Monday, 29 November 2010
The power of spinners and weavers
Bangladesh spinners and weavers may still undermine the benefits of the new EU Rules of Origin.
The new Rules allow all low-income countries poor enough to be designated Least Developed Countries (LDCs) to use raw materials from anywhere in most garments and still get duty-free access to the EU from January 1. They should significantly increase the competitive advantage in Europe of Cambodia and Bangladesh
The Rules have taken some time to change – not least because of concern about their possible effect on what is known in the jargon as the textile industry's "backward linkage": the capital-intensive spinning, weaving and dyeing industries that most very poor countries lack almost completely. EU administrators have worried about this for some time – largely because it was long the dominant orthodoxy among development activists that garment manufacturing jobs were unstable, temporary things that would disappear to somewhere cheaper, while jobs in spinning and weaving would help poor economies develop. The argument was never very good (there just aren't that many jobs in spinning and weaving). But it's been looking a lot worse since 2005, with businesses obviously happy to close spinning and weaving mills, be it in Nicaragua, Namibia or Mauritius.
Clearly, if a country like Bangladesh can export garments duty free with fabric from China or Thailand, using imported raw materials is sometimes going to be cheaper or more convenient than buying locally made fabric. Whether the resultant growth in demand for Bangladeshi garments creates more jobs overall, or even creates more jobs for Bangladeshi spinning and weaving businesses comes down to how efficiently Bangladeshi mills operate.
But in the past, that's something Bangladesh mills haven't been prepared to leave to chance. Under current rules, Bangladeshi garments can in theory use Indian or Pakistani raw materials, and still export duty free to the EU. But, to protect local spinners, yarn has to be imported from India by sea, rather than by land – adding weeks to the cycle, and putting a significant obstacle in Indian spinners' way. This obstacle was resisted by garment makers – but the spinners and weavers proved politically stronger.
Garment makers are arguing the new rules are good for the country's economy. But they've not even tried to demonstrate they're good for spinners and weaver – who argue they've invested $4 bn in equipment, and all that investment will go to waste under the new rules. This isn't strictly accurate – it'll be needed to get duty free access to Japan, for example – but it's potentially a strong argument. So far it's unclear how forcefully the argument will be made, and there's only four weeks to go.
But who knows what processes the country's textile lobby might engineer to make it tough for the Chinese? And, as far as we know, those wasteful obstacles against Indian yarn still stand.
So it's possible European importers might find it tougher in practice to make the most of the new rules – and we won't know for certain till the textile makers have had a chance to think about tactics and start their lobbying. In the meantime, businesses need to ensure they're covered against sudden new systems or taxes imposed at the country's ports