Thailand textiles & clothing industry

Manufacturing case study on policy
reform and adjustment:
Thailand textiles & clothing industry
David Harris
D. N. Harris & Associates
12 November 2004

Thailand textile & clothing industry
Case study on reform for... a DC industry... an export industry
Textile & clothing a major industry in Thailand:
• around 1 million jobs
• became largest single export industry
• US$4.5 billion export sales in 1996
• > 25% of value added in manufacturing
Developed from competitive advantage of low cost labor:
• was highly protected – 1970’s, 1980’s
• strong growth in production, exports
• trade reforms in 1990’s
• adjustment in capacity, jobs, industry specialisation

T&C industry development
T&C industry has different areas of specialisation:
• based on stages of manufacturing
• up-stream versus down stream
• fibre…. yarn… fabrics… clothing production
Rapid expansion in textiles (yarn, fabrics) but strong import
competition in late 1950’s:
• cotton textiles from Pakistan
• adjustment pressures in capacity, jobs
Tariff protection & manufacturing assistance (1960’s):
• recovery in capacity
• Japanese investment in synthetic fibres

T&C industry support policies
During 1970’s Govt. policy a combination of:
• import protection
• capacity restrictions
• industry promotion
Very high tariffs & highly regulated:
• tariff protection raised returns & stimulated growth
• ban on capacity expansion
• no new firms
• objective was to stop excess production
Strong growth in exports allowed easing of regulations:
• but restrictions remained on suppliers to domestic market

T&C industry support policies
Capacity regulations not effective:
• not properly enforced
• yarn & fabric capacity expanded in 1980’s
Pressure for policy reform because of export growth:
• increased yarn exports….
• reduced domestic supplies for fabric producers….
• domestic yarn prices increased, > world price
• tariff protection raised price of imported yarn
Govt. lifted capacity restrictions in 1987:
• new firms, increased capacity, new technology

T&C trade policy reforms
In the early 1990’s high tariffs on fabric and clothing, lower
tariffs on yarn:
• 30% tariff on yarn in 1992
• 60% tariff on fabrics
• 60% tariff on clothing
Gradual reduction in tariffs during the 1990’s:
• 10% tariff on yarn in 1997
• 20% tariff on fabrics
• 30% tariff on clothing
Larger reduction in protection for up-stream activities:
• largest cut in yarns

Structural features of T&C industry
Structural characteristics of industry reflects competitive
advantages and policy arrangements
Yarn production is capital intensive, low labor intensity:
• spinning technology key to efficiency
• small number of firms
• import competition based on better technology, scale
advantages – lower costs of production
Fabric production less capital intensive, more labor intensive:
• weaving technology key to efficiency
• more firms
• import competition based on technology, lower labor costs,
scale advantages

Trade in T&C products
Clothing production limited capital, highly labor intensive:
• labor costs key to efficiency
• many firms
• simple technology encourages small scale firms
• sub-contracting – cutting, assembly, finishing
• import competition based on lower labor costs
Exports & imports of textiles – differences for up-stream &
down stream activities:
• mid 1990’s clothing 73% of exports
• fabrics 14% of exports
• yarn & fibre 11% of exports
• exports worth US$4.5 billion

Trade in T&C products
Most imports to supply fabric sector:
• no clothing imports – competitive domestic suppliers
• some yarn imports – increased capacity, new technology,
scale gains improved domestic competitiveness
• strong demand for fabric imports
• partly quality issues but….
• fashion changes need variety of fabrics
Production and trade growth attracted more labor:
• 70% increase in clothing sector (mid 80’s to mid 90’s)…
• almost 1 million employed…
• 80% increase in fabric/yarn sector – 270,000 employed

Effects of T&C policy reform
Policy reform period has been lengthy:
• began late 1980’s with end of capacity restrictions
• followed by gradual tariff cuts in 1990’s
What happen?
• industry expanded, exports expanded
• initially growth in down stream activities
• tariff protection remained – higher input costs (yarn)
Strong growth in clothing & fabric exports
• built on labor cost competitiveness and…..
• investment in capacity and….
• investment in weaving technology (fabric production)

Structural adjustment in T&C industry
Later, industry had to adapt to lower import protection:
• reduced input costs (yarn)….
• helped competitiveness of down stream activities….
• but rising wages was eroding competitiveness
From around mid-1990’s export performance of clothing,
fabrics declined:
• competition from lower cost export suppliers
• labor costs were more competitive
• adjustment issue for firms – market focus?
Down stream firms increasingly focused on domestic sales:
• significant import protection
• adjustment issue for labor?

Structural adjustment in T&C industry
Trade reforms re-oriented industry to up-stream activities:
• industry growth shifting towards yarn
• limited protection, low labor intensity
Reduced yarn protection required adjustment by up-stream
firms to improve competitiveness:
• had to get scale efficiencies
• had to invest in technology
Effect was strong growth in yarn production:
• competitive supplier to down stream sectors
• import penetration began to decline
• strong growth in yarn exports

Adjustment in down stream activities
Adjustment pressures in clothing & fabric sectors:
• clothing production up 300% (mid 70’s to mid 90’s)…
• fabric production up 600%...
• but then growth stopped, exports declined
• import competition constrained
• increasing dependency on protection
• labor adjustment issue building-up
Import protection was slowing adjustment that must
inevitably occur:
• changed from major export industry to sheltered from
import competition
• political issues – a major employer
• alternative employment, retraining?

A ‘lesson’ in reform and adjustment
Adjustment pressures in fabric & clothing sectors primarily
driven by market forces:
• loss of labor competitiveness
• trade reform had limited effect….
• export industry was competitive against imports….
• tariff protection irrelevant but then essential?
Adjustment pressures in yarn sectors primarily driven by
trade reform:
• firms had to adapt, improve efficiency
• a ‘positive force’ for change – successful
• no adjustment assistance

A ‘lesson’ in reform and adjustment
Up-stream sector – bigger trade reform created an incentive
for change:
• promoted economic efficiency
• community benefits from some jobs growth
Down stream sector – limited trade reform diluted incentive
for change:
• slowed adjustment through efficiency improvements
• one community group gains – job losses slowed….
• but general community paying higher prices
Major exchange rate changes affect adjustment pressures:
• but is it temporary,…..a false sense of security?
• ex rates change in other countries

Managing the adjustment issue
Down stream industry adjustment issue is evident:
• inevitable contraction….
• unless competitiveness can be improved….
• fundamental issue is labor costs…..
• trade agreements will increase the pressure
Moving forward has to recognise:
• some labor/firms have to exit industry
• remaining firms have to change – specialisation, R&D,
technology, off-shore labor inputs?
• adjustment assistance could help, but….
• incentives, distortionary effects important
• be pro-active – don’t wait for the trade deals