Wednesday, July 20, 2005

Analysis: Dragon breathes down the Tigers' neck in textiles

By Ng Boon Yian

SINGAPORE - With the high-profile textile trade row between China and the US hogging recent headlines, scant attention has been paid on how the less developed economies in the ASEAN (Association of Southeast Asian Nations) have been coping with the lifting of textile quotas since the Multifiber Agreement expired at the start of this year.

Textiles and apparel are a principal export item for some countries such as Cambodia, Laos and Indonesia. The tectonic shift in the textile trade landscape since China jumped into the fray has certainly caused some impact on the textile and apparel industries in ASEAN. Contrary to popular fears, however, the regional industries did not immediately tank when vast Chinese exports flooded major markets in the West.

According to the US Department of Commerce, ASEAN's total exports of textile and apparel to the United States fell by just 1.62% in the first four months of 2005 compared to the same period last year. Meanwhile, China's cheap exports, not surprisingly, saw a big rise of 44.95%. While the overall impact on ASEAN does not seem so severe, the picture becomes more interesting when the figures for the textile and apparel industries are examined separately.

In this light, it is clear that ASEAN's textile industries, rather than garment production, are bearing the brunt of competitive forces from low-cost powerhouses like China. In fact, while ASEAN's textile exports to the US fell 19.3%, its apparel exports actually rose by 7.9%, as all ASEAN apparel exports - except from the Philippines and Singapore - reaped gains in the first four months of the year.

Even as China is now the biggest exporter of apparel to the US with an 18.2% market share, ASEAN is not far behind with 17.2%. This suggests that ASEAN countries' apparel industries may be more resilient than is generally believed. To be sure, these indicators should be taken tentatively as it is too early to posit a long-term trend from the early figures. This is especially so since apparel buyers are not likely to shift their buying patterns too quickly so as to avoid supply chain disruption. Meanwhile, China can still be restrained from fully flexing its textile muscles because of safeguard quotas, which WTO (World Trade Organization) member countries can, until 2013, impose to restrict Chinese imports - as the US recently did.

Despite these caveats, since the Chinese textile machine kicked into overdrive, media reports suggest that it has caused painful fallout for a number of small developing countries that are dependent on textiles for exports. The latest cry of pain came from South Africa, where textile workers are clamoring for protection against the surge of cheap Chinese imports; about 75,000 jobs in the industry have been lost since 2002.

The ASEAN region, too, is not free from such transition pains, particularly on the textile front. These have been manifested in terms of factory closings, job losses or even the lowering of labor standards. Take Indonesia, for instance. According to the latest labor survey, some 300,000 jobs were lost in the textile-weaving sector in 2004. The problem is likely to worsen, given that the country's textile exports to the US fell by 21.2% in the first four months of this year, compared to the same period last year. Malaysia and the Philippines were also badly hit, as their exports fell by 31.8% and 44.6% respectively.

Like South Africa, the flood of cheap imported textiles from China - legal as well as illegal - is displacing a lot of local jobs. But how cheap is cheap? In Indonesia, for example, a meter of locally made polyester reportedly costs Rp7,000 (71 US cents) compared to Rp2,300 for the Chinese version. The cost savings are therefore irresistible. Add economies of scale to low Chinese prices, and it is simply too difficult for local competitors to maintain reasonable margins and survive.

Amidst the gloom for small low-cost operators, a silver lining in Indonesia, however, is that the mid- to high-end textile manufacturers still remain competitive, as American and European buyers continue to source such supplies there for reasons of price, quality and labor standards compliance, based on a report by the US embassy in Jakarta. While Cambodia has also been suffering from some factory closings and job losses, another social fallout - the lowering of labor standards - has been observed.

As the deluge of made-in-China products push prices down, more employers in Cambodia have allegedly been trying to justify lower pay and longer working hours by waving the "compete with China or perish" card, according to a report by the International Confederation of Free Trade Unions. This is a step back for Cambodia, which has been carving out a niche for itself by producing clothes with "sweat-free" status for trendy names like Gap, H&M and Levis - an outcome of the 1999 US-Cambodia trade deal in which access to the US market was tied to labor standards.

Although the trade deal no longer holds in the post-quota world, the strategy of protecting labor standards in order to keep sewing up orders from socially conscious companies will be crucial, as Cambodia still cannot compete with China in productivity terms. In fact, according to a World Bank survey of international buyers in 2004, more than 60% of companies who bought apparel from Cambodia said compliance with labor standards was of equal or greater importance than price, quality, and speed of delivery. Companies like Gap and Marks & Spencer are still continuing to source supplies from Cambodia for the same reason.

Given that the Cambodian textile and clothing accounts for 87% of exports and employs about 200,000 workers, it is crucial that the industry holds on to this advantage and stays afloat before other sources of growth can be cultivated. Like Cambodia, Laos too is highly dependent on the textile and clothing industry. However, due to its continued trading privileges with the EU - its largest market - the poverty-stricken country is still relatively shielded from the pressures. This advantage, however, will not last and it is important that Laos find new sources of growth as well.

While Vietnam is watching China's burgeoning exports nervously, it has held its own quite well so far as its exports of textiles and garments to the US rose by 9.8% in January-April 2005, thanks to more productive labor and better infrastructure. The positive outlook has led to more investment into the country's textile industry from big names like Mast Industries, one of the world's largest contract manufacturers, importers and distributors of apparel, including brand names like Abercrombie and Fitch.

Hence, while the overall picture for the region is not one of a total disaster, the challenge from China, particularly as the lower prices cut into profits, is palpable. This, however, does not mean that it is impossible for the ASEAN to maintain its competitive edge. Even if China is the cheapest and the most efficient producer of textiles and garments, it is unlikely that savvy apparel buyers will want to put all their eggs in one basket and make China their sole supplier.

As global garment manufacturing consolidates into a few key nodes, ASEAN could aspire to be one of the key players, especially when it comes to garment production, which still accounts for a chunk of its earnings. To so do, however, ASEAN needs to fine-tune its competitive edge by, for instance, enhancing vertical integration. After all, one of the major advantages that China enjoys is a high level of vertical integration. Garment assembly time has been estimated to be as much as 30% less in many Chinese firms, according to an ASEAN study.

Meanwhile,an efficient infrastructure allows for a short lead time for apparel to be exported through the ports of China and Hong Kong, which is especially important for high-fashion items such as women's and designer clothing. Against this backdrop, it is important that ASEAN hastens its efforts to enhance the regional integration of the textiles and apparel industry - one of the 11 priority areas for such an objective - by, for instance, eliminating all tariffs on the products.

As it will be difficult for ASEAN garments to compete with the likes of China on price, it is crucial that countries in the region work to differentiate their products by design and quality, by investing in research and development in these areas. Given that Western consumers are increasingly sensitive to environmental and labor issues, it is important for countries like Cambodia and Laos to enhance such standards in order to increase the appeal of their products as well as justify the higher prices.

In addition, such product differentiation will help facilitate greater intra-industry trade between China and ASEAN, taking some sting out of the competition from China. Therefore, while the challenge from China appears to be serious at this point, it is not insurmountable if the right measures are taken, quickly.

Ng Boon Yian is a research associate at the Institute of Southeast Asian Studies, Singapore.

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