For years, the trend in the apparel industry has been the relocation of manufacturing factories overseas to less-developed areas of the world, where cheap labor is abundant. The result has been the failure of textile mills throughout the United States and Western Europe. The MFA, dated back to 1974, allowed developed countries to impose quotas on exports from developing nations. When textiles fell under the jurisdiction of the World Trade Organization, the MFA was allowed to expire at the end of 2004. Complicating the situation were the terms of China's entrance into the World Trade Organization (WTO) that allowed nations to continue imposing safeguards against Chinese goods for several years into the future.

Despite having years to prepare for the end of the MFA, markets jolted under suddenly unrestricted trade. Cheap imports flooded the U.S. market and prices sank. In July 2005, Chinese apparel imports into the United States were up 122% from a year earlier. This included huge surges in certain sectors, such as 2,256% in cotton sweaters, 1,648% in cotton trousers, and 1,378% in cotton coats. Including textiles, Chinese imports were up 46%, increasing China’s U.S. market share to 27%. During the first quarter of 2005, U.S. prices fell 2.1%.

Under the terms of China's entrance into the WTO, the U.S. can re-impose safeguards through 2008, which it did in May on seven apparel and textile categories, including pants and slacks, cotton shirts, and underwear. Prices ticked upwards in the second quarter, but dropped 3.9% in the third.

Despite the loud clamors from domestic manufacturers, the biggest losers due to the end of MFA restrictions were foreign producers. Central American nations, in particular, saw their U.S. market share drop considerably. U.S. buyers were not shifting from domestic to international producers any faster than usual, but merely switching which nations they sourced from. For several months, the United States threatened further safeguards against Chinese goods, but ultimately, U.S. producers that were moving overseas would likely have done so anyway, with or without China. The destination would have instead been Sri Lanka, Nicaragua, or Bangladesh. In fact, the United States lost very little market share in 2005.

Under the threat of renewed trade barriers, China initially considered levying tariffs on exports, but recanted when the United States went forward with plans to enact new quotas. Instead, the two nations went to the bargaining table and signed a new agreement last November. Under its terms, 34 categories of Chinese exports to the United States will be capped through 2008 at an annual growth rate less restrictive than the quotas, but likely much more restrictive than what would have been realized under free trade. The new caps haven't exactly been a boon to domestic producers, as importers have instead sourced from other Asian nations. Cambodia, India, and Bangladesh have experienced solid gains in their U.S. market shares.

The story in Europe has been similar. European Union (EU) textile manufacturers pushed for and received new quotas, resulting in an overwhelming rush at European ports to get shipments in before the quotas were reached. When EU retailers said the restrictions would likely result in empty shelves come the holidays, Europe and China went to the negotiating table and settled on a system of caps similar to the agreement between China and the United States.

Real apparel prices are as low now as they were in 1990, thanks to globalization. Increased liberalization should lead to further price reductions, albeit probably at a more moderate rate. The continuing trade conflict will artificially prop up prices for consumers, but retailers will be able to capitalize on a stable trade situation and plan their supply lines and inventories accordingly. In the past, they had been forced to diversify the sources of their goods in case new developments in the trade conflict disrupted their plans. Now importers, assured of a specific level of output from China, can plan on more customary cost and quality considerations.

The Central American Free Trade Agreement and the end of Chinese restrictions in 2008 will further test the industry. In the politicized world of apparel and textile trade, there may be pressure from domestic producers to impose more restrictions—and politics could continue to play a significant role in the world market.

Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

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