How Have Other LDCs Fared Against China Post MFA?

The phasing out of the voluntary export restraint (VER) known as the multi-fibre agreement (MFA) imposed by developed countries on textile exports from developing countries was thought to be potentially disastrous for countries in export competition with China. Indeed, the so-called bra wars between the EU and China over the sudden glut of Chinese textile exports is evidence of China's unleashed capabilities after the removal of the MFA. Justifiable fears have been raised by other LDCs which do not have the same manufacturing prowess as China about being literally killed off in global textile markets by the PRC juggernaut.

Interestingly, I was reading the 2008 Global Economic Prospects publication of the World Bank which has a box section (page xlviii, Box 1.1) on the topic. How have other textile exporting LDCs fared post-MFA vis-a-vis China? Has China overwhelmed everyone else? While others have not done particularly well, some of the more doom-laden prognostications have failed to materialize. Bangladesh, for instance, has actually increased its textile exports in the post-MFA period. This topic is sufficiently important that I am including the section in its entirety:

The system of quantitative restrictions that managed rich countries’ imports of textiles and clothing from developing countries for 30 years, especially those produced in China and India (the Multi-Fiber Arrangement), was finally dismantled at the end of 2004, although restrictions for a number of categories of Chinese textile and clothing exports to the EU and the United States remained because of measures that are due to expire in 2008 [see the link above on the bra wars].

China’s exports of clothing soared 22 percent in 2005 and 32 percent in 2006, increasing its market share in those two years to 24 percent and 28 percent, respectively, but the impact on competitors has been less drastic than some had feared. The increase in the size of the world market for clothing has allowed exports from many other countries to grow, including the Arab Republic of Egypt, India, Peru, Sri Lanka, and Turkey. In Bangladesh, where 1 million jobs were predicted to be lost, exports to the EU and the United States gained continuously between 2004 and the first four months of 2007.

Nevertheless, some countries have seen declines in clothing exports that may entail substantial adjustment. For example, exports to the U.S. and EU markets from Brazil, the Dominican Republic, Swaziland, and Taiwan (China) declined substantially in 2005 and 2006. With the exception of Swaziland, clothing exports from these countries continued to decline into 2007. In addition, for Sub-Saharan Africa as a whole, where the end of the clothing sector had been foreseen, exports to the EU and the United States fell by 7 percent in 2004 and 17 percent in 2005 (on a trade weighted average). In 2006, Sub-Saharan African textile exports to the EU grew 3 percent, whereas exports to the United States declined by 6 percent. In 2007, to the extent that data are available, Sub-Saharan African textile exports to both the EU and the United States grew by 7 and 2 percent, respectively. A number of countries, including Madagascar, Mauritius, and Swaziland, managed to reverse an initial decline in clothing exports and return to growth in 2006 or early 2007.

How vulnerable are other countries when the final restrictions on Chinese textile and clothing exports to the EU and the United States expire? In 2006, 19 percent of Chinese exports to the EU and 20 percent of exports to the United States were subject to quota restrictions, and exports of these products will likely grow significantly after removal of the quotas. In the EU market, Colombia, the Dominican Republic, Mauritius, Peru, and Sri Lanka appear to be most at risk with more than 40 percent of their 2006 exports in product categories for which China is currently still subject to quotas. For other countries, the ratio is between 20 and 40 percent, and for Sub-Saharan Africa as a whole stands at 51 percent, mainly driven by the high exposure of Mauritius (74 percent). In the U.S. market, exposure is generally lower: only the Dominican Republic, India, and Sri Lanka export more than 20 percent of their textiles and clothing in categories where Chinese exports are currently subject to quotas. For most other countries, the ratio is between 5 and 20 percent. However, looking at the impact of the elimination of Multi-Fiber Arrangement quotas in 2004, many competitors managed to defend their market shares in recent years, and they might be able to do so in 2008 as well.

The clothing sector still provides an opportunity for export diversification and the expansion of manufactured exports for low-wage countries, even in the face of unfettered competition from China. The countries best able to expand their exports of clothing will be those that have a supportive business environment, low trade costs (efficient customs, ports, and transport infrastructure), and competitive firms that are flexible enough to meet the changing demands of the global buyers that now dominate the industry.

At the same time, significant adjustment pressures may arise as more efficient firms expand, while those unable to compete in the global market decline. In the absence of other employment opportunities, especially for women, workers made redundant from the textile and clothing sector may fall back into poverty. Minimizing the costs incurred by released workers and their families and facilitating their adjustment into alternative employment will be a major challenge for a number of developing countries.