PROSPECTS 2005: Textiles, MFN erosion on trade agenda

Analysis

World trade flourished in 2004. While trade volume grew by about 5% in 2003, growth in 2004 may reach or exceed 9%, a four-year high.

Forecasts for 2005 vary, reflecting differing assumptions on such key points as oil prices, Chinese demand and the level of the dollar. However, most expect growth nearly as great as in 2004. Failure of the WTO's Cancun meeting in September 2003 led to forecasts that 2004 could be a lost year for Doha Round negotiations. Much time was indeed lost, but a 'framework' agreement last July redefined the coverage and goals of the negotiations, and re-launched work in Geneva (see INTERNATIONAL: WTO members rescue Doha Round - August 2, 2004).

Textiles liberalisation. While prospects for trade relations can be largely summed up as 'more of the same', especially with the post-election thrust of US policy likely to remain unchanged, one major development is certain. On January 1, 2005, the quantitative restrictions that since the 1960s have limited and distorted developing-country exports of textiles and clothing to the United States and EU will be removed (see INTERNATIONAL: Textiles quotas will expire on schedule - July 2, 2004).

Although this will not be quite the trade policy landmark once expected (it should have been the concluding date for both the Doha Round and the Free Trade Area of the Americas), it ends the 10-year transition period under the Uruguay Round Agreement on Textiles and Clothing. With only half of restrictions removed in earlier stages of the phase-out, the sudden disappearance of all remaining quotas will have dramatic effects:

• China and India will probably make huge gains in market share, particularly in clothing, at the expense mainly of less competitive developing countries. Estimates suggest that China alone will seize half the US clothing market.
• Bangladesh is a potential major loser, along with some smaller countries heavily dependent on clothing exports. Nevertheless, as a forthcoming OECD report argues, there will be plenty of scope for textile and clothing export success stories, based on mastery of logistics and specialities, eg in filling quality orders to short deadlines.
• US and EU consumers will benefit from lower prices, but domestic producers under pressure will seek relief from their governments through safeguard action.
• There will be disputes in the WTO, especially if the United States acts against Chinese imports.

WTO. Progress in the Doha multilateral trade round will be slow, probably unspectacular, and insufficient to boost business confidence about future trade prospects. Last July's framework agreement postponed difficult choices until December 2005, when WTO members meet at ministerial level in Hong Kong. Current work is purely technical, and although real negotiations should begin around April, decisions on target figures for cuts in agricultural and industrial tariffs, subsidies and other protection will be reached only in Hong Kong. On past WTO form, they may not be reached even then. One essential requirement for progress will be renewal of US negotiating authority, which runs out in June 2005, but with a provision for a two-year extension if the president so requests and Congress does not disagree. A new expiry date of June 1, 2007 would make spring 2007 a credible end-date for the Doha round.

Three areas are worth noting:

1. Disputes. Although the number of new disputes brought to the WTO has declined in recent years -- the 2004 figure may be the lowest yet -- developments in both old and new disputes can have wide economic and political effects. One example is the November 2004 WTO decision to approve retaliation worth some 150 million dollars by the EU, Japan and five others against imports from the United States to offset effects of the WTO-inconsistent but still un-repealed Byrd Amendment. This means that a dispute initiated in January 2001 will hurt US exporters in 2005.

   Complaints in 2002 against the trade regimes of the United States and the EU for cotton and sugar respectively have led to decisions (currently under appeal) in 2004 which may affect both trade and the Doha Round in 2005. Another long-running dispute, over the US Foreign Sales Corporation/Extra-Territorial Income Exclusion seems to have been resolved, but a new trans-Atlantic battle has been launched by the US complaint over EU subsidies for Airbus and the EU counter-complaint over US support for Boeing (see INTERNATIONAL: Airbus-Boeing dispute puts WTO to test - November 2, 2004),

2. Accessions. Several more countries should complete accession negotiations, taking WTO membership from the present 148 to more than 150. Although negotiations with both Russia and Saudi Arabia -- the biggest traders still outside the WTO -- are far advanced, Russia is unlikely to join before 2006, and bilateral problems with the United States are currently delaying Saudi accession.
3. Director-general. Supachai Panitchpakdi's term as WTO director-general ends August 2005. The choice of his successor (candidates will be named later this month) should go more smoothly than in 1999, when disagreements left the WTO headless in the crucial months before its Seattle disaster.

Regional and bilateral FTAs. There will be no let-up in the proliferation of initiatives and negotiations for regional and bilateral free trade areas (FTAs), and the consequent steady erosion of the core WTO principle of most-favoured nation treatment:

• The EU will be negotiating 'Economic Partnership Agreements' with six regional groupings of its African, Caribbean and Pacific (ACP) associates, to replace longstanding preferential arrangements.
• Prospects for several other projected regional agreements are poor. Negotiations on a Free Trade Area of the Americas (FTAA) and an EU-Mercosur agreement have made little progress, and plans for an APEC FTA have been shelved.
• Efforts to link Mercosur and the Andean group will be worth watching, as a possible home-grown substitute for the FTAA.
• The China-ASEAN FTA should yield its first concrete results, as members make initial tariff cuts under a timetable running to 2010. The agreement falls short of GATT prescriptions, since many "sensitive" products will not be fully liberalised.
• China's attraction as an FTA partner contrasts with Japan's inability so far to reach agreements with ASEAN members Indonesia, Malaysia and Thailand. Japan's reluctance to ease barriers to imports of agricultural products is matched by the ASEAN countries' fears of Japanese competition for their national industrial champions (see JAPAN/SOUTH-EAST ASIA: FTA outlook remains bleak - November 17, 2004).

The United States will continue to seek bilateral trade agreements worldwide, attracted particularly by the opportunity they provide to secure commitments, unavailable through the WTO, on investment and intellectual property. Its partners are largely driven by fears that, without an FTA, they will be at a competitive disadvantage against other suppliers to the US market who have already signed up. Several recent FTA agreements await congressional approval in 2005, but the US-Australia FTA comes into force in January.