Cover Story

The Post-MFA Conundrum

Shamim Ahsan

Readymade garments account for about 75% of our total foreign revenues. Yet many experts grudgingly call it an 'industry', as they believe it is an industry that produces its goods out of imported components. But this very industry has also created job opportunities for hundreds and thousands of women and men, who otherwise would have remained unemployed. The industry that thrived on the Multi Fibre Agreement, nicknamed MFA, now face a crucial challenge as the agreement expired on January 1, 2005. How will our garments industry fare in this new circumstance? And how well are we prepared, if at all, to survive the withdrawal of the quota?

Exports of textiles and clothing from developing countries have long faced restrictive blocks known as quotas. Introduced as a temporary relief measure apparently to favour the domestic textile manufacturers in the poor countries, it has been in force for the last 40 years. In 1962, a Long Term Agreement (LTA) regarding international trade in cotton textiles was signed. It replaced the one-year Short Term Agreement that existed at that time. LTA underwent several renewals and was subsequently replaced by the Multi Fibre Agreement (MFA) in 1974, which was expanded to cover exports of synthetic fibres and woollen products, besides cotton.

MFA came into force to allocate export quotas to the low cost developing countries, limiting the amount of imports to countries whose domestic industries were facing serious challenges from rapidly increasing imports. It sought to progressively liberalise and expand world trade by reducing banners to trade.

The MFA regime existed for 25 years, until 1994 when the Uruguay Round of Multilateral Trade Negotiations resulted in the Agreement on Textiles and Clothing (ATC). The ATC sought to phase out all quota restrictions in four phases spread over a period of 10 years. The first three partial phase-outs were in January 1995, January 1998 and January 2002. The final one was due on January 01, 2005.

Introduction of MFA in 1974 saw the start of our garments industry's rise. As the agreement kept countries like India, which had vast garment industries at bay, small countries like Bangladesh happily reaped the benefit. The MFA that created a guaranteed market for Bangladesh's RMG (Ready Made Graments) in USA and Canada, two of the world's biggest consumers of garments, inspired a boom in our garment industry since the early eighties. The expiry of MFA means lifting of all quotas and restrictions on clothing imports resulting in world trade in textiles to be fully liberalised. That means Bangladesh no longer has the guaranteed market of its RMG to USA, which consumes about 43 percent of the country's total apparel market. The US is the biggest buyer of our RMG. However, in the post-RMG regime, China and India are our formidable opponents. There is a tough competition ahead and are we prepared for that?

Not at all, believes Mohiuddin Ahmed, director of Standard Garments. He portrays a sorry picture of our preparation in the run up to the much feared about post MFA world. "It wasn't as if we weren't aware of it, in fact the alarm bell was rung long ago, but there was no uniform action plan to address the approaching crisis," Ahmed says. BGMEA leadership, leading garment exporters raised quite a hue and cry long ago, coercive lobbying was also launched with the concerned government authority, speakers in different seminars and symposiums were giving away prescriptions detailing what-to-dos to save our RMG industry from falling apart in the post-MFA world. "Everybody was talking about it, but nobody was doing anything about it. In the end, except some scattered development here and there we are still as unprepared as we were two years back," he adds.

Shahid H. Shamim, Director of Prabartana Ltd who, on behalf of UBINIG, has worked extensively with garment workers, also echoes Ahmed's observation. Furthermore, he hints at the foul play of some people in the industry. "A section of exporters and garment owners kept on pressing the government for all sorts of facilities like cash incentives and tax holiday etc. from time to time using the excuse of MFA phase out. These people are usually very powerful and have access to different levels of the government. Sometimes they use their political clout to influence the government policy, not for the sake of the overall development of the industry, but for their personal or group's interest," points out Shamim.

Another worry is our inadequate backward linkage facilities. Bangladesh is still heavily dependent on imported fabrics to meet the demand for domestic and export-oriented RMG industry. In 2003, the demand-gap of fabric for domestic and export through RMG was 2,000 million metres. "We were perfectly aware of this constraint of ours, then why couldn't we concentrate on setting up spinning, weaving and fabric processing projects?" Ahmed muses.

MA Awal, President of Bangladesh textiles Mills Association (BTMA), however, claims reasonable progress in this respect: "Bangladesh is currently able to manufacture more than 50 percent of yarn fabrics and 75 percent of knit fabrics needed for export-oriented garment factories." In a recent interview he assured that "if the government provides us with financial support in setting up composite textile mills, the country will be able to supply cent percent fabrics and knit raw materials very soon".

Our competitors however, have made great progress. China, the largest clothing and textile exporter of the world, along with India, another giant garment manufacturer in the world, are thought to be the main competitors of Bangladesh, have a number of advantages over Bangladesh. Good infrastructure aside, the lower lead-time and availability of raw materials make China an indomitable opponent. Bangladesh which doesn't produce the necessary amount of grey fabrics required for its total export of garment is to import it from India, China and Thailand under back to back L/C (Letter of Credit) facilities. But, now, as the market becomes quota free, these countries are naturally going to substitute their export of grey fabrics to Bangladesh with export of apparels to North America.

What will now happen to our garment industry? Will Bangladesh be able to sustain its position in a fiercely competitive market?

People who are concerned with the garment industry, insiders and outsiders alike, have a general consensus that, our garment industry is going to suffer tremendously in the post-MFA time. Predictions have been made that as if loses its guaranteed market in the US and now that it will have to compete with garments giants like China and India, Bangladesh is certainly going to find its market greatly shrunk. Consequently, many of our garment factories will be closed and according to one particular estimation some 1500 garment units out of an approximately 3000 might be closed down. Different estimations are also there, which give different figures, but there is a perfect consensus about the notion that a sizeable number of garment factories will have to be shut off.

The most immediate after-effect of the potential large-scale closure would be large-scale lay offs. In fact, there are claims of a good number of garment factories having been already closed and hundreds of garment workers having been already thrown out of their jobs. Zafarullah Chowdhury, owner of Sundarban Garments doubts this, "I don't know about any garment factories that have been closed because of MFA as yet. Since the early eighties about 800 garment factories have been shut off for various reasons other than MFA phase out, and into two weeks since the expiry of MFA, I believe it's too early to see any large scale closure and job cuts." Shahidullah Chowdhury, a labour leader, also corroborates this: "Job cut is a regular event in our garment industry. Workers are often fired on false accusations, sometimes workers lose their job because the owner has suddenly closed his factory and moved elsewhere without any prior notice to avoid paying arrear salaries of the workers. I believe it will take some time before we see job cuts due to the MFA phase out."

There are also differences of opinion regarding the degree of damage our garment industry is going to face. While one group is greatly panicked the other group doesn't see any catastrophe wreaking havoc on our garment industry because of the MFA phase out.

The optimists believe that though China has better infrastructure and a lower lead-time Bangladesh's competitive edge has been and will continue to be its cheap labour. For a labour intensive industry like the garment industry low labour wage is certainly a big advantage and in Bangladesh workers in the garment industry are paid much lower than in other countries, particularly those of China and Indonesia.

Zafarullah Chowdhury who owns four garment factories is one of those people who think our garment industry will lose little in the post-MFA regime. The owner of Shundarban garments Chowdhury who exports all his produce to EU believes Bangladesh will soon get over whatever trouble it might face for the time being. He has statistics to explain why he is so optimistic:" Bangladesh has a large market of knitted T-shirts and knitted jerseys in Canada and it is also the largest supplier of men's woven shirts there. Within EU, Bangladesh commands 15 percent of cotton T-shirts, 13 percent of cotton woven men's shirts, 10 percent of acrylic jerseys and 5 percent of denim and cotton trousers. According to the unit value data, Bangladesh is by far the cheapest supplier in all these categories."

Shahidullah Chowdhury also believes that the MFA phase out effect on our garment industry is exaggerated. Here one has abundant supply of workforce whom one can pay as low as 1500 taka a month. Again the condition of our garment workers are not the same as it was 10 or 15 years back. Over the years a sizeable skilled workforce has been developed who will certainly contribute to positively affect the productivity rate, an area Bangladesh has always lagged behind.

There is almost no doubt that some of the garment factories are going to face closure, but, Shamim doesn't think it will be something of a disaster. There are hundreds of factories which don't follow any rules whatsoever, maintains no safety measure, use child labour, force their workers to work more hours than law permits, and make them work in unhygienic and claustrophobic environments. Fire incidents are rampant in these factories and hundreds of lives have been lost in innumerable fire incidents in such factories over the years. The January 6 tragedy that cost at least 22 lives due to a fire incident is proof of the level of exploitation. Why should these factories be allowed to go on exploiting the poor, asks Shamim. "They should be closed," he goes on. "When such bad garment factories will be shut the overall environment will improve, workers will receive better treatment and consequently productivity will rise. So, even if there are some immediate job cuts it will be ultimately good for the industry and for the nation."

Maintaining good environment is necessary for another reason too. Many EU countries don't import goods from manufacturers who don't comply with safety regulations and who fails to upgrade work environment. In future, these importing countries, including the US, are going to be more stringent about these regulations. "Child labour is another issue exporters are taking very seriously, so the factories where standards of environment and employ child labours and violate rules that assure workers' rights are ultimately going to be hushed," Shamim argues.

"And instead of lamenting the possible damage, our RMG industry we must start, and in fact we should have started a long ago to explore new areas," Shamim contends. He believes handloom and agro-based industry do have the potential to substitute the garment industry. "We don't need to be too ambitious, there can be small or medium enterprises (SME) to revive the economy. We have never really been able to utilise our handloom sector to its fullest potential. One great advantage of this sector is that it has a huge domestic market and a reasonably good foreign market as well," he points out.

Of the domestic cotton cloth consumed in the rural areas, 81. per cent originates from handlooms and only 13.2% from the power looms. Besides, like the garment industry, it is also female labour-oriented and since the sector is home-based it is all the more appropriate for our rural women to fit into. The handloom sector provides jobs to nearly a million of weavers across the country. Not only in terms of creating job opportunity, but in terms of GDP as well, it alone contributes about 15 per cent of the share of the entire manufacturing sector.

Though small and medium enterprises have been yielding good results, we have not been able to broaden its scope and capacity. By directing our attention to sectors like handloom and agro-based industries we can not only develop rural employment opportunities, but we can also compensate the loss incurred by possible drop in our RMG sale making our foreign market bigger and wider," he argues. It's possible, but that would call for efforts both on the part of the government for providing infrastructure and financial facilities, as well as of the people who are involved in this sector.

Clouds Mass over
World's Rag Trade

Of late, the southern countries of the world have been following North's mantra of "free trade as a rising tide that will lift the world's countries into prosperity". The impact of the Multi Fibre Agreement (MFA) phase-out makes this ring a little hollow.

AHMEDE HUSSAIN

When the US, Europe and Canada adopted the MFA in 1974, small economies like Bangladesh and Sri Lanka were benefited because it imposed a tight quota regime on their major competitors. "It had distributed apparel production to nearly 200 countries, forcing retailers to cobble together their inventories from up to 50 countries at a time. Quotas added to the cost of production because they are often sold by exporting governments to brokers or factories; but it also protected jobs in some underdeveloped countries," says Chinese textile expert Lora Jo Foo.

But countries like China, Pakistan and India that were highly constrained by quotas are going to be benefited in the post-MFA era. Even before the gradual phase-out began, American Textile Manufacturers Institute (ATMI) declared China "unmatched in terms of variety and scope for its operation".

What lets China offer investors the most value for their money is its policy of massive infrastructural development. "China offers competitive shipping times; getting goods to the west coast of the US generally averages between 12 and 18 days from China but as much as 45 days from some of its market competitors," Foo says.

A boom in China's thriving garment industry is further aided by an abundance of raw materials and an increase in the production of yarns. "Besides these benefits," Foo continues, "some researchers contend that the country's macro-economic policies provide China unfair advantages over its small competitors." Since its floating in the international market, China has been manipulating its currency, Youan, to boost export sales. "Even the World Bank maintains that China needs to re-evaluate the Youan upward by 75 percent," says Foo. She believes, "These unfair trade practices, illegal under WTO regulations, make Chinese goods more competitive on the global market, thereby stymieing the growth and existence of textile and garment industries abroad."

The country's economy has started to bear trade liberalisation's immediate fruits. Taiwan's textile giant Luen Thai Holdings has indicated that it will increase production in China from 25 percent to 50 percent. "We expect that expanding production in the mainland will translate into cost savings of 2 to 15 percent after the quotas are lifted. In addition to cost savings, consolidating the industry in China can shorten the production cycle by 75 days, a very important factor in the fashion industry," the company said.

While Chinese share in world's textile and clothing market has been rapidly increasing, countries like Bangladesh or Cambodia are losing out in the battle for a decent piece of the pie. When infant wear was liberalised in Phase Two of the World Trade Organisation's Agreement on Textile and Clothing, according to the United States International Trade Commission, China's exports in this category grew by 298 percent in 2002 and 81 percent in 2003. In the same years, Bangladesh's exports of infant wear shrunk by 25 percent and nine percent.

An Oxfam report could not but agree. It says that the consequences for garment workers in countries that were protected by MFA quotas will be stark. "One pessimistic estimate for Bangladesh suggests that more than one million workers will lose their jobs over the coming years. Industry forecasts for Sri Lanka estimate that around 40-50 percent of factories will close down and that about 100,000 (one in three) jobs in the industry will be lost. Displaced women workers in particular will have great difficulty in finding employment, because of the limited alternative job opportunities for women," the report warns.

Though Bangladesh and Sri Lanka have the minimum wage in the apparel industry, many believe an abundant labour supply has made it easier for bigger economies like China and Pakistan to drive wages down and offer workers little job security in their own turf. According to Lung Kin Sing, Managing Director of an apparel factory, "As the quantity of orders will increase, the buyer will look for a lower price." However, as the profit margin is not increasing, workers will end up paying the cost for they are at the lowest on the supply chain. Even Chinese workers are not immune to this. "The current minimum wage in Guangzhu has recently been adjusted from 510 to 684 Rmb per month, and yet there are many workers who do not even earn the lower amount despite working overtime," says Foo. It will be even worse for the workers of the other Third World countries, who are deprived of any wage-board and, in most cases, of bonus and overtime.

Experts also believe that export in these countries would gradually dwindle. "Some labour advocates who pushed so hard to eliminate quotas did not anticipate that their apparel industry may also be decimated (by a quota free market)," Foo says. Apparel multinational corporations like Gap and Levi-Strauss have been producing garments in 50 countries at a time due to quota restrictions. The elimination of MFA has allowed the garment retailers and manufacturers to consolidate production in fewer countries. Reports, including one by the US State Department, maintain that companies that currently purchase goods from 40 to 60 countries will buy from 20 to 30 by early 2006. By 2010, the number of foreign suppliers could drop to one-third of the present number, she believes.

Foo also thinks apparel manufacturing will concentrate in countries offering lowest labour costs, most efficient production, and most developed transport and telecommunications infrastructure. "Apparel firms are also looking for countries that produce both the raw materials and finished garments. Countries providing 'full-package' services -- from textile production to cutting, sewing, and packaging - will be the most competitive," she predicts.

The small economies, however, do not have the proper infrastructure to provide these "full-package" services. In fact, in September 2003, at the WTO meeting in Cancún, there was talk of extending the quota system. But with China, Pakistan and India poised to benefit from the total quota phase-out, the proposal fell short of an explicit call to extend quotas.

Now that the quotas are eliminated, Foo thinks, " The developing countries will not benefit from the Uruguay Round of trade negotiations that created the WTO. In fact, they have already given up too much in return for a benefit that now appears illusory."

Though throughout the nineteenth and twentieth century the European Union and US experienced a fast economic growth behind the high walls of protectionism, these two economic blocks have now been pressurising poor countries to open their markets. Even economic policies like quotas and patent-infringement that the Asian Tigers used to build its economies are now banned by the WTO.

Apart from protecting its domestic industries and markets, the poor nations have to start negotiating the terms of all the WTO agreements that have held them back from adopting those economic policies. By their over reliance on cheap labour in the apparel industry, developing countries lock themselves into a situation where they cannot transform their economies. In an increasingly volatile textile and clothing market, the poor countries have to follow an economic policy that has to be independent of external dictums. Only time can say how these grossly neglected nations will fare in their struggle for survival in the free market.

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