But that may all be changing. The intricate network of quotas imposed by the United States and Europe is scheduled to be dismantled on the last day of 2004 under an agreement brokered by the members of the World Trade Organization. Now that China has joined the WTO, the world’s leading garment producer is poised to become the industry’s 800-pound gorilla. The World Bank estimates that China’s share of the world’s garment exports could increase from 20 percent to 47 percent by 2010. The good news: with the elimination of the costly quota system, consumers can expect to buy their Bugle Boys a bit more cheaply. The bad news: the rest of the world, especially those whose garment industries took root under quotas, may get clobbered. Already, manufacturers in these far-flung nations are fearing the worst. As Sergio Ortiz Luis Jr., president of the Philippine Chamber of Commerce and Industry, warned: “The whole garment-export industry has to re-invent itself, or it will become like the dodo bird by the end of the decade.”
Beijing’s garment industry is the only one guaranteed not to face extinction. Everyone knows WTO membership may threaten Chinese agriculture and boost its high-tech industry. But the hottest business in post-WTO China will not be IT but T–the old-fashioned, labor-intensive, unglamorous world of textiles. With its enormous population and strong manufacturing base, the mainland is virtually unstoppable as a low-cost clothing producer. Even though quotas won’t be fully phased out for another two and a half years, foreign companies are already flocking in ever-greater numbers to set up shop in China. In March, U.S. apparel imports fell 11.2 percent overall, but imports from China climbed 15 percent. David Lee, managing director of Hong Kong-based Comey Ltd.–which makes cashmere sweaters for American retail giant Costco–has focused most of his company’s production in Madagascar. But last year, in anticipation of 2005, he started operations at several factories on the mainland. “Nobody can compete with China,” says Lee. “So you have to get your foot in the door.”
For years, the door has been partly closed. China didn’t open up to foreign investment until the 1980s. And once it emerged as an export giant, the United States and Europe slapped on quotas that limit the number of clothing imports that can be made in China. Quota rights, traded and speculated on like any commodity, can end up costing far more than labor, thus pushing up prices for consumers. And the benefit to the United States? Well, it doesn’t even get the protection that quotas were meant to give. That’s because middlemen and manufacturers have found ingenious ways to circumvent quotas, often by sending factories, textiles, even workers to the farthest ends of the earth. “If you suggested this global protection mechanism today, people would think you were crazy,” says William E. Connor, chairman of William E. Connor & Associates Ltd., a Hong Kong trading company that now has 34 offices in 29 countries. “But quotas have come to define the industry.”
That has badly distorted the industry. Not only have quota brokers gotten fabulously wealthy, but the fraudulent labeling of goods–usually with the names of countries with unfulfilled quotas–is a widespread practice in Asia and the Middle East. Elsewhere, the creation of garment industries out of whole cloth, as it were, creates a false sense of development in countries that cannot truly compete on price, quality or speed. One of the consequences can be seen on the Air Mauritius flights from Hong Kong: they are often packed with poor Chinese women going to work in the island’s garment factories. Standing in line at airport immigration recently, a group of Chinese women held their new passports for the first time–not bothered by the fact that the documents all say their birthdays are identical. For the next three years these Chinese women will work unbearably long hours in a Hong Kong-owned factory sewing jeans that say made in Mauritius.
Many of these disparate operations are now starting to migrate home. Since 1999, when Beijing finally hammered out a deal with Washington to bring it into the WTO, many major garment manufacturers have set up or expanded operations in China. Robert Arnot, chairman of I.C. Isaacs, which owns the North American rights for Marithe & Francois Girbaud jeans and sportswear, shifted all of his company’s production from Mexico to Asia, mostly China. “It’s not just about price,” says Arnot, noting that, at 43 cents an hour, China’s wages are less than one third of Mexico’s. “I want the whole package.” Even lower-wage Southeast Asian competitors like Vietnam and Indonesia can’t yet compete with China’s size, expertise, flexibility and efficiency. They just have to hope that most manufacturers will spread their bets beyond China. Says Arnot: “I wanted to be building relationships in China before the herds come in 2005.”
Even within China, the competition will be fierce. Most new investment is pouring not into southern China, the industry’s Hong Kong-influenced stronghold, but to coastal provinces farther north, where Korean and Taiwanese investors hold sway. Manufacturing costs are slightly lower farther north, though the infrastructure is not quite as developed. Frontline Clothing Ltd., a high-end manufacturer that caters to European and American fashion houses, has shut down its operations in Cambodia, Laos and Bangladesh–and opened up several facilities in mainland China, including one sleek new factory in Shanghai. “The competition in the future will not be between China and other countries, but between different regions inside China,” says Phillip Ho, Frontline’s marketing director.
All of these scenarios rest on a basic assumption: that China will be allowed to compete freely in the world market. The WTO is supposed to protect that right, but the agreement Beijing struck with the United States in 1999 offers some blunt instruments to slow the expected surge in Chinese apparel imports. Without needing to prove damage to local industry, WTO members may unilaterally reimpose quotas on Chinese apparel through 2008. They can also restrict specific import categories through 2013. If the global economy continues to weaken, the temptation to erect new barriers may be hard to resist, especially for the United States, where a growing union movement decries the abuse of workers’ rights in China.
Still, even if free trade is deferred, the old system will be scrapped–and Hong Kong, in particular, will be hit hard. The city is the world’s second largest clothing exporter after China, but most of its $24 billion trade consists of re-exports that originate on the mainland. Hong Kong traders are now scrambling to redefine themselves. Quota speculators (“dinosaurs,” as Connor calls them) will be out of jobs. And Hong Kong trading companies now have the unenviable task of persuading Western clients not to cut them out of the loop. The system, Hong Kong agents insist, will still be complicated enough to require savvy middlemen who know how to consolidate production, coordinate supply chains and check factories’ compliance with ever-tougher standards of safety and human rights.
Hong Kong billionaire William Fung is king of the middlemen. His family-run company, Li & Fung Ltd., has never owned a factory, but it has carved out a huge slice of the world’s garment business by delivering goods on time–and by holding on to precious quotas. And Li & Fung is expanding its presence in China. The company has offices in 40 countries around the world, but it now has 16 offices and 600 employees in mainland China. Although the company’s stock has dropped precipitously in the past year, Fung remains bullish on Hong Kong. “China has two windows,” he says. “Shanghai is the window that looks into China. Hong Kong is China’s window out on the world.”
But where does that leave the rest of the world? Trembling with fear, mostly. The garment industry is experiencing a worldwide recession, and many countries are feeling the chill wind from China. In the Philippines, Leader Garments recently lost its biggest American accounts–the Gap, Wal-Mart and Kmart–to Chinese apparel makers. Medium-wage countries like Mauritius will not survive unless they move up the value chain. Meanwhile, the lowest-wage countries–Bangladesh, Laos, Indonesia and Cambodia–will now have to battle it out with each other at the bottom. The stakes are high: in Pakistan, the garment trade accounts for 60 percent of the country’s export earnings; in Bangladesh, it is more than 70 percent.
Still, there are glimmers of hope. Countries in sub-Saharan Africa may be able to compete on some items, since they now have duty-free access to the U.S. market–and China never will. Vietnam could prove a tough competitor for China, with its rock-bottom wages and talented workers. And the Philippine government is pouring $8 million into programs designed to train workers to be as productive as Chinese workers. But these countries’ best bet may be to find a special niche, as the Sri Lankan company Bodyline has done with a line of lingerie. Even as the country’s garment trade shrank by 15 percent last year, Bodyline brought in a healthy $250 million by rolling out bras that range from the functional to the exotic. Ever heard of a “water” bra? Anything’s worth trying if it can keep you from going the way of the dodo.
