by D K Nair
22-February-2018 | 11 mins read
India has the second largest integrated textiles industry in the world, after China. And we have significant exports in each segment of the long textile value chain, from cotton and manmade fibres to garments and made ups. Globally, West Europe and North America are the largest importers and consumers of textiles and garments and they are our largest export markets too. In both of them, market access issues are among the major hindrances that we face. So, the need to effectively address market access issues for our textile products in global markets is obvious. With increasing imports, there is also a need to focus on strengthening our own industry and protecting the domestic market.
In North America, the largest market is the USA, though Canada also has some imports, especially of garments. The USA traditionally had a policy of allowing duty-free imports of garments from countries in the neighbourhood on condition that the raw material should be sourced from the USA. During the quota era, this arrangement used to be called 807 trade and it was both duty-free and quota-free. In early 1990s, when it became clear that quotas would not last very long, the USA started finalising trade agreements that more or less had the same Rules of Origin – what came to be known as the ‘Yarn Forward Rule’ – for textiles trade. It is interesting to note that almost all its trade agreements finalised after 1990 were textiles centric, though they technically covered ‘substantially all the trade’ as stipulated by WTO.
North American Free Trade Agreement (NAFTA) and its subsequently expanded version of Central American Free Trade Agreement (CAFTA), Africa Growth and Opportunity Act (AGOA), Caribbean Basin Initiative (CBI) etc allow duty-free import of garments into the USA on condition that the raw materials from Yarn onwards should be sourced from within the area covered by the agreement. Since there is nil or negligible production of yarn and fabrics in most of the other trading partners in these agreements, effectively the USA has mandated import of all raw materials from Yarn onwards from the USA, for getting zero duty access in the US market for garments. Mexico alone developed a fairly large non-apparel textiles industry after these agreements came into force, but that was mostly through US investments. Over a period of time, the US companies withdrew these investments and non-apparel textiles production in Mexico almost collapsed.
In a study conducted by the International Textiles and Clothing Bureau (ITCB), Geneva some time back, it was seen that the US agreements providing duty-free access for garments resulted in substantially more economic benefit to the USA than the so called beneficiary countries. This is simply because of the ‘Yarn Forward Rule’ that ensured huge imports of yarns and fabrics from the USA by the trading partners who needed zero duty access for garments.
The European Union has also concluded several agreements providing zero duty access for garments, mostly with the Mediterranean countries, that take into account its economic interests. Additionally, it provides duty-free access for ‘everything but arms’ from all Least Developed Countries (LDCs) without any strings attached. Though the textiles industry in India has correctly been referring to Bangladesh as the principal beneficiary of this concession in the textiles space, countries like Ethiopia, Madagascar, Cambodia, Myanmar and Laos are also LDCs that are currently moving towards competitive garment exports. The list of LDCs is periodically reviewed by the United Nations and some get graduated out as Developed Countries from time to time. However, none of the LDCs mentioned above is expected to graduate out in the foreseeable future.
With all these agreements and concessions, a large portion of imports into our major markets from the competing countries enjoys zero duty access, whereas their imports from India are subject to import duties. In the USA, import duties on garments range up to 32%, as against their average industrial tariff of around 3%. This is the extent of cost advantage that their trade agreements provide to our competing countries. In the EU, where again the average industrial tariff is around 3%, import duty is 12% on all garments and made ups. India gets a 20% tariff concession under General System of Preferences (GSP),which is a unilateral tariff concession that EU provides to Developing Countries. With the GSP benefit, our garments and made ups are subject to 9.6% import duty at present in EU. Among our major competitors, China is the only one whose exports are subject to import duty. In addition to Bangladesh which gets the LDC concession, Sri Lanka gets zero duty access under GSP+ and Pakistan has ‘enhanced GSP’ that provides steep tariff reduction for most textiles and garments.
The GSP concession of 20% was initially available on all textile products of India. Yarn and fabrics ‘graduated out’ when our share in EU’s total import of these products exceeded some stipulated threshold levels. Our garments and made ups may also graduate out if our exports grow fast enough or the threshold levels get revised downwards. Neither of these possibilities can be ruled out.
India has finalised several trade agreements with countries whose major import items include textile products. However, market access for textiles has not got the desired focus in most of these agreements. Under South Asia Free Trade Agreement (SAFTA) we have given improved market access to the South Asian trading partners who have significant tariff reduction on their exports to us. Since none of the other trading partners in this agreement has a market for textiles that can come anywhere near the huge market that we have opened up for them, SAFTA has eroded our domestic market without any comparable benefits for our textiles exports.
In addition, we have also provided unilateral tariff concessions including zero duty access to some of the countries who are already eligible for the SAFTA concessions. Thus, Bangladesh has zero duty access for all textile products in our market without any restrictions on sourcing of raw materials. Sri Lanka has zero duty access for some specified quantities. True, there are geopolitical compulsions for providing unilateral concessions to some of our neighbours. But then, the USA is also supposed to have given tariff concessions to its neighbours and some poor countries for the same reasons. They could still keep their economic interests intact through tactful negotiation of the conditions for such concessions. Bangladesh and Sri Lanka import huge quantities of yarn and fabrics because their domestic production is woefully inadequate to service their garment industry and India is among the largest suppliers of these products in the global markets. Stipulating that zero duty for garments and made ups would be available only if the raw materials have been sourced either domestically or from India would not have compromised the viability of the concessions in any way. On the other hand, it would have pushed up India’s exports of both yarns and fabrics.
While none of the trade agreements India has finalised so far takes into account the market access requirements of the textiles and garments sector adequately, agreements with countries which can provide meaningful additional access to our textile products like the Bilateral Trade and Investment Agreement (BTIA) with EU and FTA with MERCOSUR are yet to be completed and put into operation. With Brexit, a separate agreement with Britain also needs to be concluded at the earliest.
With the youngest and second largest population in the world and one of the fastest moving economies, India has a lot to offer by way of markets for various products to all our major trading partners. Leveraging this strength effectively in trade negotiations and not to ignore economic interests completely while trying to safeguard geo political objectives is what needs to be done. All the trade agreements are subject to periodical reviews. Thus, in addition to accelerating negotiations with EU, Britain, MERCOSUR and others, there is also scope for rectification of what has been done in the past.