Clyde Prestowitz in Noticen (1/13/05)
UNCERTAIN FUTURE FOR CENTRAL AMERICAN TEXTILES AS QUOTAS EXPIRE
New year in, Multi-Fiber Agreement (MFA) out. On Jan. 1, the MFA, a
system of quotas that protected textile production in Central America
and in other poor countries around the world, expired. Among the first
effects of the expiration, Korean owners of the CSS Guatemala maquila
left the country during the New Year holidays with no notice to
employees, looting the factory of its equipment and owing workers a
total of US$257,000.
The MFA was part of the World Trade Organization (WTO) Textile and
Clothing Agreement. That agreement governed the elimination, over time,
of import quotas on clothing items coming from emerging nations and
destined for the US, Canada, and Europe. The Jan. 1 expiration means
that megaretailers in these countries are now bound only by price in
determining where apparel items sold at Wal-Mart and similar firms will
come from. That, in turn, means that China, with over 25% of the
world's textile factories, might easily drown manufacturing midgets
like CSS and effectively drive Guatemala and countries like it out of
the industry. China's labor costs are 61% below those of Honduras, the
region's largest producer of these goods.
China mushrooms, India burgeons, Pakistan expands
Reports show that, during 2004, in anticipation of the MFA's
expiration, the textile industry in China grew 26% to capture US$86
billion of the market. More than 90% of Chinese textile manufacturers
have expanded. And China is just one of several countries positioned to
gnaw on the bleaching bones of the maquilas (see NotiCen, 2001-12-20).
India has shown a 33% increase in textile production since 2003,
reflecting a 66% increase in exports to the US. India and Pakistan pay
among the lowest wages in the world to their workers.
India's apparel sector has the potential, according to Business India,
of doing US$85 billion in business by 2010. Its share of the market,
spurred by the quotaless environment, could reach 6% of world
production by that time. Added to its low-wage advantage, India also
produces an abundant cotton crop. Textiles Minister Shankarshinh
Vaghela said to capitalize on these advantages the country must upgrade
its technology and improve quality. The country also boasts an almost
limitless skilled work force, design expertise, and large production of
raw materials, all comparative advantages lacking in Central America.
Pakistan has already begun to prepare for survival in the industry,
having invested more than US$2 billion since 2000 to modernize
factories. Pakistan expects to increase its textile exports from the
current US$8 billion to US$13 billion within three years.
The US is geared to facilitate the flood from the East, further
spurring Asian growth not only to the detriment of the maquilas, but to
US manufacturers as well. Business Week reported one designer, Helen
Morley, is shifting 75% of her production to China and will have her
US$3,000 dresses flown in by UPS, which is expanding in China by buying
into the state-owned Sinotrans Ltd. Thus does exponential growth occur.
Morley, obviously, is not alone in planning shifts away from the
formerly protected manufacturers. She anticipates a 50% reduction in
production costs. "All the designers are looking to China now," she
said. "The small-business ties to Chinese industry are going to
The MFA's demise will affect 30 million jobs worldwide. The WTO
estimates that, within five years, China and India will account for 65%
of clothing imports in the US, a tripling. For Central America, the
result could be mass unemployment. "The developing countries are
doomed," said Clyde Prestowitz , president of the Economic Strategy
Institute , a Washington think tank.
CAFTA to the rescue--or not
Advocates of the Central America Free Trade Agreement (CAFTA) have
seized on the predicament to fuel the troubled pact's trajectory toward
passage. Tariffs, now in the 16% to 36% range, would drop to zero,
assuming the use of US or locally made fabric and yarn. That would give
Central America a competitive edge. Said Jesus Canahuati of the
Asociacion Hondurena de Maquiladores (AHM), "Everything depends on
CAFTA approval (see NotiCen, 2005-01-06)." In this case, "everything"
is 140,000 jobs in Honduras.
That prognostication may be overblown. The Koreans have already voted
with their feet in Guatemala, and the experience in Mexico, where a
similar trade pact, the North America Free Trade Agreement (NAFTA), has
been in place for years, is not encouraging. Since 2000, Mexico has
lost a third of its maquila jobs, most to China, where garment workers
earn a third of what Mexicans are paid. In the end, Central America
could get more help for survival from an exercise in restraint from
China and a US retreat from free-market bluster than from trade pacts.
Responding to fears of market dominance expressed by both the US and
the European Union (EU), China's Trade Ministry has announced it will
impose export tariffs on some of its clothing manufacturers. The duty
will be imposed on the export of underwear, sleepwear, coats, dresses,
blouses, and others items.
Although tremors have already been felt, some in the industry in
Central America expect it will take some time for the wave to hit the
beach. Juan Pereira, director of the trade-promotion organization
Pro-Nicaragua, said, "According to what the big brands have told us,
there won't be a great change immediately, but, in the medium term, we
will start to lose orders." He said it would take one to two years for
the full force to be felt. Nicaragua has 45,000 of Central America's
250,000 textile jobs on the line.
Even if the best hopes for CAFTA are realized, Caglar Ozden, a World
Bank economist, foresees that the region's maquilas "will be squeezed
with the elimination of the quotas, just as Mexico has been." He said
that clothing prices would fall 20% in the US, an ominous prospect for
an industry that has been operating on 15% margins.
Rethinking the model to survive
Costa Ricans, meanwhile, are trying to prepare. Said Consejo de Cuotas
president Miguel Shyfter, "There is going to be an earthquake in the
textile industry of all the countries of the world. Not only is the
competition with China, but with [other parts of] Asia, India,
Bangladesh, and Turkey." Shyfter said the survivors would be those who
find secure market niches and have fashionably up-to-date products that
can be delivered rapidly, faster than China can produce and deliver.
Under those circumstances, Maria Aminta Quirce, president of the Camara
Textil Costarricense, said the industry there could survive by
concentrating on short-turnaround production runs that would enable US
retailers to make smaller, more frequent orders. She said to do this,
capital would be needed to develop beyond the maquila model.
Ruben Mendez, who manages operations for Sara Lee in Costa Rica, said
that, for survival, "we will have to lower manufacturing costs,
reorganize the structure, and implement better processes, as well as
obtain prime materials from Central America and Asia at more
The country has so far lost about 1,500 jobs and US$50 million in
exports to China. Textiles are the country's second export after
bananas and are especially important because they employ women and
female heads of households.
The possibility that all is not lost for Central America is held beyond
the region. Gary Gereffi, a professor at Duke University and an
apparel-industry expert, agrees that the isthmus has some structural
advantages. "The Central American garment industry has relied on Asian
brokers to act as intermediaries between the United States (sic), and
many of them have made investments in the region and supplied
sophisticated knowledge of the world market," he said. "In addition,
Central America still has a geographical advantage over Asia when
dealing with US importers." He added that those brokers are not likely
to abandon their investments or their successes in facilitating trade
with Asia and the US.
Gereffi views Central America's position as "precarious," but holds out
the possibility that, if CAFTA emerges with strengthened provisions on
labor issues, "as more US companies are pressured to get their foreign
subcontractors to meet higher labor standards, Central America could be
well-positioned and more palatable to US companies with CAFTA."
Also seeing a qualified bright spot for the region, Stephen Coates with
the US Labor Education in the Americas Project said, "Most big textile
importers around the world are not going to put all their eggs in one
basket and move all manufacturing operations to China. But we still
don't know how fast and how big the impact will be in Central America."