ANALYSIS: Duty-free access to the US doesn't add up
If passed, the New Partnership for Development Act (NPDA) tabled last month would offer duty-free access to the US for products from the world's poorest countries. But the Act's totally well-intentioned plans for correcting some of the worst injustices in the world's trading system are also seriously ill-informed argues Mike Flanagan.
The US has some of the highest import duties on clothes in the world. Not quite as high as India - but a very great deal higher than other rich countries see the need for.
And the US treats most of the world's poorest and most vulnerable countries just as harshly as it treats big, tough trade competitors like China or South Korea.
So most synthetic fabric blouses arriving in the US get 26.9% duty slapped on them, whether they're made in Bangladesh or Hong Kong.
The European Union, on the other hand, slaps a relatively restrained 12% onto that shirt if it's made in China - and, under certain circumstances, nothing at all if made in over a hundred poor or neighbouring countries
In fact, the US does allow duty-free access from most African countries under its AGOA (African Growth and Opportunity Act) system.
Indeed, it goes further: until 2012, AGOA-compliant clothes bear no import duty even if made with raw materials from non-AGOA countries - which, practically always, means China or Taiwan.
Extended access arrangements
The New Partnership for Development Act (NPDA) wants to extend both duty-free access, and AGOA's special arrangement for raw materials from other countries (known as the "third country provision"), to countries outside Africa officially categorised by the United Nationa as Least Developed Countries, or LDCs: the countries where 80% of the population earns less than $2 a day.
And who could possibly argue with that?
Well, the usual suspects of course. The American Manufacturing Trade Action Coalition (AMTAC) calls the Bill "a substantial threat."
Its director even adds that two proposed beneficiaries - Bangladesh and Cambodia - are "global superpowers in terms of apparel exports" - a description that has to be the silliest hyperbole ever used by a protectionist. Though there's an awful lot of competition for that dubious honour
But, however much it sticks in my craw to admit it, AMTAC has a point.
Because the AGOA's acceptance of fabric from non-AGOA countries has a very strange result. With African wages so low, most of the cost of a $5 shirt lies in the fabric, thread and buttons imported from China.
So in a typical polyester blouse made in Kenya or Lesotho, the biggest beneficiaries of the duty-free concession are mill workers and owners in China.
Finite fabric industries
Now this really doesn't matter very much in the AGOA countries. They have tiny apparel industries, and the reason they're allowed to use Chinese fabric is their fabric industries are even tinier.
Without the concession over foreign fabric, there'd be practically no apparel exports from Africa at all. Whatever benefits the third-country concession gives China, it brings jobs and economic development to some of Africa's poorest countries that just wouldn't exist otherwise.
But the other LDCs the Act will apply to are quite different. Outside Africa, most LDCs just aren't ever going to develop manufacturing industries.
Whatever the future holds for the Solomon Islands, Bhutan and Kiribati, it won't be massive T-shirt factories.
The Act, in practice, is relevant in just three countries: Bangladesh, Cambodia and Laos, and while hardly superpowers, Bangladesh and Cambodia have major apparel industries.
And it's at least understandable why American protectionists are pretty sceptical about offering them concessions that had very little effect on American businesses or jobs when offered to Swaziland or Uganda.
Rich country help
Now the apparel industries in Cambodia and Bangladesh - which account for the lion's share of those countries' exports and jobs - really do need help from the world's rich countries.
They survived the changes after quotas were removed in 2005 surprisingly well - mainly because of the temporary quotas the EU and US reimposed against China.
The EU's withdrawal of those quotas against China next year - and similar US relaxation in 2009 - both threaten theses two countries' apparel businesses. Both are also seriously threatened by the worldwide rise in food prices.
The Economist's index of worldwide food prices on commodity markets was a staggering 31% higher in October 2007 than a year earlier.
Food for thought
In rich countries, where food accounts for a small proportion of people's spending, this really doesn't matter much: indeed, it's often a good thing since it makes their farmers richer.
In poor countries, it's devastating. Food, according to the International Monetary Fund, accounts for 60% of the Bangladeshi consumer price index: a 31% rise in rice prices translates almost exactly into a 31% rise in the cost of living for most Bangladeshi workers.
Throughout the poor world - from Bangladesh to Egypt - apparel factories are having to deal with the cost pressures of workers desperately needing substantial wage increases to match, while buyers expect the past few years of constant price declines to go on.
So surely anyone who cares about the future of poor countries should be lobbying for the NPDA, and its duty concession for poor countries? Er, no.
Bangladesh isn't just rich in apparel factories: now hardly a week goes by without a new story of raw materials factories being built there.
Why? Because the country gets duty-free access to the EU, (which accounted for three-quarters of the country's clothing exports) only if they're made from local or EU raw materials.
Now propagandists for developing countries - especially the lazy kind who never challenge other propagandists' assertions - attack this practice, known in the jargon as Rules of Origin, or ROO.
They claim it stops Bangladesh exporting clothes - which, for sheer idiocy, beats even the protectionists' nonsense about being a superpower. Since Bangladesh has now overtaken Turkey, India and Mexico to become, after China, the world's largest supplier of clothing to rich countries.
OK, say the development propagandists, it doesn't stop exports: it just makes them pricier than necessary, since the Rules of Origin actually mean most clothes Bangladesh exports don't qualify for the duty concession.
Again, a bizarre claim: 79% of EU apparel imports from Bangladesh in 2006 were duty-free. Poor-country propagandists keep on quoting data from years ago - partly because they can't be bothered doing their own homework.
But most importantly because they can't understand that capitalist businesses, realising the value of Bangladesh, have been queuing up to invest in raw material operations for the past five years.
Alternative production source
Europe's apparently restrictive rules have spawned in Bangladesh a virtuous circle of investment, an increasingly self-reliant industry, and a real alternative production source to China.
Those rules have had less impact in Cambodia, because Cambodian manufacturers have chased US business more aggressively.
Why would they want to use Cambodian raw materials when they're surrounded by countries with strong raw material industries and they're going to get zonked by America's sky-high import duties whatever they do?
But the same principle applies: link US duty-free access to using Cambodian raw materials and Phnom Penh airport will be choked with fabric and trim manufacturers wanting to come and set up shop.
I'd actually go one stage further. I'd link US duty-free access to raw materials made in the country, or in the free-market areas these countries are developing with their neighbours.
India's struggling fabric mills could export to Bangladesh and the resultant clothes could be exported duty free - so long as India finally showed some real commitment to bringing down its discriminatory import duty on US and European fabric.
But that would be slithering over the brink and advising our transatlantic cousins on how to legislate - which is about as doomed to failure as trying to get them interested in real football (the version where the ball stays at the players' feet).
So I'll stay within the limits I set myself sitting down to write this piece, and make just one request.
You won't hold back the apparel industries in Bangladesh and Cambodia by limiting duty-free access to clothes made from US or local materials: you'll set off a wave of new investment which will make them stronger economies, and more able to stand up to the real superpower.
Mike Flanagan is chief executive of Clothesource Sourcing Intelligence, a UK-based consultancy that provides the western apparel buying community with objective information on apparel production, trade, price competitiveness, and apparel producers in over 100 countries.
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