Rules incorporated in Bahrain’s Free Trade Agreement (FTA) with the US will hinder rather than help the local textile industry, says a textile industry expert.

And only one of two existing textile companies can expect to survive for long in the wake of the World Trade Organisation (WTO) quota regime abolishment and the FTA framework, says Adnan Bashir, who was involved with FTA discussions on behalf of the textile industry.
Out of Bahrain’s total exports of $378.25 million to the US in 2003, textile and garment products accounted for $185.29 million. 
Under the Yarn Forward Rule of the FTA, any textile producer can enter the US duty-free if his products are spun, woven, finished and fabricated in Bahrain.
“It means if we are to sell garments or made-up articles, they should be made from greige fabric woven in Bahrain with made-in-Bahrain yarn, which makes it impossible for all textile and garment companies except Manama Textile Mills (MTM) to benefit in any way,” said Bashir, who is also the corporate manager at MTM.  “That’s because it’s becoming a vertical set up, the only company that will have spinning, weaving and finishing facilities of its own for denim and home furnishing products and it would like to export a large portion of these products into the United States.” It now operates two spinning and three weaving mills and is expanding to make denim fabric, garments and home furnishing products.
The Yarn Forward Rule was ostensibly introduced to encourage Bahrain producers to bring into the kingdom overseas capital and technology investments.
It was also aimed at protecting the local US industry. It was feared that in the absence of the rule, garment units would have mushroomed in Bahrain and they would bring fabrics from anywhere in the world for cutting and sewing prior to exports to America.
However, the US has agreed to provide a lifeline to the textile and garment industry already existing in Bahrain. This is in the shape of the Tariff Preference Limit (TPL), incorporated after the local industry conveyed to the Americans they stood to gain nothing from the Yarn Forward Rule.
The TPL waives the requirements of the Yarn Forward Rule for 10 years but places a limit on the volume exported to the US. The limit set is 65 million sq m per year, based on Bahrain’s exports of garments and textiles in 2003. The division is 35 million sq m for the garment industry and 30 million sq m for textile manufacturers. However, the TPL does not take into account all the new investments that the textile industry, MTM in particular, is bringing in after 2004.  MTM’s investments will mainly cover denim and home furnishing plants, worth up to $40 million.
Currently there are around 15 garment-manufacturing companies, only three or four of whom make high-end items. The only textile mill other than MTM is Celtex Weaving Mills, whose output capacity is about a tenth of MTM’s.
For garment companies to survive and prosper within the FTA rules, it is imperative they produce higher-value items that yield higher margins.
“Even with the FTA in place and the TPL only those garment companies making high-value trousers, for example, would survive and the rest would close down in a matter of months,” commented Bashir.   “This would happen because the cost differential between the competition in Bahrain and South Asia or China is higher than the duty advantage or duty differential.”
A suggestion has been made that quota unused by garment companies should be distributed among other garment and textile companies. In the event none of the garment companies are utilising their quota, it should be distributed among the two textile companies on the basis of output and investment. Celtex’s investment is approximately 14 million dollars against MTM’s $150 million.
MTM’s spinning capacity is about 14 per cent of its weaving capacity which means if it wants to be yarn forward and go duty free based on the FTA Rules of Origin, it can only export 14 per cent of its total capacity to the US.
With the TPL, the capacity increases by another 7 per cent.  “In perfect circumstances (duty free and no restrictions), we’d use all the yarn made in Manama Textiles and put it into final production and sell it to the US. But this will not happen,” said Bashir.
“Besides the 21 per cent, anything extra that we’d want to sell in the US has to go with duty. Then we have to compete with our competitors in South Asia.”
If garment companies do not become yarn forward within the 10-year lifeline granted to them, they will have to down their shutters and move out, said Bashir.
“They’ll have an option to move their facilities to countries which have trade pacts with the US such as Jordan and Egypt and the cost of production is not higher than Bahrain. After all, they had come here for the quota they didn’t have in their homelands. Now they have the TPL. Even garment manufacturers selling high-value items would leave. With the WTO having pulled down international quotas, companies specialising in lower-value garments would not survive even with the TPL.”
Currently 15 per cent of MTM’s business is with the USA. In the post-FTA situation, it expects to raise that level to about 55 per cent in 2005.
In 2003, its exports amounted to $67 million and in 2004 they are targeted to reach $100 million.