Industry prepares for quota elimination: decade-old trade system set to change January 1.

As many nonwovens industry members already know, January 1,2005 will be a day to remember. And even those industry members who do hot follow trade issues closely know that this day marks the beginning of significant changes to the landscape of global trade in textiles and apparel. Indeed, unless there are significant, unforeseen changes between now and then, the decades-old global system of imposing quotas on textile and apparel goods will have come to an end by the time most Americans stumble out of bed on New Year's morning.

But, with slightly more than 90 days left before this momentous occasion, the impact of these quota eliminations is still being debated. Some industry observers, in fact, are predicting that a global economic crisis will erupt once China and India are granted the ability to flood markets with textiles and apparel, leaving lesser developed countries teetering on financial collapse because they will be unable to compete. Others see the quota elimination as an opportunity to improve global economic security by liberalizing trade in an industrial sector that has long been the subject of protectionist trade policies that unnecessarily and unfairly shift financial resources. Still others are scratching their heads, unsure of what will happen once quotas are lifted.

Against this backdrop, INDA, Association of the Nonwoven Fabrics Industry, convened a panel of experts during IDEA '04 to address the issue and, interestingly, many of the views articulated by the panel have now resurfaced--albeit in somewhat different words--in a report published last month by the World Trade Organization (WTO). Before summarizing these views, some additional background is likely required for readers.

A History Of Tension

Tension surrounding the liberalization of trade in textiles and apparel has existed almost as long as the multilateral trading system has been in place. Indeed, as the years following World War II ushered in efforts to promote global trade--including the establishment of the General Agreement of Tariffs and Trade (GATT), a de facto international organization devoted to conducting multilateral trade negotiations--efforts were consistently undertaken to shelter textile and apparel industries throughout the world.

While world leaders were aggressively pursuing opportunities to knock down barriers to free trade through the work of the GATT during the past 50 years, in fact, many were simultaneously erecting new obstacles to protect their domestic textiles and clothing industries from imports, especially those shipped from developing nations that enjoyed a competitive advantage because of lower labor costs.

To this end, the GATT adopted the Long-Term Agreement on International Trade in Cotton Textiles (LTA) in 1962, an arrangement that allowed importing countries to impose quotas on cotton textiles on a country-by-country basis. In 1974, GATT members agreed to expand the reach of this agreement by adopting the Multi-Fiber Arrangement (MFA), which allowed importing countries to impose quantitative restrictions on imports of wool, synthetic fiber and silk blends and vegetable fiber textiles and apparel products to prevent market disruption. Although it was only supposed to be a temporary arrangement, the MFA was renewed in 1977, 1981, 1986 and 1991.

But, things changed with the conclusion of the "Uruguay Round" of GATT negotiations in 1994. The Uruguay Round yielded a number of significant agreements, not the least of which established our current global trading system under the WTO. GATT members also agreed to replace the MFA regime with the Agreement on Textiles and Clothing (ATC), which essentially established a transitional process for phasing-out the quota system during a 10-year period beginning January 1, 1995.

Many developing countries largely cheered the elimination of quotas--viewing the move as an opportunity to gain access to markets closed to them for decades--as did certain U.S. textile and apparel interests. In a July 28 letter to U.S. Trade Representative Robert Zoellick, for instance, domestic apparel importers and retailers said they "eagerly awaited the end of the global quota system," which they said will "provide companies in [their] industries the ability to improve significantly the efficiencies in their sourcing and global operations." Eliminating quotas, they argue, will help make U.S. apparel firms more competitive by enabling them to offer U.S. consumers a wider variety of high-quality clothes at competitive prices.

On the other hand, many members of the U.S. textile industry have predicted devastating consequences for the domestic textile sector, which has already suffered significant job losses in recent years. These groups are convinced that countries such as China, India and Pakistan, which boast low labor costs and a large manufacturing base, will swallow up the U.S. textile markets once quotas are removed and will bankrupt other countries that rely on quota restrictions to ensure they will have some access to U.S. markets. These concerns are not entirely without merit. A January 2004 report from the U.S. International Trade Commission (ITC) concluded, for example, that China would likely become the "supplier of choice" for most U.S. importers with India running a close second.

A WTO discussion paper released this August, however, projected that China and India do stand to significantly expand their share of the U.S. apparel market once quotas are removed but also noted that these estimates only tell part of the story. According to WTO, models used to generate certain gloom and doom estimates do not account for the textile and apparel industry's tendency towards vertical specialization nor do they consider geographic fragmentation of production processes.

Vertical specialization, according to the study, suggests that the outcome of the quota phase-out will be significantly impacted by prevailing tariff rates and existing trade preference programs already in place. Further, the low-cost production advantages of China and India will likely be tempered by the fact that the textile and apparel industry tends to cluster production in geographical regions. Therefore, smaller fabric-and clothing-producing countries located close to the U.S. and EU may fare better than expected in the post-quota environment because of their ability to quickly ship products to these markets.

Moreover, when it comes to nonwovens, industry observers note that U.S. producers have proven themselves much more resilient than other participants in the textile and apparel industries, demonstrating tremendous growth and expanding into new world markets at a time when other segments of the textile industry are floundering. This is likely due to our industry's recipe for success which relies heavily upon innovation, advanced technology and product development rather than low-cost labor as well as nonwovens' use in a wide range of applications. This allows for product variety not found in other segments of the textile industry. This versatility has also allowed our industry to adapt and grow during a constantly changing world trade environment.

Indeed, this was very much the message delivered during a special international trade session convened by INDA during its IDEA 2004. This session focused heavily on the anticipated impacts of the expiration of the MFA and brought together an impressive collection of trade experts, including a lead economist from the World Bank, a University of North Carolina professor, a longtime textile industry executive and a government affairs and trade expert based in the Washington, D.C. office of a large multinational corporation. These speakers largely agreed that vast protectionist policies like the MFA do more to stifle global economic development than encourage it.

The bottom line expressed during IDEA, in fact, was that continued creativity and innovation will be saving graces for the U.S. nonwovens industry. Well after quotas have been eliminated, our industry will certainly be able to weather any economic impacts associated with this change. There was even some guarded optimism expressed by free traders on the panel who predicted that U.S. nonwovens producers may well see a "golden age of exports" once quotas have been removed. Once again, differences between the nonwovens industry and other participants in the textiles and apparel sector of the U.S. economy become apparent. We see opportunity where others see doom.