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The post MFA Era and New Trade Rules

The post MFA Era and New Trade Rules. ITGLWF / TWARO Post MFA meeting Bangkok 5-9 September By Esther Busser, ICFTU. Current developments. Workers in textiles and clothing industries are facing loss of orders, factory closures, legislative or organizational changes and job losses.

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The post MFA Era and New Trade Rules

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  1. The post MFA Era and New Trade Rules ITGLWF / TWARO Post MFA meeting Bangkok 5-9 September By Esther Busser, ICFTU

  2. Current developments • Workers in textiles and clothing industries are facing loss of orders, factory closures, legislative or organizational changes and job losses. • This is caused by a major change in the trading system for textiles and clothing • Called the MFA phase out

  3. MFA • The MFA (multi fibre agreement) of 1974 put in place a quota system, in which developed countries distributed quota to developing countries. • This MFA was meant to protect the developed country textiles and clothing industries and to prevent job losses • It led to spread of production and to part of the production being set up in smaller developing countries, to make use of the quota in place.

  4. MFA quotas • Quotas are limits put on the amount of imports in different categories of garments • For example knitted t-shirts, woven sweaters, gloves) • And textiles such as for example knitted fabric, acrylic yarn, cotton fabric

  5. MFA quotas • Textiles and clothing producing countries were assigned a maximum quantity that they could legally export to the developed country markets of the US, EU, Canada and Norway • Quotas differed per country and per product

  6. MFA quotas • Quotas led to spread of production • Some countries reached their quota and thus companies looked for countries that still had quota left: sourcing followed quotas • Garment industries were created in countries because of quota availability

  7. MFA quotas • Quotas came at a cost • Governments often sold quotas • Governments sold the right to export • In the US 15% of the garment cost is estimated to be due to the cost of quota rights

  8. MFA phase out • In 1994, at the end of the Uruguay Round, it was decided to phase out the quotas. • The Agreement on Textiles and Clothing (ATC) replaced the MFA in 1995 and established the conditions to phase out all quotas on textiles and clothing. • The phase out period was 10 years and took place in four phases • Developed countries phased out the most important and effective part of the quotas (49%) only in the last phase of the 10 year period. • That is why there is such an impact now

  9. WTO • One of the main WTO principles is trade liberalization • By eliminating the trade barriers • These barriers constitute extra costs • Another core principle is non-discrimination (MFN and national treatment) • And a third principle is the enhancement of competition

  10. Trading system • The trading system is subject to barriers • Countries protect themselves to imports from other countries in three ways • Through tariffs • Through quotas • Trough non tariff barriers (NTBs) • The quotas have now disappeared but other barriers remain

  11. Trade Barriers • Other barriers to trade are tariffs and Non tariff barriers • Examples of NTBs are technical requirements and packaging requirements or sanitary measures in the case of food products • Tariffs can be based on the quantity of goods exported or on the value of exported goods, and increases the price of the exported good in the market • US average tariff on textiles and clothing is 15% • EU average tariff on textiles and clothing is 12%

  12. Tariff preferences • Countries receive preferential access to the EU and US market through lower tariffs than the most favoured nation (MFN) tariff. • The MFN principle is important in the WTO • The EU offers the GSP (General System of Preferences) scheme (unilateral) and Cotonou • The US offers AGOA (the African Growth and Opportunity Act) and CBI (Caribbean Basin Initiative)

  13. EU GSP • The GSP provides tariff preferences on sensitive and non-sensitive goods • General preferences • Everything but Arms for LDCs • Special preferences (sustainable development scheme) (ratification of 27 conventions on labour, environment and human rights)

  14. EU GSP rules of origin • Strict rules of origin • Product is wholly obtained in the beneficiary country • Non-originating material should be “sufficiently” worked or processed in the beneficiary country • Bilateral and regional cumulation • Utilization rate determines whether the country uses the preferences

  15. EU GSP utilization rates • Moldova: 95% • Pakistan: 79% • India: 77% • Nepal: 70% • China: 62% • Indonesia: 56% • Vietnam: 56% • Sri Lanka: 33%

  16. US • CBI: Caribbean Basin Initiative: quota and duty free access for a number of garments and textile products • AGOA: African Growth and Opportunity Act • Quota and duty free market access for thousands of products to the US from approved African countries (37) with an emphasis on garments • Garments account for 5.9% of Sub-Saharan exports under AGOA, after oil products 69.6%

  17. Canada GSP • New rules of origin since 2003 • Duty free and quota free access for textiles and clothing for LDCs with a 25% origin requirement • This has boosted LDC clothing exports • Particularly from Bangladesh and Cambodia

  18. Preference erosion • The preferences that developing countries receive at the moment are threatened by negotiations on tariff reductions, including on textiles and clothing • These negotiations are part of the Doha Development Round and are called NAMA negotiations

  19. NAMA negotiations • Non Agriculture Market Access • All products, including textiles, clothing and footwear • Negotiations for tariff reductions • Tariffs on textiles, clothing and footwear relatively high in the EU and US • Negotiations focused on steep tariff reductions

  20. Consequences • Access will be cheaper, less tariffs paid, so product will be cheaper • Advantageous for competitive countries • Disadvantageous for preference receiving countries i.e. those that managed to keep some market share due to preferential access, which makes their imports cheaper than those of main competitors

  21. Consequences • Can be disadvantageous for domestic industries • Reduces government revenue • Reduces national policy space

  22. NAMA negotiations • Tariff reduction formula, Swiss type or simple Swiss • Sectoral negotiations: including textiles, clothing and footwear • Zero tariffs • Informal negotiations • Tariff binding

  23. Tariff revenue as percentage of tax revenues • Bangladesh 22.6% • India 18.5% • Pakistan 12.2% • Philippines 17.2% • Sri Lanka 11.3% • Thailand 10.4% • Vietnam 18.1% • China 9.5%

  24. Average bound tariff levels • China 9.1% • Hong Kong 0.0% • India 34.3% • Indonesia 35.6% • Pakistan 35.3% • Philippines 23.4% • Thailand 24.2% • Bangladesh 42.9% • Sri Lanka 19.2%

  25. Tariff reduction with simple Swiss formula (coefficient 30)(simple average) • China approx. 7.5% • Hong Kong approx. 0.0% • India approx. 16% • Indonesia approx. 16% • Pakistan approx. 16% • Philippines approx. 13% • Thailand approx. 13% • Bangladesh approx. 17.5% • Sri Lanka approx. 12%

  26. Binding of tariffs • Bangladesh 3.0% • Nepal 99.3% • Maldives 96.7% • Sri Lanka 28.3% • Macao (China) 15.6%

  27. Safeguards • Safeguards can be applied to protect countries’ domestic industries against Chinese imports • Such safeguards can ease the effects of the phase out, as in particular Chinese exports cause distortions of the system at the moment • Safeguards can be found in the WTO accession documents of China, in the general safeguard provision of the WTO and in the WTO anti-dumping agreement

  28. Safeguards • The China WTO accession document contains provisions for safeguards • Art. 16 Accession Document (Protocol) provides for safeguards for all products • Para 242 of the Working Party report provides for safeguards on textiles and clothing

  29. Para 242 • To be applied in the case of market disruption due to Chinese imports of textiles and clothing • Consultations with China can take place on the basis of the existence or threat of market disruption and the role of Chinese products in that disruption • Consultations would be held within 30 days of receipt of the request • Upon receipt of the request, China will hold shipments in the relevant categories to a level no greater than 7.5% (6% for wool products) above the amount entered during the first 12 months of the most recent 14 months preceding the month in which the request was made.

  30. Para 242 • A consultation period of 90 days follows • If no agreement can be reached, the export limits in the relevant categories will remain • The export limits will be in place from the day of request till 30 December or (if less than 3 months remain) for a period of 12 months • No measures can be taken under Para 242 and art 16 of the Protocol at the same time

  31. Para 242 • Invoked by Turkey on 42 items since the beginning of this year • Argentina has the legal framework in place but has not invoked safeguards yet • Brazil considers safeguards • The EU and US have invoked them. The EU has reached an agreement with China during the consultation period • The South African trade unions have asked for a safeguard

  32. US safeguards • Surge in Chinese imports of textiles and apparel to the US of 47.95% over first three months of 2005 • Safeguards on 3 categories: cotton knit shirts and blouses, cotton trousers, and cotton and man-made fibre underwear. Increases in volume of over 1,000% • Four additional safeguards were invoked at the end May

  33. EU-China agreement • Formal consultations were launched with China in two of nine categories (t-shirts (187%) and flax yarn (56%)) under investigation in the EU • Have led to the displacement of exports from Morocco, Tunisia, Romania, Pakistan, Sri Lanka and Bangladesh

  34. EU-China agreement • 10 categories of Chinese textiles exports to the EU are limited to between 8 and 12.5% growth above a specified base period for the next three years • Import restrictions on the two categories (t-shirts and flax yarn) were dropped. • Categories include: cotton fabrics (71% increase), t-shirts (199%), flax yarn (55%), pullovers (530%), trousers (413%), blouses (256%), bed linen (158%), bras (110%), dresses (219%), table and kitchen linen (64%).

  35. EU-China agreement • Quantitative limits will last till the end of 2007, followed by a transition period • The EU might still apply safeguards on categories not covered by the agreement, however with restraint • The agreement will bring certainty and more time to adapt • The agreement will benefit developing countries that compete with China

  36. EU-China agreement • New discussions have emerged, as many Chinese goods have been held by customs • Retailers versus textiles and clothing producers in European countries • Goods will probably be unblocked

  37. General safeguard measure • Provides temporary protection to products and sectors that are seriously injured from import competition • This is subject to a number of procedures such as the determination of serious injury, consultations with affected trading partners and in some cases the payment of compensation • More complicated than the China accession safeguards

  38. Anti-dumping agreement • Governments are allowed to take action against dumping • They have to prove that there is dumping and that there is genuine injury to the domestic industry • They can then impose an import duty on the specific product from a particular country

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