The elimination of quotas restricting international textile and clothing trade on 1 January 2005 will lead to a significant drop in prices. It will also reduce companies' profit margins and force many firms into the red unless they take urgent steps to minimise costs and eliminate wastage at all stages of the supply chain.

Since quotas were first introduced in the 1950s they have restricted supplies, created scarcity, and driven prices higher than those of goods in unrestricted markets. Once the brakes are finally released in 2005, global supplies will surge and prices and profits will tumble.

According to the latest issue of Textile Outlook International, worries about the impact of quota elimination are not just confined to industrialised countries. With less than a year to go before the elimination of quotas, developing countries are also getting jittery.

Some are even calling for a postponement of the deadline for phasing out quotas beyond 1 January 2005 having pressed over several decades for quotas to be abolished.

Moves to have the quota phase-out postponed were initiated in March 2004 with the Istanbul Declaration. This called for a World Trade Organisation (WTO) emergency conference to be held on 1 July 2004 to discuss an extension of quotas until the end of 2007.

Foretaste of what might happen
A foretaste of what might happen in 2005 when quotas have been removed was witnessed in 2002. Following China's accession to the World Trade Organisation (WTO) in late 2001, quotas were lifted on a number of Chinese export items. Chinese shipments to the USA surged by 125 per cent and prices were slashed by an average of 41 per cent.

Sourcing prices have also fallen in instances where quotas have been removed on supplies from other countries. In almost all cases, declines of 10-20 per cent have occurred within a year of the quota being eliminated.

Another cause for concern, according to Textile Outlook International, stems from developments in retailing. By 2010, according to international management consultants Kurt Salmon Associates (KSA), the top ten retailers could be in a position to control almost 25-30 per cent of world textile and apparel trade.

Producers in developing countries fear that giant retailers will increasingly call the tune in the liberal trading environment of 2005 and beyond. Small manufacturers will be at the mercy of large buyers, who are likely to turn to China for big volumes and low prices.

In trying to predict what might happen in 2005, some analysts have pointed to Japan. In this market China has had a free rein because the Japanese authorities have chosen not to participate in the quota system. Unhindered by quotas, China has been able to build up its share of Japanese clothing imports to 80 per cent - making it difficult for other countries to gain a foothold. Judging by Japan's experience, the prospects for the textile and apparel industries in higher cost countries would appear to be bleak.

Declaration of support
The Istanbul declaration was made by representatives of the industries in one developing country, Turkey, and in one developed country - the USA. Support for the declaration also came quickly from other developing countries, notably Mexico and at least ten countries in Africa.

It is not surprising that the declaration should win the support of African developing countries. These nations are among the poorest countries in the world and their embryonic textile and garment industries are among the most fragile.

Their garment industries have grown significantly as a result of the US African Growth and Opportunity Act (AGOA), enacted in October 2000. But the elimination of quotas in 2005 poses a threat not only to their growth prospects but also to their survival.

Under the main provisions of AGOA, garments made in Sub-Saharan African countries are permitted to enter the USA duty-free and quota-free, subject to certain restrictions. However, quota-free access will no longer be a benefit in 2005 when textile and clothing trade is liberalised on a global basis. Sub-Saharan African garments will still benefit from tariff-free treatment. But even this will depend on the use of US or African fabrics after September 2004. Many African manufacturers have only remained competitive by using fabrics imported from Asia.

In order to protect producers in Sub-Saharan Africa, on 1 April 2004 US legislators introduced a proposed bill which would speed up plans to extend AGOA by seven years until 2015 and to extend the third country fabric provision by three years until 2007. The proposed bill has the support of both Republicans and Democrats.

Garment firms in Sub-Saharan Africa say they can only compete by using fabrics from the world's lowest cost sources and therefore want the third country fabric provision to be extended indefinitely. But textile firms in the region want the provision to end in September 2004 so they will have a captive market.

"Spirit of AGOA"
In fact the "spirit of AGOA", as conceived by US legislators, is to encourage the embryonic garment industry to develop but, at the same time, to provide an incentive for investors to build upstream capacity so that a full textile supply chain becomes established in Sub-Saharan Africa.

This, experts believe, is the only way the garment industry will stand any chance of survival, given the trend towards "full package" supply and the logistical complexities of getting materials into and out of Sub-Saharan Africa.

When the third country fabric provision was introduced in 2000, it was given a four-year life in order to provide enough time for garment industries to become established and thereby create a market for would-be investors in local yarn and fabric production. Also it was designed to provide a breathing space which was short enough to attract would-be investors in textile mills, but just long enough for yarn and fabric mills to be planned, built and fully commissioned.

For some, however, the proposed extension may already be too late. At a conference held in mid-March in Mbabane, Swaziland, industry representatives said they were facing resistance in securing orders as US buyers were not willing to commit themselves unless they were certain that an extension of the third country fabric provision would go ahead.

Two weeks later firms were starting to cut workforces because there was no news that the USA would extend the third country fabric provision beyond 30 September.

The plight of garment companies in Swaziland provides a small foretaste of what will happen worldwide on 1 January 2005. Falling prices and margins will affect all companies, according to Textile Outlook International.

To compete, manufacturers will have to take urgent steps to minimise costs and eliminate wastage at all stages of the supply chain. Those in higher cost countries will only survive by offering excellent service and differentiating themselves from their lowest cost competitors.

"Thinking the Unthinkable: Will the Textile and Apparel Quota Phase-Out Be Postponed?" Textiles and Apparel in China: Preparing for Quota-Free Markets in 2005 and Beyond" and "Creating and Preserving Value in the Textile and Apparel Supply Chain: From Fibre to Retail" were published in Issue No 109 of Textile Outlook International.

Expert Analysis

Life after 2004: The Clothesource Guide to a Quota-free World

What's the world going to be like after 2005?
December 2004 doesn't just mark the end of most apparel and textile quotas. It marks the end of the current world system of import duty, and special exemptions. A number of new Free Trade Areas are due to come into existence on January 1 2005 - including the biggest and most ambitious textile free trading zone ever, the PanEuroMed area. It comes shortly after the European Union's biggest-ever expansion - and after the scheduled expiry of some crucial elements of the Africa Growth and Opportunity Act (AGOA)

Yet many industry professionals, still deeply misunderstand what is happening right now, what is definitely going to happen, and what is still in the area of speculation.

To find out more about this report, download your sample or to order your copy, please follow this link