Expiring Temporary Safeguards on Apparel Trade: Implications for U.S. Cotton

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EXPIRING TEMPORARY SAFEGUARDS ON APPAREL TRADE:

IMPLICATIONS FOR U.S. COTTON

Maria M. Mutuc

The 1995 Agreement on Textiles and Clothing (ATC) provided for the calculated liberalization of the textiles and apparel sectors over a 10-year period except for some safeguard measures ending on December 31, 2008.  These safeguard measures allowed for import restrictions by the U.S. on certain categories of cotton apparel from China.  Using a price equilibrium simulation model of the U.S. cotton and cotton apparel markets, results point to lower cotton apparel prices in the U.S. by as much as $ 0.25 per kilogram while U.S. cotton prices decline by less than $ 0.01 per kilogram once these safeguards expire. 

I.          INTRODUCTION

           Trade in textiles and clothing has a long history of quantitative restrictions through the Multi-Fiber Arrangement (MFA).  Under the MFA, developed textile importing countries negotiated bilateral agreements with developing exporting countries to set quotas on a country-specific basis. This contradicted the principles of nondiscrimination where all countries are treated equally with respect to trade measures and of reducing or avoiding absolute quantitative limits.   The Uruguay Round of GATT negotiations resulted in the elimination of the MFA with the establishment of the WTO beginning in 1995.  The Agreement on Textiles and Clothing (ATC), which replaced the MFA, provided for the phased elimination of quotas within a transitional period of ten years, bringing the textiles and clothing sector back into the structure of the multilateral trading system.

           Under the ATC, a minimum percentage of an importing country’s 1990 volume of textile and apparel imports was specified to be freed from quotas and hence “integrated” into the GATT-WTO disciplines in four phases: 16% on January 1, 1995, an additional 17% on January 1, 1998, another 18% on January 1, 2002, and the remaining 49% on January 1, 2005. Products not yet liberalized but subject to quotas or restrained in some manner had their quota growth rates increase by 16%, 25% and 27% in each phase, respectively.  Although the ATC required importing countries to integrate articles from each of 4 categories: tops/yarns, fabrics, made-ups, and clothing , they were given the flexibility to select which articles to integrate at each phase as no allocation percentages were specified.  Also, the universal set of product lines included not just items that were previously subject to the MFA but also articles that had never been restricted for some importing countries.[1]

           This allowed for developed importing countries to defer integration until January 1, 2005; 89% of apparel imports (most of which are high-value-added clothing items) and 47% of textile imports were left to be integrated in 2005 (USITC, 2004b) while those integrated in the first three stages were either not subject to MFA quotas or were subject to non-binding quotas or quotas not fully utilized by exporting countries.[2]

           To dampen a surge in imports and avoid a “hard landing” for domestic producers as a result of this “backloading”, the U.S. formed preferential and regional trading arrangements (PTAs/RTAs) concurrent and in response to the ATC.[3]  U.S. producers used the ATC’s 10-year transition period to transfer production offshore by means of PTAs that accorded duty- and quota-free imports from partner nations willing to abide by certain rules of origin (ROOs) while non-members remained constrained by MFA quotas and high tariffs.  ROOs ensured that U.S. imports incorporated as much U.S. content as possible by allowing firms to process goods offshore and avoid paying duty on U.S. components incorporated in the finished, re-imported items.  As a result, there was a shift from domestic (U.S.) to offshore regional production (Ahmad, 2004; Nordas, 2004).  

These PTAs accorded some advantage to member countries and diverted trade away from lower cost non-member countries, particularly in Asia and China.  This advantage would have been fully eroded on January 1, 2005 with the expiration of all quotas under the ATC.  However, the ATC included a mechanism of transitional safeguards available to importing countries; in particular it allowed importing countries to impose transitional China-specific safeguards, textiles and clothing specific safeguards, and countervailing duties.  As a transitional safeguard mechanism, the U.S. and China initially negotiated a Memorandum of Understanding (MOU) that re-imposed limits on Chinese exports of “core” apparel products (mainly of cotton) to the U.S. from January 1, 2006 until December 31, 2008.  But following a surge in Chinese exports of apparel into the U.S. when the ATC concluded in 2004, the U.S. re-imposed quotas earlier in the second half of 2005.  These transitional quotas limited China’s access to the U.S. apparel import market.  In turn, it enabled PTA members to retain some of its advantage against China; at the same time previously constrained countries remained competitive in the U.S. import market.   

Once the safeguards expire and as the trading system moves to a completely free trade environment, U.S. producers will shift some of their assembly operations away from PTA countries or altogether source the garments from China and Asia where there is little use of U.S. fabrics in apparel production.  With this shift of apparel production from protected and more developed countries to China and even to other previously constrained Asian countries with policies that favor domestic fiber producers and with significant cotton production, the net effect on the demand for U.S. cotton becomes an empirical question. 

While models that link the whole textiles and apparel sector to the cotton fiber sector exist (Mohanty and Pan, 2004; Diao and Somwaru, 2001; MacDonald et al, 2001; Elbehri, Thomas and Martin, 2003; Elbehri, 2004; MacDonald, Pan et al., 2004) in either a partial or general equilibrium setting, there is no extensive model of the cotton apparel sector that links to the cotton fiber sector for the U.S. 

This article develops a partial equilibrium framework that (a) vertically links the downstream cotton apparel sector to the upstream cotton sector; and (b) horizontally links the U.S. with representative major trading partners or regions in the cotton apparel and cotton sectors.  The result is a static, multi-region, two-market partial equilibrium framework that can empirically assess the amount of trade created or diverted across the U.S.’ trading partners in the cotton apparel sector and translate these resultant shifts into movements in U.S. cotton production, consumption, trade and prices once the remaining safeguard measures against China expire by the end of 2008.

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[1] According to a report by the U.S. International Trade Commission (USITC) in 2004, 29% of U.S. textile and apparel imports that were subject to GATT integration were either non-MFA (e.g., pure silk goods and jute bags) or articles not covered by the U.S. quota program (e.g., seat belts, parachutes and umbrellas).  U.S. imports of articles covered by the ATC totaled 17.1 billion square meters equivalent (SMEs) in 1990 (the base year for determining the volume of trade for GATT integration) of which, 71% or 12.2 billion SMEs were U.S. imports of MFA products (USITC, 2004a). 

[2] Out of the 937 quotas applied by the U.S. under the MFA, none were integrated in the first stage.  However, while 15 and 88 product lines were integrated in the second and third stages, respectively, these items had low quota usage.  Only 11% of all MFA quantitative restrictions were eliminated before January 1, 2005; 6.5% were eliminated from clothing restrictions (Mayer, 2004). 

[3] The U.S. has preferential agreements with a range of Sub-Saharan African countries under the Africa Growth and Opportunity Act (AGOA), the Andean Trade Preference Act (ATPDA), Caribbean Basin Trade Partnership Act (CBTPA, formerly CBI), and North American Free Trade Agreement (NAFTA).  In addition, it has bilateral free trade agreements with Australia, Chile, Jordan, Morocco, and Singapore.