Business Week | By Paul Magnusson in Washington, Frederik Balfour in Phnom Penh, and Michael Shari in Jakarta | December 15, 2003
Thirty million jobs could disappear with the end of apparel quotas
BODY: By Cambodia's modest standards, Tuch Phearom is a success story. For the past four years she has been sewing sweaters, a job that now earns her as much as $ 80 per month. The money has helped her family build a new wooden house that sits on stilts, leaving room for the chickens, pigs, and cattle to sleep and forage below. And her wages have allowed her father to expand the plot of land he farms to 4.5 hectares.
The winds of global commerce, though, may soon blow right through Tuch's humble prosperity. The U.S. and Europe next year are set to remove a 30-year-old regime of strict import quotas on clothing and textiles, which could put Tuch and the 1,300 other workers at the Thai-Pore Garment Manufacturing Co. out on the street. The reason: Once the quotas are lifted, a handful of countries -- most notably China -- are expected to quickly dominate the clothing industry worldwide, using their low wages, modern factories, and good infrastructure to put outfits like Thai-Pore out of business. ''I'm worried my family will have nothing,'' says the 24-year-old Tuch. Adds her boss, Managing Director Roger Tan: ''China is a major, major threat.''
It's not just a threat to Cambodia. From the Dominican Republic to Bangladesh, some 30 million workers in dozens of developing countries could see their jobs evaporate. Under a 1974 global pact called the Multi-Fiber Arrangement (MFA), 47 nations each gets a share of the European and U.S. markets for clothing and textiles. Cambodia, for instance, this year can export to the U.S. 1,721,232 cotton pillowcases, 72 silk dresses, and 37,896 playsuits -- in all, $ 1.4 billion worth of clothing and textiles. The original idea of the quotas was to afford some protection to the declining textile industries of the developed countries. The reality was different: With quotas effectively guaranteeing market access, manufacturers sprang up in such unlikely places as Jamaica and Sri Lanka, which before the quotas had no significant textile industry. ''TRADE NOT AID'' Talk about unintended consequences. Clothing exporters such as Ghana, the Dominican Republic, and Turkey had long protested that quotas were holding back their development. Not so many years ago, each expected to ramp up production dramatically if the quota system were dismantled. The World Bank, meanwhile, estimated that the quota system, by limiting market access, deprived poorer nations of twice what they received in foreign aid. So ''trade not aid'' became the prescription for Asia, Africa, and South America. In 1995, the U.S. and Europe agreed to begin phasing out their quotas on clothing and textiles as part of the deal that created the World Trade Organization. Of the 140 categories of clothing covered by the MFA, quotas on about 50 less contentious categories have already been eliminated. By Jan. 1, 2005, the rest are scheduled to disappear, though most products will still face import duties in the U.S. and the European Union. Developing countries hailed the agreement.
That was before China was invited to the party. In December, 2001, China joined the WTO and now it's poised to dominate the world apparel industry. Clothing workers in China earn an average of $ 73 per month, compared with $ 75 in Indonesia, $ 102 in the Dominican Republic, and $ 300 in Honduras. Moreover, with the help of trading companies in Hong Kong, China can quickly deliver its goods to stores thousands of miles from its shores. Once all quotas are lifted, China's share of the $ 500 billion global clothing market, now 17%, is expected to quickly jump to 45%, the World Bank estimates. China's piece of the U.S.'s $ 60 billion in apparel and textile imports could rise from the current $ 6.5 billion to $ 40 billion by 2010, the World Bank says.
Suddenly, the much-maligned quota system looks like a lifeline. Rather than helping developing nations, the phaseout of quotas creates a Darwinian survival of the fittest -- or, as critics of globalization would have it, a race to the bottom, where wages and benefits are certain to be sacrificed in a frantic effort to retain market share. When quotas on baby clothes and soft luggage ended last year, China's exports of baby clothes to the U.S. leaped 826%, and its soft luggage shipments rose fivefold. In Thailand, Indonesia, and Mexico, production of those products dropped by roughly half.
That kind of competition clearly benefits rich-nation consumers. Prices have already fallen by 30% on items that went off quota last year, according to industry estimates. And buyers from companies such as the Gap () and Nike () have been flocking to China in anticipation of the end of the quota regime. M. Maniwanen, CEO of Indonesia's Busana Apparel Group, got a taste of what life may soon be like when he met in November with officials of Phillips-Van Heusen Corp. The Van Heusen team insisted Busana's prices of $ 12 to $ 15 for a dozen dress shirts were too steep. ''They're taking advantage'' of the phaseout, says a dispirited Maniwanen. Van Heusen executives could not be reached for comment.
Still, China is sure to take the heat for the pricing pressure. Last year's surge in U.S. imports of three off-quota items from China -- bras, bathrobes, and woven fabric -- has already created a mini-crisis in Beijing's relations with Washington. On Nov. 30, the U.S. announced it would impose emergency ''safeguard'' quotas on the three categories to give domestic manufacturers some breathing room. China pleads that it is only looking after its own interests. ''China is still a developing country, so for a long time we will need labor-intensive industry,'' says Cao Xinyu, vice-chairman of the China Chamber of Commerce for Import & Export of Textiles.
One of the primary victims of the end of quotas is likely to be the U.S. apparel and textile industry. In the past 12 months, nearly 50,000 U.S. textile and garment jobs have been lost, leaving just 780,000 workers in the two sectors. Some expect the U.S. industry to nearly disappear, much as production of toys, bicycles, and consumer electronics moved offshore with the quiet acquiescence of Washington policymakers years ago. The union representing U.S. textile workers, UNITE, puts the potential job loss from the quota phaseout at 500,000.
Washington is also worried about the destabilizing impact of the end of apparel quotas in the developing world. Last spring, U.S. Trade Representative Robert B. Zoellick ordered a report on the effect of a quota phaseout on poorer nations. His main concern: The Caribbean, Central America, and the Andean nations. Their inefficient industries survive today only because they have guaranteed quotas and can export to the U.S. duty-free as long as they use American-made fabric. But after the study was completed in October, Zoellick refused to release its contents. According to sources familiar with its conclusions, it warns of a devastating impact on many developing economies. Dominican officials say they could lose more than a third of the country's 119,000 garment workers.
The likely losers are scrambling to fight back. Central American nations, for instance, are desperately trying to negotiate a trade deal with the U.S. by Jan. 1 that would eliminate tariffs no matter where they buy their fabric. ''For us, [a free-trade pact with the U.S.] is a question of life or death,'' says Jesus Canahuati, president of the Honduran Maquiladora Assn., an industry group representing clothing manufacturers.
China won't be the only survivor. India and Pakistan are also likely to benefit from the lifting of quotas. Both countries grow plenty of cotton and make high-quality synthetic fibers. Pakistan's textile and clothing industry employs more than a third of the country's industrial workers, while its $ 7 billion in sales abroad account for two-thirds of the country's export earnings.
India is in an even stronger position. India claims the world's third-largest cotton production, behind China and the U.S. And Indian exporters have established close ties to major U.S. retailers such as J.C. Penney () and Target. Optimists in the industry are already getting a jump-start on 2005. Welspun India Ltd., the world's fifth-largest towel maker, is doubling capacity at its plant outside Bombay, where a stream of U.S. buyers are placing orders in anticipation of the quota phaseout on towels. ''We see ourselves as one of the dominant players,'' says Rajesh R. Mandawewala, executive director of Welspun.
Will the Bush Administration yield to pressure at home and abroad to save apparel factories? ''Politically, it's not going to be possible to do nothing,'' says Fernando Silva, managing director of Kurt Salmon Associates, a consultant for consumer product companies. U.S. officials concede the pressure is intense. ''I have people in my office all the time saying, 'You gotta do something,''' says James C. Leonard III, the U.S. Commerce deputy assistant secretary for textiles, apparel, and consumer goods. ''What am I going to do? Everybody agreed to do away with quotas.''
Still, China has so many advantages that its rise seems inevitable. ''Take anything -- garments or textiles -- and people will say, 'Sorry, China is cheaper than anywhere else,''' says G.K. Ram, general manager of a Kahatex Group factory in Bandung, Indonesia, that churns out apparel for Wal-Mart Stores Inc. () and Kmart (). Perhaps sooner than most realize, Tuch Phearom and millions like her will be struggling to find new jobs. Looming Gloom A 30-year-old pact that controls global trade in apparel will end in 2004. The shift will eliminate import quotas on clothing and textiles and slash prices in the U.S. and Europe. But it will also devastate developing economies that depend on textile exports. THE HISTORY To persuade developing nations to beef up intellectual property protection and loosen investment rules, rich nations agreed to phase out import quotas on textiles and apparel. NEXT YEAR A 10-year process of phasing out European and American import quotas will be completed. Trade in most categories will be liberalized during the year and all quotas will be lifted by Jan. 1, 2005. THE REASONING Developing nations initially liked the agreement because they have low-cost garment industries and hoped to be able to export more when quotas for WTO members ended. THE RISE OF CHINA When the deal was struck, China wasn't a WTO member so it didn't stand to benefit. But China joined the group in 2001, and now it is expected to quickly dominate the market. Data: BusinessWeekBusiness Week:
