Export quotas and policy constraints in the Indian textile and garment industries

The Agreement on Textiles and Clothing will abolish all quota restrictions in trade in textiles and clothing by the year 2005. Dismantling the quota regime represents both an opportunity (for developing countries to expand exports) and a threat (because quotas will no longer guarantee markets and even the domestic market will be open to competition). Data about the real burden imposed by distorting but nontransparent policies under the quota regime are inadequate, so the authors interviewed traders in Delhi and Bombay about quota rents. They provide comprehensive estimates of the magnitude of the implicit export taxes resulting from the labyrinth of quotas imposed under the WTO Agreement on Textiles and Clothing. Using the concept of an export tax equivalent (or ETE), they assess how much exports are restricted. The international trade regime in textiles and clothing imposes a substantial tax equivalent on Indian exports. Between 1993 and 1997, ETEs for garment exports to the United States were roughly double those for the European Union. The ETEs for the United States declined 1996, which could be a warning signal that India faces increasing competition from NAFTA-empowered Mexico. From India's viewpoint, the European Union is ahead of the United States in dismantling the quota regime - and in not restricting India cotton (garment) exports (where India has a comparative advantage) more than synthetics. India's strengths in this sector lie in natural resources and factor endowments - raw cotton and cheap labor. The Indian garment industry's decentralized production structure - subcontracting, which is low risk and low capital - has served the industry well but has executed Indian products from the mass market for clothing which demands consistent quality for large volumes of a single item. Growth in Indian exports may require a shift to an assembly-line, factory-type system. This would probably require: a) No longer restricting garment production to the small-scale sector (and ending other anachronistic policies). b) Making labor policy more flexible. c) Ending the policy bias against synthetic fibers. d) Reducing transaction costs for exports.