Indias cotton stance has sparked a new round of aggressive trade protection

India's cotton stance has sparked a new round of aggressive trade protection

India's restrictions on raw cotton and cotton yarn exports have given the country the advantage of lower material costs - at least for a while. But its actions have also sparked a round of aggressive trade protection, especially by other textile exporters in the region, writes Mike Flanagan.

Of all the countries that expected to do well when the EU and US abandoned quotas in 2005, India has probably had the most disappointing record.

From 3.5% of the rich-world clothing market in 2004, India increased its share over the following six years to just 3.9% in the third quarter of 2010 - with the value of its clothing exports down 7% in the six months to September.

Over the same period, China's share grew from 23.7% to 46.5%. Bangladesh - less impacted by quota in the first place - saw its share soar to more than twice that of India. And Vietnam has overtaken India in its sales to the US, accounting for 5% of US imports in the third quarter of 2010, compared to India's 4.4%.

All sorts of things have been blamed for India's lacklustre performance. But what they all come down to is the lack of any single competitive advantage over other Asian garment suppliers.

Five years ago, some observers seriously argued India's great advantage was going to be its apparently integrated textile industry. To people with limited understanding of today's apparel industry, India's extensive cotton-growing, spinning, weaving and garment-making facilities seemed to give its clothing factories a real advantage over Bangladesh or Vietnam, which relied on importing almost all their raw materials.

Actually, though, those Indian textile resources proved more of a handicap over the past few years.

As long as governments avoid creating barriers, fabric or yarn can be moved around the world easily and cheaply - meaning that since quotas disappeared, there's hardly been any difference between cloth and yarn prices and availability in any garment exporting country.

So while Vietnam and Bangladesh have been able to turn fabric from many countries into good value, well-made clothing, India's clothing factories have been held back by the country's limited and relatively inflexible spinners and weavers.

Meanwhile, Indian government policy has consistently been torn between the conflicting - and stridently expressed - demands of cotton growers, spinners, weavers and clothing makers.

But the cotton panic seems to have changed that - at least for the moment.

Lower raw material costs
Because its clothing industry has expanded so slowly, India has developed a peculiarity: it is almost the only substantial clothing exporter which grows more cotton, and spins more cotton yarn, than its clothing factories use. Its spinners, for example, produce around a million tonnes more cotton yarn than Indian factories need.

So at a time of worldwide cotton scarcity, its cotton growers and spinners would be selling raw materials to help Bangladesh, Pakistan and China to carry on making better value clothes than India does.

India's initial reaction was to limit raw cotton exports, which meant Indian cotton prices grew more slowly than elsewhere. India's year-on-year inflation in cotton yarn by the end of November, for example, was half that of China - so its factories were paying a third less for cotton yarn than their Chinese competitors, and less than Bangladeshi or Pakistani factories too.

Now India has extended the restrictions to cotton yarn - an action that, ultimately, ought to widen the yarn price gap that has given Indian garment factories their first competitive advantage this century.

Although export bans breach World Trade Organization (WTO) rules, Indians are likely to enjoy some lower raw material costs for a while.

Aggressive trade protection
But the country's action has sparked a round of aggressive trade protection, especially by other textile exporters in the region.

India, Bangladesh, Vietnam and Peru, for example, in late November forced the WTO to reject EU concessions for Pakistani apparel and textile products intended to boost recovery from the August floods.

That followed an appeal by Bangladesh (which exports three times as many clothes as Pakistan) about how badly it would be affected by the concession to Pakistan.

Bangladesh, of course, has its own competitive edge: it's the only significant garment exporter with duty free access to the EU and Japan - and it's clearly determined to stop any other major exporter sharing that advantage. Understandable, but pretty shameless.

Indeed, the very day before the WTO meeting it revealed the Japanese Prime Minster had agreed to follow the changes in EU rules of origin announced earlier in the month, making duty-free access to both the EU and Japan easier for Bangladesh. And Cambodia is almost the only other country able to take advantage of those changes.

Unsurprisingly, Pakistani weavers are now lobbying their government to ban cotton and yarn exports - and a lobby's emerging in India to restrict polyester exports as well.

Restrictions short-lived?
In my view, India's export restrictions aren't going to be around for long. They are probably more to do with worries about the political impact of basic domestic clothing prices growing too fast than about wanting to make it easier for big factories to compete with Vietnam in selling to Wal-Mart. But as well as that:

  • The restrictions help Indian garment makers - but are against Indian growers' and spinners' interests. Today's high cotton and yarn prices mean growers and spinners aren't opposing the restrictions as savagely as usual; but if prices fall, opposition will certainly stir.
  • India's trying to get a Free Trade Agreement with Europe. Europe's textile industry has been far more supportive of this than their US counterparts have about free trade with low-income textile exporters, because European spinners and weavers believe there's a market for their products in an India that abolishes its barriers to high-quality textile imports. But that support can easily turn into hostility if India keeps restricting the sale of cotton and yarn.
  • One reason for India's weak garment exports is its lack of good garment and textile making capacity. Its programme of centrally-planned Integrated Textile Parks is key to building more capacity, but the programme is proceeding at a glacial pace. The problem used to be getting them built. Now, though the Indian government claims 25 of the 40 approved since 2005 have got to a stage where some production has started, those 25 have between them generated just 15,000 jobs, or just 600 per complex. The country's textile minister Dayanidhi Maran claimed in 2009 that the programme would create 800,000 new jobs. So the programme needs businesses to pay for new factories in those parks: Indian spinners and weavers won't do that if their profits are depressed by government regulation, and foreigners won't if India remains prepared to impose export bans overnight.

So whether India's export barriers last, they signal what looks like a new fashion among Asian textile and garment exporters to seek competitive advantage by imposing their own rules, and lobbying against rich-country rule changes that might help their neighbours.

Many - especially the Indians - feel especially aggrieved that their textile exporters have been hit by letting their currencies float freely while China keeps the value of its currency down.

Europe and America shout loudest about China's alleged "currency manipulation", but all that would happen if China let its currency appreciate is that Western buyers would buy more from India, Vietnam, Bangladesh and Indonesia.

China's tinkering with currency hurts its neighbours far more than it hurts Western manufacturers - and those neighbours are getting restive about it.

Almost all - except India - are aggrieved at India's cotton export limits. And a growing number aren't convinced that Bangladesh - which exports more garments than any country but China - should get duty-free advantages denied to almost all the rest of Asia.

But all seem to believe today's rules favour everyone else but them. They think the priority for their governments should be to give them the kind of unfair advantages they believe their competitors get. And make it tougher for competitors to keep those unfair advantages.

Protectionism looks like it's returning in the guise of developing countries knifing each others' trade policies in the back.

The new 2011 edition of Clothesource's 'The Garment Trade's Next Revolution: What's likely to change between 2011 and 2016' is probably the best-informed account of the deep underlying changes the Panic's caused.