Professional Documents
Culture Documents
I. Introduction
The history of the textiles and clothing is old as old as the necessity of the mankind to
protect itself from the cold and the climatic conditions. Trade is one of the most antique
human activities, and combines perfectly with textiles and clothing.
Historically, many reasons made this sector strategic for both developed and developing
countries. According to the WTO estimates, textile and clothing account for about 9.1
percent of world manufactured goods exports or of 6.5 percent of all merchandise
exports.
The textile and clothing industry is one whose production process is highly intensive in
unskilled labour. Since this is a factor with which developing countries are relatively
well-endowed, exports of textile and clothing products are argued to have been the
obvious choice for Third World countries in the drive to industrialise. Efforts under the
GATT to liberalize trade have always met with particular difficulties in textiles and
clothing. For more than thirty years, this sector was governed by special regimes: the
Short Term Cotton Arrangement in 1961, the Long Term Cotton Arrangement from 1962
to 1973, and the Multifibre Arrangement from 1974 to 1994. Since the early 1980s, the
developed world has placed increasingly restrictive protectionist measures against their
imports of textiles and apparel from developing countries under the auspices of the Multi-
Fibre Arrangement (MFA).
II. The History of Textile Trade & Origin of MFA
In 1959, a study was proposed in GATT to find a multilateral solution to the problem of
sharp increases in imports, over a brief period of time and in a narrow range of
commodities which can have serious economic, political and social repercussions in the
importing countries.
2.2 Need for MFA & how MFA came into being?
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As seen above, the developed countries suffered a great pressure in this sector from the
developing countries. Obviously such pressure needed to be regulated, and possibly
inside an international agreement accepted by the major importers and exporters. The
properly place for a debate was inside the GATT, where many of the countries involved
were represented. In June 1973, the Working Party became a negotiating group under the
purpose to reach a mutually satisfactory arrangement on trade in textiles by the end of
the 1973. The Agreement came into force the 1st January 1974 (GATT).
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negotiated on a country by country basis. The MFA did not apply to trade between rich
industrialized countries themselves.
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2.35 Some effects of MFA Regime
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6. Transparency and predictability
On the positive side, the MFA provided transparency as well as a degree of predictability
in textiles and clothing.
Even if the MFA was a multilateral agreement, it was composed of bilateral agreements
or unilateral actions establishing quotas. It was also far from the principles of the GATT.
In fact the quotas were a clear violation of GATT Article XI that prohibited quotas.
Moreover, MFA was in stark contrast with GATT Article I which talked about the non-
discriminatory clause. In fact, it was specified how much of each product the importing
country wanted to accept from individual exporting countries.
During the Uruguay Round, the decision was taken to phase out the MFA over a ten year
period, in order to bring trade in textiles and clothing gradually into line with the rest of
industrial trade under formal GATT rules and procedures. The MFA terminated on 31
December 1994 upon the entry into force of the WTO and its Agreement on Textiles and
Clothing on 1 January 1995.
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III. Integration of textiles and clothing into the GATT/WTO Agreement
The integration program of the Agreements on Textiles and Clothing (ATC) is based on
the assumption that the whole textile sector is not integrated in the GATT/WTO
Agreement at the beginning of the implementation. The scope of the integration is to
include also all the non-MFA members and the non-MFA restraints. The MFA members
have to follow the integration schedules, while the non-MFA members could chose to use
transitional safeguards measures and follow the same integration program of the MFA
members. If they do not wish to use safeguards they are asked to integrate their textiles
sector in one stroke.
The ATC provides that the MFA restrictions will be phased out in four stages over a ten-
year period. At every stage a certain amount expressed in percentage of the total import
volume of 1990 must be integrated, in respect of the Harmonised System (HS) lines in
the ATC Annex. The ATC Annex defines the product coverage, which comprises the
whole universe of textile products in Section XI of the HS code (excluding the fibres).
As soon as a product is integrated, it becomes subject to normal GATT rules, and the
transitional provisions of the agreement can not be invoked anymore. At the end of the
forth and last stage (1st Jan. 2005), all restrictions of this sector will be removed
overnight. At the beginning of the first stage, products accounting for not less than 16
percent of the total import volume of 1990 should be integrated, at the second 17 percent
and at the third 18 percent. At the end of the transition program, the remaining products
could count even up to 49 percent of the 1990 volumes imports
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The ATC abolish gradually the existing MFA bilateral agreements. All the restrictions of
bilateral agreements must be notified along with the average growth rates and flexibility
provisions. These restrictions will remain until the products are integrated in the
GATT/WTO, or when the agreement expires.
Also the unilateral measures are integrated and can be kept until the expiry date, but they
should be integrated within the integration program before the end of the first year of
existence of the ATC.
Each member can decide which products integrate and at which level, with the only
provision that they should come from each of the four groups: tops and yarns; fabrics;
made-up textile products; and clothing. It is the importing country to decide which
products integrate, not the TCB neither the exporting countries. This allows importing
countries to integrate those products that are not under restriction first. The ATC Annex
covers all the textile products, some of which were never restricted in any country.
The importing countries can decide to integrate products under quotas not filled. Also, the
percentage integration is based on volume and not on value of the imports.
There is no mention of the concept of Market disruption, which was the main provision
to not apply MFA rules. The mechanism of the safeguard measures operates when serious
damage has been caused by a sharp and substantial increase of imports from a particular
source. There is no mention of the low prices of the impugned imports.
The use of these measures is now allowed only when imports have caused serious
damage or there is an actual threat of causing serious damage. The provision of real risks
under the MFA was eliminated.
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The existence of serious damages must be seen under many prospects, such as output,
productivity, capacity utilisation, market shares, exports, wages, employment, domestic
prices, profits and investments.
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IV. Indian Textile Industry
British dumped
Use of their own goods. Labor-
printing Carpets in Destroyed Indian intensive
Mughal era Struggle
blocks industry policies GATT
for
500 BC Pre-colonization Independence 1990s
The Government of India (GOI) put numerous policies and regulations to ensure that
mechanization did not occur and that labor-intensive textiles were produced. However, in
following this ideological aim, the GOI did not realize the negative impacts in terms of
decreased productivity and reduced competitiveness: It provided favorable and protective
taxes and other regulations to the small-scale sector, as the GOI presumed that this sector
created more employment. Large-scale production was curtailed by restrictions on total
capacity and mechanization on mills. Strict labor regulations resulted in disincentives for
capital investment and high production costs. From the price side, the GOI cornered the
sector by imposing price restrictions. The more mechanized and the higher the capacity of
the textile producing company, both in terms of quantity and quality, the more it was
discriminated against by the GOI which used tax policies and other regulations to
sanction these practices. 1990 sounded a new era to India’s textile sector as the GOI came
to realize that efficiency and competitiveness were suffering under the numerous
regulatory burdens.
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This led to the relaxation of many of the constraints previously imposed on the textile
sector. Licensing was removed in the early 90`s by the Statement of Industrial Policy and
the Textile Development and Regulation Order. In 1995, India signed the General
Agreement of Tariffs and Trade bringing its liberalization policies to an international
level.
The Indian textile Industry is currently one of the largest and most important sectors in
the economy in terms of output, foreign exchange earnings and employment in India.
2002 2010
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About 77,000 small-scale units, including subcontractors
Clothing Only a few hundred units in the organised sector
The structure of the Indian textile industry is both complex and unique. It represents a
sharp contrast to the textile industry in other countries and can be characterized by
several aspects. First of all, it employs co-automated technology. A second characteristic
is the dualistic manufacturing structure dominated by a fast expanding decentralized or
unorganized small scale manufacturing segment and a declining, vertically-integrated,
large-scale composite mill segment. Furthermore the textile industry is dominated by
cotton as a primary raw material. A fourth characteristic is the existence of a large public
sector, which is composed mainly of nationalized and ‘sick’ mills that have been taken
over by the government. The last characteristic is the predominance of the small-scale
sector. This might be seen as a major advantage, for example, in comparison to China.
While the Indian textile companies are capable of producing very small amounts of cloths
for its clients, China is able to produce in large quantities only.
The second stage involves processing and garmenting of the fabric produced. India has a
major advantage in this segment, as this stage is highly labour intensive. As evident from
the graph below, labor cost as percentage of total cost in India is very low as compared to
other countries. Apart from cheap labour, India has skilled labour too, which also gives an
edge over other countries.
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The third stage can be recognised as branding and retailing of the garments produced.
This is the higher end of the textile chain, but it takes time for a brand to gain market
share. Indian textile majors have already started entering this segment but we believe the
process is time-consuming post the MFA scenario.
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Threat of new ENTRANTS
Economies of scale
High
V. Porter’s 5 Forces Analysis ofcapital investment
the Textile Industry
China’s entry into WTO
Increasing FTAs
10 more nations into EU
Industry
Competitors
Bargaining power of
Bargaining power of
SUPPLIERS
Developing Nations of BUYERS
Threat of SUBSTITUTES
Strengths
1. Abundant raw material availability allowing the industry to control costs and reduce
overall lead-times across the value chain. Given inconsistent quality, would the
industry be able to support large scale increases in volume?
2. Low cost skilled labour providing distinct competitive advantage for the industry.
Given the need for greater automation, how should the industry channelise the skill-
base?
3. Presence across the value-chain providing a competitive advantage when compared
to countries like Bangladesh, Sri Lanka who have developed primarily as garmenters.
Reduced lead times
o Manufacturing capacity present across the entire product range, enabling textile
companies and garmenters to source their material locally and reduce lead time.
Super Market
o Ability to satisfy customer requirements across multiple product grades – small
and large lot sizes, specialized process treatments etc.
How should the industry fully exploit this advantage?
4. Growing domestic market which would allow manufacturers to “mitigate risks”
while allowing them to build competitiveness
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Vibrant domestic market, enabling manufacturers to spread risks and overcome events
like 9/11
Very low per-capita consumption of textiles indicating significant potential for growth
Domestic market is extremely sensitive to fashion fads and this has resulted in the
development of a very responsive garment industry
How should the industry address the risk of international competition?
Weaknesses
1. Fragmented industry leading to lower ability to expand and emerge as world class
players
In fabric, large section of the industry is in the power loom and handloom sectors
Global buyers prefer to source their entire requirements from two to three vendors,
and Indian garmenters find it difficult to fulfill the capacity requirements
How should the industry organize capacities to meet global buyer expectations?
2. Historical Regulations though relaxed continue to be an impediment to global
competitiveness
The industry continues to be affected by several historical regulations. Eg: absence of
a viable exit option for industry players
These regulations resulted in a complex industry structure, which is currently an
impediment
o Pre-2000 garmenting was reserved for the SSI sector, which has resulted in most
units being set-up with small capacities
What does the industry/government need to do to speed up the reform process?
3. Lower cost competitiveness has hampered ability to compete with lower cost global
players
Labour force in India has a much lower productivity as compared to competing
countries like China, Sri Lank, etc.
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The Indian industry lacks adequate economies of scale and is therefore unable to
compete with China and other countries, etc.
Costs like indirect taxes, power and interest are relatively high
What would it take to build cost competitiveness?
4. Technology Obsolescence has resulted in the need for significant technology
investments to achieve world class quality
Large portion of the processing capacity is obsolete
While state of the art integrated textile mills exist, majority of the capacity lies
currently with the powerloom sector
How can larger players be incentivised to invest in modernization?
Opportunities
Threats
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Developed markets have seen extensive developments in the form of increased
consumer consciousness on issues such as usage of polluting dyes, usage of child
labour, unhealthy working conditions, etc.
Standards like SA 8000 have now started being implemented extensively in the
industry
This has resulted in increased pressure on companies to limit sourcing from
countries/companies known to have such practices
Could large Indian players make this a competitive advantage?
3. Regional alliances will continue to have a significant impact
Regional trade blocs play a significant role in the global garment industry with
countries enjoying concessional tariffs by virtue of being a member of such
blocs/alliances
There is a huge opportunity lying ahead for Indian textile manufacturers in post MFA era,
as the markets will no longer be restricted. But there will be competition from countries
like China, Sri Lanka, Bangladesh, in terms of cheap availability of products. But when it
comes to fashion trends, we believe Indian companies will have an advantage. As far as
cost competitiveness is concerned, the larger players in the Indian textile sector are well
placed to compete.
But the Indian textile sector has a long way to go to achieve a sustainable competitive
advantage. The industry is very fragmented and access of finance and technology has
been affecting growth prospects of the smaller manufacturers. In terms of technology and
the ability to produce products in the large-scale, we still lag behind others and to that
extent, investors to remember that there are only few companies in this league.
Impractical labour laws also restrict large players to lay off redundant workers to improve
competitiveness. Therefore, the risk profile of the sector is also higher, despite the growth
opportunity, on account of lack of control over input costs. Overall, it is a balanced
scenario and it remains to be seen how Indian companies tap this opportunity.
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Studying the orders that have been placed in the year 2005, we see that there is spurt in
demand from the big foreign retailers and the country's textile and apparel exports are
expected to grow by nearly 30 per cent in value terms during the next fiscal, according to
industry estimates. Two months into the textile quota phase-out, Indian textile suppliers
are emerging with a significant presence on the sourcing plan of major retailers in the US
and the European Union for the next couple of years. Wal-Mart, the world's biggest
retailer, plans to source $11-billion worth of textile merchandise, or about 5 per cent of its
requirements, from India over the next few years. JC Penney, which outsourced around
$500 million of textiles from India during the last financial year, plans to jack up the
sourcing to around $2 billion over next two years, according to industry sources. Players
are going for capacity additions, like Raymond has said that it would be investing Rs 100
crore in augmenting its denim capacity by 10 million metres per annum. However,
Chinese competition and curbs by US and EU may pose severe threat in post-MFA
period.
China is believed to be to make the most out of the post-quota regime. China has emerged
as a major player in the international markets by increasing its share from 6% (1985) to
15% (1995) and close to 29% (2001); expected to touch 43% by 2010. China is already
the largest exporter of textiles (16%) and apparel (23%) in the world -
The biggest producer of cotton and man-made fibres (25% of global fibre)
Has the largest spinning and weaving capacity in the world
The largest garment factories and the world's first supply chain cities
On the contrary, INDIA has barely 4% of the global textiles market and less than 3%
share of apparel.
Since the lifting of textile quotas at the beginning of this year, Chinese textile exports to
EU and the US have surged. In response, both the EU and the US have adopted measures
to limit Chinese textile imports. European imports of Indian textiles and clothing raised
an average of 10 per cent in the first quarter, following the worldwide lifting of quotas on
textile trade. In the previous five years, such imports were virtually flat. With China
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agreeing to slow some textile exports to Europe, European textile makers are targeting
India’s exports as the next biggest threat.
3. Investing in Modernization
Investment of Rs. 1,40,000 cr required across the value chain – ICMF Vision
Statement
4. Garment Driven Growth
We need to target a garment driven textile growth.
Several studies have shown that the per unit cost of production of garment in India is
much lower than most of the other production centres.
The industry also has a large and increasing domestic market to tap.
5. Flexible Labour Laws
Textiles as a whole and garments in particular are highly labour intensive.
Existing labour regime that protects the interests of the existing unproductive labour
at the expense of the huge unemployed workforce
Disruption of production should be specifically excluded from the workers’ rights;
there are several other options available for settling disputes.
Need a viable exit policy, since continued operation of a loss making unit is in
nobody’s interest
6. Human Resource Development
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Availability of trained workforce through textile education
International studies have shown that India has advantages in wages, but these are lost
in low productivity.
7. Marketing Brand India
Marketing needs to be strengthened
Strong marketing will lead to Branding
8. Being cost competitive
Prices need to be internationally competitive
International prices declining with quota-free access
Other competitors ahead in capital intensity, labour productivity and economies of
scale
Cost structure in India has so far been adverse due to high power tariff, poor
infrastructure, inflexible labour laws and fragmented production
India’s textile sector is currently poorly organized by virtually any standard. It will
probably succeed in being the major domestic provider for products for this market, but
will have a difficult time moving up the value chain to the international market. It appears
to be moving in the right direction for increased competitiveness on quality, management
practices, and eventually cost but it still has a long way to go before it catches its main
global competitors.
The Textile Industry in India has gone through significant changes in anticipation of
increased international competition. The industry has been forced to tailor products to
both the domestic and the international market which have traditionally been quite
different. The domestic market has huge potential but is also very price sensitive whereas
the international market tends to favor mass production while also emphasizing quality,
service rates to the Western world, and price of production. India has the ability to
compete on the global scale but it is losing market share to Asian countries that have
cheaper labor, better investment in machinery and capital, and better ocean transportation
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options for export to the U.S. While its market share has certainly increased over the last
decade, India still lags behind countries like China that have seen phenomenal growth in
recent years.
There are several areas where China enjoys a distinct advantage over India in a
manufacturing-type industry such as textiles. Perhaps the most noticeable advantage is
the difference in foreign direct investment (FDI), especially by Chinese nationals living
abroad. Furthermore, China has undergone significant trade reform in recent years,
especially in opening its market to foreign competitors and privatizing large government
agencies. This compares to the relative stagnation of outdated policies that better
describes India’s approach. And finally, it is simply much more efficient and cheaper for
goods to reach the U.S. from the port of Hong Kong and other China ports, versus from
India. However, India enjoys a similar comparative advantage for serving demand in the
European Union.
References
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