Commentary: Sweatshop Reform: How To Solve The Standoff

Sweatshops are the hot topic on college campuses these days. In recent months, students have been demanding assurances that clothing with their universities' logos be made under humane conditions. Some 50 universities have responded by agreeing to join the Fair Labor Assn. (FLA), a sweatshop-monitoring group founded last fall by a Presidential task force of apparel makers and human rights organizations.

But the students want more. On Apr. 15, United Students Against Sweatshops (USAS), representing students at some 100 colleges, demanded that universities quit the FLA and create a more rigorous monitoring plan. They want companies to publicly disclose the location of their foreign factories so human rights and labor groups can independently verify any monitoring. And they want employers to pay a so-called living wage that meets workers' basic needs in different countries. The FLA would do neither, though it's still debating the wage issue. "Universities must hold themselves to higher standards by rejecting the FLA's weak code," says University of Michigan sophomore Peter Romer-Friedman.

The students make valid points. Even some apparel executives privately concede that some disclosure may be needed to keep companies honest. A living wage is probably a workable idea, too. In fact, companies such as Nike use a version of it to help set wages in some countries.

But no monitoring effort will work unless it's embraced by a critical mass of the U.S. apparel industry. So far, just four companies have joined the FLA: Nike, Reebok, Liz Claiborne, and Phillips-Van Heusen. Other companies on the presidential task force bowed out because they found the FLA's goals too onerous. Since last fall, the surviving four and the White House have been unable to recruit other apparel makers or major retailers. Nor are companies crying to join a second effort--featuring a living-wage standard--launched last year by Avon Products, Toys `R' Us, and the Council on Economic Priorities (CEP), a New York public-interest group. Instead, most manufacturers and even some retailers, including Wal-Mart Stores Inc., are devising a less stringent code through the American Apparel Manufacturers Assn.

By undermining the FLA, students are inadvertently fostering the weakest approach. Instead, they should try to get the apparel industry to join the FLA, not leave it. Students should also pursue retailers, who control pricing power in the industry. "It's important that we have higher labor standards, but everyone has to adopt them, including retailers, or those of us who stick our necks out will be out of business," says Phillips-Van Heusen CEO Bruce J. Klatsky.

The debate over sweatshop codes of conduct shows just how tricky it is to put a floor under global labor standards, even in a single industry. The apparel business involves hundreds of thousands of factories in widely disparate economies. Exposes have alerted U.S. consumers to abuses, yet consumers' desire for bargain goods means companies still face fierce competitive pressures. And it's unclear what the economic toll would be if anti-sweatshop efforts lift prices.

JOB LOSS. One possible result: Consumers might buy less clothing, potentially reducing employment. A living wage, the most costly demand, poses the greatest risk. "The worry is that a living wage might cause some workers to lose their jobs," says Dani Rodrik, an economist at Harvard University. Still, slowly raising labor standards around the globe would benefit most workers now toiling in sweatshops. Given the uncertainties, the best approach is to set up a common monitoring system, such as the FLA's, that tackles the most egregious abuses first. Then the bar could gradually be lifted to include ideas like a living wage.

Each of the three antisweatshop efforts takes a somewhat different path to higher labor standards. All have a code of conduct for issues such as health and safety, child labor, and overtime. The CEP's is the most stringent--it calls for a living wage. Companies on the FLA task force refused to follow suit, which was one reason U.S. unions quit the group last fall. Ultimately, the FLA agreed that companies must match the local industry prevailing wage. The group also agreed to discuss the living-wage idea again later, and the White House commissioned the Labor Dept. to do a preliminary study. Meanwhile, the AAMA, whose members include Sara Lee, Jockey International, and VF, chose the weakest standard. It calls for companies to pay the legal minimum wage, which in some countries is so low as to be meaningless.

The monitoring systems diverge even more. The CEP and the AAMA both take a factory-based approach. Each group is setting up an association to accredit monitors, most likely auditing firms. Companies, either manufacturers or retailers, can then submit their factories or their suppliers for audit. Each factory that passes is certified to be in compliance with the group's labor code--so they can tell the public they're "sweatshop-free."

The FLA system, by contrast, focuses on an entire company. Garment makers or retailers must set up internal monitoring systems to ensure that their factories or those of suppliers are in compliance with the FLA's labor standards. Outside monitors will randomly audit 30% of a company's factories in the first three years and 10% in subsequent years. The FLA will certify those that pass as in compliance with the code.

Each approach has strengths and weaknesses. Company-based monitoring requires U.S. executives to police their own factories or those of suppliers. This is probably the best way to achieve real change because it forces companies to take a direct hand in solving the problem. And under the FLA plan, monitoring results will be disclosed to the public every year, giving companies an incentive for true reform. Still, random spot checks by outside monitors could leave many abuses undiscovered.

Factory-based monitoring better suits commodity manufacturers and retailers, which use hundreds or even thousands of suppliers and change many of them each year. Demanding that entire supply chains be certified "sweat-free" would rope many more factories into the system. But neither the CEP nor the AAMA has set timetables for requiring companies to certify any portion of their vast web of contractors. And outside groups would not see monitors' findings, as with the FLA's plan. "The FLA has the only plan that provides public accountability by companies," says Michael Posner, head of the Lawyers Committee for Human Rights and a member of the FLA task force.

Whatever oversight system is used, the underlying economic issue is whether tough standards such as a living wage do more harm than good. The same applies to labor rules in trade pacts. Malaysian Prime Minister Mahathir Mohamad and other leaders of low-wage countries have long argued that such standards would price them out of global markets. Low-wage countries would lose investment and jobs, they say, hurting the local economy and the workers the standards are intended to help.

The issue is particularly acute in apparel, a cutthroat business where relentless competition has driven production to ever cheaper sources of labor. In the past decade, U.S. apparel imports have soared to 61% of the $101 billion wholesale apparel market, up from 47% in 1987 (charts). Most of the rise has come from U.S. manufacturers exporting partly finished clothing to Mexico and the Caribbean for the most labor-intensive sewing, and then importing it back to the U.S. for sale. At the same time, production has moved from middle-wage countries such as Taiwan to low-wage ones such as Costa Rica.

LOW RISE. Certainly, U.S. consumers pay less for clothes today as a result. The U.S. Consumer Price Index for apparel has risen at half the pace of the overall CPI since 1982, the lowest rise in any major item except energy.

But there's also evidence that U.S. retailers and apparel makers share in the bounty. In most advanced economies, wages track productivity over the long term. But U.S. apparel imports have shifted to countries where workers have little bargaining power or are often squelched by authoritarian governments--precisely the countries most likely to breed sweatshops.

One indication is the huge discrepancies between productivity and wages. In Mexico, for example, apparel workers are 70% as productive as their U.S. counterparts, yet they earn just 10% as much per hour, according to surveys by Kurt Salmon Associates Inc., an Atlanta-based apparel consultant. "The people really making the money are U.S. retailers," says Raoul Verret, vice-chairman of Werner International Inc., a New York apparel-management consultant.

Harvard's Rodrik has found similar results. A new study of wages and productivity in 138 countries shows that "at least part of the cost of higher labor standards would come out of profits, though a low-wage country's competitiveness could suffer, too," says Rodrik.

Of course, no one can define a living wage down to the penny. But the idea can be used to check for gross labor abuses. One way is to use a method similar to the way the U.S. defines poverty, which is to assemble a market basket of food needed for a basic daily diet (table, page 188). Nike used such an approach to respond to the economic collapse in Indonesia, where the company raised wages for its 80,000 footwear workers by more than 30% in the past year. "We don't see the wage issue as off the table" in the FLA discussions about codes of conduct, says Maria Eitel, Nike's vice-president for corporate responsibility.

At this point, private-sector codes of conduct hold the most potential for curbing sweatshops. Labor standards in trade pacts such as NAFTA are weak and aren't well enforced. And tougher rules adopted by the International Labor Organization years ago have been largely ignored.

Nor is the market likely to solve the problem on its own. Eventually, companies may be able to charge higher prices for sweatshop-free clothes, just as they do for environmentally friendly products. But today, "it's naive to think the public will pay more because someone says their product is made with the right labor conditions," says Reebok International Ltd. CEO Paul Fireman. "It's up to the manufacturers to take responsibility."

Retailers, too, could play a huge role in setting new rules for global suppliers. As part of an AAMA pilot program, Wal-Mart has asked a contractor to undergo a factory audit--one of the first among big U.S. retail chains. Real progress toward curbing labor abuses will be made only if many more companies agree to a set of minimum standards. That should be the students' first goal.

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