Can Cambodia's garment industry compete?

Sunlight sends a shaft of light into the Top-One Garments factory, six kilometres outside Phnom Penh.

Many less-developed countries, and even some fairly prosperous ones, depend on a

single commodity like oil, coffee or cocoa for the vast bulk of their exports. But

few nations on Earth can match Cambodia's addiction to a single export - and it's

a manufactured product not a raw material.

Last year garments accounted for a whopping 96.5 percent of the country's official

exports. The labor-intensive item also managed to account for 36 percent of gross

domestic product. All this is in spite of the fact that the 220,000 people employed

by the industry - whose salaries help feed more than a million - account for just

four percent of the total workforce. Less than a decade since the first brave investors

moved their sewing machines into Cambodia, the garment sector holds the country's

economic future in its hands.

That dominance is in doubt. The Multifibre Arrangement (MFA), which provides the

basis on which many industrial countries established quotas on garment imports from

developing countries, will expire at the end of 2004.

Garment-dependent Cambodia will no longer have to worry about quotas on its exports,

but it will soon face fierce competition from other countries, notably China. With

high infrastructure costs and unskilled workers, its biggest competitive strength

could be its International Labor Organization (ILO)-recognized labor standards. Says

Minister of Commerce Cham Prasidh, "The special things that make Cambodia able

to sell and continue to sell is this linkage between trade and labor standards."

But many fear that being able to guarantee foreign brands that garments have not

been produced in sweatshops will not be enough to counter the low prices offered

by Cambodia's neighbors.

The first investors chose Cambodia for its cheap and abundant labor force. A decade

ago, garment factories could easily find people so desperate for a job that they

would accept as little as $10-15 per month. The country's first freely-elected government

also offered generous incentives such as nine-year tax holidays, tariff exemptions,

free repatriation of profits and only minimal controls on foreign exchange transactions.

But the most compelling reason for producers to come was the policies of the United

States and the European Union towards Cambodian garments. Growth of the industry

accelerated after Cambodia signed the normalized trade relationship with the two

giants in 1996 and 1997. Explains Roger Tan, the Singaporean co-vice chairman of

the Garment Manufacturers Association of Cambodia (GMAC), "This was very important

for the industry at the time because [neighboring countries were] facing quota problems."

This meant that investors were searching for new locations. As a result, the number

of garment factories flocking to Cambodia tripled, from about 60 in 1996 to 190 in

2000. Garment exports to the U.S. shot up to $751 million during the same period.

To curb the boom, in 1999, the U.S. imposed quota restrictions on a dozen categories

under a bilateral textile agreement that links improved labor standards to increased

quota. The agreement was so generous, said Tan, that, "even if they give us

more and more quota, it's no use. We cannot produce the goods... sometimes you are

overfed, some countries are underfed."

Meanwhile, the E.U. was even more open-handed and made Cambodian products quota-free

while also offering preferential tariff treatment. Today more than 220 garment factories

operate in Cambodia with total exports of $1.35 billion in 2002.

But last year Cambodia was invited to join the World Trade Organization (WTO), and

the quota system will be phased out to its members on the first day of 2005 when

the MFA expires. Cambodia will lose its advantage of abundant quota since every country

in the WTO will get free access to the huge American garment market that accounted

for 70 percent of export volume in 2002. The good news is that as a least-developed

member, Cambodia can receive a reduced tariff under the WTO's Generalized System

of Preferences.

Even preferential tariffs won't be enough for the Cambodian garment industry to survive

if it cannot improve its competitiveness. The International Monetary Fund (IMF) has

pointed out in its 2003 country report for Cambodia: "Improving competitiveness

is an immediate challenge for Cambodia's garment industry. Future market shares will

be contingent on the competitiveness of individual exporting countries."

The primary means for improving competitiveness at present is for the country to

take advantage of its acceptance in 2001 of ILO-recognized labor standards. This

attracts some buyers, particularly high cost brands which worry about their image.

It is like brand insurance because, as a high-ranking U.S. diplomat in Cambodia put

it, "[buyers] don't have the problem of consumers protesting that their products

are made in countries that have sweatshop conditions."

He and other western advisers believe that Cambodia could carve out for itself a

semi-permanent niche in the high-end market, leaving low-end products to producers

in places like China. Under the quota system, Cambodia's efforts to improve working

conditions and labor rights earned it a 12 percent quota bonus for 2003.

The US Government decided on December 1 to increase Cambodia's quota bonus by 14

percent for 2004. Tenders for the seven garment categories available will open on

February 27. Only GMAC members can apply, through the Ministry of Commerce, and there

are 200 members according to outgoing chief executive Ray Chew.

"There are two components to the quota: 1) an automatic 6 percent annual increase;

2) a bonus increase based on labor compliance in the factories. The maximum bonus

is 18 percent. This is the final year of quota. US orders are strong, particularly

for shirts and pants, so competition for quota will be vigorous."

The quota bonus is based in large part upon the information the U.S. government receives

during its twice-yearly labor consultations with the Cambodian government and other

key sources such as the ILO garment industry monitoring project. Said Robert Hagen,

director of international labor affairs at the U.S. Department of State, "Starting

in 2005, Cambodia will no longer enjoy special access to American markets, and it

must compete directly with large producers."

But, said Jason Judd from the AFL-CIO sponsored American Center for International

Labor Solidarity in Phnom Penh, "If the Cambodian government goes to Washington,

Los Angeles, New York ... and says, 'we are really doing a good job and workers in

Cambodia work in paradise,' no one will believe them. They have to do something that

the ILO can verify and the big buyers like The GAP, Nike and Reebok will believe."

The government has yet to provide the kind of concrete proof that the big brands

will demand.

Some Cambodian officials hope that the U.S. will lower tariffs on Cambodian exports.

But Cambodia could do a great deal to help itself. A high-ranking U.S. diplomat says,

"A lot of necessary reforms, administrative and legal, have not been put into

place to provide the motivation for these companies to become competitive."

And, added Sok Hach, director of the Economic Institute of Cambodia, "Though

labor costs are competitive with other countries my country is generally not competitive

because of high utility and corruption costs."

Endemic corruption, a shambolic legal system and mind-boggling amounts of red tape

raise the cost of doing business. According to GMAC, garment manufacturers spend

more than 16 percent of their management time on bureaucratic matters and about 12

percent more than Bangladesh, a close competitor. In comparison to Bangladesh, shipments

in Cambodia take twice as long to clear customs and garment producers pay public

officials twice as much money. 

Cambodia faces many challenges, but Cham Prasidh remains confident in the future

of its garment industry: "We hope that through our policy reforms, we are going

to survive. And we will try to climb the ladder, from the middle to higher class."

This article is reproduced with permission from the first issue of The Searchlight,

a newspaper produced by participants in the advanced journalism program of the South-east

Asia Media Center, Phnom Penh. The issue presented an in-depth view of the Cambodian

garment industry.