Abolition of QuotaA Zero Sum Game for the South Asian Textile

and Garment Industry ?

- Presented By:Rohan Manandhar

Akriti AcharyaAnnapurna SthapitSodhan Manandhar

Jargon we’ll Be Using

• Multi Fibre Agreement ( MFA )• Quota• Zero Sum Game

Multi Fibre Agreement

• International trade agreement• Canada, the US, and the European Union (EU)

setting the limits on fibre import from any specific producing country.

• To protect domestic industries in Europe and US.

• From 1974, applied to 73 countries, mostly in Asia.

• Against the norms of free trade of WTO• Completely terminated in 1st Jan 2005,

through 4 stages.

Contd.

What is Quota ?

Source: Google Images

What is Quota ? (In the context of the global economy)

• A government-imposed trade restriction• Imposed on specific good to increase domestic

production• In theory, this helps protect domestic

production by restricting foreign competition. • Quotas are protective measures imposed by

governments to try to control trade between countries.

Zero Sum Game

In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which a participant's gain (or loss) of utility

is exactly balanced by the losses (or gains) of the utility of the other participants

Textile Industry in South Asia

• Employed 1.5 Million people Directly & 10-15 million people indirectly

• Total Garment & Textile Exports in 2004:• 26% of India's total merchandise export.• 73% Pakistan • 61% Sri-Lanka• 94% Bangladesh• South Asian Market share in the US Garment &

Textile Industry increased from 4% in 1984 to 11% in 2001.

Cheap labor in South AsiaCountry USD / Hr

Mexico 2.45

South Africa 2.17

Thailand 1.24

China 0.69

Kenya 0.62

Indonesia 0.5

Sri-Lanka 0.48

China ( Interior ) 0.41

Pakistan 0.41

Bangladesh 0.39

India 0.38

Specializations in South Asia

• Pakistan : Cotton Textile, Intermediate goods, Exporter of yarn & fabrics ( 45% exports)

• Bangladesh: Export oriented apparel producers, imports 70% raw materials,

• Sri-Lanka: Export oriented apparel producers, imports 80% raw materials.

• India: Has entire supply and production chain, 3rd largest producer of Cotton

• Firms were independent privately owned & medium size.

A Paradigm Shift – The post quota world

• Countries whose competitive advantage was quota driven would face problems because:

• Reason:• Demand for a quick responses and full

package supply capability• Many countries in South Asia could not

improve their situation during the last years of quota.

Challenges faced by South Asia

• Preferential treatment to competitors by importers due to agreements such asNAFTA

( North American Free Trade Agreement )• BIGGEST THREAT: China’s accession to WTO

Competitive Advantages of China

• Strong Infrastructure and further investment in it.• Low cost and productive labor• Huge domestic market• After joining WTO, Textile and Garment industry

was opened for private investment.( Dupont, Itochu, BSF, Toray etc- )

• Hong Kong’s expertise in merchandising also helped China in precise procurement and delivery of goods.

Competitive Advantage in Logistics

• Sophisticated Highways and Ports• Lead time to US within 18 days.• This contrasts sharply with Sri-Lanka’s Lead

time of 90-150 days.

2001 2002 2003 2004

China 12.7 15.57 19.64 21.13

Market share (percent) of China in the United States textile imports

2001 2002 2003 2004

China 13.88 14.97 16.66 17.42

Market share (percent) of China in the United States Garment exports

India – Post Quota

• A Burgeoning middle class resulted in strong demand in the domestic market.

• Value and production chain was well developed.

• Exports grew by 19% to reach US$17 billion in2005-06.

• In 2007-08 textile exports are $20 billion. Against the target of $25 billion. Registering a growth of 9.45 against exports in 2006-07

• The textile exports are expected to reach $50 billion by 2012.

• in 2004, Indian textile and garment industry was estimated to be worth $30 billion ($16 billion domestic industry and $ 14 billion exports industry).

• International cotton mill federation expected the Indian textile industry to grow 18% a year to reach $40 billion by 2010.

Indian Garment and Textile Exports

Pakistan – An Overview• Not much impact after abolition of Quota• MCkinsey report suggested that Pakistan’s exports would

increase by 6% per year to reach $4 billion in the fourth year of post quota era

• Potential for improving the productivity of the textile industry in Pakistan

• Large cotton producing country• It was independent in terms of input sourcing• From 2002 to 2004,Investment of $4 billion in the textiles and

garments sector to develop infrastructures.• Room for improvement since the capital equipment was nearly

11 years old.

The age of capital equipment, distribution and medianPakistan: Apparel % Textiles%

Age of capital< years 14 22

Age of capital 5-10 years 28 23

Age of capital 10-20 years 35 42

Age of capital >20 years 23 13

Median(years) 12 11

Comparison of input sourcing in the apparel and textile industries

Pakistan: Apparel % Textiles %

Domestic 59 97Imported 41 3

Bangladesh – An Overview• Garment and textile industry became

a major source of economic growth.• Directly employed 1.8 million.• Originally launched by foreign

investors.• Korea and HongKong took advantage

of export quotas and abundance of cheap labor.

• Produced at the low end of the market where profit margins were low.

• Highly dependent on US and EU for exports.

• Accounted for 94% of total garment and textile exports.

Bangladesh: Growth of Garment & Textile Sector

Year Export(US $ Million)

Share in total Export (%)

Employment

No. of factories

1985-86 131 16 0.2 5941990-91 867 50.5 0.4 8341995-96 2547 65.6 1.3 2353

1999-2000 4583 76.6 1.6 3200

2001-2002 4349 75.6 1.8 3618

After Abolition of Quota

Country 2001 2002 2003 2004Bangladesh 0.76 0.73 0.64 0.71

Market share (percent) of Bangladesh in the United States textile imports

Country 2001 2002 2003 2004

Bangladesh 3.29 2.96 2.72 2.67

Market share (percent) of Bangladesh in the United States Garment exports

After Abolition of Quota

• Decrease in market share due to increasing competition.

• Chinese dominanceSpeculation:• 40% of the factories may go out of business• Bangladesh will loose 50% of the US market

and 35% of the EU market

Challenges faced by Bangladesh

• Will need to move to better quality garments where margins are higher

• Requires producing better lead times• Should decrease reliance on input sourcing.• Investment in backward linkage required.

Sri-Lanka – An Overview

Sri Lanka – An Overview• Stable market for a Quota

based economy because: • Low labor costs• Liberal Economic & Trade

Policies• Tax Benefits• Concessions granted by the

Govt.• Due to this it attained 1.2%

market share in the US garment sector.

Garment Industry in Sri-Lank during Quota

• Complacency• Low productivity due to lack of proper training• High cost of electricity compared to other Asian

Countries• There wasn’t adequate state of the art technology.• Sri Lanka had higher labor costs compared to other

South Asian countries.• Lead time: 90-150 Days• Internationally Accepted Time: 90 Days

Economies of Scale could not be achieved due to small size of factories

India Pakistan Sri Lanka Bangladesh0

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A Zero Sum Game ?

• Yes, Since China’s Gain resulted in South Asia’s decreased exports in the garment and textile industry.

• In a quota free-regime, the market would be driven by cost and convenience.

• Modern plants, efficient operations and responsiveness to the market would be the key ingredients for success

Thank You