The phase-out of the Multifibre Arrangement (MFA) under the Agreement on Textiles and
Clothing (ATC) on January 1, 2005, has led to a significant decline in international prices of textile and
clothing (T&C) products, benefiting consumers worldwide. But the lifting of remaining T&C quotas
has also created tremendous pressures for retailers, distributors, and producers. Some of the most
efficient producers, such as China and India, now free of quantitative limitations, are increasing their
shares in major import markets at the expense of other countries.
This report investigates the impact of the MFA’s lapse on the T&C sectors in four countries of
the Middle East and North Africa region: Egypt, Jordan, Morocco, and Tunisia (the MENA-4). In all
four countries, the T&C sectors play a crucial role in trade, foreign exchange earnings, and job
creation. These countries are key partners in the Euro-Mediterranean Partnership and, through the
Agadir Agreement, in the Greater Arab Free Trade Area group. In both contexts, specific industry and
trade policies could maximize the opportunities presented by MFA removal. This report analyses the
early effects of MFA removal on the MENA-4 and formulates concrete policy recommendations on
how to mitigate its impact.
The MENA-4 countries have lost market share in the newly liberalized T&C market
One year after expiration of the MFA, the MENA-4 countries are losing export market
positions in the European Union. Overall T&C exports to the European Union from Tunisia,
Morocco, and Jordan have declined by 5.8, 7.4, and 13 percent, respectively, since the removal of
remaining MFA quotas. Egyptian exporters to the EU experienced only a marginal decline of 1 percent
in the value of T&C products. The loss of market share by the MENA-4 countries in the EU T&C
market has occurred against the background of a dramatic increase in Chinese exports (41.5 percent), a
significant rise in Indian exports (18 percent), and good performance by Turkey (3.8 percent) and
Bulgaria (3.2 percent).
Despite the overall decline in MENA-4 exports to the European Union, exports in the 35
recently liberalized T&C product categories have not been as disappointing as expected. Tunisia
experienced a drop in exports of liberalized products of just 3.7 percent, compared to a decline of 12.3
percent in quota-unrestricted products. Similarly, the drop in Egypt’s exports was significantly less
pronounced for the newly liberalized products than for T&C products as a whole. Morocco is the only
MENA-4 country for which the decline in the liberalized products was larger than that in quota-free
products. Morocco’s poor performance in liberalized products reflects a high proportion of low-end
exports that compete directly with Asian products.
Egypt and Jordan experienced strong export performances in the U.S. market after MFA
removal. Exports to the United States from the two countries increased by 8 percent and 13 percent,
respectively, in 2005. Those results were largely due to the preferential access that Egypt and Jordan
enjoy in the U.S. market through their respective Qualified Industrial Zone Agreements. Tunisian
exports to the United States also increased (by 15.5 percent) after the quota removal, but from a
negligible basis. In contrast, Morocco -- also a small supplier in the U.S. market -- suffered a 20.6
percent decline of exports in 2005.
The MENA-4 export trends confirm important differences between the EU and U.S.
markets. The European market remains highly segmented along national lines, requires fast
turnaround, and is less reliant on the large orders that are typical of U.S. retailers. Other characteristics
are a high degree of customization of orders to the needs of consumers and the emergence of products
that require fashion adjustments within a single season. These characteristics tend to favor efficient and
specialized proximate suppliers that are able to cut lead time and respond quickly to orders. In the U.S.
market, the distinctions between different segments of the market are less clear, and price differences
among suppliers narrower. Order sizes are generally larger, providing more room for significant
efficiencies and economies of scale. The scope for competition is thus much larger, and even distant
suppliers may not be disadvantaged, as the success of Jordan shows.
While many T&C jobs were lost in the MENA-4 countries after the removal of the MFA,
parallel job creation in the sectors is gaining speed. In Morocco and Tunisia, investment and
employment indicators have worsened in recent years, compared with the 1990s. Yet sectoral analysis
of investment flows indicates that restructuring of the sector has accelerated since January 2005. New
factories are being opened, even as others are being closed. Jobs are being shed as uncompetitive firms
exit the market, but new ones are being created in both the textile (fabric and yarn) and clothing
segments of the sector.
The future of the T&C sector in the four countries has yet to be determined. With the right
policies, decision makers can take advantage of the ongoing processes of “creative destruction.”
Policies should be devised to accentuate investment flow and employment creation, to mitigate the
impact of employment losses, and to strengthen the international competitiveness of the sector.
Can the MENA-4 countries compete in a post-MFA world?
Competition among textile and clothing exporters has intensified since January 2005 and
will further increase when the safeguards against China’s exports expire by 2008. To improve
their competitiveness, MENA-4 producers will have to continue to lower labor costs, increase
productivity, and improve access to cheap inputs. Labor costs in Egypt and Jordan are lower than or
comparable to those of most Asian exporters. Labor costs in Morocco and Tunisia are lower than those
of some Eastern European countries and Turkey, but significantly higher than those of their Asian
competitors. Productivity differences in the industry of the four countries are not large, with the
exception of Egypt. Egyptian textile companies exhibit low levels of productivity, particularly in the
public sector, due to overstaffing and underinvestment.
For clothing, the cost of fabric typically represents 60 percent of free-on-board prices.
Producers of clothing in Jordan face a simple and transparent trade regime and pay no duty on imports
of fabrics, such as denim. In the other three countries of the MENA-4, however, the combined effects
of tariff protection of textiles and restrictive rules of origin in the association agreements with the
European Union raise the cost of fabric inputs. In Egypt, for example, protection of the inefficient
domestic textile industry raises the cost of inputs and undermines the competitiveness of the clothing
sector. For the countries of the region to be competitive in today’s global markets, further reductions of
tariff and nontariff barriers will be crucial.
Survival of the clothing sector in the MENA-4 countries depends on the ability to better
exploit the advantages of proximity to the European Union. Proximity allows buyers and suppliers
to build strong relationships and permits a better understanding of customer preferences. Firms in the
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MENA-4 countries can be competitive in exporting time-sensitive, replenishable products to the
European market because their inventory costs and risks are lower than those of distant suppliers. They
can exploit focus on products that must be replenished quickly during the selling season. Reducing lead
time—the time required from receipt of an order to shipment to markets—is a key priority. To take
advantage of the comparative advantage of proximity, the MENA-4 countries need to ensure that their
firms have quick and reliable access to competitively priced inputs. They also must enhance
productivity by investing in technology and skills while further improving trade facilitation and
logistics. As they make these improvements, they should strengthen their ties with large retailers,
focusing on their ability to replenish orders quickly in response to demand. More standardized apparel
will face increasing competition from firms in locations where labor is cheaper. For firms that compete
in this segment of the market, improving time to market and reducing production costs will be critical.
Domestic reforms can help firms in the MENA-4 countries compete internationally
Short-term policies are needed in several key areas. Of utmost importance are measures
aimed at reducing the cost of yarns, fabrics, and other inputs used in the production of clothing. These
measures include acceleration of ongoing tariff and customs reforms and the negotiation of less
restrictive rules of origin with the European Union. The free trade agreements that Morocco, Tunisia,
and, most recently, Egypt have signed with Turkey should be quickly implemented. At the same time,
the MENA-4 should speed up the implementation of the Agadir Agreement (a free trade agreement
among the four countries) in order to benefit from “diagonal cumulation” in the Euro-Med area.
Alternatively, each MENA-4 country should ensure that the terms of the Pan-Euro-Med protocol on
rules of origin are applied in its association agreement with the European Union. The MENA-4
countries should also negotiate a third-party rule that gives them flexibility to source fabric from
anywhere in the world.
To facilitate trade and enhance export competitiveness, the MENA-4 countries need to
improve their trade logistics. Both short- and long-term measures should be taken. Lowering the cost
and increasing the speed of flows of T&C inputs and products to and from the MENA-4 will require
(a) further improvements in customs, (b) more efficient port services, and (c) more efficient transport.
On customs, the number of documents and signatures needed to process imports should be lowered still
further. On port services, despite many recent reforms, delays still occur—there is a need for further
streamlining in every agency involved in the process. A new port that is scheduled to open in Tangier
in 2–3 years will offer cheaper transit to Europe and the United States, and a trade free zone nearby
will allow companies to import material and export finished clothes free of tax. Maritime
transportation is still very costly, partly because of the low volume of trade, which often implies the
shipment of containers that are not fully loaded and several stops in Mediterranean ports by
international carriers. Deeper regional integration would help increase trade volume. Such integration
would also create a larger regional market, leading to efficiency gains and foreign investments.
Other urgent short-term policy measures include safety nets to reduce the social cost of
adjustments in T&C sectors. Although the early impact of the expiration of the MFA on employment
has been less dramatic than predicted, in part because quotas have been reimposed on Chinese goods
through 2007, social safety nets are still needed. This is particularly true for women, especially those
with the lowest levels of skill and education. Job opportunities for low-skilled women are often limited
to domestic service, street vending, and farm work. Of particular concern is the employment situation
in some regions and localities of the MENA-4 countries (particularly Morocco and Tunisia) where a
few firms contribute significantly to total local employment.
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