By-ROHIT SINGH

MFM2011-13

Multi Fiber Agreement

ContentsMFA: BackgroundFrom MFA to ATCTextile & Clothing Industry StatisticsIndian PerspectiveIndian Exports GrowthExports: Before and After MFA

Multi Fiber AgreementBetween 1974 and the end of 2004, apparel and

textile trade worldwide was governed by the Multi-Fiber Agreement (MFA).

Individual quotas were negotiated which set precise limits on the quantity of textiles and apparel which could be exported from one country to another

The MFA provided a framework under which developed countries such as United States, the European Union and Canada imposed quotas on exports of yarn textiles and apparel from developing countries.

It was designed to be a short-term measure primarily to give industrialized countries time to adjust to competition from imports from developing countries.

From MFA to ATC

In 1995, the MFA was replaced by the 1995 Agreement on Textiles and Clothing (ATC), with the advent of the World Trade Organization (WTO).

Negotiators agreed that the MFA would be eliminated and full liberalization would be implemented on 1 January 2005.

The ATC was meant to be a transitory phase between the MFA and the full integration of the textile and clothing industry

Stepped quota phase-outs were scheduled for 1995, 1998, 2002, and 2005

The importing countries are free to unilaterally choose which products that they want to integrate at each stage

MFA: Example

PredictionsA decrease in prices and an increase in imports of textile

and apparel products in the formerly restricted, developed-country markets.

Transfers of income from domestic producers to consumers in developed countries

Loss of quota rents for governments of exporting countries, which constitutes a transfer from governments in the developing world to consumers in the developed world

The elimination of quotas should reduce trade inefficiencies on both the producer and consumer side.

MFA expiration will enlarge world trade of textile and apparel products, and developing countries will further gain market share.

Sources: Central Intelligence Agency. World Factbook 2005

The Indian PerspectiveThe popular and trade press largely support the

predictions that India will be better off with the expiration of the MFA

The Textile industry contributes 4 percent to gross domestic product and 14 percent to total industrial production.

Furthermore, the industry employs 30 million workers and earns 35 percent of India’s foreign exchange

The Indian textile industry is well placed with its diversified production base, abundant availability of domestic raw materials, well developed network of R&D, design and testing institutes and a growing pool of skilled workers.

Reasons for OptimismIndia has a cost advantage in cotton production

and is self-sufficient in backward linkages in the production process.

India ranks third in the world in the production of raw cotton, with approximately 14 percent of total world production.

The textile industry does not have to depend on other countries to supply necessary inputs.

Raw material production, spinning, weaving, and fabric production, are all carried out in India

Textile ministry giving economical incentives (Ex. Technological Up gradation Fund)

The key areas where the Indian textile industry has laid stress in the recent years in its preparation for the post quota regime include technological upgradation, benchmarking costs and improving product quality standards, reducing lead-time in supplying orders and capacity and workforce augmentation.

Factors that go Against India Fragmentation of the Industry

Fragmentation is a major concern for the Indian textile industry. The textile industry can be broadly divided into the mill sector and the non-mill or decentralized sector. There is great variation in production levels between them. The decentralized sector accounts for 95 percent of production and is the main source of employment and export earnings. The smaller sector might just get dethroned.

Weak Technological Progress

textile products vary significantly in quality because production processes are not uniform. Upgrading existing technology is therefore a prerequisite for access to international markets

Labour Laws

Labour policy in India favours organized labour and has a great deal of support from the political left. Retrenching is not permitted; for an export-oriented industry, this can be quite burdensome.

Indian Textile Export Growth

Structure of Indian Textile Industry

Source of Imports of Textile and Clothing to The USA

Source: FICCI report

Source of Imports of Textile and Clothing to The EU

Source: FICCI report

Estimates

Source: FiCCI report

Post MFA ScenarioMarkets % of Textile

Exports

2002-2003 2005-2006

Textiles and Clothing

Textiles and Clothing

EU 4.9 % 8.1 %

US 3.8 % 5.78 %

Source: Ministry of Textiles