EU Gears Up For Wider Europe Post Free-quota Regime

Written by Malcolm Subhan | Brussels, Nov 2: | Updated: Nov 3 2003, 05:30am hrs
Seen from here, a clash of titans - India, China, the European Union (EU), and perhaps even Pakistan - will break out in less than 14 months time. All of them will be involved, in other words, in a free-for-all starting January 1, 2005, when the 40-year-old system of import quotas on textile and clothing finally disappears.

India and the EU, therefore, face much the same challenge: how to increase their share of the world market for these two basic products. The 15-nation EU is already the worlds largest exporter of textiles and the second largest exporter of clothing (after China). It believes that it has a number of advantages over its fiercest competitors, including India and it plans to cash in on them right away.

The key elements of the EUs strategy were outlined here earlier this week to the press by its trade supremo, Pascal Lamy, and the head of its industrial policy, Erkki Liikanen. They are set out at some length in a paper which the European Commission, the EUs executive arm, has sent to the 15-member governments and the European Parliament, entitled, The future of the textiles and clothing sector in the enlarged EU.

And the future is bright. Take the main competitive advantage of countries like India, Pakistan and China cheap and abundant labour. You would think that there is no way in which the European textile industry, with wages anywhere up to six times higher than in India, could overcome this handicap. European companies, in fact, have been shifting garment production to low-wage countries, while European department stores have been placing their orders in Asia.

Mr Lamy and Mr Liikanen are planning to change this, with the support of European industry and European consumers. Their plan involves the creation of a Wider Europe, incorporating the existing 15-nation EU, the 10-new member states and the countries of the southern and eastern Mediterranean, including Tunisia, Morocco, Egypt and Turkey. With luck, this Euro-Mediterranean area should be in place by 2005. The competitive advantage which the Euro-Mediterranean area will give the European textile and clothing industry is obvious. There is the sheer size of the area to begin with. In economic terms, it represents not only a market of some 600 million but also a large supply of workers, many of them working for wages that are much lower than those in the 15-nation EU.

The textile industry, in the present 15-nation EU, will be able to send its high-quality, in-fashion fabrics to be made into garments in the new member states and in the Southern Mediterranean countries. To be sure, this is happening already, with German companies, for example, shifting production to eastern Europe and French companies shifting production to Tunisia and Morocco, for example.

This process will intensify within the Wider Europe, helped by another key element in the strategy outlined by Trade Commissioner, Pascal Lamy. This is the creation of a Made in Europe label. In other words, textiles and clothing made anywhere within the Wider Europe will bear the Made in Europe label, thanks to a system of similar rules of origin and administrative cooperation, based on US practice within Nafta and in its relations with the Caribbean and Central American countries.

Quality-and fashion-conscious consumers obviously will favour garments bearing this label; so will price-conscious consumers, given that many of these garments will be made in countries with low, or relatively low, wages. But, the EUs trade commissioner is also exploring the possibility of requiring garments made in, say, India to carry a label stipulating that the garment in question was made according to certain labour and/or environmental standards.

This will not be easy; legislation along these lines would not be WTO-compatible to begin with. What is more, many EU governments would be opposed to it; indeed commissioner Lamy would have a fight on his hands within the EU itself, given that any labelling requirements will require changes to legislation in the individual EU countries. But here, too, the EU may base itself on American practice and require European firms producing garments in India, for example, to certify that their sub-contractors meet certain labour and environmental standards. It must be remembered that the EUs trade commissioner is developing a parallel strategy aimed at promoting sustainable development within the Wider Europe - and abroad. Trade commissioner Lamy accepts that textiles are also hugely important for developing countries. Hence, his efforts to ensure that the new trading conditions are to the benefit of all poor countries and in particular the poorest and most vulnerable ones.

To this end he has proposed a significant change to the EUs generalised system of preferences (GSP) scheme.

Of course, Bangladesh, which ranked sixth as regards the value of its textile and clothing exports to the EU last year (India was fourth, Pakistan 11th), already enjoys a duty-free and quota-free entry under the Everything But Arms scheme available to all least-developed countries, including Laos and Cambodia. But in recommending to the 15 EU countries that the present GSP scheme be extended for another year - i.e. until the end of 2005 - the Trade commissioner has proposed a number of changes. The most important of them relates to graduation - the process through which India and Pakistan, for example, had GSP benefits withdrawn as regards their textile exports.

Under trade commissioner Lamys proposal, graduation will not apply to countries that account for less than one per cent of the EUs total GSP imports.

If the proposal is approved, only a dozen or so countries, including India, out of nearly 180 beneficiary countries, would continue to face the threat of graduation. Finally, if the GSP scheme is to be effective, the preference

margins should be relatively high. At present, EU tariffs on fabrics average eight per cent and on clothing 10 per cent. However, they would be reduced if the Doha Development round is successful as regards the tariff negotiations on non-agricultural products.

The European textile and clothing industry is prepared to see EU tariffs fall - provided countries like India and Brazil in particular bring down their tariffs to EU levels.