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
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
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