Garments: seeking protection through free trade? (Part 1 of 2)

Ofreneo is professor at the University of the Philippines School of Labor and Industrial Relations and trustee of Action for Economic ReformsThis piece was published in the May 23, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.

 

Six years after the Multi-Fibre Arrangement (MFA) ended, the once-robust Philippine garments industry is comatose. In 1995,  the Philippines was the fifth largest exporter of garments to the world’s biggest market, the United States. Today, the Philippines has slipped out of the top ten, overtaken by the other Asian exporting nations of Bangladesh, Cambodia, Sri Lanka, Vietnam and China.  The Philippines is  a “past-prime” garments producer.

The industry’s steep decline is reflected in its dramatic drop in employment.  In the early 1990s, the industry generated over 300,000 factory and about 700,000 home-based jobs (involving mainly embroidery and piece-rated subcontracted work).  Last year, the Department of Trade and Industry’s (DTI’s) Jesli Lapuz mentioned 100,000 as the number of workers remaining in the industry.

Given the one-sided dependence of the industry on MFA quotas, such decline in industry employment is no surprise. The industry grew continuously in the quota period, from 1976 to 1994.  It started contracting in 1995, the beginning year of the WTO’s Agreement on Clothing and Textiles (ACT), which provided for the phasing out of the  MFA quotas in a ten-year period. The job hemorrhage has led to the closure of almost all the big unionized factories—Aris, Novelty, Gelmart, Karayom, Triumph, Royal Undergarments, Levi’s, etc.  The Alyansa ng mga Manggagawa sa Garments at Textiles (ALMAGATE), an alliance covering several labor federations, had over 30,000 members in the 1990s; today, it has less than 1,000 workers.

The Philippine garments industry crisis was preceded by the earlier collapse of the local  textile industry, which had around 300 firms in the early 1970s. Today it has only a handful of firms.  The causes of the collapse of the textile industry are well-documented: the failure of many ageing textile firms to modernize, the failure of the World Bank-supported textile modernization program to take off in the 1980s, the amazing absence of productive linkages between the home-oriented textile industry and the export-oriented garments industry, the non-development of a local fiber industry (natural and synthetic), the displacement of the locally made textiles by the “surplus” imports of the duty-free garments producers, the unchecked smuggling of untaxed imported textiles and yarns, and the general lack of preparedness of the local textile producers for the World Bank-led trade liberalization program of the l980s and l990s.  Even the relatively modern textile mills set up in the 1980s like Solid Mills and Litton Mills folded up and joined the old textile firms like U-Tex and General Textiles in the textile graveyard.

The garments industry decline  is generally attributed to its  weak competitiveness. Philippine garments cannot compete with those produced by other Asian countries in terms of pricing, quality and timely delivery in a post-MFA global market. These weaknesses are rooted in other weaknesses— dependence on imported raw materials, limited textile-garment integration, long lead time, high cost of utilities and infrastructure, weak institutional support systems, etc.

In the past, some policymakers also tended to cite  “high wages” and “militant unionism”  (versus China’s “low wages” and “controlled unions”) as explanations for the local garment industry’s decline. Yet today, China’s garments exports continue to grow, even if China’s wages in the coastal provinces are now much higher than those of the Philippines.  Obviously, in the liberalized global garments industry, other competitive factors come into play such as the availability of affordable infrastructure, supplier reliability, availability of reasonably-priced quality raw materials (especially of cost-effective yarns and fabrics), conducive business climate (e.g., good customs procedures)  and efficient logistics, which all contribute to lower production cost and more competitive exports.

Moreover,  the Philippines, stuck mainly in the cutting and sewing of garments, has failed to graduate to the status of a “full-service” or “full package” producer, one with the capacity to develop  a whole range of products and services (e.g., designing, sourcing, cutting, sewing, assembling, labeling, packaging and shipping)  across the production-marketing value chain (UNCTAD 2005). Global garments specialists Gary Gereffi and Stacey Frederick have pointed out that large global retailers and brand owners prefer to outsource these interrelated activities to full-package producers.

Government and industry have been discussing  since the 1980s the need to enhance the competitiveness of the garments industry through the interrelated transformative programs of modernization, integration and diversification. This transformation failure is  best illustrated by the industry’s inability to compete vis-a-vis  the ukay-ukay, the imported smuggled garments retailed in virtually all nooks of the country.

 

The SOI non-solution

However, DTI and the Confederation of Garments Exporters of the Philippines (CONGEP) are still hoping to arrest the garments decline and even turn around the industry.  This time, the solution is  seen in the enactment by US Congress of a law —“Save Our Industries” (SOI)—giving duty-free privileges to Philippine-made garments utilizing American-made textiles.  In short, protection for both industries through a bilateral sectoral free trade.  Accordingly, 100,000 new jobs a year can be created for the first three years of the SOI program.

But will the SOI fly?   Not necessarily.

In the first place, the passage of SOI is extremely uncertain.  First filed in 2009, SOI failed to get US Congress support in 2010, allegedly due to some labor and intellectual property rights (IPR) complaints lodged against the Philippines. SOI is now due for re-filing this year in a US Congress that is fiercely divided, with the Democrats losing the House to the anti-subsidy Republicans. The passage of a bill that will give preferential treatment to two specific sectors of two trading countries is likely to meet fierce resistance among the cost-wary American legislators.  It should also be noted that the post-GFC (Global Financial Crisis) US Congress has been timid in touching any bills promoting free trade. The only trade bill under consideration is the enabling law for the Korea-US (KORUS) Free Trade Agreement, which was negotiated way back in 2007 by the George Bush Administration.

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