Home ›› 16 Sep 2022 ›› Editorial
A developed country can be defined as a place where people can afford to worry about the danger of cheap labour imports. A note from a series of lectures at Harvard Business School reported that “Garment importing is the only business where you can buy for one dollar, sell for two dollars and go bankrupt in the process”. Garment people at different business centres comment that the “garment business had not been this bad as of now”. Over the years garment industry has fundamentally and radically changed. It has been observed that too many people chasing too few customers. Consumers throughout the industrialized world have been spending less and less on clothing. This is due to the rise of sportswear and dressing-down work trends. Most garment buyers worry about direct costs and try to reduce direct costs through negotiation while factories try to reduce indirect costs by providing greater facilities. But neither the buyers nor the factories could reduce Macro costs. Macro costs constitute the single most important factor determining where buyers would place their orders. It is only the governments that could change macro cost factors.
At a time when international production capacity far outstrips worldwide demand for imported garments, low macro costs constitute the difference between a competitive flourishing industry and a bankrupt one. As such the coming years would be critical and challenging for all those in the global garments business. It has been observed that all factors appear negative for most Third World countries.
Garments demand from developing countries is falling and would continue to do so. Garments production facilities are increasing worldwide as more countries use garment exports as the first step in industrial development. Trading blocs are redirecting garment purchases to bloc members and favoured suppliers.
Besides that, there is the controversial issue of International Trade Liberalization. It has been observed that instead of making world trade more equitable, trade liberalization looks like a one-way street—the Third World liberalizes while the industrialized world benefits. As far as current US and European Union policies the Third World tariffs would be forced to reduce while tariffs in the industrialized countries would remain unchanged and the Third World non–tariff barriers would disappear while industrialized countries’ NTBs would remain despite the promises made at the Uruguay Round negotiations of WTO. For the Textile and Garment industries in the Third World countries, the results of ‘trade liberalization have been catastrophic. Many second and third-line producers in Asia, Africa, Central and South America are the worst suffers. Trade liberalization as it appeared to be evolving would not bring Third World garment exporters unlimited access to markets in the developed world, as most of the barriers (tariffs and NTBs) would stay in place. The Textile and Garment manufacturers in the developed countries fight to retain the barriers. Even African garment exporters benefiting from AGOA and other preferential agreements stand firmly behind them. On the other hand, Third World garments exporters especially in Bangladesh, India, Indonesia, and Pakistan fear China’s onslaught of taking over the entire garment exports markets.
To some degree, their fears are justified. The vast quantities of garments produced by Third World factories are of indifferent quality. Factories are limited in the types of garments they can make and deliveries are often erratic. The only advantage many of these countries have is cheap labour. Wages in countries like Bangladesh, India, Indonesia and Pakistan are lower than those in China, but the productivity of Chinese labour is far greater than in these countries. As such higher wages might not be a disadvantage to Chinese factories. Western World garments importers rely on China and only when Chinese quotas are exhausted, do the importers in developed countries go to countries like Bangladesh, India, Indonesia and Pakistan.
The future of garments exports from Third World countries looks not that bright. Over the few years reliance on garments, exports is on the wane. A few years back, Asia’s contribution to world garments exports had been around 80 per cent, which now had dropped to 50 per cent. On the other hand, Mexico emerged as a new force and appeared to be America’s largest overseas garments supplier. Trade liberalization is being attacked from both sides. In recent years, garments exporters in industrialized countries have been pressing for Third World countries to reduce duties on garments imports. From mid-eighties US and EU manufacturers have begun to show interest in branded garments exports. The third World has become an insatiable market for branded garments. US companies like Donna Karan, Tommy Hills, Ralph Lauren and Calvin Klein see real profit in their overseas retail outlets. Why should they lose money because of excessive duties?
It’s not just high-end garments trying to get into the Third World. As Mexico becomes increasingly competitive the US manufacturers of moderate-priced garments working there would be able to produce ever more competitively. Even these moderate-priced garments are beginning to look for retail markets worldwide. There is growing pressure from regional blocs of developing countries to enhance intra-bloc trade through tariff reduction. In Asia, APEC planned to phase out tariffs for all.
The loss of tariffs and removal of other import restrictions would destroy the domestic markets of the Third World countries. In the past, during Asia’s booming years a domestic supplier in a Third World country faced no competition at all. He would sell his products at any price he wished. These products in the domestic markets had a price tag which would be more than the same products in a US department store. One thing for sure is that these products could not survive long in the domestic markets.
A question often arises therefore as to how long Asia’s garments suppliers would thrive on a highly profitable business. With the passage of time demand for clothing had gone down, the taste for the diversified product had increased, several global suppliers had risen and competition had been much stiffer, forcing the supplier out of business in the overseas markets. Not only his business would be lost, but he would also be taking his upstream yarn suppliers, weaver of fabric provider, together with his downstream fabric printer and dyer and finisher with him.
In the coming years vibrating domestic garment markets in most developing countries would face a two way assault. Firstly, the suppliers to local wholesalers and retailers would have to contend with foreign competition for the existing customers. Trade liberalization would disrupt the local retail markets. Even if they wanted to retain local retail customers, it would not be possible to retain them on past loyalties. As such unless they opt for a cost-effective product the big retailers and wholesalers would not survive. Customers would look for overseas products because that would have been their new competitive source for garments. Secondly, new retail companies (Buying Houses) would open that have only limited interest in buying from local suppliers. On the other hand, major international mass-market retailers would set up their retail outlets in every Third World country. Given the increased competition in their home markets (domestic markets of developed countries) coupled with diminishing demand, these retail giants would look at the Third World countries as the single fastest growing markets to shop. Marks and Spencer, Walmart and Kmart have all entered Asia in the hope that sooner or later Asia’s markets would be flourishing and these giant companies would be sourcing internationally with their chains set up all over the world. However, many would be trying to keep retail prices competitive by sourcing locally local suppliers and would be naive to expect any special treatment from international retailers if their products and services failed up to international standards.
This is the scenario facing the garments industry in Third World countries. As international competition heightens and trade liberalization brings more foreign goods into markets, countries with high Macro costs simply would not be able to compete. Governments should take appropriate actions to reduce Macro costs if they want overseas buyers to continue to place orders or make direct investments.
The Third World countries have yet to fully recognize how many choices American and European garments importers and retailers have over where to buy their goods. Garments people go where costs are low. Third World countries want to develop a successful export garment industry, they must create an environment that would encourage industrial development. A coordinated policy must be formulated which would; attract foreign buyers; promote investment by local companies, and encourage foreign companies to set up buying houses. Instead of opening up to realities, individualistic attitudes remain widespread in many Third World countries.
However, it has been viewed that personal freedom, (the so-called Asian-value philosophy), appeared to be a good tool with which to develop not only the garment industry but the entire economy as well. Government has the power it needs to build a competitive industry. Indonesia, South Korea, the Philippines and Thailand enjoyed economic development in the last three decades. All had very competitive export garment industries until their economies collectively imploded in late 1997. The so-called Asian-value system which was supposed to bring lasting prosperity and stability brought them down.
Now that an economy develops the same way as an industry develops. If a government wishes to achieve economic development, it must decide first what companies it needs, which people themselves cannot provide. If you want a viable garment industry you must ensure that garment costs are low. Low garment costs come from low macro costs. There are five main areas of macro costs. They are education, infrastructure, government policy, human rights and the politics of trade. For ensuring Future competitiveness of the garments sector of Bangladesh, the following Policy Matrix could be followed. They are Support for scaling up, support for the more advanced production process, manufacturing of high value-added products, acquisition of new and latest technology, labour absorption through technology up-gradation, enhancing Research and Development facilities, increasing labour productivity, improvement in existing laws and regulations, develop of share market for capital support, overhaul port management, development of Backward linkage industries, ensuring uninterrupted supply of electricity, pursue market access initiatives. These are a few measures if properly implemented, only then the sustainability of the garments industry would be possible. We need to build our future based on the past, as the present would be passed sooner or later. If we fail to take appropriate policy action the booming sector would one day implode as had been seen in the case of South East Asia in the late 1990s.
The writer is former Director General of EPB. He can be contacted at [email protected]
