Jane Li

In the post-Multifibre Arrangement (MFA) world, China is expected to attract investment for a variety of reasons including vertical-integration, lower wages, and currency manipulation. Although set out to be the ‘winner’ of the MFA, this in no way means that workers will be the beneficiaries of this system. On the contrary, in an expanding textile and apparel industry dominated by fewer players, the workers are left in a less desirable position. Without the freedom of association and a higher minimum wage set by the state, workers in China are powerless against market forces.

The Multifibre Arrangement
The international textile and apparel industry has been governed by a strict system of quotas known as the MFA since 1974. Originally the MFA was intended to protect the garment industry in developed countries, so that they could adjust to the competition posed by producers in developing countries.1 Under this regime, countries would annually negotiate the quotas to be granted, in the light of the country’s previous performance. As a result of this system, preferential access was given to developing countries that were not necessarily the most competitive producers.

In 1994, the MFA was replaced by the Agreement on Textiles and Clothing (ATC). The purpose of this change was to encourage more neoliberal trade policies and bring the textile trade into accordance with General Agreement on Tariffs and Trade (GATT) principles.2 Under the ATC, the plan was to phase out the quota system over a 10-year period, with complete removal occurring by 1 January 2005.

Although the stipulations of the ATC have been carried out so far, the process by which it has occurred is quite problematic. Countries took advantage of the phase-out by removing quotas categorised as ‘non-constraining’ (by US standards, not 85 - 90 percent filled) during Phases I and II of the ATC, which ended in 2002. During 2002-4, corresponding to Phase III, an additional 18 percent of apparel was liberated from quotas. These were of a more severe nature and caused massive readjustment in the international garment industry. However, to date only 51 percent of the quotas have been removed; with the remaining to be removed mostly overnight by 2005.

Background Information on China’s Textile Industry
Currently, even before the phase-out occurs, China has already dominated the textile and apparel market. According to the officials of the American Textile Manufacturers Institute, China’s apparel sector is unmatched in terms of the variety and scope of its operation. In 2001, China produced 16 percent of the global supply and has only gained market share since.3

Textile and apparel exports also generate a large portion of China’s manufacturing output. In 2001, they accounted for 20 percent of all exports and approximately $116 billion in output.4 Of this output, approximately $53.3 billion worth was exported. According to official government statistics, employment in the sector is spread amongst 21,144 enterprises, employing 7.9 million workers.5 However, these numbers are in all likelihood an underestimation since the Chinese government only tallies enterprises that have an annual output of US$600,000 (five million Rmb). Actually, most production occurs at the village or town level. The Chinese National Textile Industry estimates that a figure of 15 million workers is more accurate.6

The Benefits of Investing in China
The garment sectors of many countries are greatly threatened by the imminent phase-out, but production will shift to other countries. While it is still not clear who all the ‘winners’ will be, no one doubts that China will receive the ‘lion’s share’ of the business. When compared with other countries on a factor-to-factor basis, China may not be the most competitive. However, despite what drawbacks there may be, on the whole, China offers investors the most ‘bang for their buck’.

 
Will scrapping the MFA benefit these migrant workers in a foreign-invested factory in China?
Photo: Apo Leong

In terms of wages, although competitive, Chinese workers are not the lowest paid in the sector. Although sources quote different wage rates, the USITC research documents the average wage of an apparel production worker at $.68 per hour in 2002. While this is a meagre wage, fellow workers in Vietnam, Sri Lanka, and other countries often earn much less. Yet, investors find that the increased productivity levels, delivery time, and better quality of the finished products offset greater costs in wages.

Moreover, as apparel production is a complex industry, companies are looking for ways to increase efficiency and achieve economies of scale. In this aspect, China has much to offer on her own as well as being in a position to take advantage of the resources in Hong Kong. China offers competitive shipping times, getting goods “to the west coast of the US generally averages between 12 and 18 days from China, Hong Kong, and Taiwan, but as much as 45 days from some member counties of the Association of South East Asian Nations”.7 Factories are able to make trial runs and samples in a short amount of time and react well to changes in fashion.

This situation is further aided by the abundance of raw materials and an increase in production of man-made fibres. The domestic cotton industry is thriving, even with the termination of price supports, making cotton prices in China competitive in the world market in 2003.8 Production of man-made fibres, however, is still costly and cumbersome, but is expected to be in a competitive state in the next two to three years. Growth in this industry has been enormous, with an average annual rate of increase of 18 percent over the last five years.9

Besides these benefits, some researchers contend that China’s macro-economic policies provide unfair advantages. China’s currency, the yuan, has been pegged to the dollar (8.28 yuan per dollar) since 1994. Most agencies, including the UN, recognise that the government is using currency manipulation to boost export sales. The Fair Currency Alliance, a group of US industrial, service, agricultural and labour associations, maintains that China needs to revalue the yuan upwards of 40 percent. One report, issued by the World Bank, even calls for a 75 percent revaluation.10 These unfair trade practices, illegal under WTO regulations, make China’s goods more competitive on a global market, thereby stymieing the growth and existence of textile and garment industries abroad.

Pressure to Ease the Quota-Free Process
Given that 49 percent of quotas, moreover the most restrictive ones, remain to be lifted on the eve of 2005, it seems unlikely that no action will be taken. Textile and apparel manufacturers from developing countries have recently taken a stand on this issue. Representatives of the manufacturing sector from Turkey, Mexico, the US, and many Sub-Saharan countries met in March 2004 in Johannesburg to discuss the ramifications of the phase-out on their countries. The result of this gathering was the Istanbul Declaration, which, addressed to the Director General of the WTO, lays out their demands, including: 1) extension of the phase out until 31 December 2007; 2) the WTO undertaking a full review of global textile and clothing production, export, and market circumstances so as to determine whether to finalise the phase-out process on 1 January 2008 or to develop an appropriate alternative arrangement; 3) to convene an emergency session to discuss the proposal no later than 1 July 2004. (Source: ATMI Web site)

More recently, a Summit on Fair Trade in Textiles and Clothing was held in Brussels in June 2004, attended by representatives of 25 out of the 47 member countries of the Global Alliance for Fair Trade in Textiles and Clothing, called for more urgent measures. Among those included the implementation of “automatic and seamless transitional safeguard mechanisms in order to prevent massive disruptive surges of trade” and “expedited and effective remedies to all types of unfair trading practices”. Although the released communiqué itself does not mention China, to a reader familiar with the subject, it is more than directly implied. Nonetheless, in the description of the summit, a participant describes the situation as a “fight against a monopoly by China”.

On 20 July 2004, Mauritius became the first nation to make a formal request for an emergency meeting of the World Trade Organisation (WTO), which discussed the need for a special meeting on the phase-out on 3 August 2004.11 However, despite any meeting that the WTO may convene, it is highly unlikely that the MFA will be extended. For this to occur, consent from all 148 member countries is required.

US government officials have already received pressure from domestic lobbies to take action on the issue. In June 2004, members of both the House of Representatives and the Senate drafted a letter to President Bush asking him to re-examine whether textile integration should be postponed until 2008 or later.12 It is interesting to note that among the signatories is John Kerry, Democratic Party nominee for President. Due to this fact, some textile lobbies are trying to raise the phase-out issue in the 2004 presidential election campaign.

At this point however, the US has publicly announced that it will not support such a decision. James Leonard, US Department of Commerce deputy assistant Secretary, stated, “The US will stick to its commitment to WTO quotas going away.”13 Additionally, it is presumed that the ‘winners’ of the phase out such as China, India, and Pakistan, would not agree to a delay. However, this does not mean alleviation measures such as anti-dumping laws, safeguard quotas, or other types of adjustment policies will not be utilised.

Business Investors Set to Reap Profits
Textile and apparel countries are aware of the change in trade regulation and are eagerly awaiting its arrival. To them, this is an opportunity to earn greater profits through lower costs, improved efficiency, economies of scale, and increased access to markets.

Hong Kong-based Luen Thai Holdings, a rising star in the garment production industry, has been very keen on investing in China. In a recent article published by the South China Morning Post, the company indicates that it will increase production in China from 25 percent (2003 figures) to 50 percent in 2006.14 It expects that “expanding production in the mainland will translate into cost savings of two to 15 percent after the quotas are lifted”.15 In addition to cost savings, consolidating the industry in China can shorten the production cycle by 75 days, a very important factor in the fashion industry.

The company investment profile states that Luen Thai Holdings has been planning since 1999 for the phase-out. It launched a strategic campaign entitled ‘Rethinking and Renewal’ to ensure that its business would be prepared to take advantage of the market forces. Luen Thai has heavily invested in building a factory in Dongguan, China and has formed a partnership with Yue Yuen, one of the largest footwear manufacturers, also located in China. However, aware of the sensitivity of the MFA phase-out, they have hedged their risk by retaining factories elsewhere and by producing apparel that is less likely to be safeguarded.16

Smaller companies, in addition to the large producers, are making this shift to China as well. Sun Hing Knitting Factory, which produces for French and English stores, is investing $2.5 million this year to expand production capacity by 25 percent on the mainland and Hong Kong.17

Another method that companies may use to exploit the system is to get the quickest market access. According to Auggie Tantillo, the Executive Director of the American Manufacturing Trade Action Coalition, “We have read reports that China is shipping goods right now to bonded warehouses in the US so they immediately can surge into the US market upon the expiration of quotas.”18

State of Labour in China
Due to the large population in China and relatively few job opportunities in rural areas, more and more people are becoming migrant workers. In Guangzhou, a city that contains three export-processing zones, the local branch of the All China Federation of Trade Unions (ACFTU) estimates that there are upwards of 20 million migrant workers.19 The abundant labour supply makes it easy to drive wages down and offer workers little job security.20
The current minimum wage in Guangzhou was recently adjusted from 510 to 684 Rmb per month (US$1 = 8.3 Rmb), yet, there are many workers who do not even earn the lower amount despite working overtime. Ah Yun, a 19 year-old worker who sews garments, said that she only received 360 Rmb per month in wages. In the three months that she had worked in a particular factory, she had to work overtime on an average of 25 days a month. She was only granted one rest day each month.21 In addition to these poor working conditions, it is very common for employers to request a month’s salary as ‘deposit’, confiscate worker’s documents, and refuse to pay workers if they want to resign.

Future predictions offer little hope. As cited by the China Labour Bulletin, “February 2004 reported that the number of new job seekers entering the labour market in China will be around 15 million people every year between 2003 and 2020. However, according to the article, only eight million jobs can be created annually, even if the economy maintains a growth rate of seven percent.”22 These figures indicate that additional foreign investment in the textile and garment industry can be easily absorbed by the available workforce.

Effect on Workers
According to 2001 figures compiled by the US ITC, workers in China’s apparel industry earned $.88 hourly in the coastal area while those in non-coastal areas earned $0.68 hourly. How wages will change with the onset of a free trade era depends on the sourcing changes that retailers and brands make. As companies seek to consolidate, they will change the nature of the global supply chain. Although subcontractors and manufacturers will still exist, those that are less competitive will be forced out, leaving only the larger and most efficient units. Laura Jones of the US Association of Importers’ of Textiles and Apparel “expects her members to buy most of their needs from only five or six countries by 2007, down from about 50 today. For most, China will be the supplier of choice”...23

Although overseas buyers in the garment industry are increasing their orders with Chinese companies, they are demanding something in return. According to Lung Kin Sang, managing director of a factory, “the quantity [of orders] will increase, the downside, however, is that already, they are looking for a lower price”. He estimates that prices will decrease by 20 percent.24 Other estimates range from five percent to as much as 50 percent. This price decrease should be alleviated in part by companies which no longer have to bid for quotas from the China
Chamber of Commerce.

Mr Fung of Li & Fung, a supply-chain managing company located in Hong Kong, said that it is likely that most of the cost savings will be passed along to consumers.25 This situation will spark more steep competition as regards prices. However, because the profit margin is not increasing, workers end up paying the cost, since they are lowest on the supply chain. When speaking to leaders of the Guangzhou Department of the ACFTU, they said that they had little idea of what the MFA was and the implications it may hold for workers. Needless to say, the workers themselves are not aware of these international trade quotas either.

WTO Stipulations
It seems very unlikely that the MFA phase-out will proceed as initially planned by the ATC. When China joined the WTO in 2001, certain safeguards were erected to protect the US and other WTO members. These include the right to: “allow a WTO member to restrain increasing Chinese imports that disrupt its market (available until 2013), a special textile safeguard (available until 2008) and the continued ability to utilise a special non-market economy methodology for measuring dumping in anti-dumping cases against Chinese companies (available until 2016).”26
In the last round of negotiations, the EU refused to give China ‘most-favoured nation’ status since it deemed that China had not done enough to make the transition to a full market economy.

The US has indicated that it will not hesitate to invoke these safeguards given that US industry is harmed. However, a further complication exists: a safeguard can be applied in two different scenarios. The first is when a product is proved to cause market disruption. The second is when a product ‘threatens’ market disruption.27 Enacting either of these procedures may take a period of many months.

The US has responded to lifted quotas with safeguards on a few occasions. In 2003, the US reimposed limits on three categories of Chinese imports including knit fabric (Category 222), brassieres (Category 349/649), and robes and dressing gowns (Category 350/650).28 These quotas can be in effect for up to twelve months but were agreed upon only with consultation between the two governments.

Currently, the Office of Textile and Apparel is considering taking similar action on cotton, wool, and man-made fibre socks.

Conclusion
The MFA is set to expire in less than four months and little preparation has been taken by governments and unions, although there is much they can do. Furthermore, companies are poised to exploit the shifts in the international production arena to their greatest benefit. This leaves the workers in a position where they can only protect themselves, by joining in solidarity with others, to form an organised voice to combat large multinational corporations.

Notes
1 ‘Bombarded by Bilaterals’, TIE Asia. http://www.tieasia.org/Documents/Bombarded_by_Bilaterals (FULL).pdf (12 July 2004)
2 ‘Legal Texts: the WTO Agreement’, The WTO, http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#General (5 June 2004)
3 US International Trade Commission (USITC), China Profile
4 Ibid
5 USITC, Table E1
6 USITC, p. E-6
7 USITC
8 Zhiming Zhang, ‘Textiles and Apparel in China’, p. 90 and USITC Report
9 Ibid
10 ‘Chinese Currency Manipulation Fact Sheet’, Fair Currency Alliance, http://www.steelnet.org/new/fca_fact_sheet.pdf, 26 July 2004
11 Carson International, http://www.carson.ca/NewsUS.html
12 Letter to President Bush from Representatives of Congress
13 ‘US Determined to End Allotments’, South China Morning Post
14 ‘Luen Thai Eyes China for Cost Savings’, South China Morning Post. 12 July 2004
15 Ibid
16 Luen Thai Listing Informational Pamphlet, acquired from a Hong Kong bank in July 2004
17 Textile Firms Positioning for Quota-Free Age
18 http://www.amtacdc.org/media/040617.asp
19 http://www.chinadaily.com.cn/english/doc/2004-03/11/content_313781.htm
20 As this article is being written, factories are reporting a shortage of labour in Guangdong province, however this is more than likely just a temporary reversal in the system that favours the employers, and the situation will soon revert to abundant employees being available again
21 CWWN worker interview data
22 http://www.china-labour.org.hk/iso/article.adp?article_id=5494, China Labour Bulletin
23 FT series ‘The Textile Revolution’, Financial Times, 19 July 2004
24 ‘Clouds Mass Over HK Rag Trade’, South China Morning Post, 15 July 2004
25 ‘The Discount Debate’, Women’s Wear Daily: 10 February 2004, Scott Malone
26 ‘China’s Accession into the WTO’, www.wto.org
27 ‘US Determined to End Allotments’, Toh Han Shih: South China Morning Post, 26 June 2004
28 ‘US Hits China with Safeguards on Knit Fabric, Brassieres, Dressing Gowns - More to Come?’
http://www.tdctrade.com/alert/us0323.htm