Who'll Survive The Textile Trade Shakeout?
On Jan. 1, 2005, Helen Morley, a Manhattan designer who markets to retailers such as Saks Fifth Avenue (SKS ), plans to shift 75% of her production from New York to a factory in China. She'll have her $3,000 dresses air freighted by United Parcel Service (UPS ), which on Dec. 2 said it was buying part of Chinese state-owned delivery service Sinotrans Ltd. in anticipation of a surge in business. Morley figures she'll cut production costs by 50%. "All the designers are looking to China now. The small business ties to Chinese industry are going to explode," she says.
Although Morley employs just 20 workers, her move is part of a revolution in the global clothing industry. With the new year, three decades of quotas on U.S. and European textile and apparel imports will become history -- meaning companies will be free to source from the cheapest suppliers. Some 30 million jobs worldwide could be affected, including an estimated 650,000 in the U.S. Developing nations in Asia, Africa, and Central America that benefited from quotas will have to compete with two emerging giants, China and India, which boast low wages, modern factories, and strong infrastructure. The Sino-Indian share of the $60 billion U.S. clothing import market could more than triple, to 65% in five years, the World Trade Organization says. The result could be mass unemployment in countries from Honduras to Bangladesh. "The developing countries are doomed," says Clyde V. Prestowitz, president of the Economic Strategy Institute, a Washington think tank.
Worried garment producers are scrambling to prepare for the new era. One strategy: postpone the pain. Some 50 governments are backing efforts by the U.S. industry to persuade Washington to limit some Chinese clothing imports for up to three more years. But it's not clear that the Administration will grant the extension, which is opposed by retailers, such as J.C. Penney Co. (JCP ), that buy from China.
A stronger defense has been mounted by five Central American nations and the Dominican Republic. They've inked a preliminary Central American Free Trade Agreement (CAFTA) with the U.S. that would lower U.S. tariffs on imported textiles and clothing -- now 16% to 36% -- to zero if U.S. cloth or yarn or locally made fabric are used. Those imports would have an edge over garments subject to tariffs. "Everything depends on CAFTA approval," says Jesús Canahuaty, head of the Honduran Maquiladora Assn.
Deep Price Cuts
Yet a similar free trade pact with the U.S. hasn't kept Mexico from shedding a third of its textile jobs since 2000. Much of the work has shifted to China, where garment workers earn 68 cents an hour vs. $2.45 in Mexico. Prospects for countries in Asia are also grim. In Vietnam manufacturers have cut prices by 15% for next year's orders. Cambodia is hoping its good labor practices will keep attracting orders. But Roger Tan, managing director of Phnom Penh's Thai-Pore Garment Manufacturing Co., expects buyers to demand price cuts of up to 20%.
Perhaps Pakistan, with $8 billion in textile exports last year, has the best chance to survive the shakeout. After investing more than $2 billion since 2000 to modernize factories, Pakistan expects textile exports to rise to $13 billion within three years. But most developing countries need to brace themselves. The pain is only beginning.
By Paul Magnusson in Washington, with bureau reports
Edited by Rose Brady