The Textile and Clothing (T&C) industry is one of the most global industries in the world and constitutes an important source of income and employment for many countries in the world, in particular for developing countries. In 1999, it accounted for 5.7 percent of the production value of world manufacturing inputs; 8.3 percent of the value of manufactured goods traded in the world; and more than 14 percent of the world employment. Over the past decade, the T&C industry has made significant restructuring and modernisation efforts, involving considerable reductions in production and above all employment. The T&C sector has traditionally been a highly protected sector, where the main 'importing' countries such as EU has been applying a wide range of quantity restrictions or quotas, whereas most 'exporting' countries (those from South east Asia or the Indian sub-continent) have been protecting their own markets by prohibitively high import tariffs and numerous non-tariff barriers. In this background, this paper is divided into three sections. First section highlights the EU's T&C trade policy, second section focuses on Agreement on T&C and final third section is devoted to analyse the possible impact of EU's T&C trade policy on India. It also concludes with the future steps for enhancing trade in T&C between India and EU.

The Textile and Clothing (T&C) imports into the European Union (EU) have to pass through a series of regulations before reaching the EU consumers. The T&C products are divided into 114 MFA categories. The restrictive measures are implemented per MFA category. MFA quotas present the first barriers to entry. The number of Indian T&C (high export potential) products under MFA quotas were 13 in 1989 and the export of products restricted under MFA constituted 75 percent of total Indian T&C exports to the EU. While the number of quota items increased to 17 in 1999 and the share of quota in T&C exports in total T&C exports fell. Presently around 60-65 percent of India's total T&C exports to the EU are subjected to quantitative restrictions (QRs). Thus, in terms of growth potential, the non-quota items have shown considerable scope. 

Most of the T&C imports into EU remain under some form of surveillance or the other. The T&C products which do not fall under the restrictive MFA quotas are called "basket products" and may be subjected to "basket exit procedure". This means that if the exports from a given country reach a specified percentage of the total imports of all the products into the EC in the previous year, the EC can call for consultations so as to arrive at an agreed quota level. In the absence of an agreement, a quota may be imposed unilaterally. This procedure can also be applied for single Member State if the imports reach a prescribed share in the total imports. Basket products are divided into three categories according to the sensitivity: (i) most sensitive, (ii) sensitive, and (iii) least sensitive. 

The third stage contains the EU's MFN tariff, reduced by GSP. Under the GSP, tariff for T&C products are zero. But it depends on the sensitivity of the products concerned, to which extent the MFN are reduced. The sensitive products subjected to tariff quotas, which were also distributed among the member states until 1992. Less sensitive products are subjected to tariff ceilings. In the case of tariff quotas, the Common Commercial Tariff (CCT) rate is automatically reinstated as the import limit is reached, once the tariff-free quota is used up, it will no longer be possible to circumvent the CCT. In the case of tariff ceiling- as soon as the community level ceiling are reached, tariff may be reinstated, when a member state makes a request to do so. The quotas and ceilings work on annual basis.

The Generalised System of Preferences (GSP) tariff quotas and ceiling cover a fraction of India's total exports to the EU. So, most of the T&C exports to the EU are subjected to the normal MFN tariff. In the case of T&C, these tariff rates are relatively higher than those for other manufacturer. Tariffs on clothing, in turn, are considerably higher than those on textiles. Although ad-valoram tariff reductions in T&C are much smaller than in other manufacturers price reductions for T&C will still be significant because of their high initial levels. T&C draw comparatively higher tariff than other product groups. Among OECD member, EU has the lowest tariff rates. In the South Asian countries, it is also the most severely protected sector, but is still lower than the average for the rest of the world. Except for Hong Kong, Taiwan, and Singapore, all these economies impose higher tariffs than the South Asian countries on imports of textiles and clothing into their economies. Even though, the tariff rates on clothing are much higher than textiles. In the EU market also, clothing/apparel attracts higher tariffs. 

Nearly all T&C products imported into EU from India and other developing countries are subjected to some restrictions or the other. These restrictions are imposed either by means of quotas or via the "basket exit" and "anti-surge" procedure. There is an evidence of increasing use of "basket exit" and "anti-surge" procedures, which resulted in fixing country specific quotas. The anti-surge procedures have not been evoked. The other form of restrictions/barriers used by EU to restrict import of T&C from India, in addition to the above mentioned include technical standards, labour standards, environmental regulations, anti-dumping and countervailing duties etc.

Generally, three regimes apply to imports of T&C and clothing products into the EU depending on the products, and the countries in which they originate: (i) the MFA regime, (ii) the preferential regimes for a number of Mediterranean countries and the partners in the Association of Lome, and (iii) the autonomous EC regime on imports which applies to textile products not covered by the MFA regime or the preferential regime. The division of power between the community and the member states in respect of these import regimes on textile products was not clear till the Single European Market (SEM) came into force in 1992. SEM required all the powers on imports to be vested at the community level. The MFA regime has been entirely operated by the EC Institution, either by the Council or by the Commission.

As mentioned earlier also, MFA is a framework agreement, which sets out the regulations for trade in T&C products. Individual importing and exporting countries negotiate bilateral agreement for voluntary export restraint. India's latest comprehensive agreement on trade with EU has been in operation since 1986. Under this agreement quotas are allocated to exporting countries on the products under restrictions.

Trade Coverage (TC) and Quota Utilisation (QU) is another way of measuring the MFA's restrictive effect. The figures for trade coverage refer to the potential influence of the textile policy. They represent the share of those products, which are potentially regulated by the MFA in T&C imports, irrespective of their origin. About half of the world's trade in T&C has been subjected to the MFA quotas. Although the share of quota countries in India's exports are declining. Quotas still account for about 3/4th of total T&C exports. The share of quota markets in total Indian T&C exports has fallen from 87 percent in 1983 to 75 percent in 1994. India also directs 75 percent of total T&C exports to the quota countries. Another method of analysing the restrictiveness of quotas is the QU. The average quota utilisation in T&C has not been 100 percent. The aggregate QU rates were above 100 percent in the US market during 1983-87 and even in the years after that, but in the EC market the utilisation rates have been low and only once during 1980-87, it had the utilisation rate of 100 percent (in 1987). In 1982, India had higher market utilisation rates (69.6 percent) in the EU markets than Malaysia (59.2 percent); Singapore (61.9 percent); and Poland (35.0 percent). the quota utilisation rate of 80 percent or above is considered to have restrictive effect on a country's exports. The quota utilisation rate of India in EU market was 78 percent in 1991. 

The Uruguay Round (UR) Agreement on Textile and Clothing (ATC) emerged after extensive negotiations with the developed countries on the issues of bringing international trade in T&C under the normal World Trade Organisation (WTO) rules. The UR-ATC envisages the abolition of decades of discrimination and restrictions in the international trade in T&C through its integration into the multi-lateral trade discipline under WTO. Since this ATC is a part of WTO agreement, it is applicable to all the members of WTO. Some of the T&C exporting countries such as India called for five-year phase out of the bilateral agreement which make up the MFAs, as opposed to the 15 years demanded by EU textile lobbies. The final agreement was a compromise at 10 years, where the phase-out was agreed to take place in three stages. Importing countries agreed to liberalise 16 percent of their textile imports on 1st January 1995; 17 percent in 1998; 18 percent in 2002; and the remaining 49 percent at the end of the transition period, on 1st January 2005. The ATC is expected to increase the world trade in T&C through abolition of restraints and by providing better and less restricted trading environment for trade in T&C.

The quantities of imports under quota are given an annual rate of growth based on formula of the growth rate that existed under the MFA. According to the agreement, quotas are to be increased at a faster pace than under the bilateral agreements. Thus, during Phase I, annual growth would not be less than 16 percent higher than the growth rate established for the previous MFA restrictions. For Phase II, annual growth rates should be 25 percent higher than the Phase I rate. For Phase III, annual growth rates should be 27 percent higher than Phase II rates.

T&C have over a long period occupied a place of dominance and have played a major role in India's exports to the world. It contributes more than one-fourth to the total Indian global exports. India with its strong T&C base is poised to take a leap forward in the area of exports. India has also diversified its basket during 1990s as evident from the Commodity Concentration Index (CCI). The average value of CCI for Indian global exports for T&C is 15.1, which is relatively high and demonstrates high concentration of Indian exports in T&C products.

EU has been an important destination for Indian exports of textile yarn and fabrics and cotton woven fabrics. In 1980, India exported 43.5 percent of its global textile yarn and fabric and 27 percent of cotton woven fabrics to the EU. Since then, the share of former has been falling and that of latter increasing. The share of textile yarn and fabric fell to 30.1 percent in 1995 whereas the share of cotton fabrics, woven increased to 34.3 percent in the same year. The share of both products decreased in 1996 to 22.9 percent and 28.9 percent respectively. The EU has been a major market for India's global exports of floor covering and tapestry, textile etc products and non-fur clothing. In 1996, their respective shares were 51.2 percent, 48.8 percent and 44.7 percent. Among T&C categories, EU's share was lowest in cotton (10.9 percent) and jute (10.3 percent) in 1996. Therefore, the products in which India's share is higher in EU's global imports are also the ones in which EU's share was higher in India's global exports of selected T&C in 1996. India has also demonstrated the high dynamic revealed comparative advantage (Bela Balassa) in order of importance in production and specialisation in (i) floor covering and tapestry, (ii) woven cotton fabrics, (iii) cotton, (iv) textile etc products nes, (v) textile yarn and thread, (vi) non-fur clothing, (vii) Jute, and (viii) woven textile non-cotton and silk at the SITC-3 digit main group of products over the period 1980-96.

The post-MFA scenario opens up innumerable opportunities as the quota-constraints are completely removed. Moreover, the falling share of the industrialised countries and the newly industrialised countries (like Korea, Taiwan, and Hong Kong) have helped India in recent years and this is bound to offer further expanding opportunities. The opportunities for India's textiles and garments sector are : (i) The falling import market share of the newly industrialised countries opens up new avenues for exports, especially for the synthetic garments (ii) The MFA phase-out provides opportunities for unrestrained export efforts with long-term perspective of investment and strategic focus (iii) In the transition period, non-quota markets offer considerable growth opportunities, which are still to a large extent untapped (iv) Backward integrated garment production, especially in the knitwear sector, opens up many opportunities (v) Climbing wage rates of many ASEAN and Asian countries offer considerable opportunities for India to expand its market share in the areas of structured garments, lingerie, outerwear, etc.(vi) Dissatisfaction with China in many respects is mounting in EU (vii) Indian domestic market leverage provides opportunity for accelerated export efforts as well (Vijay Katti and Subir Sen).

It is expected that India will gain from MFA phase out owing to its strength in raw material and cheap labour. Besides improved market access in the EU market a substantial portion is also expected to be vacated by the South East Asian countries such as Hong Kong, Korea and Taiwan (accounts around 25 percent of international trade in textile). This is because of the rapid increase of wages in these countries that makes labour intensive industries unviable. India can grab a substantial proportion of the emerging opportunity, considering the potential of the Indian T&C industries. The success India had in traditional non-quota market and in market like Sweden and Norway where some of quotas have been abolished during 1996 to 1999 is an indication of India's potential in this regard. 

In its bilateral agreement with EU, India has agreed to provide greater market access to imports by phasing out its import restrictions over seven years. This is to be done on a MFN basis (Table 1). The Indian Government moved cotton and wool yarn, polyester staple fibre and 20 other industrial fabrics onto the list of freely importable goods in 1995; in 1998 some fibres and made-ups were moved to this list. Minimum export prices were abolished since import restrictions on several products are due to be phased out only by 2003 under the agreements with USA and EU, a reduction in tariff rates before 2003 will have minor implications for imports.

For taking advantage of MFA phasing out, we need to overcome some of our weaknesses. As can be seen from the available statistics, EU has integrated only less sensitive products and the most sensitive category has been left phasing out in the end. Indian products, which are highly competitive in EU markets will be mostly liberalised only at the end of the transition period as integration, offered by EU does not cover the items exported by India. On the other hand, India offers duty reduction package to EU and removes articles from the negative restricted list right from the beginning, i.e. 1995 onwards - during the period when it would not get better market access to these countries.

The removal of MFA quota will also bear the gaps in competitive advantage between India and their competitors in the EU market. In order to increase the competitiveness in terms of quality and price, India has to improve their production structure. The 10 years transitional period which India accepted unwillingly prove useful in this respect. India is well placed to improve their qualities and quantities as they have advantage in wage/salaries and other non-cost factors also, however some loss will be in utility cost. The market access MoU finalised between India and EU in 1994 and ratified in 1996 and the reductions announced by India would help in increasing the availability of man made fibres. As their demand for synthetic blends are expected to remain in the future. It is imperative that production capability of synthetic blends can be strengthened in India to take advantage of growing market for man made fibre and synthetic. One more area which worry India is anti-dumping actions by the EU. The maximum number of investigations are initiated against India and those products, which are of highest interest to India. 

The Third India-EU Business Summit (Copenhagen) is the best platform to begin with a fresh and mutually advantageous step for further cooperation and enhancement in the trade in T&C between India and the European Union. Even industry captains and Government officials of both India and EU can meet to revamp themselves and make concerted efforts to improve the competitiveness and complementarities in the T&C trade. There is tremendous untapped potential for bilateral trade relationships by building upon the complementarities in both economies. The above mentioned possible EU's T&C trade policy and its impacts on India are conditional on the promised liberalisation being implemented fully and not offset by new forms of protection. This is not certain. This question should be addressed properly at this Summit. There is also an urgent need for a 'clearly defined parameters' related to the non-trade issues such as controlling narcotics trade. India should also resolve the dispute with the EU in not extending a package of concessions to the Indian textile sector on the same lines extended to the Pakistani textile industry bilaterally, instead of approaching the WTO dispute settlement body.  



About the Author: Dr. Nawal K. Paswan is Senior Research Associate, Centre for Policy Research New Delhi (INDIA), Email: nkpaswan@yahoo.com