Paradoxical progression

Even as the Tokyo Round was launched in 1973, there was a lot of unease in developed countries in respect of textile trade. As we know, the textile and clothing sector is important for most developing countries for two reasons: it is labour intensive and requires very basic technology. Most developing countries have low access to capital and abundant unskilled and semi-skilled workers, making the sector ideal as a vehicle for providing jobs and economic development. Most of today’s developed countries such as Japan, the US and the UK had a thriving textiles sector which contributed to their economic growth.

We may recall that the Short-Term Arrangement Regarding International Trade in Cotton Textiles (STA) was signed at the GATT in 1961. The developed countries felt that the STA should be expanded to include synthetic fibres and wool. The expanded agreement, adopted in 1973, came to be called the Krishna Gupta, better known as the Multi Fibre Agreement (MFA). The idea of MFA was rooted in the earlier agreements and originated in the US. The US sought to protect its domestic textile industry from Japanese imports and negotiated a change in VER (voluntary export restraint) with Japan for five years. This reduced US imports from Japan, but increased imports from Hong Kong. Similarly, UK had negotiated bilateral agreement on cotton and textiles trade with India, Pakistan and Hong Kong.

The MFA, basically, imposed quotas on the quantity of clothing and textiles that developing countries could export to developed countries. The stated intention of the MFA was to liberalise trade in textiles and clothing in the long run and reduce barriers to trade with developing countries playing a progressively greater role in their exports. However, in reality, the developed countries wanted to protect their domestic industry and prevent disruptions that cheaper imports from developing countries could cause. The MFA was supposed to be a temporary measure but kept getting extended until it was replaced by the Agreement on Trade in Textile and Clothing (T&C) in 1995.

The MFA affected both exporting and importing countries adversely. The exporting countries suffered because exports were restricted by the quotas imposed, which led to a substantial fall in export earnings. The importing countries were adversely affected because their consumers would have to buy textiles and clothing at higher prices. This was because importing countries would be forced to import textiles and clothing, not from the cheapest sources such as Bangladesh and China (because of the quotas), but from more expensive producers of Hong Kong, Taiwan and Korea (because wages were higher in these countries).

The MFA had many unintended consequences, some of which were desirable from the equity point of view. For example: most quotas were initially given to countries where the T&C sector was undeveloped. These were countries such as Bangladesh, Maldives and small nations in the Caribbean and Central America. This led to a lot of foreign direct investment in the T&C sector in these countries in the 1970s and 1980s. Another consequence was that many developing countries realised that their production would be restricted by the quota and therefore moved to producing and exporting high value items. Ironically, this placed them in direct competition with developed country producers (for whose protection the MFA was initially launched). Some other developing country producers who were restricted by the quota chose to move production to countries with no quota or lesser quota, which was a sub-optimal decision, driven less by comparative advantage and more by the level of quotas.

Three phases of the MFA

The MFA implementation can be divided into three phases, according to a GATT study of 1984. Phase I was the initial period from 1974 to 1977. Developed countries, which imported T&C selectively, covered articles on which quotas would be imposed. At the same time, many of the restrictions prevalent previous to 1974 were removed. Phase II was the period from 1978 to 1981 and witnessed more restrictions on trade mainly due to the European Community (EC) measures. The EC took a hard line on the extension and reduced the quotas and flexibility for developing country exporters. In Phase III, which lasted from 1982-86, the developing countries protested against the EC measures and, as a result, specific provisions were introduced, wherein imports would be restricted only in the event of a surge, when the quotas were unfilled. However, the MFA III period was also marked by increased restrictions by developed countries such as unilateral measures, new bilateral restrictions and reduction in product coverage. One example of such unilateral measures was the ‘call’ option introduced by the US in the face of increasing imports in the early 1980s. Under this system, the US could initiate a case of market disruption if more than 20 per cent of production was exported and imports rose by more than 30 per cent in the previous 12 months. The EC was however less restrictive in MFA III as compared to the earlier phases. Phase IV lasted from 1986 to 1991, and even more restrictions were introduced during this phase. Finally, in 1994, when the Uruguay Round concluded, the MFA was also disbanded. It was decided that the MFA would be phased out over a transition period of ten years, and trade in T&C would become free of quotas by 2005. The MFA was replaced by the Agreement on Textiles and Clothing (ATC) under which the ten-year transition period was implemented.

Conclusion

The MFA had a chequered history and was created to protect the textiles industry in developed countries. Ironically, the richer countries were being protected from developing country exports through trade barriers like quotas. The MFA was therefore a derogation from the GATT rules such as Most Favoured Nation (MFN) and National Treatment. Interestingly, by the time MFA ended, most of textiles and clothing production had shifted to developing countries from Asia and Latin America. It may be a good research exercise to see how developing country exports would have fared in the absence of the MFA. Be that as it may, one of the worst trade barriers was discontinued in 1994 and finally ended in 2005, which can only be a blessing for free trade.

The writer is Additional Chief Secretary, Department of Mass Education Extension and Library Services and Department of Cooperation, Government of West Bengal.