To evaluate the effect of the dismantling of the Multi-Fiber Arrangements on the Tunisian exporting textile and clothing sector, we divided the suppliers of the EU into three groups: local suppliers, constrained by the contingent, and non-constrained, among them figure Tunisia. In the same way, we used the technique of Armington which differentiates products by country of origin. The results showed that with the abolition of the quotas, the second group succeeded in increasing its exported quantity by 50%, and attended an increase in value of 30% for its sales. Contrarily, the third group saw its exported quantities decreasing by 30%, and the value of its sales outside, by 16%. Tunisia belonging to the third group would see its share of market, which was ensured by the quotas decreasing appreciably. It would lose 16% of its exports in value, and 30% in quantity. The implications of the results for the Tunisian textile and clothing sector strategies are discussed.
JEL classification: F1; F53
Keywords: Textile-Clothing; Dismantling; Multi-Fiber Arrangements; Exports; Tunisia; European Union
The Impact of the Removal of the Multi-Fiber Arrangements on Tunisian Textile and Clothing Exports
During the last two decades, the textile and clothing sector experiences a real great growth conferring to him a strategic place in the Tunisian economy. Its development was supported by an advantageous economic policy, aiming at promoting export. However, this evolution remains fragile and tributary of internal and external challenges that the sector must face. Among the external challenges, the integration of the textiles within the general rules of the GATT. Indeed, the Multi-Fiber Arrangements which consist of a system of quotas encouraging the importing countries which are developed and the exporting countries which are developing to conclude bilateral arrangements under which exporting countries commit themselves to limit their exports of the whole or a part of categories of textiles and clothing by respecting the imposed quotas, are definitively dismantled the 1st January 2005.
With the elimination of the MFA quotas, tariffs will become the primary mechanism for border protection of trade in textiles (WTO). It is generally accepted that in the long run, the reduction in trade restrictions will economically induce an increase in textile output. This will effectively improve market access for developing countries, and further change the world textile trade flows.
Though not signatory of the MFA, Tunisia is concerned by the consequent stakes of their dismantling, particularly on the European market to which Tunisia exports more than 70% of its textile and clothing products. Indeed, through the successive agreements of cooperation then of association that Tunisia concluded with the European Union, and through its adhesion as well as the EU to the agreements of GATT, our country undergoes the consequences of the procedures of liberalization that the EU starts with the rest of the world.
The primary objective of this study is to analyze and quantify the impacts of eliminating the MFA on the Tunisian textile and clothing sector: supplier of the EU in clothing. To lead this investigation we will present in the second section the Multi-Fiber Arrangements. The third section states the place of the Tunisian textile and clothing sector in the new economic context. The fourth section exposes the empirical model, the data, and the methodology. The fifth section discusses results and finally, and in the light of the founded results, the sixth section concludes, and puts forward the suitable measures to undertake to prevent the sector from relegating a less position.
The Multi-Fiber Arrangements
The Multi-Fiber Arrangements grew out of a series of voluntary export restraints imposed by the United States and Europe on large Asian textile and clothing exporters (Spinanger, 1999). Signed in 1974, the agreement imposed restrictions on exports to industrialized countries through a complicated system of bilaterally negotiated quotas on textile and clothing products. As a result of the MFA, textile and clothing products were kept out of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO).
This multilateral agreement, known as the Arrangement Regarding International Trade in textiles or more commonly the Multi-Fiber Arrangements (MFA), became “the statement of principle and policy” regarding international textile trade. The MFA initially covered the period from 1st January 1974 to 31 December 1977 and was later extended, with some major modifications, first through 31 December 1981 and later through 31 July 1986. The primary goal of the MFA was the fulfillment of two conflicting objectives: to foster the expansion of world trade in textiles with particular emphasis on developing countries' exports while, at the same time, preventing disruption of developed country markets.
These MFA objectives are clearly stated in its articles. Article 1 provides that the basic objective of the MFA be: “to achieve the expansion of trade, the reduction of barriers to such trade and the progressive liberalization of world trade in textile products while at the same time ensuring the orderly and equitable development of this trade and avoidance of disruptive effects . . ." Another principal aim of the MFA, also set forth in article 1, is "to further the economic and social development of developing countries and secure a substantial increase in their export earnings from textile products and to provide scope for a greater share for them in world trade in these products.”
A major development of the Uruguay Round was the signing of the Agreement on Textile and Clothing (ATC) in 1994. The ATC ended the MFA and began the process of integrating textile and clothing products into GATT/WTO rules by removing their quotas. Integration occurred over the four phases outlined in Table 1. During each phase, importing countries were to integrate a portion of all textile and clothing products covered by the ATC. The particular products integrated in each phase were specific to importing countries but subject to two rules. First, the products retired in each phase had to include goods from all four major textile and clothing segments: Yarn, Fabrics, Made-Up textile products (e.g., table linen, carpets and curtains), and Clothing. Second, the chosen products had to represent a set portion of each country's 1990 textile and clothing imports, by volume. In Phase I, which began on January 1, 1995, countries had to integrate products representing 16 percent of their 1990 import volumes. An additional 17 and 18 percent of 1990 export volumes were integrated at the beginning of Phases II and III on January 1, 1998 and January 1, 2002, respectively. Finally, on January 1, 2005, Phase IV of the ATC culminated in the integration of the remaining 49 percent of export volumes and all quotas were abolished.
-Insert Table 1-
It is crucial to mention that the innovation in 1993 is that the quotas are not distributed any more between the members of the EEC. Henceforth, there is only one quota in all the EEC, all countries confused. The principal change for the exporting countries of textile products towards the EEC is that they can concentrate their exports on a small number of the EEC countries, even only one. This newness in the fixing of the quotas constitutes a favor for a country similar to Tunisia maintaining the trade primarily with three countries of the EEC: France, Germany, and Italy. Indeed, these three traditional markets receive nearly 79% of the Tunisian textile exports. From now on, Tunisia has the possibility of carrying out its total granted quota only on these three markets of the EEC if this choice is considered to be more profitable. This new distribution of the quotas offers a greater flexibility to the exporting countries in the realization of their quotas.
Although not signatory of the MFA, Tunisia saw the European doors opening in front of it in particular since 1976 under the terms of the preferential agreements. Nevertheless, the abolition of the quotas constitutes a serious challenge as much as a true opportunity for the Tunisian industry of textile and clothing to improve its production and to level themselves in order to be able to support international competition, to preserve its shares of market, and in the best case to conquer new markets.
The place of the Tunisian Textile and Clothing sector in the new economic context
The middle of the Eighties marked a turning point in the strategy of development of Tunisia, which started to transfer from imports substitution and government intervention towards policies based on the markets and directed towards exports. In this context of accession of Tunisia under the auspices of GATT in 1990 and the OMC in 1995 and although protection was considerably reduced, especially because of elimination of the quantitative restrictions, the Tunisian textile and clothing sector occupying a strategic position has realised notable performances in terms of employment, export, investment, and added value.
In spite of these remarkable performances, the sector remained fragile because of its lack of integration and its great dependence on European clients, since its exports are strongly concentrated on a limited number of markets of the EEC, mainly France, Germany, Italy, and Belgium.
The investigations related to the Tunisian textile and clothing sector show that its development remains fragile and dependent on several factors that it is important to control. On the one hand, this sector present some insufficiencies limiting his competitive level compared to other countries and that threat even his survival following the changes in the international regulation of the textiles trade that took place within the framework of the Uruguay Round. On the other hand, the dismantling of the MFA and the abolition of the advantages granted to Tunisia as regards textile and clothing exports put the sector in danger by exposing it to a keen international competition.
In the context of markets globalisation which currently governs the world economy, the textile and clothing sector is from now on increasingly constrained to raise its performances, and to exploit its competitive potential. With the creation of the WTO and the expiry of the preferential agreements, the situation completely changed. Thus, the advantages from which Tunisia profited were not renewable, only within the framework of an agreement of association and under the condition of reciprocity.
It becomes clear that the abolition of the quotas will constitute a major change in the textile industry throughout the world. The elimination of quotas which had been a privilege for our country up to 2005 in order to penetrate to the European markets, had a harmful impact on our economy largely dependent on the textile sector exports. This change is likely to destabilize industrial and social balance, not only on the Tunisian level, but on a Euro-Mediterranean scale.
Methodology: Model with equilibrium equations of Armington (1969)
Tunisia is indirectly affected by the dismantling of the Multi-Fiber Arrangements and thus by the abolition of the quotas since on the one hand, it is not signatory of the agreements and, on the other hand, the cooperation agreement EU-Tunisia stipulates that the latter concluded a voluntary arrangement with the EU to limit its exports towards the European market. Consequently if we want to determine the effect of the contingent on Tunisia, we must make it through the EU market. For this reason, we carry out the separation of the suppliers of the EU in three groups. We opt for an analysis of three different markets that provide three different clothes products not only from their species, but also from their places of origin.
Such a technique was firstly used by P.S. Armington (1969) who supposes an imperfect substitutability between the three products resulting from three different suppliers. The study will be undertaken from a partial analysis where the clothing sector will be examined separately from remainder of the economy. The studied market will be that of the EU, supplying from various countries classified in three groups:
- G1: Local producers
- G2: Suppliers of the UE constrained by the MFA: Hong Kong, South Korea, Romania, Macao, Thailand, and Taiwan.
- G3: The suppliers for whom contingent are not restrictive. Tunisia belongs to this group.
Our task consists in classifying the countries offering clothing in three groups. G1 is the EU, in other words, it is the group of the local suppliers. G2 and G3 are the foreign suppliers. In fact, the difficulty in classification resides between the groups G2 and G3. In principle, these two groups are consisted by the countries constrained by the contingent. However, the fact of belonging to group 2 or group 3 depends on the nature of the quota that it is restrictive “binding“ or not. In other words the fact of having a bilateral agreement with the EU does not mean necessarily that the country is indeed constrained. For example, when the use of a quota is very weak, the quota is often not restrictive. So the exporting countries are classified, not according to the simple existence of bilateral quotas, but according to the importance of the quota and its utilisation degree. Being given the non availability of the utilisation rate of the quotas by country and by article, we borrow the classification of Goto (1990) in order to classify countries between group 2 and group 3.
We will try to evaluate the consequences of the dismantling of the MFA on the various groups and particularly on Tunisia, all things being equal. Thus, the comparison of the two situations Ex-ante and Ex-post of dismantling will enable us to evaluate the consequences of the abolition of the Multi-Fiber Arrangements on the Tunisian textile and clothing sector. It is a question of comparing an equilibrium situation of the European textile and clothing market with MFA, with an equilibrium situation of this market without MFA that is the observable real situation.
The model used will be a system of simultaneous supply and demand equilibrium specifying the conditions of demand for imports of the EU and the conditions of offer of exports of textile products of the suppliers of the European market. There will be thus, three functions of demand for importation on behalf of this market and three functions of offer of export of the three already classified groups which, at the equilibrium, determine the prices and the quantities of equilibrium on the EU market.
The model being a system of simultaneous equations, where the prices and the quantities are determined in an endogenous way to the model, except for Q 2 which is influenced in an institutional way by the authorities.
The offer functions, over-identified in our model, can be estimated, either by the method of the doubles least square, or by that of the instrumental variables. However, the method of triple least square remains higher than the preceding ones, since it estimates the coefficients of the model, equation by equation, by means of the doubles least square method, since it applies the method of generalized least squares. The method of triple least square is used to have estimators more effective than those of the doubles least square, because it takes account of the correlations through the equations.
Data for this study are collected from the EUROSTAT web site. We collected information on the imports of the EU in quantity and in value coming from the world, from the EU itself, from eight countries of the group 2 and by difference, from group 3.
The quantities are expressed in miles Tonnes and the values in miles Euro. The prices of various goods and various groups are approximated by unit values. As regards the period, it is spread out over 19 years from 1986 to 2004.
We were interested in clothing that belong to the most sensitive products and which correspond to the following classification in the NIMEXE code.
61: Clothing and accessories of clothing in hosiery.
62: Clothing and accessories of clothing, other that in hosiery.
63: Other made textile articles, second hand clothes shop, and rags.
Empirical Results and comments
To be able to interpret elasticities, we estimated the model in the logarithmic form:
Log (Q2)t= 21.05-2.62Logp2t+1.68Logp3t+?2t (1)
(37.01) (-12.42) (17.00)
Log (Q3)t=7.35+0.096Logp2t+2.52Logp3t+?3t (2)
(9.89) (7.64) (4.80)
Log (Q2)t= 21.62+0.78Logp2t+1.99LogQ2(t-1)+U2t (3)
(4.80) (1.38) (9.09)
Log (Q3)t= 7.52+2.59Logp3t+?3t (4)
Values in parenthesis are the t-student
The demand of good 2 (Clothing and accessories of clothing, other that in hosiery) reacts negatively with his relative price. Indeed, when the price of good 2 increases by 1%, the demand for this good decreases by 2.62%. However, an increase of 1% of the price of good 3(Other made textile articles, second hand clothes shop, and rags) compared to that of good 1 increase the required quantity of good 2 by 1.68%. This means that goods 2 and 3 are substitutable, since price elasticity of good 2 is negative and cross-price elasticity of good 2 compared to the price of good 3, is positive.
The third equation describes the offer of product 2 by group 2.The lagged variable in this case is very significant since the quotas are fixed according to those of last year. Just as the positive and significant price elasticity of the offer.
The fourth equation specifies the offer of the 3rd product. The price elasticity is of a good sign and it is statistically significant.
The second equation which is supposed to be a function of demand is rejected since the variable price is not relevant to explain the demand side of product 2. The fact of introducing the variable income would give significance to the equation.
To recapitulate, according to equation 1, we can conclude that the two goods are substitutable. According to the third equation, the quantity offered in good fixed quotas for is in very great part, function of the quantity offered lagged which can be explained by the mode of management of the quotas. The fourth equation is an equation of offer of the quantity Q 3 compared to its own price, where the variable price is relevant.
We think that the results are largely dependent on the width of the “binding rate”. Thus, if we had considered a rate of 60%, it would have been necessarily some countries that would have rocked from group 3 to group 2. This would have changed the estimates of coefficients. Similarly, the basic year, on which we calculated “the binding rate”, must influence the estimates of the prices-elasticity.
Being in the presence of substitutable goods, when the quota is abolished, the UE would be turned over towards the least dear suppliers, i.e. those pertaining to group 2, previously strongly fixed quotas for. To calculate the export earnings lost by the ones and gained by the others, we will proceed with the comparison of the prices and of the quantities before and after the dismantling of the MFA. These results are represented in the following table 2:
-Insert Table 2-
Being given that goods 2 and 3 are substitutable, the share of market gained by group 2 is lost by group 3. Indeed, with the dismantling of the MFA, group 2 succeeded in increasing its exported quantity by 50% and attended an increase in value of 30% of its sales with different results from one country to another. On the other hand, group 3 saw its exported quantities decreasing by 30%, and the value of its outside sales by 16%. This confirms the fact that the MFA ensure the countries of group 3 a share of market on the EU. Tunisia profits from this protection as well as the local producers. Thus, our country saw its share passing from 24874 miles tons to 20461 miles tons, thus a fall of 17.74% and an advance compared to the average of the group which is 30%. As for the values, we noticed that the AAGR of clothing exports is positive and about (+2.3%) in spite of a fall of 1.15% compared to 2004. This is justified by the slip of the Dinar compared to the Euro on the one hand, and on the other hand, by the orientation towards the finished product and the top-of-the-range one (with stronger added value).
However, one should not take these results like final, since our country will gradually follow the same repercussions of the MFA as well as the other countries of the third group. These judgements are dependent on the brittleness of our textile and clothing industry and its dependence of the EU which is invaded by the Chinese products.
Thus, we join the conclusions of Goto, Holmes, and Erzan (1990) which recommend that the profits caused by the revenue of the quota are exaggerated in the case of dominant countries, since they export much more in volume and value, once the quota is raised. The revenue is in fact significant only for the marginal producers or the last come on the market of textiles. I.e. those belonging to group 3, since the quota ensured a substantial share of market for them.
The textiles sector was at the base of the growth of the majority of the small open economies such as the South-East Asia countries, Morocco or Tunisia. Indeed these countries profiting of less expensive labour, tried to benefit from it while relying on industries using labour intensively, and it was the case of the textile and clothing sector. Considering the importance of this sector for the majority of the developing countries, the Multi-Fiber Arrangements were established. However, this arrangement constitutes a distortion for the GATT rules since it manages the trade of the textiles of the developing countries to the developed countries by means of a system of bilateral quotas. The dismantling of the arrangements which consists in abolishing the quotas, had effects on importing and exporting countries of textiles. In addition to the divergent interests between importing and exporting countries, the exporters do not have a joint position with regard to the integration of the textiles trade within the rules of GATT.
Although Tunisia is not signatory of the Multi-Fiber Arrangements, it is implied in the stakes of arrangement by means of the other suppliers signatories of these agreements. Thus, to evaluate the effect of the dismantling of the Multi-Fiber Arrangements on the Tunisian textile and clothing exporting sector, we were interested in all the supplying countries of the EU. To be done, we divided the suppliers of the EU into three groups: local, constrained by the contingent and non-constrained suppliers, among them figure Tunisia. In the same way, we used the technique of Armington which consists in differentiating the products by country of origin.
The estimate of the demand functions recommended by the theory of Armington, enabled us to deduce that the clothing of the constrained group, and those of the non-constrained group, are substitutable. The results showed that with the abolition of the quota, the prices of the dominant countries decreased, which increased their offers towards the EU. Due to the fact that the two goods are substitutable, the shares of the market monopolized by the dominant countries are lost by group 3. This confirms that this last group was protected for the same reasons as the EU, and that the Multi-Fiber Arrangements hold a share of market for him.
Indeed, with the abolition of quotas group 2 succeeded in increasing its exported quantity by 50%, and attended an increase in value of 30% of its sales. Contrarily, group 3 saw its exported quantities decreasing by 30%, and the value of its sales outside, by 16%. Tunisia which belongs to the third group will see its share of market, ensured by the quotas, decreasing appreciably, it would lose 16% of its exports in value, and 30% in quantity.
Conscious of the extent of the challenges to be surmounted, the Tunisian institutions and centers working in the field of the textile and clothing already took, through the leveling program, the restructuring measures to promote this sector pillar of the Tunisian economy, by controlling its production costs, and by improving the products quality. Being conducted by this purpose, a major interest was carried to the vocational training, the acquisition of new technologies, the marketing and the distribution chains, attraction of foreign investments, and to the financial reorganization of the sector. Remain to announce that Tunisia should also diversify its outlets while seeking to infiltrate in new markets, and not to be tributary of only one market which is the EU.
Like any research task, the present study has several limitations which can be the subject of interesting studies in the future. Our empirical model treats only one variable which is exports towards the EU; it does not enable us to determine the effect of this contingent on the Tunisian economy as a whole. In the same way, considering the fact that we are in the presence of a very recent event, we limited ourselves to only one year which seems to be a short period to take into account the effect of this phenomenon on to the Tunisian textile and clothing sector. Future studies are thus needed to consider the same problems after a certain period by applying a Computable General Equilibrium Models.
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