Roundtable 1 Textiles Summary Report by Building Bridges

THE AfCFTA AND TRANSFORMATIVE INDUSTRIALISATION ROUNDTABLE SERIES

ROUNDTABLE 1

BUILDING THE TEXTILES AND CLOTHING VALUE CHAINS SUMMARY REPORT 2022 Cape Town

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Contents A. Background and Context.......................................................................................................................... 2 Roundtable Series................................................................................................................................. 2 Round Table Objectives ...................................................................................................................... 3 B. Summary of Presentations ......................................................................................................................4 Introductory Remarks & Welcome Address............................................................................... 4 SESSION 1 DISCUSSION: MAKING THE RULES OF ORIGIN TO SUPPORT RVCS IN THE COTTON, AND TEXTILE SECTOR (USING TRADE POLICY TO SUPPORT RVCS)...................................... 5 Speaker 1: Dr Andrew Mold (Chief, Regional Integration and AfCFTA Cluster, Regional Office for Eastern Africa, UNECA) .................................................................................. 5 Speaker 2: Dr Caiphas Chekwoti (Head of TRAPCA, ESAMI) ..................................................... 8 SESSION 2 DISCUSSION: ADDRESSING CONSTRAINTS AND BUILDING PRODUCTIVE CAPABILITIES IN THE COTTON AND TEXTILE SECTORS...................................................................................... 11 Speaker 3: Dr Taffere Tesfachew (United Nations Technology Bank for Least Developed Countries) ............................................................................................................. 11 SESSION 3 DISCUSSION: CREATING BACKWARD LINKAGES AND REGIONAL INTEGRATION OF COTTON AND TEXTILE SECTORS.....................................................................................................................13 Speaker 4: Prof Lindsay Whitfield (Professor of Business & Development, Copenhagen Business School and Visiting Professor, South African Research Chair in Industrial Development, University of Johannesburg).................................................13 Discussants Remarks: Ms Winifred Eberechi Ofili. Ms Ofili (Principal Trade Negotiator at the Nigerian Office for Trade Negotiators).......................................................... 16 Government Interventions to Revive the Sector ......................................................................... 16 Closing Remarks...................................................................................................................................17

A. Background and Context In 2020 the Mandela School hosted a successful webinar series on regional integration and industrialization that included Africa’s best experts, scholars, and relevant stakeholders. The webinar on the cotton, textile and clothing regional value chain (RVCs) brought together key stakeholders, policymakers and academics to engage on how best to use the AfCFTA as a lever to facilitate the building of manufacturing capabilities in this sector (see reports on Mandela School website). There was an overwhelming consensus that it was time for Africa to build its manufacturing capabilities, collectively identify ways to address challenges and utilize opportunities focused on building RVCs. It was noted that this could be done by sharing knowledge and expertise and experiences of best practices on the continent by establishing a network of experts and relevant stakeholders. This network of stakeholders will collaborate through a series of roundtable discussions hosted by the Nelson Mandela School of Public Governance to support the implementation of the AfCFTA and to facilitate the building of production and manufacturing capacity in the cotton, textile, and clothing-related products. The cotton, textile and apparel value chain is of importance to Africa’s industrialization drive and structural transformation. However, this sector is less developed in Africa compared with other continents, especially Asia, which harbours the leading cotton and apparel producers and exporters in the world. Cotton and apparel trade is also fragmented, with the northern regions of Africa producing more of the primary good – cotton fibre, neither carded nor combed - and the southern regions trading in value-added cotton products – cotton yarn and fabric - and having a somewhat deeper regional integration than the rest of the continent. Overall, intra-Africa trade accounts for only 15 per cent of cotton exports and 12 per cent of cotton imports, which indicates the limited regional integration in the continent in this sector as Africa is unable to maximise opportunities in gains of the value-added before exporting the final products. The AfCFTA Agreement seeks to remove the most binding constraints in terms of trade barriers for the

African countries in order to encourage value addition within the continent and improve Africa’s competitiveness in the global arena. The regional cotton value chain stands to benefit and grow from this agreement, with countries able to export as well as invest more easily within the continent. Meaningful preferential margins to exporters will create an incentive for the emergence of viable regional value chains. However, stirring a significant change in the African regional value chain should encompass consideration of the rules of origin. The shallow regional integration of the cotton, textile and apparel value chain on the continent and the value chain’s potential contribution towards Africa’s transformative industrialisation calls for an investigation into how deeper regional integration can be achieved.

Roundtable Series The development of national and regional value chains for cotton, textiles and apparel relies on understanding the complexities associated with each distinct segment of the value chain. These segments cannot be examined and understood in isolation from each other. Thus, a holistic approach should be applied when examining the cotton, textile, and apparel national and RVCs. The value chain segments firstly include raw materials (cotton growing and ginning), secondly, yarn, thread, and fabric production and lastly, apparel production. How cotton is grown, ginned, and spun to produce yarn, especially how yarn is knitted and woven, dictates what kinds of clothes can be made, since value chains are dictated by the buyer’s demands (the brand

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

or retail store) and what kind of clothes they want to buy. Therefore, understanding the links and flows across the value chain and how actors coordinate this process is thus essential. Furthermore, the development of the various value chain segments varies across countries and economic regions in Africa. To ensure a structured approach to the series, the roundtable discussion topics will focus on specific areas, as well as cross-cutting areas of each distinct segment of the value chain deemed suitable for leveraging opportunities for industrialization.

Roundtable Objectives • To create a pan-continental platform for dialogue and research to contribute towards developing regional cotton, textile, and clothing value chains in Africa. • To identify and leverage opportunities available through the implementation of the African Continental Free Trade Agreement to create national, regional and global capacity and competitiveness in the cotton, textile and apparel value chains on the African continent. • To Identify policies at country and regional levels for initiating and promoting RVCs, as well as suggesting policies for promoting intra-regional investments in the production of cotton and textile and clothing.

B. Summary of Presentations The webinar comprised three sections; an introduction and welcome addresses followed by discussions organised into two distinct discussion groups - Group 1: making the Rules of Origin to support RVCs in the cotton, and textile sector (using trade policy to support RVCs) and Group 2: addressing constraints and building productive capabilities in the cotton and textile sectors, followed by concluding statements, and closing remarks. Participants put questions in writing, via the chat and Q&A function of the webinar platform. What follows is a thematic summary of the content of the various presentations.

Introductory Remarks & Welcome Address Prof Faizel Ismail delivered the official welcome address. He began his address by welcoming the audience and the speakers. He proceeded to set the context for the webinar by highlighting the importance of the webinar, as it will create a dialogue on an issue that is

of great significance for the continent: cotton, textiles and apparel regional value chains and the ongoing discussions on the Rules of Origin (RoO) in the AfCFTA negotiations. Additionally, Prof Ismail provided an overview of the vast experience and research into the trade-related issues and trade flows focused on the cotton, textile and apparel sector globally and in Africa.

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

SESSION 1 DISCUSSION: MAKING THE RULES OF ORIGIN TO SUPPORT RVCS IN THE COTTON, AND TEXTILE SECTOR (USING TRADE POLICY TO SUPPORT RVCS) The first group of presentations followed the welcome address. The session began with Prof Faizel Ismail introducing the first speaker Dr Andrew Mold. Prof Faizel Ismail moderated the session.

Speaker 1: Dr Andrew Mold (Chief, Regional Integration and AfCFTA Cluster, Regional Office for Eastern Africa, UNECA) Dr Mold began by indicating that his presentation aims to provide an overview for the subsequent discussions; the presentation would be similar to that provided to the AfCFTA Secretariat in November 2021. The clothing industry is fundamentally important as it satisfies a basic human need and has been used by developing countries to achieve economic development and diversification. The nature of the industry allows for this as the capital intensity is generally low, labour intensity is high, and the technology is relatively unsophisticated. Additionally, labour costs tend to be the most significant production factor in the industry. However, this could change in the coming years due to technological advancements. Lastly, low capitalisation levels mean entry into the industry is relatively easy for developing countries. Dr Mold noted that geographical proximity to key markets is increasingly vital.

Background issues that have an Impact on Africa’s Cotton, Textile, and Apparel Sectors • Shifting economic geography: Until the 1970’s apparel production shifted to Asia – from Japan then to the first four newly industrialised countries (NICs - Hong Kong, Taiwan, South Korea and Singapore), then to Malaysia and Thailand, and from there to Indonesia, China, and Vietnam, and more recently to Bangladesh and some African locations. However, NIC producers often lacked the design and merchandising skills, and market access of developed country firms or retailers; NIC producers typically acted as sub-contractors for those firms and surrendered much of the final value to the prime contractors.

• Labour issues: the global labour force in the sector is made up of 80 per cent female, primarily unskilled or semi-skilled, and young. In developed countries labour force tends to be immigrants/ethnic minorities with little or no social protection. In developing countries, pay is often extremely low and even below the poverty line. • Consumer and state relations: consumers and buyers are increasingly demanding more transparency in knowing how apparel is being ethically and sustainably produced and sourced. Government regulation is complex due to the fragmented, transitory nature of the industry, and historically, governments have intervened heavily in the industry. • Multi-Fibre Arrangement (MFA) 1973-2005: the MFA aimed to create a trading environment that would benefit the developed and developing world. However, over time it became more restrictive and was to be phased out over ten years from 1995-2005. Since 2005 textile and apparel exports have been concentrated in Asia, mainly China, while textile and apparel imports have been concentrated in high-income countries such as North America and the European Union. Export and import concentration have an impact on determining the sector’s structure.

Ongoing Global and African Trends Dr Mold provided an overview of ongoing trends in the textile and apparel sectors, and the cotton sector.

Textile and Apparel • The concentration of global buying power: Western Europe and North America alone account for around two-thirds of global consumption, making it difficult for smallscale suppliers to meet the requirements of large global buyers, while advantaging countries such as China with large volume plants, and multinationals. • Costs and efficiency: the industry is increasingly characterized by shorter lead-times, greater inter-and intra-seasonal variety, and tighter logistics; however, the cost has been king in this industry. The intensity of competition since the mid-1990s has led to a secular downtrend in the global price of clothing.

• The protective regime since the end of the MFA: the pool of countries that could reliably serve large-scale global buyers with low-cost and quality. • African textile and apparel exports (19952020): have increased and settled at 16.7 per cent over the last decade. The share of Africa’s global exports has declined from three to two per cent. • African textile and apparel trade flows: export is concentrated in North Africa and Morocco. Egypt and Tunisia account for 60% of total African exports. African imports have been rising more sharply than exports. Import demand is more diversified than exports with Egypt, Morocco, South Africa, Nigeria, Tunisia, and Algeria accounting for 56% of total African imports.

Cotton Sector The cotton sector fares better internationally, and although synthetic textiles have risen in prominence, cotton retains a significant role in the global fashion industry. • Exports: African share currently stands at nearly 20 per cent of global trade in exports. The leading cotton producers include Benin, Burkina Faso, Egypt and Mali. Most cotton is exported raw, with 60% going to the Asian market. • Labour: an estimated 450,000 Africans work in the cotton sector, predominantly in West Africa. • Cotton prices: low prices on world markets and a global value chain (GVC) price volatility is passed onto farmers, rather than being shared between the farmers, the ginning companies, and the traders. World cotton prices are reduced by an estimated 10 per cent because of US subsidies. • Import duties: Chinese trade regulations have negatively affected African cotton farmers, imposing import duties from 5-40 per cent on cotton imports beyond the annual 894,000-ton import quota. • Intra-Africa trade: the only region in Africa that has a substantial inter-regional trade in the sector is Southern Africa. The most significant textile and apparel exports (Morocco, Egypt, Tunisia, Bennin) are sending exports to the African market, with South Africa as an exception.

• Lessons from AGOA: has not been fundamentally successful in expanding African exports to the US. Most benefits have been confined to primary exports, and to a limited extent, textiles. Total AGOA textile exports to the US (US$ 1.4 billion in 2019) are eclipsed by exports from Asian countries like Bangladesh (over US$5 billion and over US$ 30 billion globally). Dependency on preferential market access can be a risky strategy, particularly in the current global environment for textiles. That is why AfCFTA is so potentially advantageous – despite representing a low-income market, the African market is rapidly growing with guaranteed, permanent, and reciprocal market access.

Opportunities for Reviving the IntraAfrican Clothing Industry At its peak, between 20% and 30% of formal wage employment in African manufacturing came from the textile and apparel industry (the second most important industry after food, beverage, and tobacco). Nigerian clothing manufacturing employed 200,000 workers at its peak. Zambia employed 25,000 workers in the 1980s, including an important ‘Fordist’ factory Zambia – China Mulungushi Textiles (ZCMT), with secure employment, company housing and medical care. Economic liberalisation policies of the 1980s and 1990s, plus new competitors, led to a decline in the African textile and apparel industry. In Ghana, employment declined by 80 per cent from 1975 to 2000; in Zambia, from 25,000 to below 10,000 in 2002; and Nigeria’s 200,000-person workforce all but disappeared. Since then, there have been some successes in reviving the sector, but mainly through taking advantage of preferential market access schemes (e.g., EBA/AGOA in Kenya, Ethiopia, and Madagascar). African tariff levels are high, and protectionist compared to the significant global textile and apparel exporters and importers. Morocco and Mauritius are the exceptions.

Tariff policies alone are unlikely to be effective in reversing the situation – the need for proactive industrial policies + greater intra-African trade?

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

Dr Mold emphasized that it is essential that future policies do not look like past policies as there have been several dynamic changes in the sectors that require Africa to take on different approaches. Dr Mold outlined a few factors that policymakers should consider in the design of industrial policy and the negotiations of RoO.

Anticipating Technological Change Most Technical Developments Most technological developments in non-sewing operations: grading, laying out and cutting material, and warehouse management and distribution. e.g. computer-controlled cutting can reduce the time from one hour to just four minutes. Fortunately for Africa, sewing of garments accounts for 80% of all labour costs. Robotization will probably remain more expensive than manual labour for the next 15-20 years. However, China and Europe are investing heavily in technology. Strategies to boost the sector in Africa need to factor in rapid technological changes.

Confronting Growing Environmental Concerns The textile industry accounts for about 10% of global emissions and has a significant environmental footprint in terms of water usage, chemical use, and energy consumption. Increasing concerns are being expressed about the significant environmental impact of the textile and clothing industry. Various measures, such as environmental taxes, have been undertaken to mitigate the negative environmental impact of the textile industry. These interventions are becoming an essential dimension in determining the competitiveness of these industries. Thus, sustainability needs to be factored into any new policy measures, especially within the context of SDGs and in anticipation of future restrictions taken at the global level.

Policies Towards Second-Hand Clothing Trade-in of second-hand garments had an estimated value of US$ 4.2 billion in 2019. Africa accounts for nearly a third of all global imports of second-hand clothing. Eighty per cent of people in Africa wear second-hand clothes, mainly imported from the USA, Europe, India, and Pakistan. It is challenging for the industry

to compete with second-hand clothing – a sub-sector with zero production costs. There are lessons to be learned from South Africa, which has banned the import of second-hand clothing. However, imposing such bans can be politically difficult and might have social and adjustment costs that need to be considered.

Speaker 2: Dr Caiphas Chekwoti (Head of TRAPCA, ESAMI) Dr Chekwoti began his session by thanking Prof Faizel Ismail for the introduction and Dr Mold for the sector overview. Dr Chekwoti proceeded to paint a scenario stating that:

“if I were a manufacturer in the textile and clothing sector, what would be my key driver in ensuring that my product becomes competitive? – The answer will depend on where inputs are sourced and the costs of inputs.” However, regional integration exposes the need not just to consider costs, but the need to link trade and industrialisation. This can be achieved through vertical regional integration while considering the RoO of the textile and apparel sector inputs. Dr Chekwoti’s discussion builds on Dr Mold’s sector overview and highlights regional and county-specific RoO experiences and what lessons can be learnt from those experiences, and what those lessons mean for the AfCFTA and fostering regional value chains.

RoO and Intra-Regional Trade Experience • Double transformation in SACU RoO: RoO that require more than just a change in tariff heading of textile and apparel products has appeared to be a bit more restrictive for producers already manufacturing textile and apparel products in the region. The introduction of double transformation requirements in SACU meant that non-SACU but SADC states had to comply with double transformation requirements. This, for instance, reduced Malawi’s competitiveness and ability to supply the South African market. Additionally, RoO requirements resulted in distorted investment decisions as some

firms had to relocate to SACU countries to avoid loss of preferences in supplying the SA clothing market. Additionally, fulfilling RoO requirements and preferential rules is associated with an administrative dimension that some are unwilling to comply with. For instance, Woolworths did not use SADC’s preferential rules when sending supplies to its stores in the non-SACU SADC markets but preferred to pay full MFN tariffs due to the RoO compliance cost. • RoO and AGOA experience: AGOA made it possible for some African suppliers to increase exports of apparel products through a single transformation. African exports to the US increased by 300% once single transformation rules were adopted. However, this experience was short-lived as African producers had to compete against Asian producers. • EU experience for T&C exports from African countries: Double transformation requirements limited Malagasy clothing exports and did not increase vertical integration. Clothing exports to the EU grew slower, less diversified, and used less diversified inputs relative to AGOA. • RoO and NAFTA experience: RoO in the NAFTA meant that clothing must be produced from fibre sourced from North America. This undermined the competitiveness of Mexico’s textile and clothing sector as it allowed the US to charge higher prices on textile and clothing from Mexico. Dr Chekwoti emphasised that these regional experiences indicate that:

Strict rules of origin provide greater incentives for local or regional production but at the risk of choking off the capacity to produce competitively. More relaxed rules of origin may allow the T&C industry to source more competitively, but at the cost of local value-added, employment and regional integration. Country-Specific RoO Experiences • Bangladesh: is the main export of textile and clothing. The Everything But Arms (EBA) market access requirement was a significant trigger for value addition in Bangladesh’s

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

vertically integrated textile and apparel value chain. Initial double transformation requirements were instrumental, then Deshi (company) catalysed with skills upskilling and training, business contacts and reputation. However, private sector intentions were not sufficient, and government support was required to foster regional integration through investment in infrastructure, logistics, and building up industry capabilities. • Ethiopia: EBA and AGOA access coupled with supportive government measures have been vital, though vertical integration is still limited. • Lesotho: AGOA (single transformation and third-country derogation), EBA, SACU, QFDF access coupled with explicit government measures. However, the focus on preferential market access (highly reliant on AGOA) also limited the incentive for vertical upgrading and hence limited to CMT. Reorienting its exports to South Africa triggered a positive outcome, and an increase in Lesotho’s exports and indicated the importance of RVC. • Tanzania: Being vertically integrated, the Tanzanian RVC firms comply with the double transformation requirements and can export fabrics and apparel duty-free to South Africa. Dr Chekwoti emphasised that these country-specific experiences indicate that:

Supportive and proactive government intentions have been vital in fostering and supporting a vertically integrated textile and apparel sector. Furthermore, within the AfCFTA, it is possible to have RoO that addresses the need to improve the production of textiles and clothing that are sourced through vertical integration. Policy Implications Dr Chekwoti emphasized that reviewing regional and country-specific RoO experiences within the textile and apparel sector provides mixed messages. However, these experiences indicate that RoO has played an essential role in balancing value addition and the competitiveness of textile and apparel products.

Dr Chekwoti outlined a few factors that policymakers should consider in the design of industrial policy and the negotiations of RoO.

Getting the Rules of Origin Right Stringent rules of origin have limited the benefits for African producers from preferential market access schemes like EBA. However, there is also evidence that strict rules of origin have undermined competitiveness within regional integration schemes (e.g. NAFTA). The main argument for single transformation, or a simple value addition threshold of 35 per cent or a change in tariff heading (e.g. within COMESA), is that it simplifies qualifying for FTA treatment, thus attracting market-seeking FDI and national investment. More stringent requirements are argued to assist backward and forward linkages into the value chains and the economy, which is the main argument for double transformation (e.g. EBA effect for Bangladesh).

Relaxed RoO In some cases, relaxed RoO has led to the theft of intellectual property rights. For instance, Chinese-made or Dutch-waxed fabric imitates West African fabrics such as Ivorian Woodin.

The triple transformation argument goes further because Africa has access to much cotton which could be sourced for textile and clothing production. Therefore, the FTA treatment would promote linkages and value chains, increase intra-Africa trade and advance industrialization. There could be merit in considering different customized rules at the sub-heading or even tariff-line level, allowing enough elbow room for accommodating the various positions, ranging from cotton producers who want all the cotton used to be sourced from the continent to those that wish to have a simple change in tariff heading or value addition of 20 per cent, like Mauritius.

The Need for Proactive Industrial Policy Double or triple transformation cannot lead to structural transformation and industrialization. Instead, the thrust of industrial policy should be technology and industrial upgrading, branding and fashion, digital trade, affordable and accessible finance, market intelligence for trade and investment opportunities, agglomeration and clustering, extension services and training/ skills. A work program or sector pact on clothing, textiles, clothing and retail could be helpful. Governments have undertaken various roles and industrial policies in promoting vertical integration. For instance, Ethiopia has undertaken a proactive industrial policy, Lesotho has undertaken an active sector promotion and the provision of an investor-friendly regime, and Bangladesh has undertaken government-financed innovation and infrastructure to support an expanding domestic private sector.

Investment is Key Investment in capabilities critical for RoO to drive value addition in textile and clothing – labour, machinery and energy sources as illustrated by Bangladesh’s approach.

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

SESSION 2 DISCUSSION: ADDRESSING CONSTRAINTS AND BUILDING PRODUCTIVE CAPABILITIES IN THE COTTON AND TEXTILE SECTORS Speaker 3: Dr Taffere Tesfachew (United Nations Technology Bank for Least Developed Countries) Dr Tesfachew’s presentation builds on Dr Chekwoti’s discussion on investment and industrial upgrading and the need to move beyond trade policy to consider supply-side constraints, capabilities, and opportunities in fostering regional integration. Dr Tesfachew empathized that this discussion aims to make policymakers and negotiators aware of the supply side challenges and constraints faced by the sector. To this end, he provided an overview of some critical issues AfCFTA trade negotiators should be mindful of as the RoO negotiations continue.

Key Issues that AfCFTA Negotiators Should Bear in Mind 1. Trade integration needs to be aligned with the development of productive capacities and product diversification. Strategic trade integration is not a substitute for developing productive capacities, nor is trade policy a substitute for bold industrial policy. A regional trade agreement must be backed by active national and regional industrial and investment policies for a successful outcome. The greater the level of development of productive capacities and product diversification among countries in the free trade area, the greater the incentives to engage in regional value chains (RVCs) and ‘implement’ and ‘enforce’ the rules of origin (RoO).

A fundamental principle of creating the trade policy for the AfCFTA should ensure the rules of origin speak to beneficiation, industrialisation, and value addition. Parallel to that, there needs to be functioning, articulate and clear industrial policies rolled out amongst the member states of the AfCFTA. Additionally, addressing the supplyside constraints, the level of product

diversification and sophistication, and private sector development is imperative for promoting RVCs. 2. The RoO shape the space in which the RVCs operate – the challenge is how to design an ‘inclusive’, ‘time’ and ‘product’ specific RoO. In the AfCFTA negotiations, the textile and apparel sector is a test case for designing an ‘inclusive’ and ‘smart’ RoO. As these sectors are essential for many countries in the region, the diversity in the development of these sectors is wide among countries. Therefore, the challenge is how to reconcile the legitimate concerns of countries that have developed an integrated textile and apparel sector and wish to protect producers in the sector – and vulnerable economies that rely on the production and export of apparel products and wish to see a less restrictive RoO. 3. What are productive capacities and why the development of productive capabilities in the textile and apparel sectors matters. Productive capacities are: • Productive resources: factors of production, including natural resources, human resources, physical capital and financial capital; • Entrepreneurial and technological capabilities: the skills base, local technological and innovation capabilities, the level of sophistication of supporting institutions at national and sectoral levels, etc; and • Production linkages: flows of goods and services in the form of backward and forward linkages, market-based information flows, inter-firm interactions, the development of local value chains, etc. These three elements determine a country’s overall capacity to produce goods and services, which goods and services it can produce, and at what quality and level of productivity. The more developed the productive capacities of a country, the greater the probability for ‘product diversification and sophistication, which are essential requirements for industrializing through RVCs.

4. Building Productive capabilities Productive capabilities can be built through targeted industrial policy; however, building productive capabilities and diversified economies takes time. Therefore, while pursuing the regional trade agenda through the AfCFTA, it is essential to underline the complementary roles of industrial policies (at the national and regional level) and the importance of developing national productive capacities. However, since building productive capacities and diversified economies takes time, the degree of complexity and restrictiveness of the RoO should take into consideration the level of development of productive capacities and product diversification in member countries. Dr Tesfachew emphasised that:

Arriving at carefully balanced rules of origin that satisfy all concerned parties may be easier said than done – but the ambitious AfCFTA agenda makes it imperative that all options are considered, and lessons drawn from experiences elsewhere to find a solution.

Further Considerations In concluding his presentation, Dr Tesfachew provided key further considerations and principles to guide the RoO negotiations. Past approaches to negotiations of RoO should be carefully examined and considered in the ongoing AfCFTA negotiations in the textile and apparel sector. • The weak productive capacities of some countries in Africa, particularly the least developed countries (LDCs), should be recognized, and efforts must be made to design context-specific rules – specific in time (e.g., for a certain period) and product type. • The rules should also consider the constraints firms face in the apparel segment of the value chain, particularly in countries where the sector is an essential contributor to employment. • RoO should be ‘stringent’ enough to protect the sector and value-addition in countries with a more diversified production system, but flexible enough not to penalize the most vulnerable apparel producing and exporting countries. In other words, a two-track approach.

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

SESSION 3 DISCUSSION: CREATING BACKWARD LINKAGES AND REGIONAL INTEGRATION OF COTTON AND TEXTILE SECTORS Session two was followed by a brief 5-minute break, after which the third session kicked off. The session was moderated by Ms Vuyiswa Mkhabela and Ms Liako Mofo. Ms Vuyiswa Mkhabela opened the session by providing an overview of the critical areas of focus that would be discussed in the session and proceeded to introduce the first speaker of the session Prof Lindsay Whitfield.

Speaker 4: Prof Lindsay Whitfield (Professor of Business & Development, Copenhagen Business School and Visiting Professor, South African Research Chair in Industrial Development, University of Johannesburg). Backward Integration and Industrial Clusters: lessons to learn Prof Whitfield statured her presentation by emphasising what has been noted by the previous speakers – trade policy is not sufficient in building regional value chains. Prof Whitfield noted that the following paper would inform her presentation, and further details on the points she touched on can be obtained from this paper. Whitfield, L., Marslev, K., and Staritz, C. (2021). Can apparel export industries catalyse industrialisation? Combining GVC participation and localisation. SARChI Industrial Development Working Paper Series WP 2021-01. University of Johannesburg.

Considerations on How Diverse Textile Bases have been Developed • The textile and technological advances in the sector have driven industrialisation and not the apparel sector: The creation of textile companies and economies of scale and scope, organisational capabilities, and the ability to create border linkages within the domestic economy, spill over into other industries, and intra-industry linkages have been significant. The apparel sector has historically exploited socially marginalised labour.

• International competitive textile producing countries: China, India and Turkey’s competitiveness has been due to developing a diversified textile base. The agglomeration of companies that can produce textiles of different kinds, trims and packaging, and the concentration of the supply chain in China have given these countries a competitive advantage and not just labour costs. • A diversified textile base is vital as it: reduces production costs and lead times, allowing countries to produce a broader range of products. Additionally, it allows firms to move beyond assembly and into product development, where they engage with textile mills. Furthermore, it allows innovation in fabric production. • Public support: Turkey, China, and India have historically been cotton producers; however, it was only in the 1990s that the upgrading of cotton and textile sectors took place and ensured that these countries became competitive. The upgrading of cotton and textile sectors in these countries was through government intervention, including upgrading textile, linkages with FDI, industrial clusters, and synergies between exports and the domestic market. • Intra-industry linkages: links between the textile and petro-chemical industry have allowed Japan, South Korea, Taiwan, and China to move to the production of synthetic fabric and develop innovations in fabric and mid-tech plastics products. For instance, Taiwan dominates in creating technical textiles and thus increasing its value addition. These linkages have allowed these countries to become competitive textile producers. • Vertically integrated apparel and textile firms: although Sri Lanka, Bangladesh and Mauritius have been pointed to as success cases, Prof Lindsay Whitfield stresses that their success should be taken with some caution. In these countries, backward integration has been vertically integrated within individual firms and not based on independent textile mills. Sri Lanka and Mauritius are small economies and have moved offshore and specialised in niche sectors. For instance, Sri Lanka has established joint ventures with buyers and has created vertical integration into fabric, accessories, and lingerie specialisation. In Mauritius, the local firms invested

in knit and woven fabric production to meet double transformation RoO for EBA to the EU market, and joint ventures took over foreign firms. In Bangladesh, local firms invested in yarn and knit fabric production to meet double transformation RoO to the EU market (2001-2011). Additionally, firms focused on the dyeing and finishing sector and specialised in basic knitwear. Prof Whitfield emphasised that:

Sri Lanka, Mauritius, and Bangladesh’s success was not due to RoO alone, but due to the other interventions focused on sector upgrading investments in backward and intra-firm linkages taken by the private and public sector. Additionally, investments into the textile sector and the type of products that would be produced were determined in partnership with foreign investors and buyers such as Hong Kong. Moving from the global experience, Prof Whitfield highlighted the experience of Sub-Saharan Africa.

Sub-Saharan African Experiences I: Southern Africa Top exporting textile and apparel countries in Southern Africa include Mauritius, Madagascar, Lesotho, Eswatini, Ethiopia and Kenya. Southern Africa represents SADC triangular manufacturing for the South African market and extra-regional markets (US and EU). This SADC triangular manufacturing structure is made up of the following factors: • Division of labour: within SADC/SACU based on a combination of costs and capabilities. For instance, Mauritius has moved production to Madagascar, while South African investors have moved production to Lesotho and Eswatini. • Manufacturing base unevenly distributed and Textile capabilities limited: Lesotho and Eswatini›s production comprises South African and foreign firms focused on garment assembly with limited textile capabilities as 18-35% of the fabric is sourced from South Africa. In South Africa, there is some cotton and some yarn and fabric production, which is mainly for SA firms

based in Lesotho & Eswatini. South Africa is predominantly a retail sector rather than a producer. In Mauritius, local firms focused on producing cotton woven and knit textile are vertically integrated and focused on garment assembly. In Madagascar, local, Mauritian, and foreign firms are focused on garment assembly with limited textile-producing capabilities – 15% of textile is sourced from Mauritius. Zambia and Zimbabwe are primarily cotton producers. Despite having an unevenly distributed and fragmented manufacturing textile and apparel production base in Africa, which is similar to the Asian model, Prof Whitfield argues that this is not the model that African integration should pursue. Africa should follow a different model.

Sub-Saharan African Experiences II: East Africa • Kenya was initially the most attractive country for FDI under the MFA and AGOA because of its infrastructure: However, there was an industry contraction after the loss of the MFA. The sector in Kenya is now small, with 16 firms operating in the textile and apparel sectors. Additionally, there are two industrial clusters, embedded foreign firms, few local exporting firms, and no textile base; all contributing to Kenya’s lack of competitiveness. Local firms produce lowerquality textiles for the domestic market. • Ethiopia: from a policy and FDI perspective, Ethiopia was beginning to build a diversified textile base which is not well known. As the investments were in progress, the outcomes of those investments were not yet seen. It takes a year to five years to trace the development and success of textile production. The diversified textile-based could have made Ethiopia competitive. This has happened because of a combination of interventions, including: » AGOA and targeted government industrial policies. Policies targeted buyers and encouraged foreign supplier firms to set up operations in the country and apparel-specific industrial parks; » Targeted textile and accessory firm investments to reduce lead time and capture more value in the country;

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

» The development of firm clusters based on buyer-supplier-products; » FDI can crowd in local firms, with industrial policies. The textile base makes it easier for locally-owned firms to become competitive; FDI spill overs facilitate joint ventures.

Global Trends and Policy Tools • Developing a diversified textile base: when thinking about regional integration, the model used by Ethiopia and the agglomeration on a regional scale should be considered. This approach allows for creating a broad manufacturing base across countries rather than the SADC model, which focuses on regional integration at a firm level. • Regional industrial policy to coordinate textile and accessory investments in COMESA to achieve a large and diversified textile base. Considering: » Buyers and foreign suppliers interested in shorter led times; » Start with apparel firms to create backward linkages; » Free trade of intermediates across countries, and supporting infrastructure; » With a textile base inside SSA, double transformation RoO for AfCFTA but still producing competitive export products. • Sustainability Shift in Apparel GVCs: The global fashion industry accounts for 6-8% of GHG’s 20% of water pollution. Buyers seek competitive advantage through sustainability and are placing new demands on suppliers. These demands require innovations in inputs, production processes and recycling. The Window of Opportunity: creating textile and apparel sectors for the 21st century Developing technological capabilities, innovations, and investments into the production/ development of: • Organic cotton and cellulose alternatives: lyocell and hemp fibres; • Recycled raw materials and developing fibre recycling technologies; • Recycled second-hand clothes & plastic waste;

• Waste management systems and technology in liquid and solid waste treatment; • Eco-industrial parks & industrial symbiosis; • Green energy

Discussants Remarks: Ms Winifred Eberechi Ofili. Ms Ofili (Principal Trade Negotiator at the Nigerian Office for Trade Negotiators) Ms Liako Mofo introduced the session discussant Ms Winifred Eberechi Ofili. Ms Liako Mofo invited Ms Ofili to link the issues discussed around the RoO and the creation of backward linkages in the cotton, textile and apparel sector from a Nigerian experience and perspective. Ms Ofili began her discussion by summarising what was said by Dr Mold as it relates to Nigeria’s experience – indicating that in the ’70s and early ’80s, Nigeria was home to the continent’s textile industry. The sector was the second-largest employer in the country after the Nigerian public sector. Furthermore, the textile industry was supported by several local cotton farmers. However, due to several adverse conditions, Nigeria’s textile sector is no longer flourishing.

Ms Ofili highlighted the following challenges faced by Nigeria’s textile sector: • The first challenge pertained to the lack of insufficient cotton seeds, production practices and high cost of production. • The second challenge pertained to Nigeria’s trade liberalisation, which saw the opening of Nigerian textile producers to international competition against which they were not competitive enough. • The third challenge pertained to the negative impact that smuggling has had on the sector, as manufacturers have not been able to compete with the prices set by smugglers due to operational and overhead costs which smugglers do not face.

Government Interventions to Revive the Sector • Ban the importation of textiles and enforce tariffs to prevent cheap, counterfeit, and smuggled goods from entering the country. • One hundred billion cotton and garment funding by the Bank of Industry • The government has undertaken executive orders to ensure that procurement is targeted at buying local textiles in the production of government goods.

Building the Textiles and Clothing Value Chains • SUMMARY REPORT

Ms Ofili emphasised that a pragmatic approach is required in the AfCFTA negotiations and any unilateral negotiations. The AfCFTA aims to enhance competitiveness amongst the member states and promote industrialisation. This should be at the back of the minds of AfCFTA trade negotiators. Furthermore, there is a need to have RoOs that are not restrictive and crowd out local textile manufacturers. However, the RoO should be flexible enough to allow producers to source inputs within Africa. Furthermore, sourcing accumulation should be considered – whereby producers source inputs from within Africa from smaller and bigger textile producers.

Prof Ismail notes that researchers and academics do not need to find very specific recommendations on how to solve the RoO negotiation. However, the roundtable has begun to put forward a framework for policymakers and trade negotiators with the necessary data to build creative solutions that consider the considerations put forward by the speakers.

Ms Ofili closed off the discussion by stating that regardless of the positions the countries eventually take within the AfCFTA negotiations, negotiators should be mindful that the AfCFTA should be a trade agreement beneficial to all member states. Furthermore, Ms Ofili noted that in the cotton, textile and apparel AfCFTA negotiations, Nigeria will consider the policy approaches followed at a national level to revive the cotton and textile sector.

Prof Ismail opened the floor to the speakers to share final thoughts.

Closing Remarks Prof Faizel Ismail delivered closing remarks, thanking all speakers and the audience. He proceeded to highlight the purpose of the roundtable, emphasising that the roundtable has been aimed at: • Putting as much information as possible in the hands of the AfCFTA negotiators and policymakers who are trying to find a solution to the cotton, textile and apparel RoOs negotiations. Additionally, placing information in the hands of stakeholders builds national industrial policy and strategies and regional value chains. • Providing current trade flow data and industry trends at a global, African and country-level, and how African countries can take advantage of trends and build textile and apparel sectors and regional value chains of the 21st century. • Providing an overview of the various industrial policy strategies undertaken and the considerations that need to be made regarding developing productive capabilities, and how governments can support these.

Prof Ismail encouraged participants to continue working in a collaborative spirit. He suggests that participants work collaboratively wherever possible and contribute to the current debate and discussions currently underway because of this discussion.

Prof Lindsay Whitfield emphasised that the detailed country studies, specifically those of India and China, show that the emergence of local firms who drove the local supply chain’s ability to become competitive and upgrade has much to do with building linkages, FDI and buyers’ relationships than through protectionists measures. Therefore, protection alone will not build productive capabilities, diverse textile bases and competitive firms. African history shows that protection without direct support to assist firms to build local capabilities will not achieve anything. Therefore, there is a need to move beyond relying on tariffs and RoO but consider how FDI, targeted industrial policy, the creation of intra-firm and sector linkages and building partnerships with buyers can result in diversified textile-based and integrated value chains. Prof Ismail closed the roundtable by thanking the speakers and participants. He noted that the roundtable forms part of a research project amongst various partner institutions. Furthermore, the output from the discussion will be shared with the AfCFTA Securitate in the spirit of providing trade negotiators with insights as they conclude the RoO negotiations. Additionally, the objective of the round table is to encourage an ongoing debate and discussion backed by detailed research on how to implement the AfCFTA in a manner that facilitates the building of RVC and industrialisation on the continent in a dynamic fashion. ■