The World Textile and Clothing Trade: Globalization versus Regionalization

K.F. Au

N.Y. Chan

The Hong Kong Polytechnic University, Hong Kong

Abstract The World Trade Organization (WTO) was formed to foster world trade and remove the various kinds of tariff and non-tariff trade barriers. For textile and clothing (T&C) trade, it is identified that the proliferation of regional trading blocs would undermine the broader effect. This paper in delineating the changing patterns of T&C trade in existing trading regions of EU and NAFTA has identified that intra trade for the latter is significant. It indicates that regionalization has an impact on the development of global T&C trading.

Introduction From 1955-2000, world export trade in total merchandise had increased by 64.8 times from US$ 96 bn. to US$ 6,243 bn. For the same period, total manufactures’ exports demonstrated an amazing increase by 112 times from a value of US$ 41 bn. accelerated to US$ 4,630 bn. (Fig. 1). For the textile and clothing (T&C) export trade, despite having been conducted through a series of quantitative export restrained stages, also demonstrated increases of 34 times and 249 times respectively (Fig. 2).

7000

250

6000

US$ Billion

4000

Merchandise

3000 2000

Manufacture

1000

100

Textiles

Clothing

Source: WTO Statistics

MANUFACTURE TRADE, 1955-2000.

1100

7

0 20 0

4

19 9

1

19 9

8

19 9

2

5

19 8

19 8

9

19 8

6

19 7

0

3

19 7

19 7

7

19 7

4

19 6

1

19 6

8

19 6

5

Fig. 1: WORLD MERCHANDISE AND

19 5

19 5

0 20 0

7

4 19 9

19 9

1

8 19 8

19 9

5

2 19 8

19 8

9

6 19 7

19 7

3

0 19 7

19 7

7

8

4 19 6

19 6

19 6

1

0 19 5

5

150

50

0 19 5

US$ Billion

200 5000

Fig. 2: WORLD TEXTILE AND CLOTHING TRADE,

Source: WTO Statistics

1955-2000.

Before WWII, advanced industrial countries in Western Europe and the US dominated the world economy and controlled most of the industrial production. The less-developed countries tended to concentrate in the production and supply of raw materials. Starting from the late 1940s, major T&C industrial production has shifted out from developed countries and moved to Japan. Since then, Japan was the leader in industrialization and economic development in the Asian region. In 1970s, the high cost of production and labor shortages had compelled Japanese T&C firms to invest their production in other Asian nations. Following Japan, Hong Kong, South Korea and Taiwan became three of the four Asian newly industrializing countries (NICs) with T&C as their major export industry. In 1975 the average wage for US clothing workers was US$3.79 per hour, compared to US$0.75 in Hong Kong, US$0.29 in Taiwan and US$0.22 in South Korea [3]. NICs’ cheap labor cost was the main attraction for the US and Japanese T&C firms to locate their productions overseas. Moreover, the Asian NICs quickly added other benefits including improved quality level, flexibility of production and stylish merchandise. Thus the NICs can offer good quality T&C products at a relatively lower price [2]. In response to the imposition of quotas by the US and other Western nations, the traditional Asian T&C producers have shifted their production to other less developed countries (LDCs) in Asia including China, Indonesia, Thailand, Pakistan, Sri Lanka and Vietnam since the 1980s. Boosted by Japan’s foreign direct investment, China’s clothing supplies accelerated to 74.7% of Japan’s total clothing imports in 2000, compared with 27.4% in 1990 [12]. Hong Kong T&C firms, in search for more quota holdings, also moved their production sites to mainland China. According the Hong Kong Trade Development Council survey conducted in 1998, about 54% of Hong Kong’s clothing exports were produced in mainland China [8]. China has now become the largest T&C exporter with other Asian countries such as India, Indonesia, Pakistan and Thailand also become the major exporters in the global T&C market. The shifts of T&C production to the Asian countries have witnessed the reliance of Asian economies on the T&C industry to gain their early economic successes. Today, quite a number of the major global T&C exporters are located in the Asian region. However, facing T&C trade restrictions and the establishment of regional trading blocs, this paper attempts to delineate the changing patterns of T&C trading scenarios in the EU and NAFTA regions.

Background of Textile Trade Restrictions

One of the reasons leading to the T&C production shifted from NICs to other Asian LDCs is the arbitrary quantitative export restriction. T&C export restraints to developed countries were in fact, imposed since the 1950s. The first sign of a wider protectionism measure in the textile trade was marked by the “Short Term Arrangement

1101

(STA)” of July 1961 as textile exports from Asia began to penetrate the developed country markets. Regarding to the textile imports from LDCs increased rapidly and employment in western textile industries fell sharply, more severe trade restrictions such as the “Long Term Arrangement (LTA)” was introduced then. World T&C trade was under the regime of the Multi Fiber Arrangement (MFA) effective on January 1, 1974 and lasted for two decades. The MFA provides guidelines for member nations regarding trade in T&C. Under the system, the US and other developed sometimes have negotiated bilateral agreements with most major T&C suppliers to their markets. Facing the growing restrictions on T&C products, most of the developing (exporting) countries chafed and made it clear that they would not proceed with the new round of trade talks (Uruguay Round) unless trade restraints on their textile exports were lowered [5]. Thus, the Uruguay Round lasted for 8 years from 1986-1994 and culminated the formation of the World Trade Organisation (WTO) in 1995. With the completion of the Uruguay Round, the MFA regulatory framework governing import quantities of T&C products into developed countries was replaced by the Agreement in Textile and Clothing (ATC). The ATC provides eventual elimination of quotas in T&C trade over 10 years in a 3-stage transitional period, meaning the global T&C trade will be liberalized by 2005. This marked the beginning of liberalization of world T&C trade with the anticipated application of free trade norms.

Globalization and Regionalization: The Concepts Globalization

“Since 1945, Globalization has become a fashionable concept in social sciences, a core dictum in the prescriptions of management gurus, and a catchphrase for journalists and politicians of every stripe” [7]. Since then, the globalization of the world economy has also made considerable progress. Globalization can be defined generically as the growth of economic activity or spanning politically of national and regional boundaries. It means the increased movement across those boundaries of goods and services, via trade and investment, and often of people, via immigration. It is driven by the actions of individual economic actors, such as firms, banks, people usually in the pursuit of profit, and often spurred by the pressures of competition. Globalization also refers to the production and distribution of products and services of a homogeneous type and quality on a world-wide basis. For liberals, globalization promotes the disappearance of trade barriers and state regulation [9]. Economists tend to regard “globalization” as a blessing for trade [13]. They see it as freeing the forces of competition that help to channel the energies of people and the resources of countries into activities where they are likely to be most productive, i.e. global production would increase efficiency by allowing each country to specialize in its strengths. Less-developed countries are able to provide low-cost and abundant labor supply, while developed countries provide management, technical and financial resources. Consumers, in particular, are seen as the great beneficiaries in this global integration program.

1102

Regionalization

Regionalization started during the 1950-60s. Among the developed countries, regionalization in Western Europe was by far the most advanced and significant. The creation of the European Coal and Steel Communities in 1952, the 1957 Treaty of Rome in turn created the European Economic Community (EEC) which led to the virtual elimination of intra-EEC tariffs by the late 1960s [13]. In North America, the US-Canada auto agreement, the predecessor to the 1988 Free Trade Agreement was signed in 1965. Following the EU unification efforts in 1992, other countries expressed concerned that they might have more restricted access to the large EU market-that is, the EU might become “fortress Europe” [5]. The formation of EU has proliferated the growing interest in trading with neighboring nations as well as the fear of being excluded from the existing blocs. Krugman [10,11] and Frankel et al. [6] had debated on whether the global trend towards the formation of trading blocs would be beneficial or otherwise. Unfortunately, there is still uncertain whether the existence of trade blocs would increase or decrease the welfare of the world [14]. It was implicitly assumed that regional agreements signed or trading blocs formed would induce some inherent benefits to the participating countries, such as the reduction of customs duties and non-tariff barriers (e.g. quota) among member nations. In some free trade areas, such as The Canada-U.S. Free Trade Area (CUSFTA), all T&C trade between the US and Canada have been conducted with non-tariff or unrestricted regulatory measures. Furthermore, in the member countries’ view, trading blocs would encourage them to participate in trade with the other member countries and share the higher monopoly power of stepping into a broader participation. The consumers in the region can have more choices and better prices from a greater number of producers within the bloc. On the other hand, trading blocs may simply divert rather than trade creation because it is causing reduced demand for products from outside the bloc. For outside bloc countries, powerful trading blocs may be inclined to push for trade policies that benefit bloc members, therefore individual countries not in the blocs will be at a disadvantage. The European Union (a 15-country member Union established in 1992) and the North American Free Trade Agreement (NAFTA), including the US, Canada and Mexico, was established in 1994. The two groups accounted for 36.4 percent and 22.9 percent respectively of the world merchandise trade in 2000, was the world’s first and second largest trade blocs [20]. Other than EU and NAFTA, the economic leaders of Asia-Pacific Economic Cooperation (APEC) have decided to achieve the goal of “free and open trade and investment in the Asia-Pacific” no later than the year 2010 for member countries with more trading activities [1]. With the deeper regional integration in America, European and Asian countries, this phenomenon creates a great impact to the non-members and greatly influences regional T&C trading. It seems that two opposite and inter-related trends, namely globalization and regionalization are currently affecting T&C trading in the world.

1103

Regional Trade Integration versus World Trade Growth Textile Asia reported that intra-Asia trade flows in T&C exports recorded 17% and 23% growth respectively from 1999 to 2000. The flow of textiles from North America to Latin America had increased by 29%, and the value of clothing exports from Latin America to North America had also increased by 23% for the same period [18]. The trend towards regionalism has become evident. In the following section, the growth of world trade and the intra trade of EU and NAFTA (the two largest trading blocs) in the last decade is compared. The analysis is based on the total merchandise and the T&C trade.

Total Merchandise Trade

According to WTO and OECD statistics, it was revealed that world merchandise trade had increased from US$3,442 billion in 1991 to US$ 6,243 billion in 2000, with about 7% annual compound growth rate. For the same period, the total intra trade of EU has recorded a 4.6% average growth (US$897 billion in 1991 to US$1,347 billion in 2000), which was below the world’s average. In contrast, the total intra trade of NAFTA had recorded a 13.4 % average annual growth in the last decade (from US$221 billion to U$ 683 billion), which was nearly double the average growth rate in world trade (Fig. 3).

6000

25

5000

US$ Billion

20 4000 15 3000 10 2000 5

1000

0

Share (%) of World Merchandise Trade

30

7000

0 1991

1992

1993

1994

1995

1996

1997

World Merchandise Trade

Total Intra Trade of EU (15)

Share of EU

Share of NAFTA

1998

1999

2000

Total Intra Trade of NAFTA

Fig. 3: WORLD MERCHANDISE TRADE COMPARE WITH THE TOTAL INTRA TOTAL OF NAFTA AND EU,

1104

1991-2000. Sources: WTO Statistics and OECD Trade Statistics.

Sapir [15] pointed out that increased integration within the EU had impacted negatively on EU imports from other European Union countries and prompt their applications for EU membership. Moreover, Soloaga and Winters [16] had identified that the overall intra trade in EU showed a strong negative trend since 1986. Although the EU is still the largest trading bloc in the world, the shares of EU’s total intra trade in the world merchandise was 26% in 1991 and has gradually decreased to 21% during the last ten years as shown in Fig. 3. A USITC (1997) sector-by-sector study [19] on NAFTA found that, for 9 out of 68 sectors including T&C products had a significant effect on trade. For the remaining 59 out of the 68 sectors analyzed, NAFTA had a negligible effect on US trade value, due in part to the already low-trade-weighted average duties. On the other hand, imports from Mexico are entitled to preferences under the GSP and duty-free treatment for US inputs. Those imported from Canada were substantially liberalized by the previously implemented US-Canada FTA in 1988. Nevertheless, the OECD statistics showed that, the total intra trade of NAFTA with regard to the world merchandise trade had steadily increased from 6% to 11% during 1991-2000 (Fig. 3).

Textile Trade

The textile complex in Western Europe had an illustrious past that included England’s launching of the Industrial Revolution with textile production as well as France and Italy’s positions as the fashion centers of the world for more than a century. However, the textile trading pattern has been changed. Both the value and share of T&C export trade from the less-developed countries grew at a faster rate than exports from the developed countries. Textile production and employment are projected to decline further in Western Europe as companies relocate some or all of their manufacture activities to lower-wage countries. Although Germany, Italy, France, UK and Belgium are still the leading global textile exporters, their aggregate shares have decreased from 24.2% in 1991 to 13.6% in 2000. Thus, the reduction in trading volume also led to reduce shares in EU’s intra textile trade. Except for the year after the EU formation, the share was seen to increase from 29% to 36% between 1992 and 1993, and then gradually decreased to 24% in 2000 (Fig. 4). For the NAFTA market, the US, Canada and Mexico altogether accounted for 6.9% of world share in 2000 and their intra textile trade also recorded a positive growth. For the period 1991-2000, the value of textile exports from Mexico to the US had increased by 12 times.

1105

40

160

35

140

30

US$ Billion

120 25 100 20 80 15 60 10

40

5

20 0

Share (%) of World Textile Trade

180

0 1991

World Textile Trade

1992

1993

1994

Intra Textile Trade of EU

1995

1996

1997

1998

Intra Textile Trade of NAFTA

1999 Share of EU

2000 Share of NAFTA

FIG. 4: INTRA TRADE AND WORLD TRADE VALUES IN TEXTILES, 1991-2000 Sources: WTO Statistics and OECD Trade Statistics.

Clothing Trade

Global clothing trade shifts are very much similar to the textiles, there was a marked increase in the less-developed countries’ shares at the expense of the developed countries. Owing to the labour-intensive characteristics of apparel production, along with the minimal technology and capital requirements had fostered production shifts to occur far more dramatic than the textiles counterpart. This trend could be reflected by the increasing clothing supply delivered to the US from Mexico with value jumped from US$ 71 million in 1991 to US$ 8,193 million in 2000 which was 115 times higher. It also indicated that the intra trade for clothing in NAFTA had increased from 1% to 7% for the same period (Fig. 5). According to the USITC study, clothing is one of the sectors that showed significant imports on NAFTA intra trade, the study had found evidence of trade diversion in clothing products; there were significant increases in US imports from NAFTA partners with commensurate decreases in imports from the Caribbean Basin countries, especially the Pacific Asian economies [19, 21]. For instance, traditionally US is the major market for Hong Kong’s clothing products; however, its share in the US has reduced from 15% in 1991 to 7% in 2000 [4]. With a commonly shared Canadian-US-Mexican interest in exporting to each other’s markets, this simply implies a reduction in market share for other exporters in the world. In the EU scene, the share of EU’s intra trade in clothing had decreased form 26% in 1991 to 16% in 2000 (Fig. 5). This can partly be explained by the fact that the EU group gives preferential treatments to the Mediterranean basin countries including Cyprus, Egypt, Turkey and Morocco and other developing countries, many of which were former European colonies. Goods from these countries entering the EU are entitled to special

1106

trade privileges (treated with fewer restrictions) or free of customs duties [5]. For proximity and cost reasons, developed European countries also turn to purchase clothing from Eastern Europe countries such as Turkey and Romania instead of the Asian producers. Traditionally, the Asian countries were the biggest supplier to the EU markets in both textiles and clothing, however, products from Central and Eastern Europe are now filling the market at the expense of Asian suppliers.

25

US$ Billion

200

20 150 15 100 10 50

5

0

Share (%) of World Clothing Trade

30

250

0 1991

1992

1993

1994

1995

1996

1997

World ClothingTrade

Intra ClothingTrade of EU

Share of EU

Share of NAFTA

1998

1999

2000

Intra Clothing Trade of NAFTA

FIG. 5. INTRA TRADE AND WORLD TRADE VALUE OF CLOTHING, 1991-2000. Sources: WTO Statistics and OECD Trade Statistics.

Comparison between the EU and NAFTA

For developed countries’ markets of T&C, the most striking similarity between the EU and US is that these two regions are the world’s most attractive importers of T&C products in terms of their population, GDP and high average purchasing power. The two regions constitute the most important market outlets for the exporting countries situated in Asia [17]. As the EU and NAFTA are the most dynamic and important blocs affecting the global T&C trade, it is important to analyse further (by Independent-Samples T Test) on their overall, textile and clothing intra trade in order to determine the impact of regionalization on the emerging pattern of global T&C trade. To test the significance of the EU in the last decade, three periods are used from 1992 to 1994, 1995 to 1997 and 1998 to 2000. While NAFTA was formed at a later stage, three periods are used with 1991-1993 (pre-formation period) compared with two periods after formation, i.e. 1994 to 1997 and 1998 to 2000 in order to identify the existence of significant differences. According to the analysis, by comparing the three periods of intra trade for the EU market, only the overall intra trade for periods of 1992 to 1994 and 1995 to 1997 show significance with a mean difference of

1107

around US$350 billion (Table 1). While for the periods of 1995 to 1997 and 1998 to 2000, the mean difference of overall intra trade was only US$5 billion. It indicated that the EU integration had not induced significant increases in the overall intra trade after 1995 and also little impact on the T&C intra trade during 1992 to 2000.

Table 1: INTRA TRADE COMPARISON BETWEEN EU AND NAFTA, 1991-2000

EU

Overall Textile Clothing

(1992-1994 & 1995-1997) Sig. MD** 0.022* -350.52 0.093 -8.81 0.08 -3.80

(1995-1997 & 1998-2000) Sig. MD** 0.901 5.41 0.168 5.81 0.368 1.67

NAFTA (1991-1993& 1994-1997) (1994-1997 & 1998-2000) Sig. MD** Sig. MD** 0.014* -139.67 0.029* -198.67 0.037* -2.17 0.025* -3.83 0.035* -4.50 0.015* -5.83

Notes: * Significant at 0.05 level (2-tailed test), **MD - Mean Difference in US$ billion.

In contrast, it is found that the formation of NAFTA has stimulated the total intra trade and intra textile and clothing trade within the blocs in the three periods under investigation. The significant intra trade in NAFTA can be explained that many US T&C importers has changed their sourcing pattern and are increasingly purchased from Mexico or Canada due to the establishment of tariff-free status and nil quota requirement in clothing exports under the NAFTA. Although the formation of EU did not stimulate the intra T&C trade within the bloc, Eastern European countries such as Czech Republic, Hungary, Poland, Romania, Slovakia and Turkey have become EU’s important T&C suppliers due to their geographic proximity and preferential treatments granted by the EU. The scenario has indicated that Asian T&C firms are at disadvantage in supplying the US and EU markets with the creation of regional trading blocs in the North America and Europe.

Conclusion Globalization is a catchword nowadays. The trend towards regionalization has become evident, such as the formation of EU and NAFTA, and the new regional integrations in East Asia, South America, Southern Africa and the Greater China. While we realize that the WTO was formed to foster and facilitate world trade with the removal of tariff and non-tariff barriers, with the new wave of regional blocs formation, it seems the proliferation of regional trade blocs have somewhat undermined the broader effect. In this paper, it is shown that NAFTA has had a significant impact on the US-Mexican T&C trade and Mexico had become the largest clothing supplier to the US and a large proportion of this was in garment assembly. On the other hand, the share of EU’s total, and T&C intra trade has been decreasing, it indicates that the formation of EU has not stimulated the intra T&C trade within the 15 member countries, the purchasing pattern of Western European T&C buyers are shifting to the Eastern European and other less developed neighboring countries.

1108

Acknowledgement: The authors would like to thank The Hong Kong Polytechnic University for providing a research grant (Project A/C Code: G-T420) to support this study.

1109

References [1]

APEC (1994). APEC Economic Leaders’ Declaration of Common Resolve. Retrieved Aug. 9, 2002 from the World Wide Web: http://www.apecsec.org.sg/

[2]

Bonacich, E., Cheng, L., Norma, C. Hanilton, N. and Ong, P. (1994). The Garment Industry in the Restructuring Global Econoy. In Bonancich, E., Cheng, L., Norma, C. Hanilton, N. and Ong, P. (Eds.), Global Production : The Apparel Industry in the Pacific Rim (pp. 3-18). Philadelphia: Temple University Press.

[3]

Bonacich, E. and Waller, D.V. (1994). Mapping a Global Industry: Apparel Production in the Pacific Rim Triangle. In Bonancich, E., Cheng, L., Norma, C. Hanilton, N. and Ong, P. (Eds.), Global Production : The Apparel Industry in the Pacific Rim (pp. 21-41). Philadelphia: Temple University Press

[4]

CSD (1991-2001). Hong Kong External Trade, various issues. Hong Kong: Census and Statistics Department.

[5]

Dickerson, K.G. (1999). Textiles and Apparel in the Global Economy, 3rd edition. Prentice-Hall, Inc.

[6]

Frankel, J.A., Stein, E. and Wei, S.J. (1994). Trading blocs and the Americas: The natural, the unnatural, and the super-natural. Journal of Development Economics, 47, 61-95.

[7]

Hirst, P. and Thompson, G. (1996). Globalization in Question. Cambridge: Polity Press.

[8]

HKTDC (1999b). Practical Guide to Exporting Clothing. HK: Research Department of Hong Kong Trade Development Council.

[9]

Jilberto, A.E.F. and Mommen, A. (1998). Globalization versus Regionalization. In Jilberto, A.E.F. and Mommen, A. (Eds.), Regionalization and Globalization in the Modern World Economy (pp.1-26). London: Routledge.

[10]

Krugman, P. (1991a). Is bilateralism bad? In Helpman, E. and Razin, A. (Eds.), International Trade and Trade Policy. Cambridge, MA: MIT Press.

[11]

Krugman, P. (1991b). The Move toward Free Trade Zones. Implications of Trade and Currency Zones. A

1110

Symposium Sponsored by the Federal Reserve Bank of Kansas City. WY: Jackson Holy, August, 7-42.

[12]

OECD (2001). OECD Statistics. Retrieved Aug. 9, 2002 from the World Wide Web: http: www.SourceOECD.org

[13]

Oman, C. (1994). Globalisation and Regionalisation: The Challenge for Developing Countries. France: Development Centre of OECD.

[14]

Reardon, J., Kling, N.D., McCorkle, D.E. and Miller, C. (2002). The Formation of Regional Trade Blocs: A Theoretical Perspective using Game Theory. American Business Review, 20, 91-99.

[15]

Sapir A. (1998). The political economy of EC regionalism. European Economic Review,42, 717-732.

[16]

Soloaga, I. And Winters, L.A. (2000). Regionalism in the nineties: What effect on trade? The North American Journal of Economics and Finance, 12, 1-29.

[17]

Stengg, W. (2001). The Textile and Clothing Industry in the EU. Retrieved July 15, 2002 from the World Wide Web: http://europa.eu.int

[18]

TA (2001). Management Features: World Trade in Textiles & Clothing, 2000. Textile Asia, November, 50-62.

[19]

USITC (1997). The Impact of the North America Free Trade Agreement on the US Economy and Industries: A Three-Year Review. Washington: US International Trade Commission Publication No. 3045.

[20]

WTO (2001). WTO Trade Statistics. Retrieved Aug. 8, 2002 from the World Wide Web: http://www.wto.org/english/res_e/statis_e/statis_e.htm

[21]

Wylie, P.J. (1995). Partial Equilibrium Estimates of Manufacturing Trade Creation and Diversion Due to NAFTA. North American Journal of Economics & Finance, 6, 65-84.

1111