From the container to the high street – does trade liberalisation really bring benefits to EU clothing consumers?

Citation

Curran, L. (2006), "From the container to the high street – does trade liberalisation really bring benefits to EU clothing consumers?", Journal of Fashion Marketing and Management, Vol. 10 No. 4. https://doi.org/10.1108/jfmm.2006.28410daa.001

From the container to the high street – does trade liberalisation really bring benefits to EU clothing consumers?

Introduction

Economic theory tells us that trade liberalisation is good for consumers. Lowering tariffs and non-tariff barriers makes importing goods cheaper and easier and leads to lower prices on the market. This is a key reason why the European Union (EU) has pursued trade liberalisation, both internally and multilaterally, over the last 50 years. Liberalisation has some social costs, in terms of job losses in previously protected industries, but trade theory and economic models tell us that these costs are offset by the gains, particularly those for consumers.

Clothing is a rather unique manufactured good in developed country markets in having been heavily protected until very recently. The harsh winds of trade liberalisation had not been allowed to blow across the clothing industries of industrialised countries because of the complex system of quota restrictions known as the Multi Fibres Arrangement (MFA). A key outcome of the most recent round of liberalisation – the Uruguay Round – was the agreement to liberalise the sector under the Agreement on Textiles and Clothing (ATC). Liberalisation was to be in stages over ten years with full liberalisation entering into force on 1 January 2005.

In analyses of the impact of the Uruguay Round, the liberalisation of textiles and clothing was forecast to make up a large percentage of the total gains – between 42 per cent and 27 per cent depending on the study (OECD, 2003). A large share of these forecast gains represent consumer benefits in developed country markets from lower prices. Attempts have been made to estimate the potential benefits of liberalisation of the clothing sector for EU consumers. François et al. (2000) analysed the issue and came up with a figure of €270 a year for a family of four, a figure consistent with earlier studies. Quite significant consumer gains could, therefore, be expected from liberalisation.

Has liberalisation delivered?

A key question for policy makers is the extent to which the forecast benefits of trade liberalisation actually materialise in practice. The costs of liberalisation are very concentrated in the industries and regions affected. In the clothing industry François et al. (2000) have estimated that protection against developing country imports protected only 4.5 per cent of EU clothing jobs. However each job lost represents considerable costs to the individual in question (Field and Graham, 1997). In addition, the EU clothing and textiles industry is concentrated in some of the poorest regions of the Union where alternative employment opportunities are limited. So, although in theory displaced workers should be soaked up by new employment opportunities in other parts of the economy, the social and political costs are nevertheless likely to be keenly felt and some job losses will be permanent.

On a political level, it is therefore very important that the positive effects of liberalisation are passed on to consumers. If certain sectors of society are to lose out, even temporarily, from liberalisation, citizens need to feel that there are clear benefits to offset these losses. Otherwise criticism of liberalisation and globalisation will inevitably increase.

There is evidence from trade statistics that import prices of clothing have been trending downwards. In the EU as a whole in June 2005 clothing import prices were 83 per cent what they had been in June 1995. This is unsurprising given the costs which were associated with the quota regime, not least the cost of quota, which was often auctioned by supplier governments. With import prices clearly falling, the question then becomes whether these lower prices are being transferred to consumers.

Clearly there is a risk that lower prices will translate into higher profits along the supply chain, rather than lower prices for consumers. Depending on the complexity of the chain there could be many actors involved between the arrival of the container of clothing in the EU and its ultimate sale to the consumer. If all actors benefit from falling prices to increase profits, there is a risk of limited consumer impact.

Fortunately there is evidence that consumers are seeing the benefit of lower import prices. Eurostat – the EU’s statistical office – monitors consumer prices in all EU member states over time. If we look at trends in clothing consumer prices, compared to other goods (Figure 1), we see a clear divergence in the trends since the liberalisation process started.

Figure 1 Consumer price indices for clothing and for all goods, EU15, 1996-2006

In effect, since 1996, when the current series began, clothing prices have stayed more or less stable in the EU as a whole and have even recently begun to trend downwards, while prices for other goods increased by 19 percentage points. This represents a significant gain in purchasing power for the EU consumer. Given that clothing represents 6.2 per cent of household consumption, as a rough indicator we can say that the average European will have seen a gain in spending power of 1 per cent over the time period. Although this may seem small, the annual average expenditure of an EU citizen was €15,180 in 2005, so gains from clothing liberalisation over the ten years would represent about €150 in extra spending power per person today. This is money that can be spent on more clothing, or on other goods and services, stimulating demand and job creation.

Are all Europeans seeing the benefits?

The overall picture, then, is one of positive impacts for consumers. As a whole, EU consumers have seen real increases in their purchasing power due to the liberalisation of the textiles sector. However, if we look at the situation within the different member states, we see that this general trend masks a large disparity between countries. Figure 2 shows the consumer price index for clothing for several key member states from June 1996 to February 2006. It is clear that there are large differences in trends and, in particular, there are a few key outliers showing very different trends to the mean.

Figure 2

Consumer price indices for selected EU member states, 1996-2006

Spain, Italy and, especially, Greece have seen upward prices trends over the time period, while the UK and Ireland have seen significant price falls. The effect of liberalisation is particularly striking in Ireland where consumer prices in other goods increased by 33 percentage points (compared to 14 in the UK), making the relative consumer gain in clothing an impressive 69 percentage points. In Greece, on the other hand, consumer prices for clothing evolved in almost exactly the same manner as for other goods, with no evident impact from clothing trade liberalisation.

In other countries the benefits are visible, but more limited. In France, Germany, Belgium and The Netherlands, prices were fairly stable over the time period. In Portugal, they fell early in the time series and have remained relatively low since (ending the time series at 8 percentage points below 1996), while in Sweden they have been very variable, ending the time series 9 percentage points above 1996.

Why these differences?

The key question, from a policy point of view, is why consumers are benefiting from trade liberalisation much more visibly in some member states than others. Clearly consumers in certain member states, especially Ireland and the UK, are seeing considerable benefits from liberalisation, as clothing prices fall both relative to other goods and in real terms. However others, for instance in Greece, have seen little or no impacts.

The question is particularly important politically, because those countries where the negative effects of liberalisation, in terms of job losses, are most likely to be felt are often precisely those where the positive impacts are not yet evident. In 2001 more than 30 per cent of the remaining clothing industry jobs in the EU 15 were in Italy (314,568), while Spain was the next largest clothing employer with 134,303. Although Greece only had 24,770 clothing jobs, this represents 15 per cent of their industrial workforce, higher than the 13 per cent in Italy (IFM, 2004).

There are several potential explanations for the differences between EU member states. First, it could be that not all member states have seen increases in imports. However, we have looked at import trends across the member states over the time period and, although there are some differences, general upward trends are similar in all cases.

A second possibility is that import penetration rates differ significantly across countries. Clearly if a large percentage of consumption is made up of EU domestic production, changes in import prices would have little impact on consumer prices. There does seem to be some correlation between low import penetration and higher consumer prices – with Italy, Spain and Greece being below the EU average for import penetration (which is 41 per cent). However, Portugal has the lowest import penetration in the EU (10 per cent), yet it has seen relative price falls in clothing. The UK and Ireland, which have seen the most substantial price falls, have indeed above average import penetration, however levels are lower than in Sweden, Germany and The Netherlands, where price effects are less marked (CEC, 2003). The correlation between high import penetration and falling consumer prices is therefore not automatic.

A third possibility is that differences in supply chains result in differing transmission rates to consumers. Specifically, smaller independent shops are likely to have longer supply chains than large chain stores, for the simple reason that they do not have the buying power, or capacity to source goods directly from distant developing countries. They rely on middle men to place the orders and source the goods and the latter, quite naturally, take a slice of the profits.

There are significant differences between member states in terms of level of retail concentration. Less than 30 per cent of Italian clothing is bought through large retailers, whereas the equivalent figure for the UK is over 80 per cent (CEC, 2003). Although there is certainly not universal consumer approval in the EU for a movement towards dominance by large retailers, it certainly seems likely to be the case that these structures ensure a more efficient transmission of lower import prices to consumers. Not only do they have short supply chains – often sourcing their goods directly from the factory – but they also have large purchasing power, which means that they can exercise considerable pressure on suppliers to keep prices down.

The question of why there are such differences in retail concentration between EU member states is a vital one in this debate. If this difference is simply the result of national consumer preferences for smaller or larger clothing retailers then this is clearly not an issue for policy. If consumers prefer a small local shop where their tastes are known and service is more personalised, in spite of higher prices, that is a personal choice. Where policy may become relevant is where there are regulatory barriers which interfere with the capacity of large retailers to establish outlets in certain regions or countries. Any research which could clarify this question of regulatory or cultural reasons for the current retail structure would certainly be useful in defining the extent to which any policy action may be required.

Finally, there is, of course, always the possibility that clothing retailers engage in anti-competitive behaviour to collude to keep prices high, in spite of lower import costs. Although this seems the least likely explanation for the differences, it remains a possibility that cannot be excluded. Clearly on highly competitive markets, such collusion would be difficult, but on markets where there are fewer key actors and less direct competition it could be feasible that price fixing could occur. In such circumstances, there would clearly be a need for policy action to protect consumers from the negative effects of anti-competitive behaviour.

Conclusion

For the research community the key question that emerges in relation to current trends in clothing prices in the EU is why there are differences between countries in the transmission of import price reductions to consumer prices? This question has strong political relevance for the European Commission and other trade policy makers. It is not enough for trade liberalisation to reduce import prices. Consumers also need to feel the impacts of policy change if they are to recognise the positive impacts of liberalisation and globalisation.

Further research on this topic would be most welcome, especially on relations between import penetration and the evolution of consumer prices and the reasons for the large discrepancy within the EU in levels of retail concentration. Such work could help the Commission to identify any regulatory or competition issues which may need to be addressed if the full benefits of liberalisation are to be felt by all.

Acknowledgements

This editorial represents the views of the author and not, necessarily, those of the European Commission. The author would like to acknowledge statistical support from Dominique Sabatte.

Corresponding authorLouise Curran can be contacted at: louise.curran@ec.europa.eu

Louise CurranDG Trade, European Commission, Brussels, Belgium