Ofreneo is professor at the University of the Philippines School of Labor and Industrial Relations and trustee of Action for Economic Reforms. This piece was published in the May 30, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.
Should the US Congress by some miracle approve the SOI (Save Our Industries) bill, there is no assurance that the Philippine garments industry will indeed soar again. This is seen in the garments-exporting countries’ experience with two SOI-style free trade agreements: the North American Free Trade Agreement (NAFTA) and the Dominican Republic-Central America-United States Free Trade Agreement (DR-CAFTA). Despite NAFTA and American investments in its maquiladora (border) factories, Mexico has been eased out by China as the number one exporter to the US market, though China does not enjoy duty-free NAFTA privileges. This is because China is “a lower-cost producer overall”, due to China’s greater efficiency and “coherent and multidimensional upgrading strategy” involving production diversification and “high value activities” (Gary Gereffi 2006). Similarly, the DR-CAFTA countries’ (Dominican Republic, Costa Rica, Guatemala, Honduras, El Salvador and Nicaragua) export sales in the US market have been declining despite the trade pact’s enactment in 2005. For the Dominican Republic, the biggest DR-CAFTA garments exporter, employment fell by 50,000 in the 18 months following the end of the MFA quota, “as exports to the US dropped by 35 per cent and over 60 factories closed” (ILO 2010).
Lastly, the stringent requirements of the American Rules of Origin (ROO) can cost exporters precious time and energy since ROO means complying with strict reportorial and inspection rules. Even a small item in a garment product such as a garment lining can disqualify the said product from being a “wholly-owned” American/Philippine product. In a fast-moving assembly industry used to sourcing raw materials and parts from China and other countries, the ROO in a SOI arrangement can be problematic.
In sum, the SOI is not a magic wand that can solve the problems of the crisis-ridden Philippine garments industry. Thus the country must strategize other survival and development choices for the industry, if it wants this industry to remain as a pillar of industrialization and as a major job generator. Of course, it is late in the day and extremely expensive to do what the full-package producers like China, India and Vietnam have done—invest in the integration and modernization of their textile, garments and fiber (cotton and synthetic) industries. The Philippines had this option in the 1980s, but never seriously pursued it.
A more realistic choice is to go niching in specialty products or partial full-package production, and develop capabilities in key areas of the value chain. To some extent, this is what some garments survivors are doing. For example, Luen Thai, the biggest apparel manufacturer in the country today, has been utilizing skilled Filipino workers and managers in producing prestige and value-adding products like Polo Ralph Lauren and transforming the Philippines operations as an integral part of an Asia-wide Luen Thai network (with its hub in Hong Kong) that is able to deal directly with big global buyers and retailers.
Another tack is the adoption of a labor-oriented marketing approach ala-Cambodia, which I formally recommended to the Clothing and Textile Industry Tripartite Council (CTITC) and the then GTEB (Garments and Textile Export Board, now GATIDO) in 2006. The idea is to market the Philippines as a labor-friendly site for garments production that should enjoy the support of the CSR-conscious big buyers. With a well-developed body of labor laws and a long tradition of unionism, the Philippines is in a good position to negotiate for more market access for its garments exports in exchange for good industrial relations practices. The “industrial strife” can be minimized if the tripartite partners can be goaded to work together for these good practices and if the investors-locators and government abandon the obsession to maintain competitiveness through reliance on cheap and muzzled labor. In line with this, I once suggested to DTI to organize labor trade missions (not just free trade missions) that would negotiate for markets with the following: the big buyers in New York and Paris, who are supporters of the UNDP’s Global Compact Initiative (GCI) and the ISO’s Social Accountability (SA) program; big consumer groups such as the Clean Clothes Campaign in Amsterdam and the Fair Labor Association in Washington; and the International Labor Organization in Geneva. Sadly, the DTI leadership then ignored this idea.
Another option is to boost the domestic demand for locally made garments similar to the “batik nationalism” program of Indonesia, which has required its schools, government offices and military to wear Indonesian-made uniforms. In fact, Indonesia is doing what other developed countries are doing on a larger scale in response to the global financial crisis—rebuilding their respective domestic industry through stimulus spending on the consumption of local goods. Incidentally, the Philippines need not pass a law on this because it has an old “flag law” which is only awaiting the executive branch’s political will for implementation. Imagine the demand for garments if a population of 100 million supported a campaign to wear Philippine-made garments. Imagine its implications on other faltering domestic industries.
To summarize, the story of the Philippine garments industry—and its twin textile industry—is a poignant story of industrial policy blindness. The abject lack of an industrial development policy and a road map detailing a coherent and integrated program of upgrading, diversification and modernization for these twin industries have made them “transition” industries. Is this not also the fate awaiting the electronics and the call center/BPO industry?
The reality is that global trade competition is war. The winner is likely to be the one which not only continuously upgrades its arsenal of skills and technology, but also comes up with a strategic road map for navigating the perilous terrain of competition. A lazy laissez-faire-style SOI, which promises the Philippines extra duty-free privileges without any accompanying upgrading program, cannot guarantee the victory, much less survival, of an ailing Philippine garments industry.
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