At midnight on Friday, the Agreement on Textiles and Clothing expires and the US, European Union and Canada will drop the system of limits on garment imports they first imposed more than 40 years ago.
On the eve of what some fear will be a massive shock to the Cambodian economy, worried owners and workers of the garment industry—which accounts for 93 percent of Cambodia’s exports—are bracing for conflict and change, even as some economists say their fears are unfounded.
The secretary-general of the Garment Manufacturers Association of Cambodia, Ken Loo, said Thursday that Cambodia is not prepared for what lies ahead and that despite positive predictions by the World Bank, factories are “bleeding” from cuts demanded by opportunistic buyers.
Loo could not quantify how many garment factories will close after the Jan 1 deadline, but said buyers have already negotiated unsustainable price cuts with Cambodian factories of between 10 and 15 percent.
“Buyers are always asking for a lower price. With the end of quotas, now they can come and say: ‘Look, China is producing this for X amount, can you match?’”
According to the Ministry of Commerce, Cambodia’s 197 garment factories employ some 230,000 workers, mostly female, and constitutes 12.4 percent of the nation’s gross national product, with 71 percent of their products exported to the US and 22 percent to the EU.
Over the past year, economists have voiced expectations that China and India, which operate with costs between 15 to 20 percent lower than Cambodia, will dominate the industry in the quota-free world.
But, giving a more positive outlook for Cambodia’s garment trade, the World Bank this month reported that 60 percent of overseas buyers—accounting for over half of Cambodia’s market—plan to increase their purchases here.
World Bank’s Nigel Twose credited close monitoring of the country’s labor standards by the International Labor Organization for the buyers’ continued interest in Cambodia. “Findings show that Cambodia’s overseas buyers rate labor standards as one of their top priorities,” Twose said earlier this month.
Loo, however, said that resistance by garment workers to productivity increases is hampering the industry. “They [workers] need to understand that come 2005 it is going to be very difficult times for manufacturers,” he said
Manufactures do not want to reduce wages, but they do want increased productivity, he said, adding that factories cannot legally respond to price cuts with wages fixed by law at a minimum of $45 per month.
Establishing a textile industry, the source of the garment sector’s raw materials, in Cambodia would go a long way toward offsetting the high labor costs associated with doing business in Cambodia, said Loo.
Economist Kang Chandararot, of the Cambodia Development Resource Institute, was optimistic that buyers will not flee. But he warned that corruption and deteriorating labor relations must be addressed if the industry is to remain competitive, and that relations between labor and management must improve. “I think both parties need to change their behavior as soon as possible,” he said.
Still, he said, friction between the two may worsen because “if buyers really want a price cut, market pressure could affect the worker’s wage.”
Hildegunn Kyvik Nordas, an economist working for the World Trade Organization wrote recently that while Cambodia now faces a serious global challenge, it has potential if its business environment improves.
Kyvik Nordas, analyzing the post-garment quota world, sees China’s share of the US clothing market increasing from 16 percent to an estimated 50 percent, while India’s will jump from 4 to 15 percent. In comparison, the group of countries labeled “the rest of the world,” which includes Cambodia, is expected to lose over half its share, falling from 24 percent to 10 percent.
Based on Cambodia’s large supply of cheap labor dependent on the garment industry, the WTO rates the country below only Macao and Bangladesh as having a high comparative advantage in producing clothing.
“Cambodia…is in a good position to gain from trade liberalization,” she wrote in an e-mail Wednesday.
But she said, there are factors weighing against Cambodia’s competitiviness.
“Poor infrastructure and corruption lead to delays and less reliable delivery,” she wrote. “In many market segments, timely delivery is more important than anything else.