On Jan 1, 1999, Cambodia and the US signed a bilateral textile agreement that set a quota on textile and apparel exports to the US and reduced tariffs on imports from the US.
The deal also implemented a clause that had never been included in any previous bilateral trade agreement between any nation: Cambodia would receive additional quota if factory working conditions “substantially” complied with Cambodian labor law and core labor practices.
Now, with Cambodia on the verge of entering the World Trade Organization and the US textile agreement set to expire at the end of 2004, government and garment industry officials are hoping that Cambodia’s reputation for good working conditions will keep the garment industry, and Cambodia’s fragile economy, from collapsing.
“Companies will always go to China for their profit,” said Sok Siphana, secretary of state at the Ministry of Commerce and Cambodia’s lead WTO negotiator. “Yet profit alone is not always the basis for business. Image-conscious multinationals will continue using Cambodia because of our high labor standards.”
The garment industry has boomed in the past eight years. In 1995, industry statistics show that garment exports totaled $26.2 million, or 8 percent of domestic exports. In 1999, when the bilateral textile agreement took effect, garment exports totaled $653 million. And in 2002, garment exports amounted to more than $1.3 billion and account for 96.5 percent of all domestic exports.
In 2001, the International Labor Organization began to inspect factory working conditions, in cooperation with the Garment Manufacturer’s Association of Cambodia, and jointly financed by the US and Cambodian governments. Their independent reports found that the major problems in factories included involuntary overtime work, instances of anti-union discrimination and incorrect payment of wages.
But primarily the reports confirmed to international buyers that Cambodian garment factories contain no child labor, forced labor or sexual harassment.
“I do know that a number of buyers from better known brands like what is happening in Cambodia,” said Lejo Sibbel, chief technical adviser for the ILO in Cambodia. “They support the idea and welcome transparency. However, I can’t tell whether orders have increased as a result.”
The garment industry is counting on orders to increase if its factories, which employ more than 200,000 people, are to stay in Cambodia. In the short term, experts say, the WTO will not have a major effect on the garment industry.
In the long term, however, WTO membership will give Cambodia full access to the US and European markets, which it currently does not have because of the quotas. If Cambodia did not join the WTO, its market access would be severely limited when the bilateral textile agreement expires.
Yet it remains unclear just how much business will be retained based simply on Cambodia’s reputation for good labor standards. Economists worry that Cambodia’s production costs are too high to compete with surrounding nations. Without the quota system, they fear, factories will simply relocate to a country that has cheaper production costs.
“We cannot simply rest on our past accomplishments and hope the garment industry will expand,” said an economist on faculty at the Institute of Technology and Management who has conducted studies on the garment industry. “When we join the WTO, we will still face the problem of competitiveness. We need to reduce operational costs to be competitive.”
Those costs, the economist said, include the high prices of gasoline, electricity and bureaucracy. Also, since Cambodia is a dollarized economy, labor costs are higher than in competing nations.
Some experts say that Cambodia’s good reputation will help the industry, but it will not be enough to support the garment factories currently in Cambodia. If the garment industry is to survive, they say, the government needs to provide incentives for companies to stay.
“A garment factory is a very mobile thing,” said a western diplomat. “They can move practically overnight to almost anywhere. Any country can make garments. You have to stay cost-competitive to survive.”
Government officials are optimistic that Cambodia will retain enough business to sustain the industry. While some factories have left in the past year, the industry now has seven more factories than it did last year. Since January, 11 new garment factories gained approval from the Council for the Development of Cambodia.
Fewer textile factories are opening than in previous years, said Hing Thoraxy, director of the project monitoring department at the Council. Yet existing factories are expanding, he said, which is a good sign that the garment industry is expecting to retain business.
“We cannot get out from this globalization,” Hing Thoraxy said. “We were isolated under communism for more than 25 years. We are now just trying to integrate into the free market.”
Currently, GMAC is conducting a study to determine if Cambodia will retain enough business after the bilateral textile agreement expires. In addition, they are studying if buyers will pay a higher price for garments produced in factories with good labor conditions.
So far, according to GMAC President Van Sou Ieng, buyers still insist on cheaper prices regardless of Cambodia’s high labor standards. “Instead of encouraging us with words, buyers should do it with actions,” he said. “In countries that don’t care about child labor, environmental protection or social justice, of course their prices will be cheaper. We believe the trend must change—if not, it will be a sad story for some factories.”
Major buyers in Cambodia include Adidas, Puma, Gap and Polo Ralph Lauren, according to published reports. Those buyers could not be contacted.
The ILO’s contract expires in December. Some have said for Cambodia to keep its reputation for good labor standards, it needs to continue letting the ILO issue independent reports on factory working conditions. GMAC is currently polling factory owners to see if they want the ILO to continue their inspections.
With tremendous changes about to take place in the global textile industry after all quotas are abolished in 2005, experts say it’s impossible to predict exactly what will happen.
In May, Sok Siphana spoke at a conference on the future of textiles and clothing in Brussels, Belgium.
“After listening to all the speakers at the conference, I realized that nobody had a clue what the future will be like, with one exception,” Sok Siphana said. “Everyone agreed that China is a threat on a cost basis.”
And that is what has economists worried. Cambodia’s ability to compete will determine how beneficial the WTO will be to its economy, they say.
“Now we will have additional market access, but we are handicapped fighting against very strong men,” the economist from the Institute of Technology and Management said. “If you want to compete under these conditions, you have to stay in poverty.”