Order Code RS20889
Updated June 10, 2005
CRS Report for Congress
Received through the CRS Web
Textile and Apparel Quota Phaseout:
Some Economic Implications
Bernard A. Gelb
Specialist in Industry Economics
Resources, Science, and Industry Division
Summary
Because of their importance to both industrialized and developing country
economies, textiles and apparel have been major issues in trade relations. A number of
agreements (multilateral and bilateral) were signed over the years restricting the amounts
of textiles and apparel traded — in attempts to resolve issues between the interests of
exporters and importers. This report analyzes the effects of the phaseout of the quotas
on textiles and apparel that occurred January 1, 2005 — focusing on the consequences
and on implementation issues. The report will be updated as events warrant.
Context
Textile and apparel manufacture, and international trade in their products, have been
important elements of economic activity and growth since the Industrial Revolution.
Major reasons for this are: (1) textiles and apparel are basic items of consumption in all
countries, and (2) apparel manufacture is labor-intensive, requiring relatively little fixed
capital to establish production facilities. Thus, with fiber and fabric essential inputs to
apparel, these industries are major generators of jobs. Modest capital requirements
contributed to textiles and apparel being major industries at the start of the Industrial
Revolution and being important to developing countries now. The percentage of total
manufacturing value added accounted for by textile and apparel production among
developing countries in 2002 was two and a half times that for industrialized countries.1
Lower wage rates in developing countries together with the labor-intensiveness of
textile and apparel manufacture tend to give developing countries a comparative
advantage in textile and apparel manufacture. Thus, textile and apparel manufacture is
shifting to developing countries, with textiles and apparel constituting large portions of
their exports. Developing countries’ share of world textile manufacture (measured by
constant-dollar value added) increased from 21.5% in 1980 to 37.5% in 2002; and their
share of world apparel manufacture rose from 18.4% in 1980 to an estimated 30% in
1 United Nations Industrial Development Organization. International Yearbook of Industrial
Statistics 2004. Vienna: 2004. p. 55. 2002 is the latest year for which such data are provided.
Congressional Research Service ˜ The Library of Congress

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2002.2 Between 1980 and 2002, textile and apparel exports of developing economies (in
nominal dollars) in 2002 were more than seven times their 1980 level. In contrast,
developed economies’ textile and apparel exports in 2002 were less than two and a half
times their 1980 level. Textiles and apparel comprised 12% of developing economies’
exports in 2002, versus 4% for developed economies.3
Because of their importance to both industrialized and developing country
economies, textiles and apparel have been major issues in trade relations among and
between many countries. In attempts to resolve conflicts between the interests of
exporters and importers, a large number of agreements (multilateral and bilateral), mainly
between developing and developed countries, were signed over the years bearing on, and
generally restricting, the quantities of textiles and apparel traded.
The Multifibre Arrangement. In 1974, virtually all of the principal existing
multilateral and bilateral agreements were combined into the Multifibre Arrangement
(MFA). A common set of rules was applied, which, among other things, provided for
quantitative restrictions when surges of imports of particular products caused, or
threatened to cause, damage to the industry of an importing country. The MFA did not
adhere to the basic rules of the General Agreement on Tariffs and Trade (GATT),
particularly with respect to the principle of GATT non-discrimination. The MFA was
intended to be temporary, but was extended several times.
Agreement on Textiles and Clothing. The Agreement on Textiles and
Clothing (ATC) replaced the MFA on January 1, 1995. The ATC provided for a ten-year
four-stage transition period for producers in developed countries to plan for and adjust to
prospective intensified competition from developing countries, ultimately placing textile
and apparel trade under the rules governing other products; and it aimed to improve
access to the textile markets of developing countries. The ATC, which was under the
supervision of the World Trade Organization (WTO), was approved by Congress as part
of the Uruguay Round Agreements Act, and signed into law by President Clinton.
The ATC called for reductions of 16% (January 1, 1995), 17% (January 1, 1998),
18% (January 2002), and 49% (January 1, 2005) of the quotas pertaining to specified
textile and clothing products based upon 1990 volumes. In addition, the growth rates of
quotas of products not liberalized as above or of products otherwise restrained were
increased during the first three steps of the phaseout period. There were numerous
exceptions; and, in the four-stage process of liberalization, importing countries had the
choice of how much of each (defined) product category to liberalize at which step; and
they could, and did, defer liberalization of the most "sensitive" products until the final
stage of the ATC. Many developing countries saw the ATC as a constraint on their
economic growth. They believed it was unfair, and regularly advocated a faster phaseout.
2 International Yearbook of Industrial Statistics 1999. Vienna, 1999, p. 46; International
Yearbook of Industrial Statistics 2004. p.48. The 2002 percentage for apparel is estimated
because leather items and footwear are combined with clothing in the 2002 data.
3 United Nations. 1994 International Trade Statistics Yearbook, Vol. II. New York: 1995. p. S-
20, 76, 92; 2002 International Trade Statistics Yearbook, Vol. II. New York: 2004. p. 506, 562,
and 578. Percentages based upon trade data published by the WTO may be different.

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Implementation and Effects of the Quota Phaseout
Completion of the phaseout of quotas on textile and apparel trade removes a
hindrance to industries in countries with competitively-advantageous characteristics to
win markets from their counterparts in other developing countries and in industrialized
countries. Exporting country industries that had some assured market access along with
restricted quantities by virtue of an agreement with an importing country will face more
open competition, particularly in labor-intensive apparel manufacture/assembly. There are
uncertainties, however, as to the actual extent of implementation of the phaseout.
Implementation Caveats. If implementation is defined as the ability of
countries’ political leaders to permit the quota phaseout to take full effect, it can be argued
that complete actual implementation may be difficult for at least three reasons: (1) The
final stage of import quota phaseout was large in terms of the volume of textile and
apparel items that were freed from quotas; (2) the final stage covered items that were left
to the end because of their domestic sensitivities; and (3) the phaseout is a major symbolic
as well as actual step toward further “globalization,” considered by some as economically
and environmentally oppressive and/or an intrusion into their economic or personal lives.
The prospect of the consequences of the phaseout may aggravate those negative feelings.
With respect to procedure, it is likely that parties that are harmed by or perceive a
threat from goods produced abroad will use the safeguard mechanisms available.4
China’s WTO accession agreement allows the United States and other Member countries
to impose temporary quotas on textile and apparel from the People’s Republic of China
if they determine that Chinese-origin imports of a product are causing “market
disruption.” Moreover, trade in textiles and apparel still is constrained by tariffs.
Competitiveness Factors. While low labor costs are important, numerous other
factors in one country can combine to offset lower labor costs in another country, or
provide an advantage over another country with comparable labor costs. “Other” factors
include labor skills, workforce availability, managerial quality, proximity to markets,
infrastructure suitability, degree of market access, quality and cost of material inputs,
availability and cost of capital, level of service, and business climate.
Labor skills and work force availability are among the factors that determine
effective labor costs. Better trained workers tend to be more productive, and wages tend
to be higher if textile and apparel producers face substantial competition for workers from
other parts of the economy. Geographical location and transportation availability and
proficiency affect delivered prices and shipment times. The market access afforded by
a trade preference (unilaterally provided or by agreement) might offset disadvantageous
characteristics, but this can depend heavily upon the strictness or looseness of any rules
of origin provisos. Quality and cost of inputs depends upon factors such as access to raw
materials and intermediate inputs, including the sizes of any tariffs on imports of raw
materials. Level of service includes product quality, scope of service, reliability, and
flexibility. Political stability, citizen safety, security of operations, reliability of
4 This was anticipated at least by 1995. See, for example, J. Michael Finger. “Legalized
Backsliding: Safeguard Provisions in the GATT,” in The Uruguay Round and the Developing
Countries, Will Martin and L. Alan Winters, Eds. World Bank Discussion Paper No. 307, 1995.

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telecommunications, and the consistency, efficiency, and honesty of the legal and
commercial systems are among characteristics determining a business climate.
Effects on Developing Countries (Including China). Developing countries
as a whole were expected to gain from the phaseout of textile and apparel quotas.
Removal of textile and apparel quotas tends to remove an obstacle to industries in lower-
labor-cost nations (generally, developing countries) to win markets from their
counterparts in industrialized countries. Elimination of quotas tends to provide more
scope to countries whose industries are more efficient to gain at the expense of countries
with less efficient industries. (In this context, efficiency particularly connotes the ability
to produce at a lower cost measured in a common currency.) Inasmuch as industrialized
countries still account for about 65% and 70% of world textile and world apparel output,
respectively,5 it is reasonable to expect that the shift of textile and apparel production
from developed to developing countries will continue.
In some cases, there will be offsets to whatever gains in sales volume developing
countries may derive as a result of the quota phaseout. Under a quota regime, which
limits competition and tends to raise prices, developing country textile and apparel
producers benefitted by receiving higher prices (on smaller volumes) in many cases.
A derived effect of the shift of textile and apparel production from industrialized to
developing countries has been a shift (smaller so far than the product shift) in textile
machinery manufacture from industrialized to developing countries. This, in turn,
stimulates the development of supplier industries to the developing country machinery
industry. Another benefit is the associated, even required, improvements in technological
and managerial skills and business networks. These include (1) process, product, and
industrial engineering capabilities; (2) the ability to locate, purchase, and install
equipment; and (3) the ability to establish linkages with other firms (suppliers, designers,
customers) and with institutions.6 All of which benefit the economy as a whole.
China. By virtue of its rapid industrialization, large economy, fast economic growth,
and large population, China is an especially vigorous and strong competitor in a world
textile and apparel trading regimen with fewer restraints now that it is a member of the
WTO, which it joined in December 2001. A major factor is China’s quasi-privatization
of its agricultural sector and consequent gain in productivity, which is releasing portions
of its large rural population from agricultural work for employment in urban industrial
centers. A continuing large availability of workers tends to restrain wages.
Thus, in contrast to initial expectations that the quota phaseout would result in
increased exports of textiles and apparel by developing countries as a whole, which were
the primary proponents of the phaseout under the ATC, it increasingly appeared — and
has come to pass — that China will be a major beneficiary at the expense of most other
developing countries. For example, in the first four months of 2005, U.S. imports of all
5 CRS estimates.
6 These points are taken from “Building Export Capabilities in Textiles and Clothing: Case
Studies of German and Italian Companies’ Exports,” by Sanjaya Lall and Ganeshan Wignaraja,
in Beyond the Multifibre Arrangement: Third World Competition and Restructuring Europe’s
Textile Industry, Organization for Economic Cooperation and Development. Paris, 1995.

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textile and apparel products (on a value basis) from China were 52% greater than in the
comparable 2004 period, accounting for 25% of total U.S. imports of textiles and apparel
compared with 18% in the comparable 2004 period. Percentage gains for some products
were considerably greater. Total U.S. imports of textiles and apparel rose 10%.7 China
also has made large inroads in European Union textile and apparel markets in 2005.
However, U.S. and other major market importers are expected to reduce the risk of
sourcing from only one country. India has a large, versatile, strongly competitive
manufacturing base with low labor costs; and Pakistan, Bangladesh, and Vietnam have
sufficiently low labor costs to compete well in some product markets. Vietnam has
sharply increased its exports of clothing recently, but it will be subject to quotas until it
becomes a member of the WTO.
Effect on U.S. Producers and on the U.S. Economy. Imports of textiles and
apparel — especially the latter — into the United States increased steeply in the early
1960s, winning sizable portions of U.S. markets from U.S. producers; and such
penetration has continued since then. U.S. textiles and apparel output has risen
nevertheless, albeit modestly. Employment in U.S. textile and apparel manufacturing has
fallen markedly however. Part of the decline in U.S. textile and apparel jobs is attributable
to increases in imports, but part is linked to substantial productivity gains. U.S. textiles
have fared less badly with respect to trade than apparel. Textile production is less labor-
intensive, more easily automated, and, as a major input to apparel, can be exported to serve
as inputs to foreign-made apparel that then is exported to the United States.
With imports of textiles and apparel already increasing, U.S. textile and apparel
manufacturers, particularly apparel makers, already are being affected by the quota
phaseout. It is likely that textile and apparel manufacturing employment will decrease
further, perhaps faster than in the past. Textile and apparel industry sources predict job
losses in the hundreds of thousands. On the other hand, U.S. importers of textiles and
apparel (domestic apparel manufacturers that use or hope to use foreign-made textile
inputs, domestic apparel wholesalers, and large chain stores) will tend to benefit vis-à-vis
competitors who use less imports.
There will be benefits to the overall U.S. economy (and European Union economies
as well) from acceleration of imports of textiles and apparel. To the extent that prices of
textiles and apparel fall, or are lower than they would be without the quota phaseout, as
a result of the expected increase in competition from foreign-produced goods, U.S.
industrial users of these products and U.S. consumers should benefit. Also, substitution
by foreign-made goods will tend to facilitate the ongoing long term shift in the United
States from lower to higher value added industries, and increase average wages in the
process. Value added per worker in textile and apparel production is considerably lower
than in U.S. manufacturing as a whole. At the same time, there are calls for assistance to
U.S. workers adversely affected by increased imports.
The effects of the textile and apparel quota phaseout on U.S. producers probably will
be limited somewhat by provisions in China’s WTO accession agreement. A major
7 U.S. International Trade Commission Dataweb (compiled from U.S. Departments of Commerce
and Treasury data).

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element of that agreement is a textile-specific safeguard provision, in effect through 2008,
that allows the United States and other WTO member countries to impose temporary
quotas on textiles and apparel from China if they determine that Chinese-origin imports
of a product are causing market disruption. In addition, U.S. law created mechanisms to
monitor China’s compliance with the WTO and other trade agreements. The U.S.
government already has made determinations of disruptions with respect to several
products, and has imposed temporary quotas.
Countries With U.S. Trade Preferences. Inasmuch as tariffs were not phased
out along with MFA quotas, countries eligible for duty-free U.S. textile trade preferences
have a potential advantage over some other potential suppliers, depending to a great extent
upon beneficiary countries’ geographical proximity to the United States. It is unsurprising
that the Caribbean countries constitute the largest market by far for U.S. fiber, yarn, and
fabric among the three U.S. trade preference regions — Andean, Caribbean, and Sub-
Saharan Africa — but it should not be inferred that geography is the only factor.
Regional Trade Agreements. Generally, it would appear that the phaseout will
tend to diminish the benefits of regional agreements to the participating parties. On the
other hand, the structural relationships formed as a result of such trade agreements may
limit the hoped for gains of the textile and apparel quota phaseout.
Selected Pre- and Post-Phaseout Developments
Expectation of gains in textile and apparel exports by China and other Asian
countries, and of market losses by developed country producers, has led to a series of
requests by some governments and textile and apparel industries for measures to ease or
extend the transition to quota-free trade in textiles and apparel. The so-called Istanbul
Declaration by textile industry trade associations from Turkey and the United States (later
joined by others) called for an emergency meeting of the WTO to review the possibility
of an extension of the phaseout. The governments of Mauritius and six other developing
countries asked the WTO to study adjustment-related issues arising from quota phaseout,
and to establish a program to discuss solutions to the problems identified by the study.
In the United States, some Members of the U.S. Congress wrote to President Bush
in mid-2004 requesting support for asking the WTO to re-examine the scheduled ending
of quotas.8 Since the phaseout, the Administration has been receptive to industry petitions
for the imposition of safeguard quotas.
U.S. and European Union implementation of safeguard quotas have provoked strong
objections by China. In mid-June 2005, the European Union and China agreed to limit the
rise in textile and apparel imports in the next three years.9
8 House of Representatives letter dated June 7, 2004, signed by 88 Members; Senate letter dated
June 9, 2004, signed by 29 Senators. "Members of House, Senate Urge Bush Support for WTO
Meeting on Textiles," International Trade Reporter, BNA, Inc., June 17, 2004, p. 1014.
9 Geoff Dyer and Raphael Minder. “EU and China in textile Truce,” Financial Times, FT.com
on June 10, 2005.

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