Textile and clothing exports from India to Western nations have been restricted by quotas for more than 25 years. But the end of quotas in 2005 is now being seen in India as more of a threat than an opportunity, according to a new report by S K Modi, India's Apparel Export Industry: Meeting the Challenge of a Quota-Free Market, published in the January 2000 issue of Textile Outlook International.

When the MFA quota system was devised, it was agreed that quotas would be administered by exporting countries. This meant that importers have competed between themselves to buy the limited number of goods available to them. When the goods are in demand, importers drive up the price of the goods and the exporters benefit from higher profits.

The alternative would have been for importing countries to allocate quotas to buyers. The exporters would then have had to compete amongst themselves to sell their goods, and prices would have been forced down. This would have benefited the consuming countries, but not the exporters. However, this has not been the case - and some exporters have reaped generous rewards from a system which was intended to protect western economies from floods of cheap imports.

The end of quotas in 2005 will represent a window of opportunity for the most competitive exporting countries, allowing them to ship their goods freely into the important US and EU markets. But some countries have held on to their market share largely on the strength of their quota holding - and for these, 2005 will come as a shock.

Mr Modi examines the textile and clothing industry in India, as an example. Although quotas have inhibited India's exports into the European and North American markets in the west, they have provided its exporters with guaranteed access to a share of the major consuming markets. But once quotas go, competing countries whose exports had previously been held back by a lack of quota will be free to ship as much as they want. The volume of goods entering the market will increase, but the size of the market will not. The report in Textile Outlook International points out that India is, therefore, justified in its anxiety about the final elimination of quotas scheduled for January 1st, 2005.

Since the first quotas were phased out in 1994/95, India's volume of restrained exports - those restricted by quotas - has continued to rise, but their unit values have been steadily falling. Similarly in 1995, EU imports of textiles and clothing covered by the MFA were almost static during the first year of the liberalisation process - with value growth at only 2.8% overall, and volume growth at zero. This came after a year of solid growth in 1994 - when imports rose by 7.2% in value and by 14.9% in volume.

This shows that previously, while quotas restricted imports, the unit values of these goods remained protected, and exporters could charge more for products which were in demand but whose supply was restricted. But as quota restrictions are eased, supplies improve, prices weaken and Indian profit margins fall.

Textile Outlook International reports that India's export growth of ready-made garments declined steadily from 1994/95 to 1998/99. After 22% growth by value in 1994/95, exports rose by only 1% in the following year. The average % change during the period was 11.2%. Global prices of most products, in dollar terms, either remained stagnant or declined during the 1990s.

After the liberalisation of quotas, Mr Modi explains in the report how India will have to export about 280 mn more pieces of apparel (just over 20% more) merely to earn the same amount of foreign exchange. The chief problem is that the major markets are limited in size, and are growing only slowly.

Even the buoyant US market could be heading for a period of more moderate growth. Indian exporters will therefore only benefit from the elimination of quotas by capturing market share from competing exporters, or by taking it away from West European and US producers. But this will not be easy.

Much of the USA market is being seized by Nafta and Caribbean countries, largely because of preferential tariff treatment. Similarly in Europe, Turkey's prospective membership of the EU and the almost certain entry of Poland, Hungary and the Czech Republic within a few years will pose challenges for Indian exporters. And in the aftermath of the Asian financial crisis, the devaluation of currencies of many of the region's economies have allowed exports from Asian countries to become very competitive in the developed world.

From 2005, any country - with the possible exception of China, which has yet to join the WTO - will be able to export unlimited quantities of textiles and clothing to the EU and the USA. Some countries will also have the advantage that their exports will enter these markets duty-free. However, the duty on items from India will remain. For example, in the EU market, clothing imports from Vietnam will enter duty-free whereas imports from India will be subject to a duty of 15%.

The report on India's Apparel Export Industry: Meeting the Challenge of a Quota-Free Market raises the question as to how long Indian clothing exporters will be able to survive in EU markets. Tariff preferences have been available to least developed countries for about 20 years now, but the effect of tariffs on the growth of exports from developing countries has been cushioned by quantitative restraints. Once quotas cease to restrain their exports, the availability of tariff preferences to competing countries is likely to inflict severe damage on the apparel export industries of nations such as India, China, Taiwan and South Korea.

EU producers will also suffer downward price pressure after a combination of the phase out of quotas by 2005 and the aftermath of the Asian financial crisis. A continuation of the industry's structural adjustment seems inevitable as companies downsize and cease to manufacture products whose production in the EU is no longer competitive. India's exports to the EU of MFA clothing fell by an annual average value of 4.4%, between 1989 and 1997, increasing to only 0.6% in 1998.

The report suggests that - in order to compete in the global textile and clothing market - India, and other major exporting countries, will have to be more selective in their choice of markets. This may mean adjusting their product mix, focusing on items which they believe they can offer more competitively than others.

The same applies to geography. In this respect, rather than relying on its clothing industry, Mr Modi suggests that India's future may lie in building up a technologically advanced textile industry which would supply high quality materials to growing clothing manufacturing centres in emerging, least developed countries in Asia.

But this runs contrary to the official view, that clothing manufacture will be the future engine of growth for the Indian industry.