Title

“An investigation into textile and clothing industry in Turkey: The possible effects of the expiry of textile quotas”.

Name of researcher
Ali Umut KANSU

Name of Supervisor
Nigel GRIMWADE

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Abstract:
On 1 January 2005 international trade in textile and clothing became quota-free after being regulated more than 40 years. It is believed that this cancellation will lead significant changes on the global textile and clothing trade. It is also found that the Turkish textile and clothing manufacturers have been quite successful in enhancing their competitive position in major markets namely, in the EU and US. However, this cancellation would transform the competitive conditions in this particular market. In this context, this report reviews the working papers, articles, news, and discussions in order to investigate the recent situation of textile and clothing industry in Turkey and to find out the possible effects of the expiry of quotas. The Turkish textile and clothing manufacturers that earn almost 40% of export revenue should prepare themselves both financially and strategically for these changes to protect their existing situation in major markets.

Key Words:

Textile and Clothing, Turkey, Effects of expiry of quotas.

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Table of Contents:
Abstract-----------------------------------------------------------------------------1

Research Brief---------------------------------------------------------------------3

Research Aims and Objectives-------------------------------------------------5 Research Questions---------------------------------------------------------------6

Research Methodology-----------------------------------------------------------7 Research Design-----------------------------------------------------------7 Data Collection------------------------------------------------------------7

Research Plan and Time Schedule----------------------------------------------9

Resources---------------------------------------------------------------------------10

Possible Outcomes----------------------------------------------------------------10

Literature Review-----------------------------------------------------------------10

References------------------------------------------------------------------------16

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Research Brief
Textile and clothing sectors constitute the greatest dynamics of unqualified manufacturing sector and helps developing countries eliminate the chain of poverty. These sectors are regarded as the first starting point among the unofficial sector, which is characterized with unqualified human power, insufficient employment, low levels of education, minimum wages, discrimination, and bad treatments to the employers. Moreover, areas such as textile and clothing provide opportunities for the different levels of the society such as women, and children who have more limited choices (http://www.b2bturkishtextile.com/preface.htm) Technological evolvements in recent years have raised international trade and have helped developing countries gain competitive advantages in the global markets by reinforcing their technological infrastructure. In relation to this, increasing relations among countries led

restrictions to be moderately removed. Textile and Clothing industries constitute a great part of international trade, particularly within developing countries. Moreover, the Textile and Clothing industries have played a considerable role in the early industrialization process of almost all countries. The existence of quotas in international textile and clothing sector provide a significant advantage to those countries making textile and clothing export from competition and allows them participate in international trade. However, the quotas on textile and clothing, which were accepted with Uruguay Rounds, were eliminated for WTO member countries with the agreement on Textile and Clothing (ATC) on the date of 1 January 2005. In other words, the multi Fibers Agreement has been eliminated as of the given date and ATC (Agreement on Textiles and Clothing) of WTO took its place. In relation to this, international producers, including the ones having lowest wages will have to modify their production methods and wages in order to comply with international standards and the ones

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who cannot meet these standards will be faced with severe dangers such as decreasing sales and market share. Many people believe that there will be significant changes on the global textile and clothing trade. The manufacturers particularly within the developing countries will find themselves in a strict competition, which will be related to finding the formula of having competitive advantage. It is also predicted by the representatives of Textile and Clothing industry in USA that the expiry of quotas will lead local clothing industry to die, especially after China’s joining WTO. By joining WTO in December 2001, China begun to benefit from implementations including the elimination of quotas in textile and clothes sectors. According to a research made by World Bank on the participation of China to WTO, it has been determined that China can have 50% of textile and clothes market in the world as of 2005. Moreover, the goods of China, which are very difficult to compete with, may lead prices to decrease in the markets they enter particularly after 2005. (http://www.b2bturkishtextile.com/preface.htm) For some countries, such as Turkey, textile industry forms a major income resource and constitutes a great role in generating employment. In fact, according to the United Nations Economic Commission for Europe UNECE (2003) textile and tourism are the leading economic sectors in Turkey. Despite the fact that Turkey, whose importance of which is constantly raising for the textile and clothing industry will not be decreasing their exports with the expiry of quotas, they may not be able to maintain their current prices due to compete with China’s low prices. Another major problem that Turkey may face is the labor cost compare to China. Although labor cost in Turkey is lower than that in Eastern Europe, they are three times higher than China’s. But its proximity to the key Western European market as well as the vertical integration of the industry and the well-equipped production are still its advantage. Besides, the tariff-free access to the EU constitutes another significant advantage. However, the quota-free entrance to EU market with

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the cancellation of quotas may cause Turkey no longer have these advantages over its Asian competitors. Investigating into the recent situation of Turkish textile and clothing industry and possible effects of the expiry of textile quotas on Turkey could therefore contribute to the present knowledge and investigation of the Turkish textile and clothing industry and also guide the textile companies for ensuring that they take the necessary measures in order not to be influenced by the expiry of quotas.

Research Aims & Objectives
With respect to the research brief, the aim of the following investigation is to find out the strengths and weaknesses of the Turkish textile and clothing industry by examining it in details and to develop strategies by investigating the possible effects of expiry of textile quotas. Objectives According to the research aim, the objectives of this investigation are mentioned as follows: 1- To study present secondary literature regarding key topics related to the aim including the study of available research results of past investigations of the same subject. 2- To conduct a research in order to identify the current situation of Turkish textile and clothing industry. 3- To examine the role of elimination of quotas in textile and clothing industry: possible impacts on textile and clothing industry. 4- To draw conclusions by applying the theoretical framework to the research results and develop appropriate strategies in order to overcome the threats which may possibly come from the expiry of quotas.

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Research Questions
Based on the research aims and objectives the following research questions shall be addressed by the investigation. 1- What is the recent situation of the Turkish textile and clothing industry? 2- What are the strength and weaknesses of Turkish textile and clothing industry? 3- What are the possible effects of the expiry of quotas in textile industry on Turkey? 4- What are the Turkish textile and clothing companies thinking in order not to be influenced by the expiry of quotas? What should they do? 5- Should Turkish companies focus mainly on quality?

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Research Methodology
Research Design
With respect to aims, objectives and research questions, the investigation is intended to be conducted as a case study approach. In a book of 1993 Robson defines case study as the ‘ development of detailed, intensive knowledge about a single ‘ case’, or a small number of related ‘cases’ and he also believes that this approach has considerable ability to generate answers to the question ‘why?’ as well as the ‘what?’ and ‘how?’ questions. (cited in Saunders 2000). In addition, in a book of 1991 Morris and Wood says ‘This strategy will be of particular interest to you if you wish to gain a rich understanding of the context of the research and the process being enacted’ (Saunders et al 2000)

Data Collection Justification The qualitative research is used as a case study method in order to: Gain depth information on current Turkish textile and clothing industry Identify possible effects of the expiry of quotas on Turkey Develop appropriate strategies for the future of the Turkish textile industry

Employed technique
I believe that qualitative research with both secondary and primary data will be providing a wide range of answering approaches and depth understanding about the current situation of Turkish Textile and Clothing industry and possible effects of the expiry of the quotas on Turkey’s Textile and Clothing industry. Therefore, both primary and secondary data will be exploited in this research. With regards to secondary data in which the recent situation and strength and weaknesses of Turkish textile and clothing industry will be investigated; well-known textile companies’ websites and reports from government institutions such as ‘Secretariat of Foreign Trade’, ‘State Institute of Statistics’, Ministry of Industry and Trade, Turkish Export Promotion

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Center, Istanbul Textile Exports Union etc. will be used to gather data. As for the primary data in which the possible effects of the expiry of quotas in textile industry on Turkey will be investigating; 10 depth interviews each of 20-25 minutes length with respondents who will be an expert or working as a high executive in textile industry will be conducted. The interview will consist of a list of themes and open-end questions in the form of an interview guide and will be record taped. I believe that with the use of interviews, I will be able to gather valid and reliable data that are relevant to my research questions and objectives. In order to get the relevant information, a designed interview guide will be required. The questions answered by interviewees may be a bit different because personal opinions are welcome during the interview process.

Thus, based on the information gathered by searching the literature thoroughly and the results obtained from the interviews, with recommendations and strategies, the conclusion of research will be drawn in the end.

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Research Plan and Time Scale
Plan: Study of secondary literature => qualitative research Month (2005) Weeks Task

- Review of secondary Literature and study of past investigations on similar March – midst of April 5-6 topics.

- Preparation for qualitative research Midst of April – End of May 5-6 (interview guide, acquiring of respondents).

- Test and conduction of qualitative research June 3-4 -Collecting and structuring of qualitative results

July – Beginning of August

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Analysis of qualitative data and start writing the dissertation

August – Beginning of September

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Final writing of dissertation

. Beginning of September Revision & Submission

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Resources
I will be using Notebook with Internet access in order to search for online Journals and other resources. Offline resources shall be provided by the Perry Library of LSBU and if necessary additional libraries in Turkey such as, OECD Library and Documentation Center which is located in both Ankara and Istanbul will be consulted. Also, as mentioned before, trade organizations and government institutions such as ‘Secretariat of Foreign Trade’, ‘State Institute of Statistics’, ‘Ministry of Industry and Trade’, ‘Turkish Export Promotion Center’, ‘Istanbul Textile Exports Union’ might be contacted regarding previous investigations.

Possible Outcomes
As mentioned in the research brief this investigation might contribute towards present investigations on the Turkish textile and clothing industry. Also, with the outcomes obtained regarding the possible effects of the expiry of quotas on Turkish textile and clothing industry, it might give the textile companies brief idea about possible effects of the expiry of quotas so that they can take preventions against the possible adverse effects or get ready for the prospects.

The Literature Review
In order to get a basic theoretical knowledge of the research problem, a broader survey of the literature relating to textile and clothing industry and quotas in Turkey and the possible effects of the expiry of quotas on Turkey’s textile and clothing industry should be conducted. The

research topic is about the textile and clothing industry in Turkey and possible effects of the expiry of textile quotas, therefore, an overlook at the key theories related to textile and clothing industry in Turkey and establishment and implementation of quotas as well as the effects on Turkey’s textile and clothing industry will be examined in relation to the objectives.

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Textile and clothing industry in Turkey

Textile is: …originally a woven fabric, but the terms textile and the plural textiles are now also applied to fibres, filaments and yarns. natural and manufactured, and most products for which these are a principal raw material (http://textile.texworld.com/informationcenter/texdefinitions/default.html)

The textile and clothing sector has been the largest manufacturing industry of the Turkish economy with a crucial role to play in the industrialization process and market orientation of the economy in the last two decades. Turkey's leading exports are textiles and clothing, followed by agricultural products, iron, steel and machinery. Followed by the US and Italy, its largest trading partner is Germany. Due to Chinese achievements through following policies of reform and trade openness, the Turkish government plans to set up special economic zones similar to the Chinese model, while also expanding trade with Mainland China. Turkish textile producers have recently joined with the American textile industry in a last-ditch effort to push for an extension on global textile quotas that are set to expire in 2005. The cancellation of these textile quotas will create a great advantage for Chinese textile industry which currently constitutes a third of the global trade in clothing and textile and possibly destructive to the exports of smaller, more inefficient countries who have used the protection of textiles as a way to get a foothold into the global market. However, the Agreement on Textiles and Clothing which is set to expire contains the clause that 'there shall be no extension of this Agreement so the prospects for this effort seem unpromising. (http://www.cid.harvard.edu/cidtrade/gov/turkeygov.html)

Turkey joined a customs union with the EU in 1995 and also entered into the Black Sea Economic Co-operation Organization (BSECO) with 10 of its other neighbors: Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, and Ukraine. In April 2003, the Turkish government agreed to begin negotiations with Iran on a preferential commerce

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system, whereby protection rates would be cut gradually over a transition period in accordance the Generalized System of Preferences (GSP) of the European Union. Turkey is also pursuing a trade agreement with Saudi Arabia, with the aim to increase exports of textiles and clothing (http://www.cid.harvard.edu/cidtrade/gov/turkeygov.html)

Turkish textile and clothing industry begun in the 1960s with small workshops and quickly developed and converted Turkey into a global competitor with its 40 thousand firms in the clothing industry that possessed a 3.4% global market share in clothing exports in 1999. With this export performance, the Turkish textile and clothing industry has taken a significant share in the world trade. The textile and clothing industry has a vital role in the Turkish economy and the Turkish exports. (Akalin 2001)

It accounts for; 5.5% of Turkish gross domestic product, 17.5% of industrial production, 19% of the manufacturing industry production, 21% of manufacturing labor force, 39% of total Turkish exports. There are 60 textile and 15 clothing company among the first 500 big establishments in Turkey. (http://ejt.marmara.edu.tr)

One of the most important factors that constitute the success of the Turkish textile and clothing industry in world market is having most of the raw materials needed. For instance, in cotton production, Turkey ranks as the 6th biggest producer in the world following USA, China, India, Pakistan and Uzbekistan with the rate of around 900 thousand tones. Besides, in terms of quality, some of the Turkish cotton types are among the top quality cottons of the world. Turkey has a powerful production capacity in raw materials such as yarn and fabric as well as cotton. Yarn production of Turkey was 670 thousand tones in 1998 in which 480 thousand tones were cotton and 85 thousand tones were wool and 105 thousand tones were synthetics. Moreover, the Turkish textile production capacity is supported by modern machines. For example, at the end of 1999 the Turkish yarn production capacity was 1.5 million tones, which was produced by mostly new machinery. (Akalin 2001)

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In addition, the relative cheaper labor cost compared with some rivals constitutes Turkey’s another significant advantage. One other important factor behind the success of the Turkish textile and clothing and clothing industry is the proximity, which becomes very crucial tool in the international trade.

WTO Agreement on Textiles and Clothing (ATC)
Quotas In order for small countries, which are relatively weaker in competition to take part in international trade, quotas are essential due to the fact that they provide economic and social benefits on issues such as foreign capital, structuralisation, transport, communication, infrastructure, employment, and foreign exchange income. If quotas had not restricted the export of efficient countries such as China, Korea, Turkey, India, and Indonesia, the market share of developing countries such as Nepal, Sri Lanka, Tunisia, and Morocco would be much lower. For example, when the market share of China out of quota goods was decreased by half in the years 1989-2001, the smaller developing countries increased their market share in USA.

General Agreement on Tariffs and Trade (GATT): The GATT is a multilateral agreement that was the predecessor to the World Trade Organization (WTO). It was established on a provisional basis in January 1948 as a framework for world trade disciplines, as well as for rules regarding employment, commodity agreements, restrictive business practices, international investment and services. (www.mekongcapital.com)

The GATT was later expanded to include anti-dumping provisions (the Kennedy Round, 1960s) and to develop a more extensive system for trade (the Tokyo Round, 1970s). In 1995, at the conclusion of the Uruguay Round, the GATT was succeeded by the WTO. As opposed to the

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temporary nature of the GATT as a multilateral agreement, the WTO is a permanent institution with its own secretariat. www.mekongcapital.com)

The Multi Fiber Agreement (MFA): The agreement was established in 1974, it exempts textile and clothing trade from the basic principles of the GATT, by allowing signatory countries to place quotas on imports of various textile and clothing products on a country-by-country basis, even though this is inconsistent with the principles of GATT. The MFA allowed two important exceptions from the fundamental principles of the GATT. First, it allowed for the use quotas; and second, it allowed restrictions to be targeted at individual countries, whereas GATT normally requires member countries to treat equally all trading partners who are also GATT signatories or WTO members. The MFA was planned to be a temporary, short-term arrangement, for manufacturers within developed countries to reconstruct and to adapt to competition from cheaper imports from developing countries. However, the MFA was renewed five times, until it was replaced by the ATC on 1 January 1995. (www.mekongcapital.com)

The Agreement on Textiles and Clothing (ATC): The ATC is an attempt to halt the continual extension of the MFA in the form of an incremental phase out plan, ending on 31 December 2004. After this date the textile and clothing sectors will no longer be regulated by a quota system. It is important to note the ATC only eliminates import quotas, and does not eliminate import tariffs. The ATC is a 10-year non-extendable agreement for the gradual integration of the textile and clothing sector into the WTO. All members of the WTO are subject to the ATC, regardless of whether or not they were signatories to the MFA, and only members of the WTO are entitled to the benefits of the ATC. Under the ATC, WTO members were required to gradually eliminate textile and clothing quotas in a series of four stages during 1995, 1998, 2002 and 2005. At the completion of the agreement, on 1 January 2005, all quotas must be eliminated, except for those under

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Transitional Safeguards. Therefore, by the end of ATC agreement on the date of 31 December 2004, apart from temporary safeguard measures, all quotas on textile and clothing trade among WTO members will be removed. . (www.mekongcapital.com)

The Textile Safeguard Mechanism There is a Textile Safeguard Mechanism, which will be applicable for 4 years, from 1 January 2005 through to 31 December 2008. This allows other WTO members to easily require quotas on garment imports from China that, due to market disruption, threaten to impede the orderly development of trade in textile and clothing. This safeguard mechanism is easy to apply and doesn’t even require the importing country to notify the WTO. . www.mekongcapital.com)

Possible effects of cancellation of quotas The Multi-Fiber Agreement (MFA) was created by the U.S. in 1974 to establish defined export quotas on all textile-manufacturing nations. The Agreement on Textiles and Clothing (ATC) will halt the continual extension of the MFA. This decision will have a tremendous impact on the global textile and apparel industry, which employs over 40 million people, most of them in underdeveloped countries, and generates trade volume of over $350 billion dollars annually. (http://www.businesslife.com/newsstand/bl_pastissues/2005/feb_mar05/dept_pacific.html)

According to the director of the PPI Project on Trade and Global Markets Edward Gresser (2004), “The abolition of textile quotas by the World Trade Organization (WTO) in January 2005 does not bode well for all developing countries. Although the lifting of textile quotas will be a much-awaited victory for developing countries against rich economies like the US and Europe, its benefits will be highly uneven. Come January, the 55 countries with quota limits on the number of textile goods they can export to the US will no longer be bound by such restrictive trade policy. This means that economic giants of the developing world, China and India, will be able to manufacture and export as many textile goods as they desire. As a result, some of the

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world’s smallest and least developed countries, like Nepal and Cambodia, will see their textile industries pushed out to the periphery. Middle-income countries like Mexico and Malaysia will also lose sales fast, while the fate of Muslim states like Bangladesh and Turkey is not yet clear.” (http://yaleglobal.yale.edu/display.article?id=4069)

When the quotas are eliminated in 2005, Ciftci (2002) believes that international manufacturers, including the ones having lowest wages, will have to create a sound framework for their production methods and wages in order to comply with international standards. And the producers who can’t meet these standards will make loss due to the decreasing sales and market share. The developing countries will compete strictly after 2005. But how will this competition be shaped? The situation after 2005 will be related to finding the formula of having competitive advantage.

According to the Heymann (2005), countries whose closeness had so far enabled them to function as the extended workbenches of their client regions will also feel the squeeze, as their main rivals are no longer subject to export restrictions. They include Mexico (for the US) and the nations of Eastern Europe, North Africa and Turkey (for the EU-15). Until the present time, these producer countries have benefited from access to neighbouring markets unencumbered by tariffs or quotas; at least the quota advantage will no longer exist in future. The countries cannot compete with China on wage costs or integration of the value chain. (Heymann, 2005)

Heymann (2005) also believes that after the removal of import quotas, EU’s most important supplier Turkey faces major challenges in terms of labor cost compare to China. Although there are positive points that Turkey has such as the vertical integration of the industry, production with modern machines and the customs union with EU, Turkey however will not be able to use its advantage over its Asian rivals after the quota-free market access to the EU from the

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beginning of 2005. Surely its closeness to the key Western European market is important. It enables fast deliveries to the point of sale for orders placed at short notice – an increasingly important factor in view of the ever shorter fashion cycles. As for the quality, Turkey also enjoys advantages over most of its rivals. However, when it comes to produce large volumes of standard goods it cannot score points against China. Turkey will experience a decline in its share of EU textile and clothing imports following after the end of ATC. A model calculation by the WTO came to the conclusion that Turkey will see a decline of around 3 percentage points in its share of EU-15 clothing imports – with China and India the main beneficiaries. Following China’s accession to the WTO, however, Turkey has been able to maintain its position as a clothing supplier to the established EU. The country is likely to concentrate more on quality, speed of delivery and design. It will also be at pains to reduce its own reliance on textile and clothing exports by diversifying the industry. In 2003 they amounted to nearly one-third of the country’s exports. In 1995, however, the figure was still 40%. The problem, however, is Turkey’s heavy dependency on the EU, as it generates negligible sales in the US and Japan (Heymann 2005).

As a summary, I believe that the textile and clothing industries will continue to play an important role in the near future as well. However, the textile and clothing industries will find themselves in an environment of increasing competition that will be much more strengthened with the elimination of quotas. Therefore, the Textile and Clothing industries in Turkey should pursue two aims simultaneously: i) they should enhance competitiveness of Textile and Clothing producers in foreign markets through improvements in productivity and specialization towards high value added products and activities, and ii) they should gradually transform the structure of the economy by diversifying towards other sectors.

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BIBLIOGRAPHY & REFERENCES
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BRYMAN A. and BELL E. (2003) Business Research Method Oxford, England: Oxford University Press

BUSINESS LIFE MAGAZINE (2005) Apparel Industry: An Asian Perspective. Online available at http://www.businesslife.com/newsstand/bl_pastissues/2005/feb_mar05/dept_pacific.html (accessed on 5 April 2005)

CAT (2002) Sustainable Development For Textile and Clothing Industry: From MFA to ATC 2005 (CIFTCI, H.A.) online Available at http://www.b2bturkishtextile.com/preface.htm (accessed 13 March 2005)

DEUTSCHE BANK RESEARCH (2005) WTO textile agreement now expired: China maturing into the world’s tailor. Online available at http://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000000184480.pdf. (accessed on 2nd April 2005)

ELECTRONIC JOURNAL OF TEXTILES: International Technologies Research and Development Centre: Online available at http://ejt.marmara.edu.tr (accessed on 21 March 2005)

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and

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MEKONG CAPITAL (2003) WTO Agreement on Textile and Clothing (ATC): Impact on Garment Manufacturing in Cambodia, Laos and Vietnam. Online available at http:// www.mekongcapital.com (accessed on 30 March 2005)

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