The developed countries have "temporarily" protected their textiles and clothing sectors for 40
years and these two sectors have represented anomalies in the GATT ever since the LTA came
into force in 1962. Among the most distorting measures to have prevailed are import quotas
allocated to some, mainly developing countries on a country-by-country and product-by-product basis,
while other countries face no quotas. This has led to a pattern of specialization where countries with
the strongest comparative advantage for textiles and clothing, such as China and India, face binding
quotas, while others receive investment in the sector motivated by unfilled quotas and may well
find that these investments are unsustainable in a trade regime based on the principles of the GATT.
Most analyses of the impact of the phasing out ofthe ATC conclude that China and India will come
to dominate world trade in textiles and clothing, with post-ATC marke t shares for China alone
estimated at 50 per cent or more. This study replicates those predictions using a model which is
commonly used in such studies (the GTAP model). It is argued, however, that these estimates only tell
part of the story, as they are totally driven by changes in relative prices and cost competitiveness.
This paper has focused on other factors that are also important and which have generally not been
taken into account in the previous literature. The main contribution of this study is thus to take
into account recent developments in the organization of the textiles and clothing sector,
where vertical specialization is an important feature. Vertical specialization implies that the
inputs embodied in the final product cross borders several times and such trade is very sensitive to the
tariff level. Hence the outcome of the phasing out of quotas will depend much more on the prevailing
tariff rates and the preference margins of countries receiving such preferences than is captured by the
conventional estimates. Second, time to market is important and increasingly so, particularly in the
fashion clothing sector. Therefore, countries close to the major markets are likely to be less affected
by competition from India and China than has been anticipated in previous studies. Mexico, the
Caribbean, Eastern Europe and North Africa are therefore likely to remain important exporters to
the US and EU respectively, and possibly maintain their market shares. This is even more likely given
the preferential access they have to the markets through regional trade agreements. Thus, it is
shown in the paper that having a common border with the importer and facing low or zero tariffs
have a substantial impact on bilateral trade. The countries that are most likely to lose market
shares are those located far from the major markets and which have had either tariff and quota-free
access to the United States and EU markets, or which have had non-binding quotas. These
countries will undoubtedly face adjustmen challenges. Also local producers in EU, the United
States and Canada are likely to lose market shares. These producers have enjoyed more than 40 years
of "temporary" protection, but nevertheless face a long-term structural decline. Thus, adjustments
costs due to changing comparative advantage in the textile and clothing sector are not new, and it is not
confined to the ATC countries, as the experience of some of the major Asian exporter such as Hong
Kong, China; Chinese Taipei and the Republic of Korea shows.
To conclude, there is no doubt that both China and India will gain market shares in the European
Union, the United States and Canada to a significant extent, but the expected surge in market
share may be less than anticipated, as proximity to major markets assumes increasing economic
significance and tariffs are increasingly restraining trade due to the fact that products cross borders
several times. Furthermore, other developing countries are catching up with China in terms of
unit labour costs in the textile and clothing sector and China has of yet not shown competitive
strength in the design and fashion segments of the markets.
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