chapter  7
42 Pages

The multi- fibre arrangement and South Asia

ByMAUSUMI KAR, SAIBAL KAR

High degrees of economic transactions within the South vis-à-vis those between North and South countries was long described as the ‘flight of the chicken’ – one that is always promising, but failing to materialize. The reasons behind this observed trend, naturally eclectic, have been discussed in various ways. Among these however, the lack of intra-industry trade was considered reasonably potent in explaining why the North-South interactions are still overwhelmingly important. Differences in production technologies, according to the Heckscher-OhlinRicardo model of trade (1995 for APEC region and so on) or imperfect competition à la Krugman (1980, 1981), provide strong grounds for intraindustry trade, and yet smaller domestic markets and other institutional barriers did not allow these to successfully explain intra-South trade in goods. In more recent times, however, there has been a significant growth in the flow of goods and services within the countries of the South, mainly owing to the benefits of globalization reaching large masses in the South. What we argue in this chapter is that certain changes, ushered in with regime shifts in the WTO policies, have caused to bring the South countries closer through competition than they ever were. With regard to such exogenous policy shifts we shall invoke the wellknown Multi-Fibre Arrangement (henceforth, MFA) in clothing and textile and its slow phasing out over a period of ten years. For a large number of Asian countries that traditionally enjoyed high comparative advantages in the production of these commodities, the demise of the MFA brought in varied and significant economic changes. This chapter traces the impact of MFA withdrawal for a handful of Asian countries and reflects on the implications for the global South. Although much has been written on the role of MFA and its implications, a cross-country analysis of the nature, as the one developed here, is not yet available in the current literature. The focal point of this analysis is the state of competitiveness for India in the manufacturing of textiles and clothing vis-à-vis other Asian exporters. As we have already mentioned, choice of textile and clothing sector is an outcome of the importance it carries for India and competing Asian countries. For India, in particular, it is the largest industry as well as the largest net foreign exchange

earner. The contribution of this industry to the gross export earnings of India is over 20 per cent, while it adds only 2-3 per cent to the gross import bill. Between the textile and apparel industries, it is the apparel (clothing) industry, which is of a more recent origin and primarily produces exportable items. Second, in spite of being the largest net foreign exchange earning sector in India the industry’s share in world exports of textile and apparel is still quite low when compared to other countries, such as the Asian Giants; South Korea, Singapore and Hong Kong. Not surprisingly then, export promotion policies in India strongly support this sector, which in recent times has become quite sensitive to the changing of the global economic order and newly adopted rules. In analysing the impacts, we must keep in mind that the Agreement on Textiles and Clothing (henceforth, ATC) ensured the dismantling of only quotas on textile and apparel items, while tariff on these items were not abolished.5 The MFA provided a framework under which developed countries imposed quotas on exports of textiles and apparel from developing countries. These quotas were typically applied on a bilateral basis and were product-specific as defined by fibre and functionality. This allowed discrimination not only against specific fibres and products but also among exporting countries. The exporting countries’ governments administered the MFA export quotas, which were allocated to them based on predetermined criteria.6 This iniquitous system of quotas thus violated all the fundamental principles of the multilateral trading system, and discriminated against the poorest countries and those seeking to move up from a reliance on primary commodities to manufacturing. Hence, it is important to note as a starting point that despite removal of the MFA, trade in clothing and textile would still not be entirely free, but merely ‘quota free’. In addition, in the presence of political equations in an increasingly complicated world of multilateral negotiations, the extent of compliance with the ATC on the part of importing countries remains unclear. This impending reality brings the issue of competitiveness to the fore for all countries including India. In fact, as we shall observe in the following sections, the changes give rise to a make or break proposition in which some Asian countries will do much better than the rest. This should additionally serve to empirically verify a recent proposition that quotas can function as a competitive device. This stands contradictory to the accepted wisdom that quotas are anti-competitive in nature. Marjit et al. (2009) have argued that the entry of China in the WTO and the removal of the MFA shall work against the interest of many smaller countries in the South. The scale of production or sheer efficiency of Chinese manufacturers would negatively affect the erstwhile quota protected market shares of a large number of countries and might lead to a monopoly outcome. However, as long as the monopoly price set by a large exporting country remains below the import competing price in the importing countries, gains from trade via removal of quota at destinations still improve. Note that, between the North and the South the results are likely to be asymmetric. With India at the core of our analysis, we intend to see if a withdrawal of the MFA actually brings forth more competition or drives monopoly concentration within a host of Asian countries.