“The abolishing of quotas by 2005 will change the trading environment in the textile and clothing sectors dramatically,” says Turkey’s minister for foreign trade, Kursat Tuzmen. “The answer to the question of how we should handle this depends not only on Turkey’s performance but also on the other major textile and clothing exporters’ compliance to their World Trade Organization commitments.”

The textile and clothing sector is undeniably important to Turkey’s economy. It is the country’s largest industry and accounts for 10% of GDP, 22,6% of manufacturing output and 21% of employment in the manufacturing sector.

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Despite the ugly economic crisis that the country underwent in 2001, the volume of its textile and clothing trade expanded during 2002, 2003 and 2004. In 2003, textile exports reached $5.6bn and clothing exports $9.5bn, a yearly increase of about 22%. Exports of textile and clothing products contributed 33% to total merchandise exports in 2003.

The EU has traditionally been Turkey’s main export market, followed by the US. According to government data, 63.7% of the country’s total textile and clothing exports are to the EU and 11.6% are to the US market. The abolition of quota restrictions will affect the buying behaviour of these two key markets, with various implications for Turkey. For one thing, its customs union relationship with the EU will give its textile sector less protection now that European companies can buy as much as they want from China, India and others.

“Considering Turkey’s current competitive advantage against Asian countries as a result of not being bound by any quotas in the EU market, the complete elimination of quotas by the year 2005 will mostly affect our country,” says Mr Tuzmen. “Taking this threat into consideration, Turkey will take necessary measures and make required adaptations.”

 

 

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Competition strategy

The priority is to develop a viable strategy of both competing with and doing business with China. Within 10 years, Turkey expects the Chinese market to be as important as the US, EU and Japanese markets to Turkish textile exporters.

Turkey also recognises that it must do something about the heavy taxation and social security burdens, and high energy and telecoms rates that add to production costs. Taking into account the role of small and medium-sized enterprises (SMEs) in textile production, strengthening the financial infrastructure of SMEs and facilitating their access to new technologies are seen as necessary steps towards lowering production costs, says Mr Tuzmen.

Transferring production to less developed regions of the country, such as the east and south-east, could also help to reduce costs. For example, the production of cotton could be relocated to the South East Anatolian Project Region. As production moves eastward, Istanbul could evolve from a production centre into a centre for fashion and design.

R&D funding

The sector should allocate more funds to research and development activities and design, and should take effective measures to increase the efficiency of labour, says Mr Tuzmen. It should also look outward for inspiration: the government is encouraging Turkish textile and apparel makers to find foreign partners with which to exchange know-how and to develop new designs. Because of the relatively high labour and input costs that Turkish producers face, it might be more profitable for them to seek out research co-operation opportunities in developing markets in Asia, where developed countries have been transferring their supply chains, says Mr Tuzmen. “We have to give high priority to co-operating in technology transfer in the technical textile field, especially with the EU, US and Japan.”

The Turkish fashion retail sector could look to such foreign companies as Spain’s Zara and Mango, for examples of successful business models and develop them to suit its own circumstances. Then applicable policies for Turkey should be generated with the participation of the sector, says Mr Tuzmen, while the government helps the companies to expand by providing support for fashion franchises abroad.

Turkey’s FDI situation will be little changed by the end of the quota regime because the textiles and apparels sectors have a limited share of FDI into the country – about $105m. Among 1667 foreign manufacturing companies operating in Turkey, seven are in wearing apparel excluding the knitted products sub-sector, 67 are in textiles, and 224 are in ready-made garments sub-sectors. The weight of these companies among total foreign direct investors is only about 1.85%.

“Although it is very early to assess immediate effects of the removal of textile quotas on the FDI flows to Turkey, for the short and mid-term, we don’t anticipate a profound impact,” says Mr Tuzmen.

Good and bad news

Addressing the Textiles Monitoring Body at its final meeting on December 9, WTO secretary-general Supachai Panitchpakdi said: “The elimination of the trade-distorting, quantitative restrictions that are still in place will be beneficial for the global economy in terms of increased market access opportunities, efficiency gains and consumer welfare. Developing members, as a whole, in particular stand to gain since they have significant comparative advantages in the sector.”

That is small consolation to those that stand to lose. Despite the preferential treatment they receive under the Africa Growth and Opportunity Act, sub-Saharan African countries will suffer a huge impact from the change.

The Lesotho Clothing and Allied Workers Union has warned that Lesotho could lose 50,000 jobs due to fierce Chinese competition in its key export market, the US. The tiny kingdom is the region’s largest exporter of textiles to the US. And in Asia, impoverished Bangladesh is expected to be one of the worst affected countries.

Trade practices

“There is no doubt that many textile and clothing exporting countries, including Turkey, have been facing difficulties because of the unfair trade practices of some major exporting countries,” says Mr Tuzmen. “As numerous credible studies have shown, by the removal of quotas by January 1, textile and clothing trade will be dominated by a very few countries aggressively using unfair and illegal trade practices,” he warns.

According to a study by the American Textile Manufacturers Institute (ATMI), China’s share of the US textile and clothing market will rise to more than two-thirds of the US market within two years. The study predicts that a large number of countries – in Africa, Latin America, south-east Asia and central Asia – that depend on textile and clothing exports to the US market for much of their foreign exchange will be badly affected by the abolition of the quota system.

Countries with close geographical proximity to developed country markets, like Mexico for example, are expected to fare slightly better. This might also save the textile industry of the Dominican Republic, which has a geographical advantage over China in its number one export market.

“It is easy for us to talk to the Americans, negotiate with them and send shipments to them,” says Ricardo Fondeur, president of the Chamber of Commerce of the textile-producing Dominican city of Santiago. “That’s why the US customers are still with us and why we’re still in the business. When you place an order here, you can have it in the US in two weeks. If you place it in China, you will wait at least three.”

Blessings to count

The country is counting on a free trade agreement that is being drawn up with the US to offset some of the damage from the end of the quota regime. The Central American Free Trade Agreement (CAFTA), which also includes El Salvador, Nicaragua, Guatemala, Honduras and Costa Rica, would abolish US tariffs on imported textiles and clothing if made from US yarn or locally-made fabric.

Even factoring in CAFTA, the Dominican Republic stands to lose, by some estimates, 20% of its textiles jobs (about 15,000). But Mauricio Haché, president of the Industrial Association of the Northern Region, based in Santiago, says: “If it weren’t for the free trade agreement the losses in jobs would be bigger.”

Either way, the Caribbean country is not prepared to give up on its textile-exporting business. “We are working hard trying to compete with the rest of the world,” says Mr Fondeur.

This is difficult when Dominican Republic’s textile producers must grapple with higher costs than their Chinese counterparts, especially when it comes to energy; Chinese producers can easily undercut their prices.

The Dominicans believe that their best bet is to provide superior service and improve the way they do business: they are speeding up delivery times, focusing more on design and trying to become more flexible, for example. Mr Haché says that companies that are unable to move to the next level, offer a complete package to their customers and re-engineer their services will experience losses.

As for the rest, it seems they will face fierce competition from the likes of China, India and Pakistan. But in a world without quotas, everything is up for grabs.

 

Part One