Arguments for a new MFA

When I started to research the textile industry in 1987, there was something called the Multifiber Agreement (MFA). It was widely studied and in Chapter 4 of my PhD Thesis “Trading Places, the Changing Geography of Clothing Production” there are more than 25 articles and books referenced. And there is more to find on the MFA. I referred several times to the MFA in relation to a transition towards circular and fossil- free textiles. I took time to structure my thoughts and like to share them with you. When I started to work in 1991 I learned it to work with the MFA which entailed how to apply for a basket exit procedure, how to distinguish a product in cat. 15 from cat. 16 and to know which custom office was the least competent and which one the most flexible. I knew how to apply for export authorisations and for import permits. I knew how the MFA impacted on Incoterms and the need of letters of credit to book production capacity. I played a decisive role in early liberalisation of category 21 in 1998. The Multifiber Agreement (MFA) started as a Short Term Agreement on Cotton (1961), was extended into a Long-Term Agreement on Cotton. The MFA lasted from 1974 till 1994, but its gradual phasing out lasted till 2005. Hence for 44 years trade in textile and clothing was regulated by quota. In addition a quota regime existed for trade with Mediterranean countries and with state trading countries: e.g. the Central European Countries. Trade with these countries was liberalised in the 1990s, ahead of the MFA but with faster phasing out for quota on Outward Processing Trade. I could call myself the specialist on OPT in the EU from 1992 till 2000, when that specialism became irrelevant. I changed jobs (to innovation).

The existence of the MFA was a fact of life for any researcher and company in textiles and a subject of contention for policy makers. However it seems to be forgotten now, even if the existence as well as the phasing out had a decisive effect on the shape of the textile industry. For me the MFA structured my life for at least ten years. Every month, usually on a Friday I travelled to Brussels for the Trade Policy meeting of first Comitextile, then of EURATEX. The meetings were chaired by the late Camille Blum, setting at the head of a long table,smoking cigars, and acting as our headmaster. As the youngest pupil, I fought to get higher up in the pecking order. The other contest was on understanding the rules of origin (also worth a thesis, and relevant for Brexit these  days). However the MFA had real consequences for real people. It was designed to assist the adjustment of the European and American industry to global competition. In the same time it was designed to offer developing countries a gradual growth of their industries. The mechanics were quite complex with five levels: first an overall agreement between the signatories, second a range of bilateral agreements between the European Union and each exporting country, third a range of quota with some flexibility clauses, fourth a set of export and import procedures (with an associated bureaucracy), fifth historical rights for companies to exports or to import. The MFA was a culture: a strategic issue in board rooms, stress with custom forms in the warehouse, and meetings with Camille Blum.

Looking backwards, the MFA had unforeseen impacts, that would be worthwhile to study. That would certainly be welcome, as there is little research done on the relation with current trends and in particular sustainable development. I would set the hypothesis that the MFA had two foreseen, and two unforeseen impact. The foreseen impact was that with the abolition of the MFA the ceiling on production volumes would be off. Indeed before 2005 the production volume was limited by the total quota volume, the limited demand in developing countries, and the high production costs in developed countries. The other foreseen impact would be to lower prices, since the MFA created a quota rent and a distortion to supply and demand. However unforeseen after liberalisation were the pressure on prices because of trading down (with quota the strategy was to trade up: to get maximum value for each garment exported). Also unforeseen was the changing position of the exporter. In the old days the exporter had the limitation of the quota, but also its historical right to it. An export license was also related to a payment, as the letter of credit acted as proof for granting the export license. Hence exporting firms in developing countries has assured volumes, long term clients and assured prices and payments. The downside is that quota were granted to established companies, giving little room for newcomers.

It maintained a sizeable industry in the heart of the EU, especially in rural areas and industrial regions (providing incomes and opportunities)

It benefitted near sourcing, if not inside the EU at least in the Mediterranean and Central and Eastern European countries

It protected the clothing/textile industries in smaller Asian countries against Chinese competition.

It appreciated value over volumes, hence limiting a fast fashion trend (fast fashion was made close to the market, however often in urban sweatshops with migrant labour, though).

Especially OPT schemes fostered vertical integration, and in general the preservation of industrial knowledge in developed countries (that disappeared from 1995 onwards) and it strengthened the power of manufacturers vis a vis retailers

It structured trading relations through contracts, permits, letters of credit and possibly a governance structure

What is a new MFA

But lets not waste time over spoiled milk. What is a new MFA? In its core it is similar to the old one. Since the world cannot stand a growth from 100 Mln Ton fiber production to anything higher, the main objective of a new MFA is to set quantitative restrictions to production of fibers. The second objective is to improve the social and environmental conditions of manufacturing. This is partly achieved by quantitative restrictions, since a cap on volumes works as a price increase. But it is also attained by a system of licenses: trading licenses are only granted to exporters and importers complying to minimum standards. The third element is to facilitate investment in more sustainable production, this is attained by the former two elements, but if an export or import license is connected to a levy, the revenues can be used to foster investments in training, sustainable technologies etc... This is in short a new MFA. Lets work out the problem and the proposition.

Two things need to be clarified. I suggest a levy on a weight base. Hence products with a higher value added have relatively lower levies. This creates an incentive to put better fibers on the market, it increases the incomes for farmers and manufacturers and it would create an impulse for recycled and for recyclable products. The old MFA had a similar system: restrictions were by weight or piece, hence it created a floor in prices. I hope that my examples demonstrate the relations between fibers, and that thus a multi- fiber approach is required. What is also needed is a multilateral approach: like under the MFA all countries should have obligations and benefits. India should provide higher income for its farmers, while Europe should commit itself to recycling targets. China should upgrade its fiber production, but American retailers should reduce the share of products designed with fiber blends. All should use levies to invest in training of farmers, workers, designers and buyers.

The second component is a system of licenses: export and import permits. This restricts the new regulation of trade to international transactions. That excludes domestic production for national markets, so be it: that might promote reshoring (to the USA or Europe) or growth through targeting local consumption rather than for exports in developing countries. As with the MFA the least developed countries could be exempt from permits and levies. The permits should be required to assure that manufacturing meets a minimal standard in terms of 

social and environmental conditions. By reverting to a system of state granted permits, control of state regulation occurs were it needs to occur: by the state and not through a patchwork of voluntary standards and controls in the value chain (that imply high transaction costs).

The system should also enable investments in the value chain. My educated guess is that the transition to a fossil- free and circular textile industry costs over 800 Billion Euro (or over 1 Trillion Dollars over a period of 30 years. That is around 25 Bill Euro in sustainability investments. The actual investments are far lower. Hence we have to find a mechanism to foster investments. A levy of 25cts per kilo of textiles would provide enough investment sum to do so. I am not favouring a full public investment, but the current situation of less than 1 Billion Euro’s of public investments in sustainable textiles and anything between 3 and 5 Bill in private investment is totally inadequate to achieve the transition. Hence I would recommend a levy of around 10ct a kilo of textiles, with a higher fee on polyester and a franchise for flax, hemp, and recycled materials.