476 weaving mills and 475 dyeing-finished mills the be established by the year 2005. But the International Finance Corporation (IFC) of the World Bank in 1999 suggested that instead of manufacturing the fabrics, Bangladesh should consider importing fabrics from cheaper sources and concentrate or dying, printing and finishing. There is an opinion that the government should launch protective measures like tariff protection to save the domestic backward linkage industries.

One of the most crucial factors in the post MFA period will be lead-time. In the 1980s and 1990s the usual lead-time was 120-150 days and now, due to present short fashion seasons, lead-time has been reduced to 30-40 days. According to BGMEA, a Central Bonded Warehouse can reduce lead-time to 60-75 days. But Bangladesh Textile Mills Association (BTMA) is strongly opposing this demand. BTMA is also against the demand of SAARC Cumulation. With SAARC Cumulation, the garments will be able to enjoy GSP facilities by using textile products of all SAARC countries, whereas to enjoy GSP status they now have to use Bangladeshi products only. This might be profitable for garments as they will have a cheaper and wider range of inputs than now, but the textile industries will be seriously affected. Recently BTMA and BKMEA with 72 other textile and apparel groups from 36 countries urged the WTO to extend the deadline for phase-out up to December 31, 2007. But BGMEA has not yet responded in this regard. Debates regarding such issues between BGMEA and BTMA are continuing without any possibility of result.

Another argument against Bangladesh's survival after 2005 is that she is not a major cotton producer. But many cotton growing countries have failed to achieve competitive advantage in cotton fabrics or clothing while several countries especially in East Asia obtained it. Thailand, Indonesia, and South Korea managed to establish a fabric sub-sector within a short period of time. However, comparative advantage in raw cotton is neither necessary nor sufficient for comparative advantage in cotton fabrics.

So far Bangladeshi garments are dependent on USA and EU markets. About 45 percent of our total apparel exports go to US markets, 50 percent to EU countries, 2.5 percent in Canada, and the remaining 2.5 percent go to other countries. To sustain our competitive edge, diversification of market is essential. At the same time Bangladesh needs to develop capability for product development and design, as changes in fashion and taste are more frequent now, Questions about the quality of Bangladesh's garments often rises, but the producers believe that their quality is not far behind the world standard. Improvement of this quality and import of suitable technologies will change this sector dramatically.

It is certain that it will be very hard for the RMG sector to maintain today's high profit margin, as prices will fall and shortage of fabrics will increase production costs. Absence of certain markets, like today, will increase marketing cost. To maintain today's profit the industries have to reduce cost. Increased productivity of the workers may reduce costs. But this involves extra costs. The owners may follow the most popular way of cost reduction which is to pay workers less and cut their facilities. It is certain that those affected the most will be the workers, as they are always. Many of them might lose their jobs, and those who will still have them will be offered lower wages with fewer working facilities than now. They might even be forced to work more than now. The owners will do this by arguing that their profit margin has declined and they need to be cost competitive. But as the cost of labour in Bangladesh is quite low and as local value addition is low and most of inputs are imported, the scope of reducing the cost of the final product by using cheap labour is limited. On the other hand, when backward linkage is established and inputs are available at lower domestic prices, the relatively low wage level can play a more significant role.

Bangladesh's preparation and planning for survival after 2005 will not be realistic until the problems of poor law and order, port handling, delay in shipment, poor infrastructure, and bureaucracy are solved.

Recommendations

The Bangladesh government has established a national council to face the post MFA situation. BGMEA has placed their demands several times. CPD, Oxfam, World Bank, IMF and other organisations have also given their opinions. Some have promised to give financial assistance to overcome the loss. The following initiative should be taken on emergency basis:

Necessary steps are urgent to establish backward linkages for the RMG sector. Government support in the form of investment, low interest rate, and cash incentives to facilitate establishment of industrial linkages is critical.

To save lead-time BGMEA's demand for a "Central Bonded Warehouse" must be fulfilled immediately.

Proper foreign policies are necessary to exploit existing foreign markets adequately and to identify new potential markets and gain access to those markets. Simultaneously participation in specialised trade displays in various potential markets will help the exporters to promote their products.

Research regarding diversification of products and viability of producing more value added products in the case of Bangladesh must be given preference.

To be cost competitive and to produce quality items, modern technology and training at all levels of RMG are essential. At the same time to get maximum from the workers minimum wage, job security, better working environment, labour rights, participation of works in the management, development of skills and training are a must.

Initiatives are urgent for improving infrastructure (ports, roads, electricity, telecommunication) and power facilities in term of both availability and price.

If Bangladesh can take the above steps properly, she can reverse the predictions about the post MFA situation. If strong linkages and improved governance can be introduced, with cheap labour, shorter lead-times, and quality and diversified products, Bangladesh can be a strong competitor in the world market. But first of all a sound and dynamic policy should be chalked out after consulting with all related to RMG.

Asif Reza Anik is an economist.