Factory Owners Know They Can’t Survive on Quotas Alone

Will they stay or will they go? That is the question everyone seems to be asking of Cambodia’s garment factories as worldwide garment quotas for World Trade Organization members expire in less than six months.

The answer, of course, is unknown.

The government has taken steps to carve out a niche market through factory compliance with international labor standards in the hope of obtaining orders from socially conscious buyers. But garment factory managers say that while the reputation for good labor standards undoubtedly helps, at the end of the day, buyers look at price. And with high electricity costs, under-the-table fees and bureaucratic delays, the cost of doing business here is still relatively high.

In 1999, the US and Cambodia signed the Bilateral Textile Agreement linking increased market access to labor law compliance—the first such agreement the world has ever seen. Since then, the garment industry has grown from $355 million in exports and about 80,000 jobs for mostly female workers to $1.58 billion in exports and an estimated 240,000 jobs last year. The industry comprised about 40 percent of the country’s economic activity in 2003 and accounted for about 93 percent of its exports, according to US officials.

Along with quotas, the textile agreement with the US is set to expire near the end of  the year. On Tuesday, US officials who were in Phnom Penh to conduct a semi-annual review of labor standards, as required by the agreement, were optimistic about the continued success of the industry.

Because Cam­bodia is “marketing itself as a country where workers rights are respected,” it is “in a good position to thrive and prosper,” said Robert Hagen, a US State Department official.

“The evidence says that consumers will pay a premium for the assurance that the clothing they buy is not made in sweatshops,” he said.

The Garment Manufacturers Association in Cambodia says that high-end companies, like Gap and Nike, will pay a premium for factories that are labor-law compliant. But for most others, the issue is purely price.

“Price is still the main issue for most buyers,” Ken Loo, GMAC’s secretary-general, said Wednesday. “Not all, but most. We hope we can change the mind-set of these buyers.”

Garment factory managers contacted Wednesday agreed.

“Yes, it’s nice for a company to say our garments come from a good source. But the man on the street isn’t perturbed where it comes from,” said Adrian Ross, general manager of New Island Clothing (Cambodia), a garment factory renowned for its good labor conditions.

“I have seen superb companies go down the drain because their prices were too high,” he said. “You have to put out a garment at a competitive price, that is of equal or better quality. Good ethics are very good for a factory, but it’s secondary.”

Another manager of a large garment factory in Phnom Penh said Wednesday that he didn’t think the industry’s labor law compliance was much of a competitive advantage.

“Everything comes down to the bottom line: The price,” he said. He declined to be named to protect his business.

To allow more breathing room for the industry, GMAC is lobbying the US to reduce tariffs on Cambodian garments after the quotas expire. Last month, in arguing for a reduction in tariffs, GMAC President Van Sou Ieng said “Cambodia is a country the US should treat differently because of labor-law compliance.”

But US officials said Tuesday that Cambo­dia should not expect a tariff reduction on their garments.

“It’s highly unlikely we would consider a tariff reduction,” Hagen said.

On Wednesday, Loo said that a tariff reduction would be “very useful” to sustain the in­dustry in the short term, and that GMAC has hired a lobbying firm to press for the reductions.

Though US officials said they were unaware of any talks with the Cambodian government to reduce tariffs, Loo said Wednesday that “there will be government-to-government talks. There must be.”

Other issues worry garment industry officials as well, such as Cambodia’s impending entry into the WTO. Though Cambodia was invited to join the WTO last September, the ongoing political deadlock has prevented the National Assembly from meeting and ratifying the agreement.

“If we don’t get the [WTO] sorted out, how can we plan for next year?” asked Dean Lewis, country manager of Wilson Garment (Cambodia). “We would love to keep and add employees to the industry, but factors outside our control might prevent us from doing it.”

Though investment in the garment sector increased through the first three months of this year compared to the same period last year, GMAC is unsure whether the growth will continue next year.

“It depends on whether tariffs [to the US] can be reduced, corruption costs can be lowered and whether the business environment can be made more attractive so investors will choose Cambodia over another country,” Loo said. “We expect with increased competition that some factories will close, for sure. But other factories that can control costs can then take advantage.”

 

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