Statement of Robert A. Rogowsky, Director of Operations
United States International Trade Commission
Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means
Hearing on U.S. Trade Relations with Sub-Saharan Africa
February 3, 1999
Introduction
On January 14, 1997, the U.S. International Trade Commission (Commission) received a request from the Committee on Ways and Means of the U. S. House of Representatives for an investigation under section 332(g) of the Tariff Act of 1930 (19 U.S.C. 1332(g)) regarding the likely impact of granting quota-free and duty-free entry to textiles and apparel from 48 countries of Sub-Saharan Africa (SSA). Specifically, the Committee requested that the Commission provide- -
(1) a review of any relevant literature on this issue prepared by governmental and nongovernmental organizations;
(2) an assessment of the competitiveness of the textile and apparel industries in SSA countries, to the extent possible;
(3) a qualitative and quantitative assessment of the economic impact on U.S. producers, workers, and consumers of quota-free entry for imports of textiles and apparel from SSA. The Committee also asked that the Commission address the potential shifting of global textile and apparel production facilities to SSA that might occur as a result of the changes contained in proposed legislation. (The Committee specifically referenced H.R. 4198, African Growth and Opportunity: The End of Dependency Act of 1996, introduced in the 104th Congress, and stated that a similar bill would be introduced in the 105th Congress); and
(4) a qualitative and quantitative assessment of the economic impact on U.S. producers, workers, and consumers of eliminating the exclusion of textiles and apparel from SSA countries from coverage under the Generalized System of Preferences (GSP), in addition to quota-free entry for imports from these countries.
The Committee also requested that the Commission identify the specific types of textile and apparel articles which are most likely to be produced in SSA and which would have the most significant impact on U.S. producers, workers, and consumers.
The following sections delineate the major findings of the Commission's report and address these concerns.
Product Coverage
The articles covered by the Commission's investigation are those subject to textile agreements, namely textiles and apparel of cotton, other vegetable fibers, wool, manmade fibers, and silk blends. U.S. imports of textiles and apparel from SSA grew by an annual average of 18.8 percent from 1991-96, to $383 million, or less than 1 percent of total U.S. sector imports. In 1997, U.S. imports of these goods reached $454.9 million. Most textiles and apparel imports from SSA consisted of apparel (93 percent of the 1996 total), particularly basic cotton pants, shirts, and blouses. These goods are especially suited to production in countries at the initial stages of industrialization because manufacturing involves standardized runs, simple tasks, and few styling changes.
Approximately 80 percent of textile and apparel imports from SSA in 1996 came from three countries--Mauritius (43 percent), South Africa (20 percent), and Lesotho (17 percent). Kenya followed with 7 percent of the total. Textile and apparel imports from most of the remaining SSA countries were very small; 24 of the countries each shipped less than $100,000 in 1996. Although textiles and apparel accounted for slightly less than 3 percent of total U.S. merchandise imports from SSA in 1996, they represented a significant share of the shipments from several SSA countries. For example, textiles and apparel accounted for 99 percent of total U.S. imports from Lesotho, 76 percent for Mauritius, and 38 percent for Swaziland.
Economic Overview of Sub-Saharan Africa
SSA is made up of a diverse set of countries. In 1995, South Africa had the largest economy, with a gross national product (GNP) of $131 billion; Nigeria was second, with $28 billion. The smallest, based on available information, was São Tomé and Principe, with GNP amounting to $45 million. Most countries in the region rank among the poorest in the world. The World Bank classified 38 of the 48 SSA countries in the lowest income group (GNP per capita of $765 or less in 1995) and 6 in the lower middle income group ($766 to $3,035); the remaining 4 countries are in the upper middle income group ($3,036 to $9,385). The average annual growth rate of the region's gross domestic product (GDP), fell from 1.7 percent during 1980-90 to 1.4 percent during 1990-95. The region' s growth was much lower than that of most other lower and middle-income country groups during 1990-95.
Although many SSA countries rely heavily on agriculture, the services sector accounts for the largest share of SSA GDP. From 1980 to 1995, services' share of SSA GDP rose from 38 to 48 percent, while industry's share fell from 36 to 30 percent, and agriculture's share declined from 24 to 20 percent. The latest available data show that agriculture accounted for 68 percent of SSA employment in 1990. Manufacturing value added accounted for more than 20 percent of GDP in only six SSA countries--between 20 and 25 percent for Burkina Faso, Mauritius, and South Africa, 30 percent for Zambia and Zimbabwe, and 36 percent for Swaziland.
Overall SSA exports decreased by 24 percent during 1980-93, to $62 billion. A major portion of the decline was accounted for by the drop in exports of Nigeria (55 percent) and the Democratic Republic of the Congo (36 percent). The share of SSA exports accounted for by fuels, minerals, and metals fell from 61 to 40 percent during the period; "other manufactures" rose from 16 to 36 percent. On a geographic basis, SSA exports to the European Union (EU) declined by 31 percent during the period, to $18.9 billion, and exports to the United States fell by 21 percent, to $13.0 billion. Exports to the rest of the world dropped by 21 percent to $30.1 billion. The decline in SSA exports to the EU occurred despite trade preferences afforded SSA under the Lomé Convention.
During the past decade, many SSA countries began the process of economic reform. To varying degrees, these countries initiated reforms that were designed to stabilize foreign exchange rates, liberalize trade and investment, and promote foreign direct investment (FDI) and free enterprise. Nevertheless, SSA still lags behind other developing countries in terms of net private capital flows, including FDI. Although the levels of net FDI and portfolio equity have increased during the 1990's for the region as a whole, in 1997 total foreign investment in SSA accounted for only 3.3 percent of total foreign investment in all developing countries.(1) A small number of SSA countries have attracted most of the net private capital and FDI flows into the region. For example, Nigeria, Angola, and Ghana accounted for approximately 58 percent of net FDI in 1995.
Such low levels of FDI and foreign exchange earnings have not been sufficient to meet the developmental needs of the regions. SSA countries, as a group, have had to borrow from international institutions, leading to a significant debt burden for the region. The World Bank classifies 31 of the 48 SSA countries as "severely indebted." The ratio of total external debt to either GNP or exports of goods and services for SSA is higher than the respective ratios for other regions, such as South Asia, Latin America and the Caribbean, and the Middle East and North Africa. Such high debt burdens can have a detrimental effect on economic growth both by acting as a disincentive to investment and by potentially increasing uncertainty.
The size of the domestic markets in most of the countries in the region may also serve as a disincentive to both domestic and foreign investment. Extreme poverty hinders the growth of a consumer market in many of the region's countries. Moreover, in recent years, SSA textile and apparel producers have had to contend with growing competition from U.S. exports of used clothing and other used textile items. At $92 million in 1996, these products were the eighth largest U.S. export to the region. Several SSA countries have expressed concern about the adverse impact that shipments of used apparel and textile articles have had on their domestic textile and apparel sectors, as such goods depress demand for locally made goods. The growth in U.S. exports of these goods has served as a disincentive to investment in new production capacity or to upgrading existing plants and equipment.
Finally, although the level of infrastructure varies among SSA countries, the region as a whole lags behind other low- to middle-income regions. SSA's infrastructure deficiencies contribute to the region's difficulty in attracting FDI and additional domestic investment.
Competitive Position of the Textile and Apparel Sector in SSA Countries
Recent data on the value added for the textile and apparel sector are limited. Of the SSA countries currently competing in the global market, South Africa has the largest textile and apparel sector ($2.0 billion in 1993), followed by Mauritius ($288 million in 1992), and Zimbabwe ($236 million in 1993). Mauritius stands out since the sector accounts for 45 percent of its manufacturing value added.
SSA is a very small exporter of textiles and apparel to the global market, accounting for less than 1 percent of world exports of such goods in 1995. SSA textile and apparel exports grew by an annual average of 5.4 percent during 1990-95 to $1.7 billion, two-thirds of which consisted of apparel. Textile and apparel exports accounted for about 2 percent of the region's total exports in 1995. Mauritius and South Africa together generated three-fourths of SSA's sector exports in 1995. The EU, with its colonial ties to SSA, was the primary market for the region's exports of textiles and apparel, accounting for just over one-half of the total in 1994. The United States followed with just under one-fourth of the total. Other SSA countries accounted for 13 percent of exports.
If SSA countries are granted free access into U.S. textile and apparel market, transportation costs are an important factor that will determine the level of exports. Because SSA textile and apparel exports, and African exports as a whole, are relatively small, SSA exporters cannot enjoy the cost advantages from the economies of scale in shipping afforded to exporters in larger markets, such as in East Asia. A recent quick survey of freight forwarders offers some insight. Port-to-port costs for apparel shipped from Hong Kong to New York is $2,620 per 40 foot container and takes 20 days. In the same mode, Mauritius faces $4,300 and 42 days. South Africa faces $3,800 and 40 days; Uganda, $8,270 (with inland freight) and 42 days. Most of the shipping lines go to SSA via such European ports as Antwerp or Rotterdam. After stopping in Europe, containers shipped to Kenya or Zimbabwe may go via Durban, South Africa, where the container must be transferred to a feeder carrier that may service Durban only every 15 days. Most shippers service South Africa and east Africa weekly, and sail to west Africa every 21 days.
Long delivery times, high transportation costs, and uncertainties involved in shipping finished products from SSA are important disincentives to developing production there. In addition to high quality, the highly competitive U.S. apparel retail market demands low-inventory and quick response supply. SSA countries, therefore, must overcome substantial hurdles beyond gaining free access to the U.S. textile and apparel market to meet these requirements.
In the Commission's report, the 48 SSA countries are divided into three groups. The first group comprises the seven countries that are established textiles and apparel industries that have been able to compete in developed country markets such as the United States and the EU. The second group consists of nine countries that are considered to have the potential to expand exports of textiles and apparel to the United States based, in part, on past production and export performance. The third group includes the 32 remaining SSA countries, which are less likely to compete in the U.S. market for such goods.
Quantitative results 2
The quantitative analysis undertaken by Commission staff addresses the following question: What would have been the effect on the two U.S. industry sectors (textiles and apparel) if, ceteris paribus, the tariffs and quotas applied to U.S. imports of these products from SSA had been eliminated in 1996? By assuming that all other U.S. policies (monetary, fiscal, and trade) remain the same, the analysis focuses on the effect from changes in the specific policies under question, in isolation from the rest of the U.S. economy. The analysis is not a forecast; it does not tell what will happen if tariffs and quotas are actually removed. It provides an assessment of the effects of the proposed policy change.
The quantitative analysis is based on the value of U.S. domestic shipments in 1996, the respective 1996 values of U.S. imports from SSA and from the rest of the world, the average imported weighted tariffs applied to these goods in 1996 and staff estimates of the tax equivalents of the quotas applied to the U.S. imports of apparel from Mauritius, which were the only ones that were actually binding. Because only these two quotas imposed constraints, it is not surprising that removal of the quotas had little impact. The analysis also relies on several behavioral parameters that reflect the degree to which U.S. consumers, U.S. producers, SSA suppliers, and other foreign suppliers respond to price changes in the U.S. market.
The information on these market behavior parameters was taken from previous research on textiles and apparel and is documented in the Commission's report. Supply responses from SSA are of particular concern. Short term responses may come from existing inventories, shifting supply from existing customers, and increasing hours of operation of existing manufacturing facilities. Long term responses involve adding new manufacturing capacity and employing and training new workers. Given the limited empirical research in this area, however, and to provide a more complete picture of the possible effects of elimination of quotas and the reduction of tariffs, staff used lower and upper-bound ranges rather than relying on a given estimate for each of the parameters.
I want to highlight the upper-bound scenario, the worst-case from the U.S. industry perspective. This is the circumstance that leads to the largest reduction in U.S. shipments and employment. This situation occurs with: (i) moderate price responsiveness of U.S. consumers in terms of their aggregate purchases, (ii) high price responsiveness on the part of U.S. producers, (iii) a high price responsiveness of SSA and other foreign producers, and (iv) a willingness on the part of consumers to shift purchases between goods produced in the United States, SSA, and the rest of the world in response to changes in the respective prices for these products. In this exercise, staff stretched each of these parameters to its highest reasonable level to estimate a maximal effect on the U.S. 2
Under the "upper-bound" scenario, eliminating both tariffs and quotas, U.S. imports of apparel increase by 46 percent (to $557.3 million). Net U.S. welfare increases by approximately $96 million. Imports from the rest of the world decline by 0.2 percent. Domestic shipments decline by 0.1 percent. Assuming that a decline in employment tracks a decline in production, around 676 jobs (or, more precisely, full time job equivalents) are eliminated.
Subsequent to the release of the study, arguments have been made that the study did not deal adequately with transshipment and foreign investment in SSA as means of increasing SSA exports to the U.S. market.(2) These issues, in fact, have been incorporated implicitly into staff's quantitative analysis by including scenarios in which SSA suppliers are able to respond very aggressively to changes in price. Transshipment and increased foreign investment mean SSA countries can increase their supply to the United States. These factors are accounted for in the analysis by expanding SSA's supply capability.
First, staff compared the results of the "upper-bound" scenario (same assumptions regarding the price responsiveness of U.S. consumers, U.S. producers, and other foreign suppliers), but completely eliminates any supply constraint on apparel from SSA (an infinite supply elasticity). Under this scenario, tariff and quota removal results in a 61 percent increase in U.S. imports from the region ($616.2 million). However, the changes in U.S. imports from other suppliers and U.S. production do not differ significantly from the initial "upper-bound" scenario. In other words, our quantitative analysis in both cases suggests a decline in U.S. apparel production of around one-tenth of 1 percent.
Second, at the request of the staff of the Ways & Means Committee, ITC staff also analyzed what would happen if U.S. imports from SSA were to increase ten-fold, reaching $3.5 billion (i.e., roughly $2.9 billion greater than the results generated by the quantitative analysis outlined above). Even in this case, the decline in U.S. apparel shipments is relatively small (i.e., by six-tenths of one percent, or $767.1 million). Although the quantitative analysis conducted by staff is not an explicit analysis of strategic investment in the region or potential transshipments through the region, the sensitivity analysis does shed light on the potential effects of significant FDI into and transshipment through SSA on the U.S. economy.
It is unlikely that SSA will achieve this level of export growth in the near term because of the general economic climate prevailing in the region. Although several SSA countries have developed successful textile and apparel industries, the industries in most of the countries within the region face a wide variety of constraints. Government ownership of lucrative or critical sectors of the economy precludes much foreign investment. In many Sub-Saharan countries, banking, insurance, petroleum, utilities, telecommunications, mining, and in some cases, manufacturing sectors are government-owned monopolies. Regulatory impediments-- such as slow and insufficiently transparent licensing, outdated business laws, and unreliable judicial systems that do not provide effective dispute settlement-- also deter foreign investment. Many countries still impose price controls and restrictions on foreign-exchange transactions, profit remittance, and foreign ownership of land and assets. Tax administration is poor in some instances and tax rates are often high.
Infrastructure development in the region lags behind other low- to middle-income regions and contributes to the region's difficulty in attracting FDI. These problems, significantly greater than the average experience in either East Asia or in Latin America and the Caribbean, include inadequate roads and port facilities, poor communications (average waiting time for a telephone line in 1995 was 15 years versus one year in East Asia), unreliable public power, and poor access to necessities such as water. The high debt burden makes exchange rates uncertain and deters foreign investment. Political stability remains problematic. Some of the more successful economies, such as Mauritius, face a serious labor shortage and relatively high labor costs.
I hope that this clarifies the scope and findings of the Commission's study. I would be pleased to address any questions that remain.
1. Based on preliminary estimates. Source: World Bank, Global Development Finance 1998, Country Tables, pp. 14-38.
2. The transshipment of textiles and apparel through third countries to avoid quotas, as well as other types of textile fraud, is by no means a trivial concern. It is a priority of the U.S. Customs Service, which has expanded efforts to combat such illegal transshipments. Although official data are not available on the extent of these transshipments, the Customs Service has documented a number of instances where SSA countries have been used as illegal points of transshipment. Under textile agreements negotiated with exporting countries, the United States may send "jump teams" to foreign countries to verify production capacity of a factory. In addition, the United States may apply transshipments to the quota of the true country of origin and charge up to three times the amount of the transshipment against quotas in the event of repeated circumvention by a country.