Multi-Fibre Agreement Impact on the European Economy - Essay Example

Business Economics Multi-Fibre Agreement - Impact on the European Economy 0 Introduction Although quantitative restrictions were existing in respect of several industrial products in the context of international trade, in no other sector such restrictions were pronounced as they were in Textiles and Clothing industry. Such institutionalized quantitative restrictions though were responsible for some unintended consequences, had also helped regulating the growth of the textile and clothing industry in almost all the countries around the world. There are also arguments that the quantitative restrictions were the one single factor that has diffused the development of the industry in most of the developing countries in the recent past. The regulation of the quantitative restrictions was institutionalized through the entering of a Multi-Fibre Agreement (MFA) during the 1970s and the agreement continued to control the international trading in textile & clothing industry for almost 25 years. There was an agreement among the EU states in the year 1995 to phase out the MFA over a period of ten years. Accordingly the MFA was abolished at the end of the year 2004. The removal of the protectionist measure in the form of MFA has resulted in economic advantages to certain Western European Countries. However certain other European countries like Italy, Spain, Portugal, and Greece have raised serious complaints against the removal of the quantitative restrictions on the plea that such action had largely affected their domestic textile and clothing industry and the workers in the industry. With this background this paper presents a critical assessment of the potential benefits and problems to which European Union is subjected to due to the abolition of MFA. 2.0 Europe and Multi-Fibre Agreement Before the impact of the abolition of the MFA on the European Union can be discussed it is important a background of the causes and circumstances under which MFA was entered and the immediate effect of the abolition thereof. (Jean-Pierre Lehmann) The emergence of China as an economic power had influenced all the other countries of the world to make economic adjustments to grow at the same pace as Chinese economy developed. In the light of these changes in the world economy, the Western European countries had embarked upon an association for peace and prosperity in the form of European Union. The economic and political success of the European Union had made the Eastern European countries to request for accession to the EU. All the European countries and even China opted for accession to World Trade Organization in the wake of economic globalization. (Jean-Pierre Lehmann) The formation of the EU and accession to the WTO had resulted in some over-regulation and un-dynamic inbuilt rigid aspects in some of the European economies especially for the protection of uncompetitive sectors. This had also restricted the provision of the conducive conditions for any creative destruction or innovation. Under these circumstances countries like the Netherlands, Britain, Ireland, Latvia and the Scandinavian countries have reformed their economic structures and adjusted themselves to the changing circumstances. However there are other larger economies like Germany, France, Italy, Spain, and Poland had become less successful due to their industrial sluggishness. One of the anomalies of the international trading system resulted out of such un-dynamic environment basically to protect the domestic industry was to place the textiles and garment out of the General Agreement on Trade and Tariffs (GATT) rules in the Multi-Fibre Agreement (MFA) The agreement was entered into with the intense pressure from the governments of the developed countries since there was a fear in the import-competing firms in such nations that the rise in imports from the cost-competitive developing countries would eventually destroy the viability of their domestic textile and clothing industry.( (Grimwade, 1996) "This was a defence measure initially taken in response to the rise in the 1970s of Asia's newly industrialised economies of Taiwan, South Korean, Hong Kong, and Singapore." (Jean-Pierre Lehmann) The MFA as originally conceived was expected to create an orderly expansion of trade in Textiles and Clothing through a gradual development of the emerging economies by allowing them export to the developed markets. However subsequent renewals of the MFA in the later years only witnessed increased quantitative restrictions on most of the developing countries. (Agggarwal, 1985; Cline 1990; Underhill, 1998) In recognition of this anomaly and remove it the EU's member states in the year 1995 agreed to phase out the MFA over a period of 10 years. From then on the MFA was rechristened as 'Agreement on Textiles and Clothing' (ATC). On the abolition of the MFA at the end of the year 2004, the EU national economies and their textile and clothing industry were left to recommendation-adjust themselves to the post 2005 period. This called for a number of restructuring and innovative measures. The more dynamic European economies and the textile sector in those countries could achieve this and they claim that the abolition of MFA was a welcome measure. Whereas, other stagnant and un-dynamic economies like Italy, Spain, Portugal, and Greece failed to catch up with the intended developments and claim that the abolition of MFA had seriously hampered the development of their domestic textile sector. 2.1 Post-MFA Scenario in EU: The early periods of post-MFA scenario witnessed a large scale import of Chinese textile, clothing, and garments. The important feature of this development was that such increase in the import occurred mainly through: The manufacturing companies in China who are the subsidiaries of European firms who have invested in such companies as foreign direct investments and The import and distribution by some of the famous retailers like H&M, Carrefour, and Marks and Spencer. These imports had the distinct advantage of passing on significant value of their money to their customers. The un-dynamic European textile and garment manufacturers who did not restructure them in the 10 year phasing out period launched an aggressive campaign against the Chinese textile imports. These entities claimed that China through the large textile imports was "destroying Europe's industrial fabric" 3.0 Economic Justification for Protecting the Textile and Clothing Industry in EU: "Textiles and clothing form one of Europe's major industrial sectors, notwithstanding increasingly fierce global competition and some relocation of manufacturing to lower-wage countries." (Euratex) Despite the comparatively higher wage cost differences between the emerging economies and European countries, the European textile and clothing industry is considered to be competitive because of the higher levels of productivity. In addition the industry possesses more enormous strength in innovation, unmatched quality, creativity in new designs and high fashion orientation. Nearness to one of the major global textile and clothing market also places the European textile industry in a distinctly advantageous position. It has been claimed by some of the EU member countries that the key consequences of the trade liberalization meted in to the textile and clothing industry by abolishing the MFA are: Intensified competitive pressure from the emerging economies and developing countries mostly China being the rapidly expanding emerging economic power Necessity to recommendation-balance the price, quality, and delivery time of the apparel and clothing goods. Increase in the off-shoring of production leading to closure of manufacturing units and loss of employment opportunities.(Clothing Europe) It is with this background that certain European countries insist EU to impose quantitative or other restrictions again on the imports of textile goods to protect their domestic industry and the potential problems of unemployment resulting from the stiff competition from the imported goods. Such an action of protection may bring the following positive effects to the EU economy: (1) Protection of Domestic Textile Industry Despite the availability of a period of 10 years preparatory period before the MFA was finally abolished, for restructuring their economies as well as the textile industry, countries like Italy and Portugal have not taken adequate steps to strengthen their position in the context of international competition in the textile goods. Though the industries in these countries possess a potential comparative advantage they might not have yet exploited the potential economies of scale. A continued short term protection from established foreign competition especially from countries like China would allow the industry to develop its competitive advantage. Once the industry in these countries reach the position of strength to withstand the international competition the trade protection may be withdrawn. (2) Protection of Employment Opportunities It is claimed that in the first half of 2005 over 1000 jobs were lost per day in the EU and according to the European Apparel and Textile Organization more than one million jobs would have been lost by the end of the year 2005. (TSSA) "One danger of over-specialisation is that unemployment may rise quickly if an industry moves into structural decline as new international competition emerges at lower costs." (Tutor2u) This would affect the textile industry in the countries like Spain and Greece by making to move to structural decline. By ensuring that the import restrictions is followed for some more time the EU may ensure a phased deployment of the labour in the textile sector of these countries to other productive sectors which was not attempted during the period immediately before the abolition of MFA. Apart from the lower costs there are other factors that EU may take advantage of by protecting the local industries. ""Other" factors include labor skills, workforce availability, managerial quality, proximity to markets, infrastructure suitability, degree of market access, quality, and cost of material inputs, availability, and cost of capital, level of service, and business climate."(Bernard A. Gelb) 4.0 Potential Issues that European Union may face with Protectionism: In fact if EU decides to extend the protection to textile and clothing industry in the wake of the claims of the countries Italy, Spain, Greece and Portugal who have not made adjustments to their domestic industry for a global exposure it will act as a restraint on the free trade and will destruct the atmosphere of economic globalization. Studies worldwide indicate that protectionism has brought only a few benefits while imposing substantial costs and associated issues in the domestic economic scenario. The issues that EU may have to face if the requests of Italy etc are acceded to with respect to the protection to the domestic textile sector are: (1) Market Distortion It has always been proved that protection to any domestic industry is an inefficient and expensive means of covering the employment opportunities. The trade restrictions would also prevent the efficient manufacturers accessing the world markets freely. In fact the essence of economic globalization would be greatly hampered if there is the continuance of the protection to the domestic textile and clothing industry. (2) Higher Prices for Consumers The major issue that EU may face is that the trade barriers may result in pushing up the prices of the textile goods which will be passed on to the consumers. This will also amount to insulation of the inefficient textile sector from competition. Such an action would penalize the foreign manufacturers and would lead to an inefficient allocation of resources not only domestically but also in the EU as a whole. The import restrictions would burden the community with unnecessary additional costs. These costs would not arise in case if there is a free trade environment. (3) Loss of Economic Welfare Another major issue that may arise with the continued protection of domestic textile industry is that such protection results in a deadweight loss of consumer and product surplus which is a distinct disadvantage to the consumers not only of the countries which raise voice for protection but for the EU as a whole. The consumer and product surplus are clearly lost due to an inefficient allocation of the available resources. There will be a significant restriction on the consumer choices because of higher prices in the domestic market. (4) Inefficiencies in Production With protection offered to the domestic industry the manufacturers may have only very little incentive to bring about innovations and reduction in the production costs. This will be a definite disadvantage to EU, as the monetary impact of this inefficiency will naturally be passed on to the consumers. (5) Effect on the Distribution of Income The higher textile good prices resulting from the protectionist measures would hit mostly the people in the lower income brackets, because it is quite usual that lower income families spend a comparatively larger proportion of their income on clothing among other things. Thus the import restrictions may result in a regressive effect on the distribution of income with more inequalities creeping in. (6) Lower Protection for Employment One of the main contentions of the countries in favour of the continuance of protection to domestic textile industry is that such measures protect the loss of relatively low skilled and low paid jobs in the industry to a great extent since in a free trade context the industry faces still international competition. However studies have disproved this contention. They suggest that in the long term such protection proves to be expensive and inefficient in the matter of protection of the domestic employment potential. "According to the DTI study on trade published in 2004, since 1997 UK employment in textiles manufacturing has fallen by 45%, in clothing manufacture by nearly 60%, and in footwear manufacturing by around 50% - and this despite the protection afforded to European Union textile manufacturers." (Tutor2u) The EU has to provide for large amounts for protecting the employment opportunities in the industry . Alternatively this amount can be spent in other more productive ways. The opportunity cost of protecting the textile industry in EU is significantly higher as at any point of time it may not be possible for the European textile industry would be able compete effectively against the low cost of China which might necessitate a permanent protection being offered to the industry which is highly detrimental to the EU economy. (7) Chances of Trade Wars With the enhanced globalization EU has to depend for its exports on emerging markets like China and India. If there is a continued protection to the domestic clothing industry in the EU this may affect the exports of textile goods from the emerging economies. Such countries in retaliation may impose restrictions on the goods that are being imported from the EU member countries. Such trade wars are undesirable for the global economic development. (8) Negative Multiplier Effect If EU imposes renewed import restrictions on other countries there will be a reduction in the total world trade which will have a negative multiplier effect affecting all the countries involved. This is so because according to macro economic principles, the exports are an injection of demand in to the circular flow of income of all the countries worldwide. The negative multiplier effects would become more prominent when the intensity of trade disputes escalate and result in retaliation. (9) Higher Level of Taxes and Higher Prices If at all EU decides to extend the protection to textile and clothing industry on the request of certain EU member countries, it would impose a double burden on the taxpayers who are the consumers. Evidence can be seen from the agricultural sector of Europe where the cost to the taxpayer is estimated to be around 50 billion per year. In addition the consumers have to bear the burden of an extra 50 billion in the form of artificially higher prices of food items. This amounts to an increased budgeted expenditure of 800 per family per year. The continued trade barriers had resulted in an impact of $ 500 billion a year towards lost income. 5.0 Conclusion: In general it can be stated that the protectionist measures in the textile industry would rarely achieve their intended objectives. Such measures would be very expensive to administer and only encourage inefficiencies among the domestic manufacturers which would naturally result in higher costs being passed on to the consumers. Protectionism is undoubtedly not the correct approach to mitigate the issues arising from structural unemployment. Mainly such protectionist measures restrict the free trade and act against the principles of theories of comparative advantage. In effect the import restrictions reflect the failure and inefficiencies of the government concerned. They also exhibit the inherent inability of the governments in intervening in the market control mechanisms. Since there will be increase in the number of issues that continued protection may pose, it is not advisable for EU to accede to the requests of the countries like Italy, Spain, Portugal and Greece to continue to impose trade and import restrictions on the textile and clothing industry. References: Aggarwal, V. K. (1985) Liberal Protectionism: The International Politics of Organised Textile Trade, Berkeley, CA: University of California Press Bernard A. Gelb 'CRS Report for Congress - Textile and Apparel Quota Phase out: Some Economic Implications' http://www.opencrs.com/rpts/RS20889_20050610.pdf. Cline, W. R. (1990) The Future of World Trade in Textiles and Apparel, revised edition, Washington, DC: Institute for International Economics. Clothing Europe 'Comparative Perspectives on Trade Liberalization and Production Networks in the New European Clothing Industry' http://www.unc.edu/depts/europe/conferences/04/global/conference_outline.pdf. Euratex 'Meeting Global Challenges in the Textile & Clothing Market - the Way ahead for Europe' http://www.euratex.org/download/publications/others/euratex_brochure.pdf. Grimwade, N. (1996) International Trade Policy, Routledge London Jean-Pierre Lehmann 'Europe can help ensure China's Rise is Peaceful' Europe's World http://www.europesworld.org/EWSettings/Article/tabid/78/Default.aspxId=4bfbca25-14b7-48d4-81b1-db56bc0405f7 TSSA 'Bra Wars' TSSA Journal November/December 2005 http://www.tssa.org.uk/article-60.php3id_article=2643 Tutor2u 'A2Macroeconomics/International Economy: Protectionism' http://www.tutor2u.net/economics/revision-notes/a2-macro-protectionism.html Underhill, G. R. D. (1998) Industrial Crisis and the Open Economy: Politics, Global Trade and the Textiles Industry in the Advanced Economies, London: Macmillan Read More