REGIONAL WORKSHOP ON TRADE CAPACITY BUILDING & PRIVATE SECTOR DEVELOPMENT PHNOM PENH CAMBODIA 2 .

DECEMBER
n d

2003

Lyn Fernando

1

THE GARMENT INDUSTRY
• THE CHALLENGES IN THE GARMENT INDUSTRY FOLLOWING THE PHASE OUT OF THE QUOTA SYSTEM • PRIVATE – PUBLIC PARTNERSHIP TO OVERCOME THE CHALLENGES

Effects of the MFA
 MFA INTRODUCED IN 1974 TO REGULATE THE
TRADE IN TEXTILES & CLOTHING

 Asia became the world’s foremost exporter of apparel.  Many developing countries embarked on the garment
country in search of quotas

industry using quota as an instrument for market access.

 Buyers were compelled to move from country to

SUCCESS OF ASIAN COUNTRIES
• SRI LANKA – Garment exports account for over 52% of exports. Over 1 million employed out of 6.5 Million. Only 20% knit fabrics but fair quantity of Accessories made locally • CAMBODIA – Garment exports account for 85% of exports. All fabrics & large quantity of accessories imported. • BANGLADESH – Garment exports represent 75% of exports. 80% Knit & 20% woven fabrics now produced locally • PAKISTAN- Garment exports represents over 67% of total exports but similar to INDIA – Have invested large sums in modern fabric mills – Have the capacity to specialize in cotton based fabrics & garments

New Rules of Trade
 The Uruguay Round starting in 1986 finally came into
effect in 1995 in Geneva.

 It was decided that Textile and Apparel have to be

integrated into the mainstream by removal of all quotas over a 10 year phase out.

Agreement on Textiles and Clothing
 ATC lays down the modality of phasing out the
MFA over a period of 10 years.  Total elimination of quotas would be done in four stages  Three stages have been already completed.  The fourth stage is due on Dec. 31, 2004 where all the popular or ‘hot’ categories will be phased out.

4-Stage Phase out of MFA
MFA
Restricted textile Trade due to quotas

Phase-out in 4 stages

WTO
Free world trade

1
January 1995
Integration’s of at Least 16% of the import volume of 1990 for textiles and clothing

2
January 1998
Integration of another 17% of the 1990 Import volume

3
January 2002
Integration of another 18%

4
January 2005
Total integration of textile and clothing all

Assumptions on ATC
 The movement of industry from the developed to the
developing countries will continue  The greatest relocation would be from one developing country to another  The MFA guaranteed a market for a wide range of poorer countries even though they were not competitive

Assumptions on ATC

(cont’d)

Without MFA there will be a concentration of the industry in countries with inherent advantages: Availability of fabric  Infrastructure for Marketing and Transport  Low Wages  Favorable Trading Terms  Proximity to the Market

Marginal countries will be squeezed out

The Question is not….
Whether there will be change, the Question is whether the change will be :

A Sudden Collapse
or

Slow and Somewhat Predictable

THE US MARKET

Lyn Fernando

11

REGIONAL TRADING BLOCKS (USA)
• NAFTA- The North American Free Trade Agreement - Result a growth in Textiles & Clothing in Mexico at the expense of Asia • CBI - The Caribbean Basin Initiative Result growth of Garment trade in the Caribbean at the expense of Asia • AGOA - The African Growth and Opportunities Act - Result Movement & Relocation of Factories to Africa

1980

2000

Continuation of MFA Signing of NAFTA Signing of CBI

1980 Apparel Imports Far East into USA
82%

Far East 82%
Far East 35%
Others 5% I ndian Sub. 5% CBI 5%

Mexico 3%
Mexico 3%

Mexico 16% Other 12% I ndian Sub 14% CBI 23%

2000 Apparel Imports into USA

EUROPEAN UNION

TARIFFS
• Most tariffs on Garments to the Developed Countries are high. • EU has a tariff of 12.5% • USA varies between 0 - 30% • With increased competition a 1% tariff difference can loose a large order • Tariff concessions can be obtained bilaterally or multilaterally • Tariffs are on the basis of reciprocity

FREE TRADE AGREEMENTS
• Many countries are negotiating FTA’s with the USA. • The Tariff advantage could be relatively short term as many others strive to obtain better market access. • The USA has indicated total duty free by 2015 • The EU pursue the implementation of the Doha Agenda but have many agreements providing duty free access • New members States of the EU and their close proximity could also be a challenge

• WORKER ISSUES – Linking Trade to Labour rights Child Labour, Forced Labour, Health & Safety, Freedom of Association, Disciplinary Procedures, Working hours, Wages • FACTORY STANDARDS-Modern Factories, Latest Equipment & Technology, Proper Storage Facilities for Fabrics & Accessories • FACTORY AUDITS • NON TARIFF BARRIERS -ENVIRONMENTAL ISSUES, INTERLECTUAL PROPERTY & ANTI DUMPING

GLOBAL SOURCING PRINCIPLES

THE CHINA FACTOR

Lyn Fernando

19

The Agreement of T&C
The 3rd Phase of integration resulted in the following categories becoming ‘quota free’ for the whole world from 01 Jan 2002 :
239 – Infant and young children’s wear 350 – Cotton Robes/Man-made fibre Robes 349/649 – Cotton Bras/Man-made fiber Brassieres and other Foundation Garments 670 – Luggage 331/631 – Gloves & Mittens

Exports to the USA by UNITS
700 600 500
World Vs China/SL – Jan-Aug 01/ Jan-Aug 02

% Growth

400 300 200 100 0 -100 239 350/ 650 349/ 649 670 331/ 631

World Sri Lanka China

10 0 -10

Exports to the USA by FOB
World Vs China/SL – Jan-Aug 01/Jan-Aug 02

% Change

-20 -30 -40 -50 -60 -70 239 350/ 650 349/ 649 670 331/ 631

W orld Sri Lanka China

LESSONS FROM SRI LANKA
• Category 670 bags were made by a few foreign firms in Sri Lanka because of quota. In 2002 with quota free they could not compete and closed down • Categories 350/650 & 349/649 Intimate apparel – Robes & Bras. Sri Lanka supplies the high end of the market – branded goods and exports increased

Projected Chinese Control U.S. textile and apparel Import market

80% 60% 40% 20% 0% 2002 2003 2004 2005 13% 20% 22% 44%

71%

2006 ATMI

REGIONAL CORPORATION & PROSPECTS
• Can the Asian Countries that do not have a fabric base secure their requirements in future? • Why should China supply fabrics when they can add value domestically? • The SAARC countries – India & Pakistan have large cotton cultivation's & modern textile mills. • ASEAN countries produce competitively priced textile. Can they be used regionally? • Should countries specialize in products?

PRIVATE-PUBLIC PARTNERSHIP
• Prepare a strategy- where you want to be in 5 yrs • 80/20 rule. 20% account for 80% of exports. • Large firms – 20% should take the lead as the critical mass is important • Improve the Enabling EnvironmentCost of Utilities, Transaction Costs, Regional Corporation, Market Access, Image Building, Labour Laws

PRIVATE – PUBLIC PARTNERSHIP
• Supply Chain Management –Sourcing 60% or more consists of fabrics & another 10-15% on Accessories • Benchmarking – at firm level. The FIT- an ITC tool to benchmark domestically, Internationally or with Buyers requirements • Human Resource Development – Skills development at all levels • Forward Integration & Marketing- A more focused approach to harness the resources of the public & private sectors in Marketing

Apparel Products Value Chain
By Lyn Fernando

Lack of Facilities to design,make,stock,& supply on credit Proximity to market

Buyer (Retailer) 100%

-Lack contacts/ Retailer.

of Direct Access to

-Long lead time Selling & Distribution (Agents) - Cost of Agents Proximity to market, regular sailings -sea & Air. Electronic Data Interchange for documentation Lack of Advanced Manufacturing Technology Dependency on imported raw material, long lead times,delays at customs, documentation, EDI

Need to develop strong networks & lobby groups. Free Trade Agreements, concessionary tariffs

Social Compliance Buyers /ETI Codes Labor Standards. Modern factories Good on time Delivery Records Educated & Trainable Workforce Manufacturing Quality products Availability of basic fabrics & accessories locally

Outbound logistics

• High Cost Structure ( Labour, Utility) Wastage use of CAD/CAM • Labor Laws, Invest in Human Resources • Lack of Management • Proximity Suppliers •High energy cost Lack of Specialty fabrics & Accessories Skilled

Manufacturing (cut, sew & finishing)FOB 10-25% of Retail

•Low productivity, to

Raw materials /Accessories –40-70% of FOB Sourcing Product Development

Non availability of advanced product development facilities Lack of design capabilities

Design

FIRM LEVEL STRATEGIES
• From Family Business to Professionally Managed Business • Product Specialization and Finding niche markets • Closer links with Buyers & Markets • Continuous Improvement & Investment * At Factory Level * Staff Training * New Machinery & Technology

THE FUTURE
• Unpredictable- an uncertain world • How will China perform as a member of the WTO ? • What will happen to China’s domestic market ? • Growth potential of India & China with huge internal markets • Post 2005 could be an opportunity not a problem. A challenge requiring action

THANK YOU
Lyn Fernando

31

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