Making the Cut?
11
Since clothing exports face some of the highest tariffs on manufactured goods, preferential market access has a substantial impact on global production and trade pa erns. Preferential market access is negotiated in different agreements. On the one hand, developed countries, in particular the United States, the EU, and Japan, have negotiated regional and bilateral trade agreements. Examples include NAFTA, the Caribbean Basin Initiative, and DR-CAFTA as well as bilateral trade agreements with Jordan and Israel in the case of the United States; and the EU itself, the Euro-Mediterranean Partnership, and the EU Customs Union in the case of the EU. These agreements further regional production networks and allow domestic producers to outsource labor-intensive production steps to countries with lower labor costs. This was typically achieved by applying—at least in the initial phase—complex tariff schedules and rules of origin (ROO) to protect the more capital-intensive parts of the sectors (textiles) and reduce tariffs on labor intensive stages3 (clothing) (Kaplinskly 2005; Morris 2006a; Bair and Gereffi 2003; Begg et al. 2003). On the other hand, within the Generalized System of Preferences (GSP) 27 developed countries have provided tariff preferences to over 100 beneficiary countries. Whereas the EU includes T&C products in its GSP scheme, the United States excludes T&C products from GSP preferences. Besides the GSP, trade agreements have been negotiated that should benefit developing countries in giving them preferential access to the markets of developed countries such as the Everything but Arms (EBA) Initiative and the Economic Partnership Agreements (EPAs, which were predated by the Lomé Convention and the Cotonou Agreement) by the EU and the Africa Growth and Opportunity Act (AGOA) by the United States. These agreements generally also cover T&C products and preferential market access is governed by (more or less restrictive) ROO, which have a crucial impact on outcomes. The United States implemented its GSP in 1976. The ROO requirements of the U.S. GSP stipulate that the value added in the beneficiary country must be at least 35 percent. However, the U.S. GSP excludes most T&C products and thus reduces average tariffs only marginally from 7.54 percent (under MFN) to 7.36 percent for textile and from 10.67 percent (under MFA) to 10.64 percent for clothing. For SSA countries, AGOA was signed in May 2000 and has subsequently been extended and modified three times (from AGOA I to AGOA IV, see below on SSA). The EU implemented its GSP in 1971 and it can be used by all developing countries but Myanmar. For textiles the general GSP reduces average EU tariffs from 6.7 percent (under MFN) to 5.42 percent and for clothing from 11.54 percent to 9.23 percent. The most favorable arrangement under the EU GSP is reserved for least developed countries (LDCs). The EBA amendment that became effective in March 2001 extended duty- and quota-free access to all products originating in LDCs, except arms and ammunition. ROO requirements under EU preferential trade agreements vary. In general ROO under the EU GSP require two significant processes to be performed within the beneficiary country, which often requires a product to be reclassified from one four-digit tariff heading to another. For the clothing sector this means that production, including cu ing and sewing, must be combined with another process such as manufacture of fabrics or yarns. Thus, ROO require that clothing items undergo a double transformation in the beneficiary country, that is, assembly plus at least one preassembly operation (spinning and/or weaving/kni ing, Gereffi and Memedovic 2003).4