Changes in Global Trade Rules for Textiles and Apparel

Implications for The Dominican Republic

Research

Prepared with USAID support under contract PCE I-00-98-00016,Task Order 13 (Support for Trade Capacity-Building Activities)

2

Changing trade environment

• The WTO Agreement on Textiles and Clothing (ATC) will eliminate quotas on US imports January 1, 2005

• Preferential trade agreements are expanding--other countries are joining the club (e.g., AGOA and ATPDEA)

• US free trade agreements are increasing (e.g., Chile, Singapore, Southern Africa, CAFTA etc.)

3

US imports from theDominican Republic

Footwear5%

Other 23%

Tobacco3%

Electronics16%

Apparel 53%

(US$2.2 Billion)

Total US Imports from the Dominican Republic US$ 4.2 Billion (2002)

Source: USITC Dataweb. Apparel is defined as Standard Industry Trade Classification code 84.

4

US Imports of apparel from the Dominican Republic 2002

Synthetic Apparel*4%

Support garments7%

Other 14%

Cotton Underwear13%

Cotton Trousers34%

Synthetic Trousers*12%

Cotton Knit Shirts9%

Other2%

Non-MFA3%

(Based in Value)

Source: US Department of Commerce Office of Textiles and Apparel (OTEXA).

*Synthetics are garment primarily made of man-made fibers such as polyesters and acetates.

Phase-out of Quotas

A Major Benefit Will End in 2004

6

Dominican Republic exports will be subject to more competition

US Imports of Apparel From Dominican Republic 2002

Unconstrained99.9%

High Risk85%Low Risk

15%

The Dominican Republic is not constrained by

quotas

Most Dominican Republic exports are in categories

which Asian countries are quota constrained

Source: Data from U.S. Department of Commerce. Low-risk exports are products in which the Dominican Republic and other countries are not constrained by quotas. Dominican exports of certain wool suits were constrained by quotas in 2002 but amounted to less than 1% of trade.

7

Products exposed to a high risk of quota elimination

Description

Number of Countries

Restrained by US Quotas

Percent of 2002 US

Imports from the Dominican

Republic Cotton Trousers and Slacks 16 34%

Cotton Underwear 10 13%

Synthetic Trousers and Slacks 15 12%

Cotton Knit Shirts 17 9%

Swimsuits\Coveralls\Caps 4 4%

All Other Restrained 22 14% Source: Based on data from U.S. Department of Commerce Office of Textiles and Apparel. A quota is constrained if it is more than 90 percent filled.

8

Tariff equivalents of quotas and tariffs on selected quota constrained countries

Product

Average Tariff Equivalent of US Quotas on

China, Hong Kong, and India*

2002 US MFN Tariff

Cotton Trousers 44% 17% Cotton Underwear 17% 10% Synthetic Trousers 18% 28% Cotton Knit Shirts 32% 18% “T” and Tanks 12% 17% Knit Shirts 43% 18% Other Synthetic Apparel 12% 18% Other – Constrained 19% 18% Total Constrained 19% 18%

*Tariff Equivalents of quotas are technically called export tax equivalents, because the quota is applied before the duty is charged in the US, it is not exactly equivalent to a quota.

9

Impacts of US quota phase-out:assumptions

• Adjustments are long term (1-3 years)―Buyers can find new sellers―Unprofitable producers close

• No trade remedies (antidumping or safeguards)

• No major shifts in exchange rates• Costs such as labor, fabric and

transportation remain the same

10

Impacts of US quota phase-out:Exports

Product

2002 US$ Imports

from Dominican Republic

Impact of Quota Removal

Cotton Trousers 729 -50% Cotton Underwear 276 -24% Synthetic Trousers 251 -51% Cotton Knit Shirts 198 -42% Other Synthetic Apparel 89 -25% Other Not Listed 307 -34% Total Products Impacted by Quotas

1,850 -41%

Apparel Not Impacted by Quotas

327 0%

Total 2,177 -35%

Decline in

Baseline 2002

Exports of $759 Million

11

Impact of quota phase-out: direct employment

20,000

40,000

60,000

80,000

100,000

120,000

Employment 118,652 75,641

Base 2002 Quota Elimination

Lose of 41,528 Direct JobsNumber of

Employees

12

The importance of China

• China will likely account for up to up to half the impacts of quota removal

• The U.S. may apply China specific safeguards to counter import surges from China

• China safeguards could provide up to a three year window for the Dominican Republic to adjust to competition in a quota free world

US-CAFTA Scenarios: Implications for the Dominican

RepublicAnswer to a Problem?

14

US apparel imports from Dominican Republic and Central America

Dominican Republic(US$ 2.2 Billion)

Woven64%

Knit36%

Central America (CA-5)(US$ 7.0 Billion)

Woven35%Knit

65%

Source: U.S. Imports of Merchandise Trade 2002. Shares based in value.

15

US applied duties under the Caribbean Trade Preference Act

2002 Imports (Million US$)

Country/Region

Value Duty

Free

Average Applied

Duty

Central America-5

6,997 65% 6%

Dominican Republic

2,133 89% 2%

Source: US Imports of Merchandise Trade.

16

US applied duties under the Caribbean Trade Preference Act

Duties and Preferences

US Imports 2002 Value Average Applied

Country (Million US$) Duty Free (a)

MFN (b) Rate

Nicaragua 433 31% 17% 12% Honduras 2,502 80% 16% 3% Guatemala 1,659 36% 18% 12% El Salvador 1,675 72% 16% 5% Costa Rica 727 80% 10% 2.0% Total CA-5 6,997 65% 17% 6.0% Dominican Republic 2,133 89% 17% 2% Source: US Department of Commerce Imports of Merchandise Trade 2002. (a) US imports meeting the US rule of origin under the CBTPA are duty free. (b) Average MFN rate is the duty that would be paid if there were no preferences to CBTPA countries.

17

Impacts of US-CAFTA and quota phase-out: assumptions

• Adjustments are long term (1-3 years)―Buyers can find new sellers―Unprofitable producers close

• No trade remedies (antidumping or safeguards)• No major shifts in exchange rates• Materials costs do not change as a result of new

rule of origin• Non-preferential trade can be converted to duty

free

18

Impacts of US-CAFTA and quota phase-out: exports

Impacts of Quota Phase-out and

Product

2002 US Imports

from Dominican Republic

No US-CAFTA

US-CAFTA Without

DR

US-CAFTA

With DR

Cotton Trousers 729 -50% -53% -47% Cotton Underwear 276 -24% -27% -27% Synthetic Trousers 251 -51% -54% -47% Cotton Knit Shirts 198 -42% -52% -36% Other Synthetic Apparel 89 -25% -26% -17% Other Products 307 -34% -37% -1% Total Impacted by Quotas

1,850 -41% -45% -34%

Apparel Not Impacted by Quotas

327 0% -2% 24%

Total 2,177 -35% -39% -25%

19

Impacts of US-CAFTA and quota phase-out: direct employment

20,00040,00060,00080,000

100,000120,000140,000

Employment 118,652 72,378 88,989

Base 2002 US-CAFTA No DR No Quotas

US-CAFTA with DR No Quotas

Number of Employees

20

Impacts of US-CAFTA: rules of origin determine material inputs

• Fabric can comprise 50% or more of trousers’ factory gate price

• Regional fabrics (Central American or local) could reduce material costs and provide a broader input base

21

Impacts of US-CAFTA and quota phase-out: exports

Impacts of Quota Elimination and

Product

2002 US Imports

from Dominican Republic

US-CAFTA With

Dominican Republic

US-CAFTA With Dominican

Republic and Reduction in

Material Cost Cotton Trousers 729 -47% -17% Cotton Underwear 276 -27% -27% Synthetic Trousers 251 -47% -17% Cotton Knit Shirts 198 -36% -36% Other Synthetic Apparel 89 -17% -17% Other Products 307 -1% -1% Total Impacted by Quotas

1,850 -34% -18%

Apparel Not Impacted by Quotas

327 24% 24%

Total 2,177 -25% -12%

With Assumed Ten Percent Reduction in Dominican Republic Trouser Material Cost

Adjusting to the New Trade Environment

23

The post quota market for apparel

• What will the post quota world look like and how can the Dominican Republic prepare for it?

24

The post quota market for apparel

• According to a survey by the Department of Commerce, U.S. apparel buyers plan to reduce by half the number of producers from whom they source apparel soon after quotas end

• Buyers are indicating that they require the value-added services of large apparel firms such as design shops, floor-ready merchandise and full-package production

25

Adjustment strategies

• Clustering of small and medium sized firms

• Improving knowledge of regional fabric sourcing

• Diversifying products away from categories with significant quota protection to products with significant tariff protection

26

Adjustment strategies

• Insuring new customs regulations are efficiently implemented (24 hour rule, Container Shipment Initiative, Customs Trade Partnership Against Terrorism)

• Engaging in free trade negotiations and ensuring that negotiated provisions benefit the Dominican Republic

27

Adjustment strategies

• Insuring new customs regulations are efficiently implemented (24 hour rule, Container Shipment Initiative, Customs Trade Partnership Against Terrorism)

• Engaging in free trade negotiations and ensuring that negotiated provisions benefit the Dominican Republic

28

US applied duties by fiber and fabrication

Fiber Fabrication Synthetic Cotton Wool Knit 27% 16% 13% Woven 19% 16% 17% Source: US imports of Merchandise Trade, 2002.

The average applied duty on Asian suppliers for the products

exported by the Dominican Republic is 18.7 percent

US Average Duties on all Apparel Products

29

Selected US imports with high duties

Product Fabric Duties Men’s Cotton Sport Shirts Woven 20 - 29% Men’s Synthetic Sport Shirts Woven 29% Women’s Synthetic Blouses Woven 15 – 27% Infant’s Knitwear Knit 8-33% Source: American Textile Manufactures Institute (ATMI).

Dominican Republic Apparel Export PerformanceAnswer to a Problem?

31

US import market shares:cotton trousers

1997

Africa3%

Mexico25%

CA517%

DR10%

Other12%

Constrained

33%

2002

Mexico25%

DR6%

Other21%

Africa5%

CA514%

Constrained

29%

Source: US quota categories 347/348. Market shares in SME. The US imported $730 million from the Dominican Republic of cotton trousers in 2002.

32

US imports of cotton trousers 1997-2002

0

200

400

600

800

1997 1998 1999 2000 2001 2002

CA5 DR MexicoAfrica Constrained Other

Square Meter Equivalents

33

US imports of cotton trousers 1997-2002

3.504.004.505.005.506.006.50

1997 1998 1999 2000 2001 2002

CA5 Dominican MexicoAfrica Constrained Other

Average Unit Values

34

US Import Market Shares: Cotton Underwear

1997

Constrained 14%

Mexico6%

CA541%

DR18%

Other21%

2002

Mexico3%

DR13%

Constrained17%

CA546%

Other21%

Source: US quota categories 352. Market shares in SME.

35

US import market shares: synthetic trousers

1997

Constrained

56%

Mexico21%

CA58%

DR8%

Other7%

2002

Mexico19%

DR6%

Constrained

47%

CA513%Other

15%

Source: US quota categories 647/648. Market shares in SME.

36

US import market shares: cotton knit shirts

1997

Constrained

33%

Mexico19%

CA523%

DR4%

Other21%

Source: US quota categories 338/339. Market shares in SME.

2002

Constrained

23% Mexico18%

CA533%

DR2%

Other24%

Effects of Quota Elimination on Support Garments

Answer to a Problem?

38

US Imports of support garments

• Brassieres, girdles and other body support garments were integrated into the WTO in 1998, so constraining quotas were removed principally from South East Asian countries (Thailand, Indonesia, Malaysia, and Singapore)

• Quotas remained on China up to January 2002 when they were removed

39

US imports of support garments 1997-2002

0

10

20

30

40

1997 1998 1999 2000 2001 2002

CA5 DR Mexico China S.E. Asia

Quotas on South Asian countries eliminated

Quotas on China

eliminated

(Million Units)

40

US import market shares:support garments

1997

China4%

S.E. Asia12%

Other14%

DR19%

CA523%

Mexico28%

2002

Mexico11%

DR9%

Other15%

China21%

CA522%

S.E. Asia22%

Source: US quota category 649. Market shares in SME.

41

US imports of support garments 1997-2002

0

5

10

15

20

1997 1998 1999 2000 2001 2002

CA5 DR Mexico China S.E. Asia

Quotas on South Asian countries eliminated

Quotas on China

eliminated

(Average Unit Values (US$/SME)