Future of UAE Textile Industry under Liberalization

An Expert's View about Trade Trends in the United Arab Emirates

Posted on: 21 Mar 2010

The objective of this study is to assess the future of the textile industry under trade liberalization for UAE in general and Dubai in particular. Specifically, the study attempts to assess the impact of the quota elimination and the free trade agreements (FTAs). The UAE is currently negotiating with several countries.

Sector Monitor Series Future of UAE Textile Industry under Liberalization Bader Aldeen Ali Bakheet Dr. Eisa Abdelgalil Data Management and Research Department Table of contents ?????? ????...................................................................................................................................... 3 Executive Summary...................................................................................................................... 5 1. Introduction............................................................................................................................... 8 1.1 Background ................................................................................................................................................8 1.2 Objective ....................................................................................................................................................9 1.3 Methodology and Data ...............................................................................................................................9 1.4 Outline of the study ....................................................................................................................................9 2.Characteristics of Dubai textile industry............................................................................... 10 2.1 Number of establishments ........................................................................................................................10 2.2 Dubai foreign trade in textile ....................................................................................................................12 3. Aspects of WTO and Free Trade Agreements (FTAs) regarding textile........................... 13 3.1 WTO aspects ............................................................................................................................................13 3.2 The Agreement on Textiles and Clothing.................................................................................................14 4. Global textile and clothing market and the quota system elimination .............................. 15 4.1 Quota elimination .............................................................................................................................................15 4.2 Effect of quota elimination ...............................................................................................................................18 4.3 Dubai textile trade with US...............................................................................................................................19 4.4 Dubai textile trade with EU ..............................................................................................................................20 5. DCCI Dubai textile industry sector survey 2005 ................................................................. 21 5.1 Textile activities................................................................................................................................................21 5.2 Employment......................................................................................................................................................22 5.3 Sources of raw materials ...................................................................................................................................22 5.4 Sales in textile sector ........................................................................................................................................24 5.5 Quota system effects on textile sales. ...............................................................................................................25 5.6 Effects of FTAs on textile industry...................................................................................................................26 5.7 Future market prospects ....................................................................................................................................27 5.8 Competitiveness strategies under FTAs............................................................................................................28 6. Conclusion and recommendation .......................................................................................... 29 Appendix: DCCI Textile Survey................................................................................................ 31 2 ?????? ???? ???? ????? ?2004 ? 2000 ??????? ??? %60 ????? ????????? ??? ??????? ?????? ?????? ?????? ????? ? ??????? ?????? ?????? ??? ???????? ??? ??? ??? .2004 ??? ?? ???? ?????? ?????? ?????? ?? %14.6 ????? ?? ??????? 2004 ??? ?? ??? ?? ??????? ?????? ?? %7.2 ??? ????? ???? ????? 2,112 ?????? .2005 ??? ?? ???? ????? 2,227 ???? ???? ??? %6.5 ?????? ???????? ?????? ?? ????? ??? ??? ?????? ?? ????? ???? ?????? ????? ???? ? ???? ????? ??? ???? ??????? ???? ?? ??????? ??????? ??????? ?? ????? ?????? ????? ?????? .2004 .?????? ??? ????? ???????? ???? ????????? ????? ?????? ??? ????? ??? ?? ??????? ????????? ????? ????? ??? ? .??????? ????? ?? (??? %8.5) ??????? ?????? ???? ????? %91.5 ????? ???? ???? ? ??????? ????????? ?????? ???? ???? 32 ????? ?2005 ?? ???? ????? ??? ???? ?? ???? ? ????? ???? ????????? ???? ??? ????? ???? ???????? ???? ????????? ????? ?????? . ???? 7,455 ????? .??????? ????????? ????? ?????? ?? %63 ??????? ????? %23 ???? ???? ??????? ????????? ?? ??? ?????? ???? ?2001 ? 2000 ?????? ??? ? ??????? ??? ??? ???????? ???? ???????? ??????? ???? ??? %22 ????? 2004 ? 2001 ?? ?????? ??? .??????? ????????? ??? ?? ?????????? ???? ?? ???? ??????? ???????? ??????? ???? ?2004 ? 2001 ??????? ???? %19 ????? ??????? ??????? ??? ????????? ?? ??? ?????? ?????? ? ???????? ???????? ?????? ??? ??? .%19 ????? ?????? ??? ??? ??????? ??????? ?? ??? ??? ?????? ?????? ??? ????????? ??????? ???? ??? ?? ? ???? ????? 504.13 ????? 2004 ??? ?? ??????? ????????? ?? .?????? ?????? ??? ??? ???? ??? ???? ????? 1.56 ??????? 10 ??? ( ????? ??? ?? ??????? ????????? ??????? ?? ??? ??? ?????) ????? ???? ? ???? ?? 2005 ??? ?? ? .2005 ? 1995 ?????? ??? ????? ???? ??? ??????? ?????? ??? ??? .?????? ??? ?? ????? ???? . ???? ??? ??? ???? ????????? ???? ? ??? ???????? ??? ?????? ????? ???? ???? ?2005 ??? ?? ? ??????? ??? ???? ????????? ????? ?? ???? ???? ????? ?????? ????? ?????? ?? ???????? ??? ????? ????? 3 ???????? ?????? ?? ????????? ?? ??? ??????? ???????? ??????? ???? ???? ??? ?? . ?????? ???????? .??????? ??????? ???? ???? ??????? ???????? ???? ??? ????? ???? ????? ????? ?? ??? ?? ???????? ??????? ?? %42 ????? ???????? ???????? ???? ? .?????? ????? ?? ???? ?? ???? %33 ????? ??? ?? ?????? ??? ??? ????? ???? ??? ???? ??????? ??? ?? %91? %85 ???? ????????? ????? ??????? ???????? ????? ??? ?????? ??? ? ?? ????? ??????? ???????? ?? ???? ????? ??? ??? . ??????? ??? ??????? ???????? ??????? ?????? ?? ??????? ???? ???? ??? . ??? ?? ????????? ????? ??? ???? ????? ??? ???? ??? ?????? ???????? ????????? ?????? ??? ???? ??????? ?????? ?????? ????? ? ????? ?????????? ?????? ????? ???? ????? ??? ?? ????? ??? .????????? %62 ????? ??? . ????????? ??? ?????? ???? ??????? ???? ??? ?? ?????? ????? ????? ?? %79 ???? ? ?????????? ?????? ???????? ????? ?????? ????????? ?????? ??????????? ????? ??? ???? ??????? ??? ?? .???????? ????? ?? ???????? ?????? ????? ??? ?? ????? ??? ???????? ????? ?? ??????? ???? ???? ?? ??????? ??????? ????????? ????? ????? ??????? ??? ??? ? .?????? ???????? ??????? ?????????? ???? ??? ????? ?????? ??? ??????? ?????? ????????? ?????????? ??????? ?? ?????? ??????? ??????? ????? ??? ??? ????? ? .????????? ??????? ???? (Tariff Shift) ?????? ????? ????? ????? ??????? ??????? ?? ???? ?? ??????? ???? ??? ????? ? .??????? ?????? ????? ????? ? .???? ??? ????? ?????? ???? ??? (TPL) ???????? ?????? ?????? ????? ???? ?? ??????? ???? ? .???????? ???? ????? ???? ??? ????????? ?????? ??? ?? ??????? ??????? ?? ????? ?????? ???? ?? ???? ?? ?? ????? ??? ?(the yarn forward) ???????? ????? ?????? ???? ???????? ??????? ??? ??? ? ???? ??????? ?????? ???? ??? ?????? ???? ??? ??????? ??????? ??? ????????? ????? ??? ????? ??????? .??????? ?? ??????? ??????? ?? ???? ?????? ??? ????? ?? ???? 4 Executive Summary ? GDP of Dubai manufacturing industries increased by 60 per cent during the period 2000- 2004, and accounted for 14.6 per cent of Dubai total GDP in 2004. Among this the textile industry production estimated at AED 2,112 million, which represents 7.2 per cent of Dubai industrial production in 2004, and it expected to reach AED 2,227 million in 2005. ? The textile industry plays a great role in Dubai economy, it has contributed to the total exports by 6.5 per cent in 2004. The textile industry is considered one of the major sources of employment in UAE in general and Dubai in particular. ? The manufacturers of textile and clothing in Dubai have been depending on imported raw materials. About 91.5 per cent of raw materials are imported and only 8.5 are sourced from the local market. ? In Dubai, there were about 32 active textile and clothing establishments in the first quarter of 2005 employing about 7,455 workers. The dominant textile and clothing activity is the manufacturing of wearing apparel, which represents 63 per cent of the total textile and clothing activities. ? During the period 2000 ? 2001, Dubai exports of textile and clothing registered an annual growth rate of 23 per cent, while it decreased by 22 per cent during the period 2001 - 2004. The main destinations of the textile and clothing exports are EU and U.S, which are the major importers in the global textile market. ? Dubai textile exports to US increased by 19 per cent during the period 2001-2004, and the imports of textile from US to Dubai also increased by 19 per cent during the same period. The US total imports of textile and clothing amounted to $ 504.13 billion in 2004, while its imports from UAE totaled $ 1.56 billion only, which is a quite low share. ? In 2005, the quota system (which limits importing textile and clothing products into countries) was eliminated after 10 years of executions. The elimination was phased ? out through three stages during 1995 - 2005 5 ? In 2005, DCCI conducted a survey among the textile and clothing manufacturers in Dubai. The results of the survey show that the major sources of textile raw materials are India, Pakistan and China. On the other hand, the major destinations of textile exports are EU, U.S and GCC. ? According to the survey, 42 per cent of Dubai manufacturers expect that the effect of the quota elimination to have negative impact on their businesses, while 33 per cent expect a positive impact. ? When asked about the effect of the expected Free Trade Agreements (FTAs), 85 and 91 per cent of the manufacturers stated that it would be positive with the EU and U.S respectively. Some of them mentioned that the FTAs with China, Malaysia, Pakistan and India would have negative impact. This may be attributed to the fact that these countries are also manufacturers and exporters of textile, and therefore are not potential markets for Dubai textile manufacturers. ? 79 per cent of Dubai textile manufactures expect positive outlook for the future of the textile market. 62 per cent mentioned that they would adopt strategies of low price, improved quality and new technology in order to strengthen their competitive position in the world market. ? The study argues that for the local textile and clothing manufacturers to be competitive in the global market, they need to adopt low production cost strategy. Further, they need to enter into strategic alliances and joint ventures to strengthen their position in the global textile market. ? The UAE is advised to ask the U.S to follow the tariff shift rule and not the value added rule "under this rule the rules of origin would not matter much". 6 1? The UAE could ask for a Tariff Preference Level (TPL) of say 1 billion square meters. Alternatively, seek from the US to include some of the textile products on a cut and sewn rule. ? The UAE is advised to negotiate for the same treatment as Jordan and Israel, which is the yarn forward with unlimited third-country yarn and fabric in apparel eligible for duty-free treatment. 1 It is an exception to the rule of origin allowing for specific amount of trade to receive duty free treatment without having to use U.S or the country yarns and fabrics. 7 1. Introduction 1.1 Background The Textile industry occupies an important place in the UAE economy as a whole and particularly in Dubai, because of its contribution to the industrial output, employment generation and foreign exchange earnings. The textile industry is one of largest employment provider in the industrial sector of Dubai. The contribution of the textile industry to total export earnings was about 9.7 per cent in 2003. The textile industry production estimated at AED 2,112 million, which represents 7.2 per cent of Dubai industrial production in 2004, and it expected to reach AED 2,227 million in 2005. The textile industry is considered a large employer in the industrial sector, ranks second after the manufacturing of metal products, machinery and equipment. It employs both skilled and unskilled labor and the low-cost skilled textile workers are experienced in textile technology. Almost all the sub - sectors of the textile industry have shown significant achievement. The sector GDP showed 30 per cent growth rate over the last five years. The textile industry has small value added at each stage of processing because it is not fully a self -reliant industry from the production of raw materials to the delivery of final products. The textile and clothing manufacturing industry of Dubai has been mainly dependant on imported raw materials from different destinations. About 91.5 per cent of the raw materials are imported and 8.5 per cent are sourced from the local market. The textile industry comprises the following activities: the readymade garments production, textile and textile articles manufacturing and others. Textiles and clothing are closely related, both technologically and in terms of trade policy. Textiles provide the major input to the clothing industry, creating vertical linkages between the two. International trade in the two sectors is regulated by the Agreement on Textiles and Clothing (ATC) at the multilateral level, while bilateral and regional trade agreements typically link the two sectors through rules of origin accompanying preferential market access. 8 1.2 Objective The objective of this sector monitor is to assess the future of the textile industry under trade liberalization for UAE in general and Dubai in particular. Specifically, the study attempts to assess the impact of the quota elimination and the free trade agreements (FTAs). The UAE is currently negotiating with several countries. The study aims at answering the following research questions: (i) What are the main characteristics of the textile industry in Dubai? (ii) What are the major aspects of WTO and FTAs as regards textile industry? (iii) What is the impact of WTO rules regarding textile industry on the UAE textile sector? (iv) What is the impact of quota elimination on the UAE textile industry? (v) What are the future prospects of the UAE textile industry? 1.3 Methodology and Data The data collected through a questionnaire from manufactures and traders of textile in Dubai. The purpose of the questionnaire is to explore the opinions of Dubai textile and clothing manufactures on the issues of textile trade liberalization. The data collected is processed and analyzed using SPSS statistical program. 1.4 Outline of the study The rest of the study is divided as follows: Part 2 analyzes the major characteristics of the textile industry in Dubai. Part 3 explains the aspects of WTO and FTAs related to textile. Part 4 provides details of the quota system and its elimination and the textile global market. Part 5 reviews the DCCI textile sector survey. Finally, part 6 concludes the study and recommends policy measures. 9 2. Characteristics of Dubai textile industry In 2004, the investment of Dubai textile and clothing industry amounted to AED 261 million, which equals 27.2 per cent of total investments of UAE textile and clothing industry. Moreover, the number of employees in Dubai textile industry represented 5 per cent of Dubai total employment in manufacturing industries and 12.5 per cent of UAE textile employment. Table 1 below shows Dubai textile and clothing sector' production during 2000 ? 2004 compared to the total production of manufacturing sector in Dubai. Table1: Share of textile sector Production in total Dubai manufacturing production, 2000-2004 (AED million) 2000 2001 2002 2003 2004 Dubai total manufacturing production 22,439 24,173 25,907 27,374 29,950 Dubai textile sector production 1,628 1,767 1,881 1996 *2,112 % 7.3% 7.3% 7.3% 7.3% 7.1% Source: compiled from Economic Development Department; Dubai Municipality and Ministry of Economy & planning * Estimated It is clear from the above table that the share of the textile sector production in the total production of Dubai manufacturing sector was fixed during the last 5 years (7.3 per cent). 2.1 Number of establishments For the purpose of the study, the manufacturing textile establishments are classified into three different size classes according to the number of employees. Small establishments are defined as those employing 1-9 workers; medium employ 10-99 workers and the large establishments employing 100 & more. According to DCCI membership database, as of first quarter of 2005 there are 32 active textile- manufacturing establishments in Dubai of different sizes and specializations compared to 23 manufacturers in 2004. 10 The large size establishments are dominant in the textile sector due to the labour intensity in the sector. In the first quarter of 2005, they represented 63 per cent of the total number of the textile establishments active in Dubai. The medium size establishments represented 31 per cent and the small size represented 6 per cent. The main textile activities are spinning, weaving and finished textile (which include, preparation and spinning of textile fibers, using cotton, and tarn textile, etc.), manufacturing of wearing apparel (which includes, men's garments and underwear manufacturing, ladies and children garments and underwear manufacturing, etc.), and manufacturing of other textiles (which includes, manufacturing of made-up textile article, manufacture of carpets and rugs and manufacturing of cordage, rope, twine and netting). Figure1: Main Textile Activities in Dubai, 2005: 3% 34% 63% Spinning, weaving and finished textile Manufacturing of wearing apparel Manufacturing of other textile Source: DCCI Membership Database, first quarter 2005 Figure 1 above shows the main activities in the textile manufacturing sector. It is clear that the manufacturing of wearing apparel is dominant in the sector, representing 63 per cent of the textile activities followed by the manufacturing of other textiles, which represented 34 per cent. Finally, the spinning, weaving and finished textile, which represented 3 per cent. 11 2.2 Dubai foreign trade in textile Figure 2 below shows Dubai foreign trade in textile and clothing. Figure 2: Exports of Dubai Textile and Clothing Articles , 2000 - 2004 800 700 600 647 799 733 642 625 500 400 300 200 100 0 2000 2001 2002 2003 2004 Source: Dubai Chamber of Commerce and Industry During the period 2000 ? 2001, Dubai exports of textile and clothing articles increased by 23 per cent, and then deceased by 22 per cent during the period 2001 ? 2004. This could be attributed to the market situation and the quota system. The main destinations of Dubai textile exports are U.S, EU, and Canada. Figure 3 below shows the percentage share of Dubai export destinations Figure 3: Percentage Share of Dubai Textile Exports destination, 2004 Others Canda 14% 20% GCC 2% EU US 39% 25% Source: Dubai Chamber of Commerce and Industry 12 Million AED 3. Aspects of WTO and Free Trade Agreements (FTAs) regarding textile 3.1 WTO aspects Since 1 January 1995, international textiles and clothing trade has been going through fundamental change under the 10-year transitional program of the WTO's Agreement on Textiles and Clothing (ATC), see table 4 below. Before the Agreement took effect, a large portion of textiles and clothing exports from developing countries to the industrial countries was subject to quotas under a special regime outside normal GATT rules. Under the Agreement, WTO Members have committed themselves to remove the quotas by 1 January 2005 by integrating the sector fully into GATT rules. The ATC is a transitional instrument, built on the following key elements: (a) the product coverage, basically encompassing yarns, fabrics, made-up textile products and clothing; (b) a program for the progressive integration of these textile and clothing products into GATT 1994 rules; (c) a liberalization process to progressively enlarge existing quotas (until they are removed) by increasing annual growth rates at each stage; (d) a special safeguard mechanism to deal with new cases of serious damage or threat thereof to domestic producers during the transition period; (e) establishment of a Textiles Monitoring Body (?TMB?) to supervise the implementation of the Agreement and ensure that the rules are faithfully followed; and (f) other provisions, including rules on circumvention of the quotas. Their administration, treatment of non- Multi-Fiber Arrangement (MFA) restrictions, and commitments undertaken elsewhere under the WTO's agreements and procedures affecting this sector. Table 2: Integration of Textile and Clothing into GATT Source: WTO 13 3.2 The Agreement on Textiles and Clothing In the Agreement on Textiles and Clothing (ATC), which agreed under the Uruguay round, the Multi Fiber Agreement (MFA) quotas are to be removed gradually over a 10-year period, as Figure 3 below shown. The 10-year period cannot be extended. The WTO members were required to integrate 16 per cent, 17 per cent, 18 per cent and the rest which is 49 per cent of their 1990 imports of textile and clothing products in the first, second, third and fourth stages respectively. Products not yet integrated are subject to a special transitional safeguard mechanism, where an importing country can apply quantitative restrictions for up to three years on imports from other source that causes or threatens to cause serious injury to the domestic industry. After integration, regular GATT safeguards apply. Figure 4: Integrated Stages of the Quota System (Percentage of 1990 imports) 120% 100% 80% 60% 84% 67% 49% 40% 20% 100% 16% 17% 18% 0% First Jan1995 First Jan 1998 First Jan 2002 First Jan 2005 Products Integrated into GATT Products not Integrated into GATT 1994 Source: Adapted from IMF (2002) 14 4. Global textile and clothing market and the quota system elimination 4.1 Quota elimination The quota system began early in 1974 during the multi ? fiber agreement period that limited the imports of textile into the countries by a quota system. However, quota system contradicts the rules of WTO in terms of restricted quantities and the Most-Favoured-Nation treatment. The textile industry is divided into two main parts, namely, textile and clothing. The main importing countries of textiles from the world are the EU and the US. In tandem with the quota system period, the imports of clothing into the U.S and EU have recorded substantial growth during this period. The US imports of clothing rose from US$36 billion in 1995 to US$63 billion in 2003, an increase of 75 per cent. In the same period, the EU clothing imports rose from US$65 billion to US$91 billion, an increase of 40 per cent. Figure 12 below shows the clothing imports of the US and the EU during the period 1995-2003. Figure 5: Imports of Clothing, U.S and EU, 1995 - 2003 Source: US Census Bureau and Eurostat In 2003, the world total imports of textile and clothing amounted $ 395 billion, of which 43 per cent is textile and 57 per cent is clothing. 15 In the year 2003, the global imports of clothing amounted to US$ 226 billion, an increase of 12 per cent from previous year. Figure 13 below shows the share of the global clothing trading by countries. The EU was the largest market for textile and clothing articles. It accounted for 43 per cent of the total, followed by the US with 30 per cent and Japan with 8 per cent. Figure 6: Clothing global imports share by country, 2003 Others Switzerland 13% 2% EU 43% Canada 2% Japan 8% Russia 2% US 30% Source: WTO Textile global imports in the year 2003 increased by 11 per cent from the year 2002 to reach US $ 169 billion. The EU is also considered the largest market for the textile, it accounted for 29 per cent of the total imported textile in the year 2003 followed by the US with 10 percent. Please refer to figure 7 below. Figure 7: Textile global imports share by country, 2003 Others EU 43% 29% Turkey US 2% 10% Canada Mexico China Japan 2% 3% 8% 3% Source: WTO 16 It is clear from the above figures that the EU and U.S import 73 per cent of clothing global imports and 39 per cent of the global textile imports. Therefore, the U.S and EU textile and clothing markets provide a vast potential to UAE textile and clothing exporters, when the FTAs are signed with the US and EU. Table 3 below shows the UAE and rest of the world exports of textiles and clothing to the US Table 3: US Imports of Textile and Apparel from UAE and the World, 1998 ? 2004 "Value in $ billion" 1998 1999 2000 2001 2002 2003 2004 UAE 1.73 1.99 2.25 1.96 1.69 1.67 1.56 World 365.62 385.75 433.88 425.34 436.59 468.09 504.13 UAE share from total 0.47% 0.52% 0.52% 0.46% 0.39% 0.36% 0.31% US textile imports Source: U.S. Department of Commerce, Office of Textile and Apparel From the table above, it is clear that UAE share in total US textile and clothing imports is very low and declining during the 2000-2004, while the US imports from the world is increasing during the same year except in 2001. Since both the EU and the U.S are huge markets for textile and clothing, it is expected that the FTA with these countries will positively influence Dubai textile and clothing sector, and this is confirmed by the expectations of the textile and clothing manufacturers which will be discussed in the section 5 of this study. The US has a perception that the UAE?s textile industry is economically not viable. They feel that the UAE does not need this industry, as its contribution to the economy is very little. The US believes that the only reason the UAE has a textile industry is because companies were set up here to exploit the no quota status of the UAE before quotas were slammed on to the UAE. This might be the case in the early days of this industry but now it has developed significantly and is a strong contributor to the UAE economy. 17 Since the UAE is a very small supplier of the US imports of textile, which is less than 0.5% of the US imports, the US should become more flexible in its stand on the textile and take in more from the UAE. 4.2 Effect of quota elimination The elimination of the quota restrictions is expected to affect the global business in textiles and apparel. However, this effect is expected to vary, depending upon the countries' ability to meet the new challenges in the global competitive situation. The WTO has estimated that the tariff equivalent of the quota applied by EU in 1997 ranged from 1 per cent to 21 per cent for textiles and from 3 per cent to 34.2 per cent for clothing. The Agreement on Textile and Clothing (ATC), which has now come into full operation, made 2 the following assumptions : a) There will be efficiency gains from quota elimination as production is allocated more efficiently. b) Quota rents will be eliminated, leading to lower prices of final products. c) Decline in prices will benefit consumers and may not benefit manufacturers. d) Decrease in import prices will lead to more imports. e) As a result of competition from imported products, prices of similar domestic products will also go down, leading to a higher level of consumption. f) Exporting countries will benefit from the increase in export revenue as their exports grow. The impact of the quota elimination may depend upon the size of the quotas with respect to other factors such as local demand, the price elasticity of demand and the impact of export revenue on the income of the exporting country. 2 Dewani, M (Benefits of quota removal can vary from country to country) available at http://www.expresstextile.com/20050615/regulars01.shtml 18 4.3 Dubai textile trade with US The total foreign trade of textile between Dubai and the US totaled AED 369 million in 2004, of which AED 132 million are imports, AED 168 million are exports and AED 69 million are re- exports. It dropped by 19 per cent during the period 2000-2004, but increased by 5 per cent during 2003-2004. Figure 8 below shows the trade in textile between Dubai and US during the period 2000 ? 2004. Figure 8: Dubai Foreign Trade with U.S in Textile ,2000 - 2004 250,000 200,000 150,000 100,000 50,000 0 2000 2001 2002 2003 2004 Imports Exports Re- Exports Source: Calculations based on Dubai Ports and Customs data Exports of Dubai textiles to the U.S dropped by 23 per cent during 2000 ? 2004, and the imports of textile and textile articles from the U.S dropped by 6 per cent during the same period. Dubai exports of textiles to the U.S represented 33 per cent of the total exports of Dubai to the U.S. in 2004. 19 value- AED (000) 4.4 Dubai textile trade with EU The total foreign trade of textile between Dubai and EU totaled AED 1,654 million in 2004, of which AED 1,066 million are imports, AED 203 million are exports and AED 385 million are re- exports. Figure 9 below shows the trade in textile between Dubai and EU during the period 2000 ? 2004. Figure 9: Dubai foreign Trade with EU in Textile, 2000 -2004 1,200 1,000 800 600 400 200 0 y2000 y2001 y2002 y2003 y2004 Import Export RE-Export Source: Calculations based on Dubai Ports and Customs data In 2004, Dubai textile and clothing exports to EU represented 33 per cent of total Dubai textile exports and this showed the importance of the EU market to the textile and clothing manufacturers in Dubai. It is noticed from the figure above that the exports of textile and clothing to EU dropped in 2004 by 18 per cent from the previous year. As Dubai textile and clothing manufacturers expect (please refer to the next section), an FTA with the EU will positively affect the textile sector in Dubai since they can increased their exports to EU that is considered the biggest world textile and clothing importer. 20 AED Million 5. DCCI Dubai textile industry sector survey 2005 In the second quarter of 2005, DCCI conducted a survey on textile and textile articles manufacturing in Dubai to highlight the structure and performance of the sector. In addition, the survey endeavors to assess the impact of the WTO rules on textile, the quota elimination and the impact of the FTAs on the UAE textile sector. A questionnaire was sent to all textile manufacturers in Dubai, a total of 32 manufacturers and their response rate was 44 per cent. For the questionnaire, please refer to the Appendix at the end of this paper. In the following section, the main findings of the questionnaire are analyzed and discussed. 5.1 Textile activities Figure 10: Textile Activities in Dubai, 2004 21% 50% 29% Ready made garments production Textile production Other Source: DCCI Dubai Textile Industry Survey, 2005 The results of Dubai textile industry survey 2005 show that the major activity is ready-made garments manufacturing, which represents 50%, followed by Textile manufacturing 29%and then other represent 21%. The category "other" includes activities like made-up textile article, manufacture of carpets. 21 5.2 Employment For the purpose of the survey, the size classes have been divided as follows: small size employed 1-9 workers, medium size employed 10-19 workers and the large size employed 20 workers and more. Figure 11: Percentage Distribution of Employees by Size Class, 2004 7% 7% 86% 1-9 10 - 19 20 and more Source: DCCI Dubai Textile Industry Survey, 2005 It is clear from figure 11 above that the large size establishment, with 20 and more employees, is the major employer. They employ 86 per cent of the total textile workers in 2004. The small sized and medium sized establishments, those employ 1-9 and 10-19 respectively, employ 7 per cent each. 5.3 Sources of raw materials Figure 12: Sources of textile raw materials 15% 85% Local market Foreign market Source: DCCI Dubai Textile Industry Survey, 2005 22 Figure 12 above shows that only 15 per cent of raw materials are sourced from the local market. 85 per cent of textile raw materials are sourced from the foreign market. This is a clear indication that Dubai textile industry is dependent on the foreign market as a source for the raw materials. Dubai' sources of raw materials are given in table 4 below. Table 4: Source countries of textiles raw materials in 2004 Countries % India 71% Pakistan 57% China 57% EU 21% Egypt 7% Others 64% Source: DCCI Dubai Textile Industry Survey, 2005 Textile manufacturers get their raw materials from several sources. 71 per cent of textile and clothing manufacturers identified India as the source for their textile industry raw materials. 64 per cent of them identified other countries (that includes Korea, Turkmenistan, turkey, Australia, West Africa, USA, Spain, Indonesia, Taiwan).57 per cent of them identifies Pakistan and china. 21 per cent of them identified EU and 7 per cent of them identified Egypt. It is obvious from table 6 above that India, Pakistan and China are the major source of textile raw materials for the textile manufacturers in Dubai. 23 5.4 Sales in textile sector Figure 13: Percentage of product sales, 2004 24% 76% Local market Foreign market Source: DCCI Dubai Textile Industry Survey, 2005 As figure 13 above shows, 76 per cent of the textile produced in Dubai is exported to foreign markets. Production and exporting for foreign market faces tough competition from producers in other textile production countries. Therefore, it is expected that Dubai textile sector to compete with other textile producer because it has already exposed to world market competition. Only 24 per cent of the produced textile is sold in the local market. Dubai's major destinations of textile and clothing exports are given in table 5 below. Table 5: Destinations of Dubai's Textiles and Clothing Exports in 2004 Countries % EU 64% US 50% GCC 43% MENA 29% Others 29% Asia 21% Source: DCCI Dubai Textile Industry Survey, 2005 As table 7 above shows, EU, U.S and GCC countries are the major destinations for Dubai textile and clothing exports. 64 per cent of Dubai's textile and clothing manufacturers identified the EU as the destination for their exports. 50 per cent of them identified the US as destination and 43 per cent of them identified GCC as destination to their exports. MENA and other countries are 24 also identified by 29 per cent of the textile and clothing manufacture and 21 per cent of them identified Asia. 5.5 Quota system effects on textile sales. We tried to assess the effects of the quota elimination on the sales of the textile and clothing by asking the manufacturers about their expectations on this issue, figure 14 below summarizes their opinions. Figure 14: Effects of Quota Elimination 25% 33% 42% positive effect negative effect no effect Source: DCCI Dubai Textile Industry Survey, 2005 As figure 14 shows, about 42 per cent of the respondents expect that the elimination of the quota would affect their businesses negatively. In the medium and long run, they need to adopt efficient production, quality improvement, and low cost labor and raw materials to compete in the international market. On the other hand, 33 per cent expect that it would affect their businesses positively. These also need to continue strengthening their position in the market by producing high quality products and using low cost materials. Only 25 per cent expect that it will have no any effects on their businesses. 25 5.6 Effects of FTAs on textile industry Table 6: Effects of FTAs on Dubai Textile Industry Positive Negative No Effect US 91% 0 9% EU 85% 0 15% Australia 55% 0 45% Singapore 36% 0 64% Malaysia 36% 18% 46% China 30% 20% 50% India 60% 20% 20% Pakistan 46% 27% 27% Source: DCCI Dubai Textile Industry Survey, 2005 UAE is currently negotiating several FTAs with different countries; we tried to assess the impact of these FTAs on the textile and clothing sector by asking the manufacturers about the effect of these expected FTAs on their businesses. The manufacturers were asked whether these FTAs will have positive, negative or no effect on their businesses. From the results of the survey, 91 per cent expect that an FTA with US will have a positive effect on their businesses and only 9 per cent expect that it would not affect them. 85 per cent expect that an FTA with EU would have a positive effect on their businesses, while 15 per cent expect no affect. 55 per cent expect that an FTA with Australia will have a positive effect on their business and 45 per cent expect it would have no effect. On the other hand, 36 per cent expect that an FTA with Singapore will have a positive effect on their businesses and 64 per cent expect no effect. For the rest of the FTAs, 36 per cent think that an FTA with Malaysia will have a positive effect on their business, 18 per cent think it will negatively affect them and 46 per cent think there will be no effect. For the FTA with China, 30 per cent think that it will have a positive effect on their business, 20 per cent think it will negatively affect them and 50 per cent think there would be no effect. Regarding FTA with India, 60 per cent think that it will have a positive effect on their business, 20 per cent think there would be a negative effect and 20 per cent said there would be no effect. Finally, for the FTA with Pakistan, 46 per cent believe that, it will have a positive 26 effect on their business, 27 per cent believe there would have negative effect and 27 per cent believe it would have no effect. It is clear from table 6 above that the FTAs with US, EU, India and Australia are the most important as the manufacturers think they would positively affect the textile manufacturing businesses in Dubai. Those who believe that FTAs with China, India, Malaysia, and Pakistan will have negative effect, may attribute this to the fact that these countries are also producers of textile and clothing and have the advantages of the availability of the raw materials and cheap labor and this will give these countries an edge over Dubai manufacturers. In addition, Dubai manufacturers see them as competitors and not potential markets like the EU and the US. 5.7 Future market prospects Figure 15: Future market prospects under FTAs 14% 7% 79% Better Normal Not sure Source: DCCI Dubai Textile Industry Survey, 2005 The majority of Dubai textile and clothing manufacturers expect the future market prospects under the FTAs to be better, as 79 per cent of them think so. 14 per cent of them are not sure about the future prospects under the FTAs. 7 per cent think it would be normal and the FTAs will 27 have no effect on the market. Therefore, the percentages show that textile manufacturers expected Dubai future market prospects of textile under the FTAs to be better. 5.8 Competitiveness strategies under FTAs. Table 7 below shows the strategies that the textile and clothing establishments will adopt to strengthen their competitiveness under the FTAs. According to the survey results, 62 per cent said they would adopt quality improvements strategies. 62 per cent said they would adopt low price strategies. 46 per cent said they would adopt new technology strategies, 15 per cent said they would adopt horizontal integration strategies, 14 per cent said they would adopt other strategies, while only 8 per cent said they would adopt a vertical integration strategies. From the above, it is clear that companies are most likely to adopt strategies of low price, improved quality and the adoption of new technology to strengthen their competitive position in the era of global market liberalization. Table 7: Competitive Strategies for Dubai textile sector, 2004 # Strategies % 1 Quality improvements 62% 2 Price 62% 3 Adoption of new technology 46% 4 Horizontal integration 15% 5 Other 14% 6 Vertical integration 8% Source: DCCI Dubai Textile Industry Survey, 2005 28 6. Conclusion and recommendation After the elimination of the quotas, the textile and clothing manufacturers will start to compete in the global market according to their strengths in the manufacturing and exporting of textile and clothing products. There are many ways for the textile and clothing manufacturers to be competitive in the global textile and clothing market. Some may derive competitiveness from lower labor cost others may specialize in designs and new fashions and others may have an edge over rivals by lower raw materials cost and quality products of clothing and textiles. The Free Trade Agreements (FTAs) and proximity to the market are also important factors influencing the competitiveness of textile and clothing Manufacturers. An FTA allows its members to import goods from each other free of tariff, which will reduce the costs of goods. On the other hand, proximity to the market gives an edge not only on delivery time, but also in cultural similarity and sensitivity to market trends. The removal of the quota system will enable importers to import from locations that offer the most competitive products in terms of quality and prices. After the quota elimination, it is expected that the competition level among textile and clothing manufacturers will be higher. This situation will exert enormous downward pressure on the prices of textile and clothing products. The textile and clothing sector in Dubai is characterized by small size establishments. The sector is dependent on the imported raw materials. The textile sector in Dubai is considered an exporting sector. The main exporting destinations are the EU, the US, and Canada. Some of the manufacturers in Dubai textile sector expect the effect of the quota elimination on their businesses to be negative in the medium and long run, while others expect it to be positive. The manufacturers in Dubai textile sector expect that an FTAs with EU, US, Australia, and India, will be positive on their businesses, while they think an FTAs with Malaysia, China, and Pakistan will negatively affect their businesses since that these countries are textile and clothing producers and considered competitors in the global textile market. 29 UAE textile manufacturers in general and Dubai in particular need to increase their market competitiveness in order to compete in the global market. To do so, they need to adopt a reduced cost strategy in order to be competitive by lowering the price, improve their quality, and depend on innovation and creation that is based on new technology. 3 The UAE is advised to ask for the same treatment as Jordan and Israel, which is yarn forward with unlimited third-country yarn and fabric in apparel eligible for duty-free treatment. If it is not possible for the UAE to receive the same treatment, for one reason or another, the other alternative for the UAE would be to seek a yarn forward rule of origin with sufficient US flexibility to enable the UAE compete effectively against the low cost producers, such as China, who under the WTO regime of no more quotas would kill higher cost producers. 4 On the yarn forward rule of origin basis, the UAE could ask for a Tariff Preference Level (TPL) of say 1 billion square meters. Note, at present, UAE exports to the US are estimated at only 90 million. If the US does not accept such a high TPL meterage, the alternative is for the UAE to seek from the US to include some of the textile products which constitute a significant portion of the UAE?s apparel export to the USA, on a cut and sewn rule. The UAE may request from the US not to follow a vale-added rule but a tariff shift rule. If the US accepts this proposal, then the rules of origin would not matter much and the UAE apparel industry could flourish significantly. Since UAE is negotiating several FTAs with the EU and the US, Dubai textile and clothing manufacturers should take advantage of these FTAs and export more to these countries since there are no tariffs and these countries are considered the major importers of the world textile and clothing products. This necessitates that sales networks are to be built and developed. 3 Means that apparel made in UAE can be exported to the U.S duty free if the essential or primary fabric used in the garments comes from the U.S or the UAE. 4 It is an exception to the rule of origin allowing for specific amount of trade to receive duty free treatment without having to use U.S or the country yarns and fabrics. 30 Appendix: DCCI Textile Survey Company name: I. Company characteristics 1. What is your major activity Other (Specify)????. Ready made garments production Textile production 2. On average, how many employees were working in your company in 2004? Less than 9 employees 20 and more employees 10 - 19 employees II. Production and sales in 2004 3 From where do you get the raw materials "in percentage" Local market ?????% Foreign market ???.% 4 Which of the following countries is a source for your raw materials? (You can select more than one) India Pakistan China Egypt EU Others (Specify)?????. 5. What is the percentage of your product sales in: Local market ?????% Foreign market ???.% 6 What are your major export destinations of your major products? GCC MENA Asia EU US Others (Specify)??????.. MENA: Middle East and North Africa III. Expectations 7. In January 2005, the quota system was eliminated. To which extent this will affect your sales? positive effect negative effect no effect 8. UAE is negotiating several Free Trade Agreements (FTAs) with the following countries, which of these FTAs will have positive, negative or no effect on your business? (Tick appropriate box and column) Positive Negative No Effect US EU Australia Singapore Malaysia China India Pakistan 9. In your opinion, what will be the future market prospects of UAE textile under the FTAs? Better Normal Worse Not sure IV. Competitiveness strategies 10. Which of the following strategies you will adopt to strengthen your competitiveness under FTAs? (You can select more than one) Horizontal integration Vertical integration Quality improvements Price Adoption of new technology Other (pls. specify ______________ V. Respondent's contact information a. Name: ________________________________________ b. Designation: ______________________ b. Tel No._________________ c. Fax No.________________ E-mail:___________________ Thank you very much for your cooperation 31
Posted: 21 March 2010