Trade Policy and the Clothing & Textile Industry Don Ross School of Economics University of Cape Town August 2009

In the dark ages Under the pre-democratic regime, the c&t industry was heavily protected by tariffs. During this time, its productivity declined and its technology and skills base became antiquated.

From 1995, tariff protection was reduced and the industry was encouraged to seek export markets. Its productivity, technology and skills based significantly improved. BUT … … it remained the second-most heavily protected major industry in SA. (Now it’s the most protected.)

Tariff liberalization ceased. The industry remained a profitable exporter thanks to (1) Rand weakness and (2) the continued international protectionist regime in c&t (the ‘multifibre agreement’, or MFA). Its productivity gains stopped with the end of progress in tariff liberalization.

The Rand strengthened, the MFA ended, and SA c&t was driven out of its export markets by low- cost Asian producers, especially China. There was a massive surge in imports, especially from China. Note: this was NOT a zero-sum game in the domestic market, where consumption in the relevant market segment also exploded. The SA industry’s vertiginous decline was mainly due to collapse of exports. (Continued relatively high tariffs on intermediate textile imports certainly didn’t help.)

The c&t industry’s strategy since 2002 Cost reduction by outsourcing to cut- make-and-trim operations. This slowed the decline in profits, but took the industry down market and reduced its capacity to innovate up the value chain.

Quotas were introduced on some Chinese imports. These failed, as retailers replaced them with imports from other Asian countries, our SSA neighbours, and ‘grey market’ products (under-invoiced, smuggled, trans-shipped through Zimbabwe and other African routes). The decline in the industry continued, but at a slower pace. This was due to renewed Rand weakness, not thanks to the quotas.

What the quotas really showed Given the ease with which clothes from multiple countries –including EU countries! – replaced Chinese suppliers to compete in our market, we were reminded that the problem isn’t China – it’s us. Our c&t industry has become a basket case by global standards. Much of it can be preserved only by making poorer S’Africans pay higher prices for inferior quality clothes.

The basic policy choice in 2009: more protection or not? SACTWU lobbies for increased tariffs (up to WTO limits) and new safeguard measures. The industry lobbies for reduced tariffs on intermediate inputs – which the DTI is now organizing – and public assistance with re-structuring. Retailers lobby for renewed trade liberalization.

What the economics say (1) Increased protection from imports would be more of the poison that has sickened the patient. The industry would respond by slowing the rate of modernization, and (worse) by retreating further down the value-added scale. (2) Tariffs and safeguards are a highly inefficient tax on poorer S’Africans – the industry’s primary customers. (Question: Who here is wearing clothes made in Asia?) Estimated cost to the economy of 40-45% clothing tariffs, per c&t sector job saved, is R3.5 million. Estimated cost of replacing each c&t worker’s COE is R70,000. (Question: Is buying R70,000 worth of welfare for R3.5 million a good deal?)

Economically sound policy Protection against imports should be reduced, not increased. Some c&t firms would respond by moving up the value-added chain and finding niche markets abroad (following the example of Mauritius). Most would collapse. C&t sector workers are vulnerable and relatively stranded in the current labour market. They should be generously assisted with cash, re-training, and re- location grants to seek better prospects. ‘Generously’ could mean replacing their entire salaries. Some public assistance with re-structuring is in order, but only for firms that demonstrate specific plans and capacity for export-oriented, higher-value- added production