CHANGES IN TRADING PATTERNS

There is one additional contingent factor which is of particular relevance and that is the impact of regional trading arrangements. Take for example the combined effect on the apparel industry of the Multifibre Arrangement (MFA), Caribbean Basin Initiative and North American Free Trade Agreement.

• The MFA led to the development of the apparel industry in countries which otherwise would not have had any comparative advantage in that sector. Coupled with the labour cost advantage of many Asian countries this has been a big boost to investment and job creation, although their future will depend on their ability to develop comparative advantages in terms of QSCC.
• The Caribbean Basin Initiative added to the quota based trading system in the Caribbean by offering advantageous duty treatment to garments assembled in the Caribbean from textiles cut and formed in the United States. This locked the Caribbean nations into an assembly role. The product was grown, spun, woven, designed and cut in the USA, shipped to the Caribbean for assembly, then sent back for marketing. US companies found it more convenient to do this in countries close by than to ship the cut fabric to Asia. Hence the Asian producers tend to be providing complete apparel to the US market at the higher end. In other words, geographic proximity reinforces the assembly function of Caribbean countries while the higher costs of transport have forced Asian producers into more integrated manufacture of up-market items. (Leading Asian firms are completely vertically integrated, with cotton farms in China, textile mills in Malaysia and apparel plants in China, Mauritius, Jamaica and Sri Lanka for example). Innovation is therefore far more likely and necessary in the Asian plants than those in the CBI countries.
• The entry into force of NAFTA has placed Caribbean states at a disadvantage relative to Mexico which now enjoys lower tariffs in the highly competitive textile and apparel products sector. There has been a dramatic growth in Mexico's exports to the USA thanks to the fact that they enter duty free while those from CBI countries are subject to duty on the value added offshore. In addition, the 50 percent devaluation of the Mexican peso at the end of 1994 effectively reduced the price of Mexican exports in dollar terms⁽¹⁾.
• CBI states have continued to increase their textile and apparel exports to the USA but at a slower rate than Mexico. US imports of textiles and apparel from CBI countries rose 26 percent in 1997, but imports from Mexico jumped 38 percent. The CBI as a group is still the largest supplier of garments to the USA, but by 1997 Mexico had already overtaken Hong Kong to move into second place behind China amongst individual country's exports.
• The Caribbean has been the hardest hit by NAFTA and the increasing competitiveness of other regions. Recent currency devaluations in Asia will reduce the cost of exports from those countries and most likely intensify the competition in major markets even further. The Caribbean Textile and Apparel Institute reports that since the introduction of NAFTA over 150 companies and 123 000 jobs have been lost in the apparel industry in the Caribbean, and that many of those firms have relocated to Mexico. Caribbean countries will have to look at ways of growing out of the assembly role and acquiring more value added activities based on their intrinsic production capacities rather than their location or preferential trade agreements.
• Asian apparel exporting countries may be next to suffer the NAFTA-effect. The Limited, manufacturer of Victoria's Secret underwear, recently opened a plant in Mexico. Martin Trust of The Limited was quoted in Forbes Magazine⁽²⁾ as saying that despite the fact that wages are three times higher in Mexico than in Sri Lanka it was more economical to produce in Mexico because of savings in time, transport costs and duties. In fact, there has been a steady reduction in apparel imports from Asia over the last quarter century, from 83 percent of the total in 1980 to 41 percent in 1996. Not only is it cheaper and quicker to do it in the western hemisphere, but it allows US textile manufacturers to supply the bulk of the fabric, something they cannot do with Asian suppliers. With the vertically integrated operations some US companies are now establishing in Mexico we can expect to see the same trend towards competition based on QSCC rather than on simple cost savings.
• The need for quick response in increasingly differentiated and volatile consumer markets will also encourage production platforms close to final markets. Many retailers now analyse sales data on Sunday night and place orders for delivery on the following Thursday, just in time for the weekend. This is happening even in large department stores which carry standard product lines.

1. Source for statistics on trade with USA - USITC
2. February 10, 1997