India’s Trade Negotiating Strategies and Options in the Textiles and Apparel Sector

However, negotiating trade agreements in this sector is complex as they try to address not only tariff barriers, but also rules-of-origin (RoO), standards and certifications related issues, along with other issues like sustainable business practices. With the gradual reduction of tariffs globally, non-tariff measures like standards and certifications have become a major trade barrier. If trade agreements are successful in enforcing mutual recognition of standards and processes along with tariff liberalisation, there can be long-term gains for the exporting country like India.        

In the case of a high-tariff country like India, many of our trading partners have lower tariffs and hence tariff negotiations imply that India may need to liberalise more. This is often a concern for the domestic industry, which has been somewhat insulated from the competition through high tariffs. At the same time, the exporters may be facing a disadvantage in some of the markets such as the EU, UK and the USA as compared to competing nations like Bangladesh, Vietnam, Cambodia,  if the latter either have a benefit under Generalized System of Preferences (GSP) or lower tariffs through their trade agreements. Therefore, exporters and their export councils like the Apparel Export Promotion Council have been asking for zero-for-zero tariffs with key export markets like the EU and the UK in textiles and apparel.

The stakeholder consultations organised by ICRIER found that some domestic stakeholders are worried about the impact of the reduction in tariffs on imports and their price competitiveness, especially since in the last few years there has been an increase in autonomous tariffs, which offers a kind of price protection. A tariff analysis over a 10-year period shows that most product categories under the textile and apparel sector attracted basic customs duty (BCD) of 10 per cent in 2009-10, along with an applicable countervailing duty (CVD) of 8.24 per cent and a special CVD of 4 per cent.

While the BCD and special CVD remained constant, the CVD increased from 8.24 per cent to 12.5 per cent in 2015-16, except for wool (HS code 51) and man-made fibres (HS code 55). Most of the sub-categories still have a BCD of 10 per cent applicable, but the BCD has increased for a few sub-categories to 15-20 per cent in 2021-22. These are silk (HS code 50), manmade filaments (HS code 54), man-made fibres (HS code 55), articles of apparel and clothing accessories, knitted or crocheted (HS code 61), articles of apparel and clothing accessories, not knitted or crocheted (HS code 62).

From a trade negotiating perspective, it is important to understand why autonomous duties have been increased in select products and what are the implications of duty reduction under the trade agreement for the domestic firms.  Tariff may not be the right means to provide support, which can be provided through other areas like subsidies.  For key export markets like the EU and the UK, a zero-for-zero tariff will benefit India. For imports, it is important to classify them by categories – raw materials, intermediate products and products for final consumption. To avoid the incidence of inverted duties and support “Make in India”, tariffs should be reduced first and faster on raw materials and intermediate products. 

For negotiating other areas of the trade agreement along with tariff reduction, it is important for the government and the industry to understand the bilateral trade flows, the entire value chain of the sector and where the Indian industry is located in the value chain for each product category and sub-categories along with the partner country’s strength and location in the value chain. India’s export of textiles and apparel increased from USD 32720.44 million in 2012 to USD 41620.81 million in 2021, growing at a compound annual growth rate (CAGR) of 2.4 per cent. India’s imports of textiles and apparel increased from 2012 USD 5194.41 million in 2012 to USD 8466.58 million in 2021, with a CAGR of 5 per cent.  Overall, India has maintained a positive trade balance in this sector over the past ten years. In addition, India has a strong export capability across a wide range of product sub-categories (see Figure 1) in textiles and apparel.

Focusing on the markets with whom India is entering into the trade agreements like Australia, EU, the UAE and the UK, these countries/regions are some of the major export markets for India’s textile and apparel. For example, in 2021, the UAE and the UK were key export markets for products such as ‘silk (HS Code 50)’, ‘apparel and clothing accessories; knitted or crocheted / not knitted or crocheted (HS Code 61 & 62)’, and ‘fabrics; special woven fabrics, tufted textile fabrics, lace, tapestries, trimmings, embroidery (HS Code 58)’. At the same time in markets such as the UK, India faces strong competition from countries like China and Italy. Products like, ‘wool, fine or coarse animal hair; horsehair yarn and woven fabric (HS Code 51)’, and ‘carpets and other textile floor coverings (HS Code 57)’ are exported by India to the UK and Australia. In the case of exports of ‘carpets and other textile floor coverings (HS Code 57)’, to the UK, Indian companies face strong competition from companies in Belgium, Netherlands and Turkey while Chinese companies are strong competitor of Indian companies in ‘carpets and other textile floor coverings (HS Code 57)’ in Australia. Thus, our competitors may vary by product sub-categories and markets.    

Looking at imports, in some product sub-categories such as ‘silk (HS Code 50)’ and ‘wool, fine or coarse animal hair; horsehair yarn and woven fabric (HS Code 51)’, India is a net importer (see Figure 1).  India imports ‘silk (HS Code 50)’ mainly from Vietnam, China, Brazil, and Myanmar and in ‘wool, fine or coarse animal hair; horsehair yarn and woven fabric (HS Code 51)’, Australia is among the top import partners along with New Zealand and China. The UAE and the UK do not have a very strong presence in both these categories. For trade agreements, it is important to understand what kind of products India is importing from the partner countries with whom it is entering into the trade agreement. For example, in 2021, ‘man-made staple fibres (HS Code 55)’ were largely imported from the EU and the UK. India imports products like ‘wool, fine or coarse animal hair; horsehair yarn and woven fabric (HS Code 51)’ and ‘cotton (HS Code 52)’ from Australia and in these products, there is a strong export interest on both sides. From the UAE, India imports products like ‘carpets and other textile floor coverings (HS Code 57)’ and ‘man-made filaments; strip and the like of man-made textile materials (HS Code 54).’

Understanding the strengths of the trading partner, our competitors in that product in the FTA partner country, and what our competitors are getting in terms of tariff liberalisation, non-tariff measures and trade facilitation, is key to a successful trade negotiation.

India today has developed competence in new product categories like PPE kits or mask. Exports of such products require meeting the importing country’s standards and requirements. In its trade agreements with markets such as the UK and the EU, there is a need for discussion on standards and certification and how there can be provisions for joint capacity-building programmes and regulatory cooperation, which can help the Indian industry, especially the small and medium enterprises (SMEs), to know and meet the importing country standards and requirements. Similarly, India has strength in exports of organic cotton. Such exports also require testing, third-party certification and meeting the technical requirements of the importing country, which in turn, requires provision for regulatory cooperation and mutual recognition of standards and certification processes that can be part of a trade agreement.  A core issue of organic products is that they do not have a specific HS code. A 10-digit HS code is sometimes designed by countries to negotiate market access for organic products and India may look into this while negotiating its trade agreements.   

Product Re-routing and Rules-of-Origin (RoO)

A concern of the Indian industry is related to the re-routing of products from the third country through the FTA. For example, if a product from Turkey is re-routed into India through the UK or the EU trade agreements with minimum value addition in the FTA partner country. Sometimes a rigid RoO is implemented, with a domestic value-added content requirement of between 35 and 40 per cent, to avoid re-routing of products from the FTA partner country as has been the case of the India-UAE agreement. However, a rigid RoO may be difficult for our exporters to comply with, in an era of global value chains and fragmented production networks. Further, multiple trade agreements, with different RoOs can lead to complexities of compliance and add to the trade costs, which may discourage businesses from taking advantage of the FTA. For products where tariffs are low (say 10 per cent or below), trade may continue to happen through the normal route to avoid the rigid RoO, and hence the FTA utilisation may be low.

Trade and Sustainable Development

While trade and sustainability issues are becoming key component of trade agreements of markets like the EU, this issue has not been much discussed in India in the context of trade agreements. There is need for stakeholders’ consultations on the requirements and the likely benefits and costs of taking binding commitments in this area.      

One of the biggest problems in the textile and apparel industry is the annual cost of throwing out clothes. According to UN estimates, about USD 460 billion worth of clothes are thrown away each year, when they can be re-used. By including the circular economy in FTAs, with businesses that provide circular solutions, India and its FTA partners can focus on reusing and recycling products. Circular economy principles can provide guidance in transitioning into a more resource-efficient sector while cutting down on harmful effluents by adopting sustainable alternatives (raw materials, chemicals, etc.). Also, other sustainable and ethical practices like improving the working environment, application of Life Cycle Assessment (LCA)  methods, eco-labelling of the apparel, and other environmentally friendly practices (for example, use of low impact dyes, reduction in the use of toxic chemicals, optimised use of water, reduction in the use of emission of gases, filter out hazardous metal like lead, cadmium from used water and use of eco-friendly textile fibres)  are often discussed as part of the trade agreements and the Indian industry needs to provide inputs to the government for such discussions, in case they arise. There is scope for enhancing technical cooperation, and capacity building, in green and sustainable technologies/practices with FTA partner countries through the trade agreements and this area needs to be explored.

Several other issues are also discussed under the trade agreements like gender equality. Given that textiles and apparels are large employers of women in India, there is a need to assess the gender implications of trade agreements.  Child labour in areas like cotton cultivation is being discussed under trade agreements, which require a process of product traceability to the field and strong implementation of regulation to prevent child labour along with support and an incentive framework to ensure that children go to school and stay in school.

Given that trade agreements cover a wide range of issues and can have a multidimensional impact, there is a need for detailed studies and industry consultations to understand the likely impact of the trade agreement across the entire value chain of the textile and apparel products and how India can use the agreements to strengthen domestic manufacturing capabilities and value addition along with enhancing exports. While traditional trade agreements focused on the removal of barriers in export markets, it is important to focus also on enhancing domestic competitiveness, productivity and efficiency through trade agreements, which can lead to long-term benefits, as has been experienced by countries such as Vietnam. As new issues like trade and sustainable development may be discussed in trade agreements, instead of taking a defensive position, there is need for domestic consultation, joint capacity building programmes and innovative negotiating strategies, which can bring long-term gains to the country.