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Report Contents
	Scope of Work
	Executive Summary
	Policy Issues Governing World Trade in Textiles & Apparel
	Implications of the Phaseout of the MFA

The objective of African Growth and Opportunity Act (AGOA) was to create exports to the United States and to move the Sub-Saharan African countries towards market based economies. For the textile and apparel sectors, the specific objective was to develop an integrated textile and apparel industry in Sub-Saharan Africa from growing cotton to producing apparel for export.

AGOA, particularly its apparel provisions, may be one of the most successful United States trade preference programs ever. As a result of AGOA, one can see the development and expansion of an almost non-existent apparel industry in a number of lesser developed COMESA members.

The driving force behind this study is the concern of COMESA suppliers5 that there will be a surge of Far East textile and apparel exports to the United States, in the aftermath of the removal of MFA quotas. This surge threatens to displace from the U.S. market their exports as well as exports from the many countries whose industries grew over the past forty years in the sheltered environment of the Multi-Fiber Arrangement (MFA) and its predecessor agreements. Many of these countries entered the market when large competitive suppliers were subject to quantitative limitations. Buyers, whether in the form of importers, contractors or retailers, were forced to seek out and even develop producers in countries not limited by quotas. Thus, today, more than 40 countries supply apparel to the U.S. market.

The only significant Sub-Saharan African suppliers to the United States before the passage of AGOA in 2000 were Mauritius and South Africa, which had benefited from the need to develop uncontrolled suppliers. The only other COMESA country that was developed was Kenya whose brief period of exports was snuffed out by the imposition of US quotas. However, starting in 2001, the continuation of limitations on more competitive suppliers together with the advantages provided by AGOA induced Kenya to reenter the market and two new suppliers to export to the United States. Ethiopia was induced to devote resources to upgrading and expanding their textile production, as well as to encourage apparel production. Mauritius focused on maintaining its market share by upgrading production and on providing investment, training and strategic advice to least developed Sub-Saharan African countries that were better able to compete.

During the nine month period ending September 30, 2004, five countries or groupings of countries accounted for 76 percent of U.S. worldwide apparel imports on a volume basis.

TABLE 1: Leading Suppliers to the U.S. Apparel Market

Countries, such as India, Pakistan, Bangladesh and possibly Indonesia, will likely benefit the most from the removal of MFA quotas. Exporters in these countries will no longer find their exports subject to textile restraints and will no longer have to pay quota charges and will be free of tedious paperwork requirements.

It is true that the fastest growing source of apparel into the United States over the past few years has been China and Vietnam, whom today account for 15 and 4 percent respectively of global U.S. imports. The fear is that China’s exports would surge to the point where it could control 60 to 70 percent of the American market. However, among all significant suppliers to the U.S. market, only exports from China and Vietnam are still subject to bilateral quantitative restraints. Vietnam will remain subject to bilateral quotas in the US until it becomes a member of the WTO.

The U.S. Government is considering petitions from textile producers to restrain Chinese exports in a number of categories, including categories that represent the largest exports from the five visited COMESA suppliers (trousers, knit shirts and blouses and woven shirts and blouses). In addition, pressure will continue on the Chinese Government to revalue its currency thereby exerting upward price pressure on its textile and apparel exports. On the other hand, it is not clear how restrictive these safeguard restrictions will be; how much product China will be able to transship (“leak out”) through newly unrestrained suppliers, Macao and Hong Kong; or how successful efforts will be to convince China to revalue its currency.

Even if more competitive countries freed from quantitative restrictions significantly increase exports, some second tier suppliers will survive in the post-MFA world. Buyers will strive to balance costs, flexibility, speed, and risk in their sourcing strategies. They will want to reduce risk by diversifying sources of supply so as to avoid excessive reliance on a few suppliers. Second tier suppliers will fall into one or more of three categories: 1) Close proximity to the United States, 2) Sophisticated manufacturers able to find market niches based on fashion or quality; and 3) Low cost. However, some of the more than 40 suppliers to the United States will disappear from the American market since they cannot survive the more intense competition in the post-MFA world. Some may survive for a short period of time being able to take advantage of the breathing space offered by continued restraints on China and Vietnam.

Second tier suppliers will include some Western Hemisphere exporters since they are in close proximity to the United States and have limited preferential access under the Caribbean Basin Trade Partnership Act (CBTPA), the Andean Trade Preference and Drug Eradication Act (ATPDEA) and the Dominican Republic-Central American Free Trade Area (DR-CAFTA) if ratified by the U.S. Congress. Mauritius is working hard on remaining a participant in the U.S. market by carving out a high priced market niche. Three COMESA countries visited (Kenya, Madagascar and Uganda) benefit from preferential access under AGOA and hope to reduce their costs through increased worker productivity. Other low-cost producers with preferential access are fellow COMESA members eligible for AGOA-Namibia and Swaziland-AGOA beneficiary Lesotho, Egypt (COMESA member but a non-beneficiary of AGOA) and Jordan. Additional low cost suppliers not benefiting from preferences, but nevertheless hoping to hold on to a share of the U.S. market, include the Philippines and Turkey.

AGOA promotes the development of textile and apparel production by providing duty-free entry for six apparel categories. The categories are principally differentiated by the origin of the yarn and fabric incorporated in the garment6. There are only two categories where the allowable duty-free entry is quantitatively limited – apparel incorporating regional yarn and fabric falling under Preference Groups (PG) 4 and apparel incorporating third country fabrics or otherwise not eligible under the other preference categories (PG5).

A tariff preference level (TPL) is established for the two categories and will be in effect until the program expires, which is currently scheduled to occur on September 30, 2015. The level will soon reach 7 percent of the previous year’s global U.S. apparel imports, meaning that shipments above that amount enter at full or MFN duty rates. Apparel falling under PG 5 will be subject to a more restrictive sub-limit of fifty percent (50%) of the allowable TPL. This sublimit will be reduced by half on September 30, 2006 and then phased out completely on September 30, 2007. Once phased out, the whole TPL would be reserved for apparel incorporating regional materials.

By providing duty-free treatment for apparel assembled from the most competitively priced yarns and fabrics, it was hoped to jump start the Sub-Saharan African apparel manufacturing sector in the developing countries and attain world class standards over a short period of time. By phasing out duty-free treatment for apparel incorporating third country yarns and fabrics over an initial four year period eventually extended to seven years, but allowing such treatment for regional materials to continue for the duration of AGOA. it was hoped to induce the development of textile mills to substitute their output for imported materials in Sub-Saharan African apparel exports. Apparel manufacturers would make this substitution since they would otherwise lose duty-free treatment.

For Kenya, Madagascar and Uganda, the results have been impressive. However, almost all the growth has been in basic cotton garments – woven trousers and knit shirts. The trade was entered under the sub-limit for PG 5. Imports from Kenya and Madagascar are projected to grow by 256 and 276 percent respectively in the fifth year of the program ending September 30, 2005 in comparison with the second year of the program (the first full year of AGOA), that ended September 30, 2002. Uganda had no apparel exports to the United States in the first years of the program. Uganda is now projected to export 2.7 million square meters equivalent (SME) in these products in the fifth AGOA year. Ethiopia has a small foothold in apparel exports that it is trying to expand. However, it is focusing on improving and privatizing its textile mills and has received a large loan for this effort.

Ethiopia could become a major source for fabrics to be incorporated in COMESA AGOA exports to the United States.

Mauritius, the only COMESA AGOA beneficiary that has seen its exports largely stagnate since AGOA was enacted. However, Mauritius hopes that with legislation granting it a small allocation of the third country LDC quota, continuing attempts to upgrade its production and moving into more fashion-oriented item, utilizing other provisions of AGOA (PG 7 or the short supply provision) to maintain duty-free treatment and participating in the development of LDC AGAO beneficiaries, the country will continue to benefit from AGOA.

In the post-MFA world, all exporters will have to meet a number of specific challenges created in large part by changes in world textile and apparel production and trade wrought by the ending of the MFA.

Global production is already changing because of the end of the MFA, limited liberalization and reflecting the increased consolidation in the retail sector. In the future, there will be increased pressure for economies of scale, sourcing from fewer locations, low prices, and just-in-time deliveries meaning that factories will be electronically connected with the retail floor and be under pressure to fill inventories on short notice. The more fashion-oriented the product, the more pressure for quick turnaround and timely delivery. The more basic and undifferentiated the production, the more pressure for competitive pricing.

As for the trade pattern, the following elements are expected to be in place.

1. COMESA suppliers will have to compete against increased amounts of competitively priced apparel available from countries formally limited by quantitative restrictions

2. Those countries, previously restrained by quotas, now with unlimited access will no longer have an incentive to stay out of the lower-priced garments – the major market niche currently occupied by Kenya. Madagascar and Uganda.

3. The elimination of quota charges will likely lower prices in countries newly freed from restraints since quota charges are expected to disappear.

4. With buyers reducing the number of countries where they purchase apparel, COMESA suppliers will be challenged to be included among them.

5. Unrestrained suppliers will be freed from paperwork, AGOA suppliers will not.

Of the 40 countries currently supplying apparel to the U.S. market, only a small percentage will remain major suppliers in the post-MFA world. The key question is whether the countries visited will be among the major suppliers to the U.S. market.

In the short-term, the countries visited are not likely to be competitive in the upscale or fashion segment of the market. Workers, managers and production systems are neither sufficiently sophisticated nor flexible to allow these countries to be competitive in this market segment. Instead, these suppliers should strive to reduce their costs and improve their receptivity to buyers so as to maintain and increase market share in the type of basic apparel that they are now producing. This provides the best opportunity for them to be secondary suppliers.

The paper first analyzes the relative competitive position in basic apparel production of two of the COMESA suppliers visited. It looks at global exports of cotton Women & Girls (W&G) trousers, the largest category exported from Kenya and Madagascar. It compares the export price from these countries to export prices from selected other large suppliers. The largest exporter, Honduras, is by far the lowest priced exporter. Seven countries are grouped together in the next price range – Kenya, Mauritius and recently unrestrained suppliers Bangladesh, Turkey, Pakistan, Sri Lanka, Turkey and Vietnam. When AGOA duty-free treatment is taken into account, however, the COMESA suppliers are more priced competitive, even if the removal of quota charges are taken into account.

Second, the paper compares the production cost of a popular style of trousers, five pocket jeans, in five COMESA countries to China and India. China and India can produce jeans at a lower price than the COMESA countries. When AGOA tariff preferences are taken into consideration, however, the COMESA countries are less costly with Kenya and Madagascar having a margin of 67-70 percent over the Far East countries. We would, however, warn against concluding from the above analysis are that COMESA countries have price and cost advantages over their competitors since the analysis compared information often contained in verbal interviews and often based on different databases.

The comparison is useful for indicative purposes since it demonstrates where COMESA and its producers must improve their performance to remain and to become more competitive. They have no choice but to improve production systems and to upgrade the training of managers and workers, especially sewing machine operators. The table also shows that the cost of working capital is extremely high in four COMESA LDCs. Finally, production costs can be reduced if there is an improvement in infrastructure specifically focusing on low priced power supply, as well as a reduction of rental costs in free trade zones.

In some non-cost areas, Sub-Saharan Africa does well. Although room for improvement, AGOA’s emphasis on good governance, rule of law, a friendly investment climate, together with the region’s emphasis on democratic and market principles was recognized during the visit. The only exception is corruption--still a concern when dealing with bureaucracies. The survey indicates that existing plant quality controls are comparable to India and China and the local Indian and less numerous Chinese investors provide links to the international apparel trade. Some deficiencies cannot be corrected in the near future and Sub Saharan Africa must develop within them, e.g., a general renaissance in U.S.-Sub-Saharan African trade will be required before there are direct, regular shipping operating between COMESA and the United States. Areas where there could be improvements are more government support, consolidation of production units, improvement of marketing and production practices, better publicizing COMESA as an apparel source, convincing buyers that there is respect for ILO worker standards and further deepening and making more comfortable the relationship among Sub- Saharan African producers, middle men and American buyers.

An impending challenge that must be addressed is the reduction and then elimination of dutyfree access for apparel incorporating third country yarn and fabrics. After September 30, 2007, COMESA countries will not be able to ship duty-free apparel under this category. Unfortunately, today, COMESA and other Sub-Saharan African suppliers are in a position to supply only a small portion of the yarn and fabric required by its apparel industry and there is little activity in developing new capacity that requires at least two or three years to be built and reach would class competitive levels.

Even if COMESA textile mills can produce sufficient quantities of competitive yarn and fabric for apparel production, the structure of the market will not allow Sub-Saharan Africa to substitute regional for all or most of its third country yarn and fabrics. This is because textile mills are large fixed investments that do not have the flexibility to modify their output to reflect fashion changes. There is no way that Sub-Saharan African textile producers in the near future can produce all the types of fabrics likely to be demanded by Sub-Saharan African apparel manufacturers. Although basic garments require less specialized fabrics, no industry should be limited to bottom line production.

We agree with the emphasis on increasing and upgrading the output of textile mills in COMESA. However, investment decisions should be tied to the competitiveness of the product on the world market, not simply to fill projected orders from apparel factories in Sub-Saharan Africa. The COMESA Secretariat, the five member states visited together with donor entities must make the textile sector a priority area if they are to meet the challenge of the termination of MFA quotas and seize opportunities available under AGOA. Concrete measures must be taken by them to allow textile mills and apparel manufacturers to meet the post-MFA challenge and not lose opportunities available under AGOA.

1. The COMESA LDC apparel manufacturers that were visited must increase their output per sewing machine if they are to compete in the post-MFA world. This is not a problem of plant and machine obsolescence. It represents poor training of local labor, particularly systems engineers, managers, operators and technicians. We strongly recommend that a training institute, perhaps modeled on the successful Mauritian experience, be established on a COMESA-wide or on the member state level. In addition, a comprehensive system of government support for plant-level training should be developed in each exporting country.

2. COMESA members must continue efforts, as called for in AGOA eligibility requirements, to maintain an enabling environment for investment and deepening economic integration.

3. Each country visited should formulate, either for the first time or update, AGOA action plans.

4. Negotiations under the Doha Development Round (DDR) of multilateral trade negotiations and consultations with multilateral development banks (MDBs) should provide technical assistance, capital and outlets for African cotton, both in its raw form and incorporated into clothing.

5. National governments and private sectors in the five COMESA countries, together with donor entities, must work together to establish a five year plan for mobilizing capital for building of textile mills, developing infrastructure to support such mills and carrying out studies on requirements to upgrade cotton production and rehabilitate existing or developing new textile mills. Specifically, donor entities should focus on supporting Ethiopian and Ugandan efforts to develop world class textile mills.

6. Fashion and marketing advice should be provided to develop an outlet for machine made ethnic fabrics and made-up goods recently designated for duty-free entry under PG 9.

7. For apparel, Governments must assist the private sector in meeting the competition of a post-MFA world. We suggest that countries develop a consistent policy of incentives for apparel production7, assure the appropriate enabling environment, provide training resources and working capital at low interest rates.

8. There should be an emphasis on maximizing AGOA benefits by such “AGOA SMART” activities as incorporating third country fabrics in short supply, producing wool sweaters, export in categories with the highest duty savings, such as high valued items and apparel incorporating man-made fibers or organically-grown cotton.

9. The COMESA Secretariat should compile and disseminated a list of best practices in the textile and apparel sectors. Kenya has been successful in developing free trade zones. Mauritius can be a valuable resource in training, diversification, developing product niches given its successful experience in these areas.

10. Countries with unblemished records and appropriate certifications for observing labor rights will be desired locations. Each COMESA manufacturer should have his work place certified by an organization acceptable to his buyer.

11. The COMESA Secretariat should work with national governments and USAID to become a clearinghouse for information about the region’s comparative advantage and publicize the advantages of working in the region.

12. Consideration should be given to establishing a special short-term rebate for apparel manufacturers, buyers and retailers who incorporate regional yarns and fabrics in their apparel exports.

13. The private sector in the countries visited must intensify efforts to develop alliances with non-African players in global textile trade, alliances that will increase the comfort level of Americans in doing business with COMESA suppliers

14. The Office of the United States Trade Representative should take into account the importance of maintaining and expanding the AGOA textile and apparel sectors as it develops policies for the final phase of the Doha Development Round.

15. The Secretariat, member state governments and the private sector should work with their American counterparts to allow access for apparel incorporating third country fabric beyond the current legislation. However the extension must be accompanied by an inducement to incorporate regional fabrics as well.

16. USAID should focus on more facilitative assistance including development of a blueprint for improving productivity of existing textile mills and developing new mills.