Textile sector to struggle after quota termination

Zakki P. Hakim, The Jakarta Post/Jakarta

The popular issue blanketing the textile and clothing industry, both at home and overseas, throughout the year 2004 was the termination of the global textile quota system.

Producer countries, including Indonesia, are worried that they will lose significant market share, especially to China's cheaper products, when the Multi Fiber Agreement (MFA) is terminated on Jan. 1 next year.

In a world without MFA all exporters are supposed to enjoy freer market access to the major textile and clothing markets: the United States and European Union (EU).

However, many nations are worried that their economically important textile and clothing manufacturing sectors will become sunset industries, believing the sun will rise in China.

Studies have shown that China will benefit most from the quota system elimination, thanks to cheaper labor, more efficient production and better integrated infrastructure.

A World Trade Organization (WTO) paper shows that after the removal of the quota system, China could gradually expand its share in the U.S. garment market to 50 percent from the current 16 percent.

Meanwhile, Indonesia would have its market share cut to 2 percent from 4 percent. Thus Indonesia could lose 50 percent of its market share in the U.S..

These numbers illustrate the "catastrophe" that Indonesia's textile industry may face once the quota system is removed, prompting some to suggest that Indonesia should join other countries in lobbying the WTO for an extension of the MFA.

Observers have criticized both the government and industry players for not being better prepared to cope with the imminent MFA termination, as the matter had actually been decided a decade ago.

The WTO paper shows that China would also dominate EU's fabric and yarn market, and also its apparel market.

The WTO forecasts that Indonesia could still enjoy a higher share of the EU's fabric and yarn market, from 4 percent to 5 percent in the post quota system.

Others think that 2005 may turn out to be not all that catastrophic.

An industry player said mid-year that the quota system had only hampered his company's plans to expand its exports. The MFA removal would only "kill" unhealthy firms that had become overly dependent upon the quota system, he said.

His company is the publicly listed PT Great River International -- a garment manufacturer, retailer and exporter -- that recently projected a 43 percent increase in output to 20 million units next year, as it received new orders from France, German, Japan and the U.S.

Great River president director Sunjoto Tanudjaja, said that the company planned to recruit an additional 3,000 workers next year to strengthen its current workforce of 11,000 employees.

Nevertheless, he said that to facilitate the company's expansion plans, the government needs to continue improve the domestic investment climate by, among others things, providing political stability, conducive regulations and a business friendly environment.

Industry players have recommended that the government implement a short term plan to overcome various problems such as the volatile currency, high labor costs due to sharp increases in minimum wages and the controversial severance pay ruling, poor tax administration, and poor implementation of regional autonomy.

A government survey, though, showed that what the industry needs is not only a better business climate but also capital to purchase new machinery.

The survey revealed that nearly 20 percent of 4,109 companies surveyed between 2001 and July 2004 needed to replace their old and inefficient machinery, which would cost at least US$505 million.

The need for such restructuring is urgent, as production capacity has declined from 84 percent in 1999 to only 65 percent in 2003.

The government has lobbied bankers to channel more of their funds into the troubled textile sector.

The effort seemed to have borne fruit when a dozen private banks eventually approached the textile manufacturers in October to find out how they could assist with financing.

Moreover, the government has also sought the help from overseas financing sources, particularly in China, to help finance the restructuring of the local textile industry.

The industry, which absorbs 1.2 million workers, was the second-largest contributor to foreign exchange earnings among non-oil and gas industries last year, after the electronics industry, with an export value of $7.03 billion, or 16.22 percent of total non-oil and gas exports last year.

Textile and apparel exports to the U.S., meanwhile, reached $2.5 billion or 33 percent of Indonesian total exports to the U.S. in 2002.

Surely Indonesia does not want to lose share in this lucrative market. So why is Indonesia about to lose 50 percent of its market share in U.S. apparel market in post quota system?

The U.S. Agency for International Development (USAID) has the answer. According to their study, Indonesia pays higher duties than any other supplier, thus faces the risk of losing out to competition in the U.S. market.

This is because most of the country's apparel products exported to the U.S. coincidentally fall into categories with high import duties.

The Ministry of Industry acknowledged that Indonesia exported much synthetic fiber-based apparel products that has to pay higher import duties as compared to garments made from natural materials.

The USAID said Indonesia should have pursued a preferential reduction for those groups of goods long before the elimination of quota system.

Meanwhile, officials at the Ministry of Industry said they would encourage manufacturers to use more natural materials such as cotton and flax fiber (serat rami).

The question may well be whether or not it is already too late, and whether the country's textile industry will be "naturally selected" for extinction.