RMG industry in Bangladesh: An imminent earthquake?

Experts predicted, and the industry itself and the authorities in Bangladesh, realise most painfully, that the resultant restructuring and process of adjustment in a free trade framework, would be exceedingly difficult, even with the best of strategies and policies in place. And, to the best of our knowledge, it is not so in the case of Bangladesh, despite the timetable of quota withdrawal being known for quite some time. It may be pertinent to mention here that about two years ago, a longish article written by this author and published in Financial Express, analysed the possible scenario for our RMG industry and indicated certain preparatory courses of action to strengthen its performance and potential.

Global perspective
The restructuring and renewal of linkages in the basic manufacturing industry relating to textiles and clothing and their global exports/imports would be a huge phenomenon as this sector employs at least 40 million workers worldwide and generates trade worth more than $350 billion a year. More than 30 countries' exports are controlled by quotas.

Among the potential losers in gaining access to the US market when the MFA quota ends, Bangladesh falls from the present 4 percent to 2 percent. Similarly, Indonesia and the Philippines go from 4 percent to 2 percent, Mexico from10 percent to 3 percent, rest of Americas from 16 percent to 5 percent. The potential winners include by a wide margin China from the current 16 percent of the US market to 50 percent in the post-quota, free trade regime from 2005. India is also anticipated to push its share from the present 4 percent to 15 percent from 2005.

The foremost country to gain is predicted to be China. It is to be specially noted that in many areas of manufacturing sector, clothing in particular, its efficient, large-scale production and low costs are the factors that give it a decisive advantage.

Experts say that there should be a huge shift in demand in favour of China, even to the extent that the strong demand once the quota ends may swamp China's production capacity. As mentioned earlier China is expected to garner 50 percent of the US market, increasing from its already impressive share since it joined the WTO in 2001. Later China's strategy and performance will be analysed in some detail, as a possible study in success that our RMG industry could learn from. Some comments on India's prospects to almost quadruple the present share of 4 percent, will also be helpful for Bangladesh to improve her performance.

In Bangladesh, RMG accounts for almost 75 percent of merchandise exports and generates an amazing 3 million jobs. Overall earnings annually have gone beyond $4.8 billion. More significantly, RMG industry has touched on the socio-demographic parameters so effectively in terms of female employment, with all its concomitant benefits that are well known. It is more perhaps for the latter reason Bangladesh must seek to retain, and indeed build upon, the production-export performance in this vital sector, in spite the daunting challenges that MFA quotas withdrawal pose.

Rich economies such as the EU, where 2.7 million people work in clothing and textiles, are also facing these challenges. Employment in this sector in Britain and in Germany is expected to fall 16 and 13 percent respectively. Even the US garment trade is lobbying hard with the Bush administration to ensure protection against China. However, they may have recourse to "special provisions" and "safeguard restrictions" to give support to their own industries while the smaller producers and exporters will be unable to stand up to the rigours of intense free competition to enter the larger markets.

Bangladesh and Mauritius have campaigned to get the MFA extended, while protectionist US and EU industry lobbies have joined respective legislative authorities to fight to preserve the barriers.

However, these moves apparently have come too late, experts believe. Even the Mauritius request for a formal emergency WTO meet to consider the issue on behalf of the adversely affected smaller, vulnerable countries, may not produce any significant move. A WTO agreement to extend MFA beyond January 2005 seems unlikely, because all its148 members have to approve it.

The rationale for removal of protectionist barriers allowing freer trade comes from the fact that severe distortion to trade and production on the basis of comparative advantages and factor endowments, puts enormous cost on western consumers and developing economies in general. World Bank and IMF say barriers to textile and clothing trade have reduced world income by $137 billion annually. They also estimate the cost to developing countries at $40 billion in the lost export revenues and 27 million jobs are gone -- or 35 jobs for every job saved in the rich nations.

Despite such a scenario that led to MFA's proudest achievement in the Uruguay round to secure a commitment to its removal, in practice, the system did suit many poor nations who were shielded from stronger competition. China and India are poised to grab the lion's share of the world markets where US textile producers are now frantically lobbying for a bill to guarantee a fixed share of the US textile and clothing markets due to the imminent end of a quota system that protected them over the last 4 decades. In 2002, Uruguay Round agreement saw US release 29 categories of clothing from quotas. China's share in those very categories rose from 9 percent to 65 percent and China dropped prices by an average of 48 percent. The losers are not only the US companies but all others that export to the US. The fear in 2005 is that situation will be magnified by 100 times, as predicted by Amtac, the actions coalition of US manufacturers.

In Brussels last June, 47 countries' textiles and clothing associations, including Bangladesh, Cambodia, and Turkey called for a 3 year extension of quotas and an emergency meeting of WTO to identify solutions to the crisis when the quotas end. Mauritius has made a formal request that the WTO convene such a meeting. Large US apparel makers Kellwood and Levy Strauss have now adopted global strategies moving lower wage jobs to Mexico or Central America which enjoy tariff free access to US markets. US Commerce Department will be making a decision on restricting imports (starting with socks) from China. Reports also claim that it is hard to compete with China when the wages there are so low and worker protection almost non-existent and that if no action is taken by the US government, 60-70 percent of US textile industry will disappear before the end of the decade.

There is a huge pressure of expectation of falling prices of all the clothing textile items barring a very few very top range products. The questions how much less and how quickly so, could prevent extensions of quota very much beyond this year end. Retailers will source their supplies from the best and most productive sources in a small group of countries. And competition will force them to pass on the price benefits to consumers. Merrill Lynch analysts predict that "the end of quotas is likely to exacerbate deflationary pressures." Gap's choice of suppliers (maybe true with other retailers) would come down to not only price, but to scale, quality, innovation and respect for international labour standards.

That and also whether China would devalue its currency and adopt safeguard measures on its imports, might prevent her from the kind of dominance as predicted. In Prof. Gary Ciereff's (of Duke University) view, "ultimately China and half a dozen or so countries, including India, Pakistan, Vietnam, Indonesia and Bangladesh as well as Mexico and one or two from Central America , are likely to supply virtually all American clothing."

Retailers are raring to import from only a handful of countries guaranteeing high quality, low price, assured flow of supplies with efficient adaptability, and so on. Consumers in the West would also welcome a sharp fall in prices of these products. And hence, promote further the free, unhindered trade worldwide. The US importers' association expects its members to buy most of their needs from only five or six countries by 2007 instead of about 50 sources they use now.

Threats from China and India
Interestingly, their choice starts with China, followed by India, with a large vertically-integrated industry, and Pakistan. China does not compete just on price, indeed it is not always the lowest cost producer in some clothing categories. It needs be noted that the US, EU and other large consumer markets put a premium on China's rapid response, reliability, and business-like attitude and keen understanding of customer demand. Analysts are also prompt to point out that China will continue to face many political and commercial hurdles in the coming years.

One, China's WTO accession agreement entitles other countries to reimpose quotas on its exports until 2008. The US has already activated some curbs on Chinese clothing products in addition to the well known anti-dumping measures against China by many of her trading partners. It is expected that the US Congress would sympathise with the internal industry lobby and impose further temporary restrictions, especially due to this year's presidential elections, generating quite a lot of lobby pressures.

Second, there are good possibilities that western protectionist lobbies would seek to use eco-labelling schemes, labour standard rules, and other regulatory devices to prevent the onrush of Chinese imports. India and several other countries will cash in on these restrictions to enlarge their exports. Third, many importers plan to hedge their bets by sourcing supplies from other countries as well. Fourth, steep tariffs would be used to protect markets from imports. From 12 percent in the EU to a massive 33 percent in the US, and still higher elsewhere, exporters need to be very highly price competitive to have any sizeable entry.

Indian garment manufacturers are preparing for the unprecedented increase in demand for items like trousers, women's outfits, etc. previously in the barred categories for India, with the end of the textile quota system. India is billed to be the biggest beneficiary after China. McKinsey and DHL's recent report indicated India's textile and government exports could double to go up to $30 billion by 2013. In preparation, India's textile and clothing industry plans to invest about $2 billion over the next year to expand capacity to meet the US and EU buyers' demand, which will be consolidated in orders among several large suppliers, as quotas for small countries disappear. India is aiming at more flexible labour laws linked to productivity and restructuring factories without strike threats. Infrastructures such as adequate port facilities, power supplies, as well as higher prices of cotton and high interest rates are some of the major problems areas that Indian authorities are urgently focussing on.

Actionable lessons for Bangladesh
However, one route for tackling to some extent the China and India threat in the post-quota period is the special groups' preferential treatment. Bangladesh must use the LDC platform more actively with an urgent and highly articulate call for such concessions and special treatment for at least a 5-year transition/adjustment period from 2005. An effective and continued lobbying with all the arguments, facts and figures regarding the brutal impact on LDC economies forcing them to go the wrong way should mounted in all seriousness. There will be a huge fund of sympathy for Bangladesh and other moderate states with democratic governance, trust and partnership in ensuring a safe and secure global arrangement under US leadership.

All the above, and many other factors, represent opportunities for small RMG exporting countries like ours, and to exploit them profitably we need to move fast. Some developing nations have already activated their survival buttons. Mauritius has launched government-backed programmes to prepare clothing producers for upcoming competition and create new jobs for displaced workers. Thailand, a leading silk producer, aims to become an important Asian fashion centre by developing new designs and skills and marketing with linkage set up with globally recognised names. Cambodia is highlighting its industry's full compliance with international labour standards.

All these efforts, however, do not presume in any manner that there is a rosy scenario ahead -- far from it, indeed a hugely difficult task lies ahead for all these countries. Even if there is a significant closing of gap say between China's productivity and service standards and those in Bangladesh, that would not be enough unless (and these facilities are always under continuous threat and breakdown in Bangladesh) the access to dependable infrastructure, including transport, shipping and so on, to get the manufactured goods to market on schedule and on advanced telecommunications to link the importers/buyers and the exporters/sellers on a day to day basis.

Syed Muhammad Hussain is a former Secretary and Ambassador.