After January 1 the environment for international trade in textiles and clothing has changed substantially. For the first time in over four decades of protected system, the trade in this sector has been freed and reintegrated into the WTO system. Ten years ago, all WTO members signed the Agreement on Textiles and Clothing (ATC) to abolish existing quotas in four phases. As a result, no WTO member is allowed to restrain textiles or apparel imports by quotas like they did before. From now onwards they have to follow the rules applicable to trade in goods under the WTO. So the general perception is that the end of quotas would completely free the world trade in textiles and clothing. But in reality it is not. To be precise, it is getting relatively liberal, but also becoming more complex. Nepali exporters are hurt in both ways.

From the outset the liberalisation of apparel trade has not favoured Nepal. The impact during the first six months of the first year of quota-free trade was overwhelming. Nepal’s apparel export to the US has nose-dived: by 50 per cent compared to last year. Nepal was the only country in the region that has suffered a massive loss in the American market. On the contrary, countries of equal footing but with relatively huge production capacities like Bangladesh, Cambodia and Sri Lanka have relished the growth rate, ranging from 10-20 per cent each. Their shares in the US apparel imports increased from around 1.5 per cent each to over 2.5 per cent during the first two months of 2005, despite being also cited as likely victims of liberalised trade. This clearly indicated that the buyers would still prefer countries with a production capacity of “critical mass” for sourcing in the transitional period. But in the long run they would consolidate sourcing in fewer countries, like China or India, which can produce from cotton to fabric more efficiently.

Apart from feeble production capacity, the Nepali apparel exporters are faced with more hardships of the price competition, intensified since the elimination of quotas. One study revealed that the world apparel price has declined by over 32 per cent on average if compared to the early 1992 dollar. That means a shirt priced at $4 in 1992 would cost only $2.72 today. A continuous fall in the world apparel prices is attributed to strengthened production capacity, reduced distribution costs and shifting of production bases to cheaper locations. The price competition from China looks more threatening to Nepali exporters. The average price for Chinese apparels, removed from quotas, declined by more than 50 per cent on average. That makes a garment made in Nepal 40 per cent costlier than a Chinese one. However, the prices for some selected Nepali clothing items are still cheaper, indicating some scope for competitive edge, provided the industry matches the new trading environment.

The trade without quota has also become more complicated because of the use of other trade restrictions and policies to make up for the loss of quota restriction. There is a possibility of obstructing trade by retaining higher tariff barriers in rich countries. While escalated tariff barriers hit the Nepali traders, they are also discriminated against by the preferential trading arrangements in apparels. They have already lost the level playing field in the US as the latter provided duty-free market access to clothing made in selected poor African countries under the US trade act. The European countries have accords on outward processing trade, under which the west reimports apparels made out of their fabric in the east without tariffs. The objective of this system was to retain capital-intensive textile base in the west and to exploit cheaper labour inputs in the east. Such types of trading arrangements have apparently diverted export of small suppliers and geographically distant countries like Nepal. The new ways of trading system have aggravated the situation of the ailing Nepali apparel industry and trade.

However, Nepali apparels are not without duty-free treatment everywhere. They get privilege of zero tariffs in Canada and the EU, under the generalised system of preferences (GSP). The EU has relaxed Nepali apparels from the tough GSP rules of origin, requiring only one processing operation fabric originating in SAARC or ASEAN countries, to benefit from the privilege. Yet the Nepali exporters have failed to exploit the opportunity, as they were enjoying easier American market access protected by quotas in the past. The ultimate aim should not be protection from preferences, but the preparation to face new challenges.

If the trade without quotas would encourage other forms of trade barriers, such as higher tariffs, safeguards or anti-dumping measures, to control imports by the rich countries, the trade spillover from China or India is inevitable. Nepali exporters should eagerly wait for that opportunity. After all, the world apparel trade is not going to be totally free from trade barriers.

Shakya, a TU lecturer, is a consultant, WTO Cell/GAN