Countdown to 2005: Developing Nations Fear Millions of Job Losses

Executives and officials in developing countries are concerned that the end of the quota system next year will bring devastating changes.

NEW YORK — For the past decade, the coming end of quotas on apparel and textiles was pitched as a great development opportunity for much of the Third World. But private and public sector leaders are now raising concerns that rather than being a boost, the changes could cost millions of jobs in many desperately poor nations that can ill afford to lose them.

That’s because if the handful of nations, including China, realize the substantial market share gains that are expected after the nations of the World Trade Organization drop their textile and apparel quotas Jan. 1, their growth will result in many other developing nations losing apparel exports. For many nations, apparel exports are a critical source of foreign exchange earnings and employment.

Losing this employment, experts said, could could threaten social instability in some nations.

“More than 80 percent of our export earnings are coming from this [apparel and textile] sector,” said Farkul Ahsan, Bangladesh’s commercial counselor in Washington, D.C.

Since the WTO agreed to the 10-year phaseout of quotas, which began in 1995, officials at the trade body and many other observers of the world economy have urged developing nations to diversify their industrial base to ensure that their national well-being wouldn’t be overly dependent on any one sector. That goal has remained elusive for many.

“A lot of people talk about going for diversification of exports, but in a country where poverty is pervasive and 40 percent of people live below the poverty level, diverting resources in order to diversify exports is a very difficult task,” said Ahsan, whose nation in the year ended Nov. 30 shipped $1.93 billion worth of apparel to the U.S.

Neal Kearney, general secretary of the International Textile, Garment & Leather Workers’ Federation, cited Bangladesh, along with Indonesia and Sri Lanka, as countries that are likely to experience severe job losses after the quota system is lifted.

“Our estimate was 1 million jobs would be lost in Bangladesh, 1 million in Indonesia, 200,000 to 250,000 in Sri Lanka,” he said. Other sources have estimated that the nations of Central America and the Caribbean could lose 500,000 apparel jobs.

Ahsan said in a phone interview that the apparel industry employs about 1.8 million Bangladeshis and, in a country with a population of 138.4 million and unemployment of around 40 percent, has an extensive economic effect.

Nilmini Jayasinghe, an executive with Sri Lanka’s Mast Lanka (Pvt) Ltd., who is also affiliated with the Sri Lanka Apparel Exporters’ Association, said the apparel industry employs 338,000 people in the country of 19.7 million and accounts for 53 percent of total exports.

Jayasinghe said in an e-mail message that job losses on a massive scale “would threaten even the carefully nurtured democratic institutions of Sri Lanka” and added that a rise in unemployment “would create a serious threat to the social, political and economic security of Sri Lanka.

According to U.S. government data, American companies imported $1.49 billion worth of Sri Lankan apparel in the year ended Nov. 30. Jayasinghe said 95 percent of Sri Lanka’s apparel exports go to the U.S. and nations of the European Union.

Kearney said Indonesia’s combined apparel, textile and footwear industries employ about 3 million. Representatives of the Indonesian government did not respond to repeated requests for comment.

“Given the Bangladeshi economic scenario, where each earning member supports about five people in this country directly or indirectly, about 10 million people are dependent on the earnings of garment-sector workers,” said Ahsan, the commercial counselor. “The port facilities, the banks and insurance — all industries are dependent on garment exports.”

He said the effect of such a massive job loss would be “enormous.”

The union’s Kearney said if his bleak prediction is accurate, it would have far-reaching effects within Bangladeshi society.

“The vast majority of those workers came from the countryside into the cities and it’s difficult to see them going back into the countryside,” he said. “What happens when you have a million people on the streets without work and with no social safety net?”

To Kearney’s way of thinking, the risks for massive job losses — and resultant social instability — extend far beyond Bangladesh and Sri Lanka. He noted that countries including Pakistan, Mauritius, Cambodia and Nepal all rely heavily on apparel exports.

“The textile and clothing sectors are vital and often nearly the sole source of industrial employment,” he said. “If the jobs disappear on this magnitude, then the pressure for people to migrate is going to be very real. The prospects for civil unrest in a whole range of countries must be great.”

Bangladesh is the U.S.’s 16th-ranked foreign supplier of apparel and textiles, and importer executives sometimes tack that country and Indonesia on to the short list of nations seen as likely to win more apparel business in 2005. According to sources, the almost-certain winners will be China, India and Pakistan, while other possibilities include Thailand and the Central American nations, Guatemala, Nicaragua, Costa Rica, El Salvador and Honduras.

The quota system has caused U.S. buyers to spread their hefty orders across much of the world. According to Commerce Department data, in the year ended November, the U.S. imported $77.29 billion worth of apparel and textiles from 105 nations. The U.S.’s two largest suppliers — China and Mexico — accounted for more than 25 percent of that volume.

But after that dichotomous pair — China has been rapidly gaining ground in recent years, building its market share to 14.8 percent, while Mexico’s slipped to 10.3 percent — no one nation enjoyed more than 5 percent market share. Twenty nations had market share greater than 1 percent and together they accounted for 57.2 percent of the garments and fabric shipped to the U.S., at a worth of $44.36 billion.

That fragmentation is the direct result of the quota system. In the shoe and toy businesses, neither of which is regulated by quotas, China’s market share exceeds 90 percent.

For much of the past few years, apparel executives and government officials from many countries seemed to believe the end of quotas would allow all countries to grow their apparel exports. However, there appears to be a growing awareness that, without a radical increase in worldwide spending on apparel, one country’s gain must be another nation’s loss.

“It amazes me that it’s only at the end of January of 2004 that people are beginning to understand that something will be different in 2005,” said Wilbur L. Ross, chairman and owner of Burlington Industries, whose bid for Cone Mills Corp. was approved last week.

If the quotas are lifted on Jan. 1 and no other restraints are put into place, Chinese suppliers — many of which have been building up capacity in anticipation of this event — are seen as likely to vastly increase their sales to U.S. apparel importers. After the U.S. lifted quotas on robes, bras and knit fabric, China’s market share in those categories quickly rose to 36.9 percent, 33.8 percent and 6.4 percent, respectively. The explosive growth rates prompted the Bush administration last year to impose safeguard quotas on Chinese goods in those categories.

Sources have suggested that the U.S. might seek to impose across-the-board safeguard limits on Chinese imports prior to the end of the quota system, but the Chinese government is said to be unwilling to negotiate such a deal.

Jeanne Atkinson, a consultant who works with the U.S. Agency for International Development to help nations in Eastern Europe, as well as Jordan, develop their apparel industries, said many developing countries that are growing increasingly concerned about what effect a surge in Chinese exports will have on the rest of the world.

“Everyone is scared to death,” she said. “These countries are so fragile that when they have such a massive loss of jobs, to reeducate, retrain and to bring new industries into these countries and develop those industries, it has to take five, 10 years, during which time they have this massive economic drain.”

Importers, however, argue that the quota system itself is a drain on the world economy — both in terms of stifling competition and because quota rights are essentially traded as commodities and factored into the cost of garments.

Last month, importers released a study called “The Big Bang: Ending Quotas and Tariff Policies,” which argued that quotas and tariffs now add as much as $80 billion a year to the retail cost of clothes and shoes.

“The current system’s major effect is to raise prices for goods — especially important to poorer families,” the study said. “Each one funnels thousands or millions of dollars from American families to federal and provincial governments in China, India and elsewhere in the world.”

In many ways, the quota question cuts to the heart of a broader debate on the effects of globalization. The use of low-cost foreign contractors has helped U.S. businesses to cut the price of everything from sweaters to DVD players to golf clubs. But as businesses in recent years have started exporting a broader array of job functions — many computer makers, for instance, have moved telephone tech-support lines to India — Americans have increasingly begun to ask what the process now called “offshoring” will mean to the economy in the long run.

It’s a topic that Federal Reserve Board chairman Alan Greenspan addressed last week in a speech to a British banking conference.

“I do not doubt that the vast majority of us would prefer to work in an environment that was less stressful and less competitive than the one with which we currently engage,” Greenspan said. “The cries of distress amply demonstrate that flexibility and its consequence, rigorous competition, are not universally embraced.

“Yet, in our roles as consumers, we seem to insist on the low product prices and high quality. Retailers are afforded little leeway in product sourcing and will seek out low-cost producers, whether they are located in Guangdong province in China or northern England.”

Ultimately, advocates of globalization argue that increased competition in a free market forces all companies and countries to focus on what they can do most efficiently, which in turn raises the standard of living of all.

The international union’s Kearney noted that an International Labor Organization study released last month found that, despite economic growth across most regions of the world in 2003, world unemployment at year’s end stood at 185.9 million, or 6.2 percent, the highest ever recorded by this study.

Sources said growing concerns about job losses — particularly in Central American countries, where rising unemployment can encourage people to try to emigrate to the U.S. — is resulting in rising political pressure to postpone the quota phaseout.

William Fung, managing director of Hong Kong-based sourcing powerhouse Li & Fung Ltd. said while the U.S. manufacturing industry has been protesting the ending of quotas for some time. It seems to be as though the U.S. is trying to protect these industries in the surrounding countries of the Caribbean and Mexico.”

He added: “There seems to be a more geopolitical reason to protect the jobs there.”

In December, representatives of the world’s 49 least developed nations raised concerns at the WTO headquarters in Geneva that the end of quotas would hurt them economically. Beneficiaries of U.S. trade-preference programs, in particular the nations of sub-Saharan Africa, said they feared the end of the quota system will effectively jerk the rug of economic development out from under their feet.

Last month, officials at the European textile group Euratex began to call for restraints on Chinese exports, echoing the position of their U.S. counterparts.

According to U.S. sources, Turkish trade officials met in Washington last week with U.S. textile lobbyists to discuss the possibility of forming an alliance of U.S., Turkish and European industry executives who opposed the quota phaseout. Turkish Embassy officials did not respond by press time.

Kearney called for the WTO to reevaluate the effects of the planned end of quotas on the developing world.

“The WTO needs to do, over the next couple of months, an in-depth examination of what is the impact on the textile and clothing trade of the role of China,” he said. “There needs to be an urgent review of trade liberalization.”

Sri Lanka’s Jayasinghe said his nation’s industry has developed a five-point plan intended to help it become more competitive by taking measures including trading up in customers and consolidating. But he said tariff concessions will be needed to give the industry time to adapt.

Bangladesh’s Ahsan said he feared that many nations are not ready for the coming change.

“You can play well when you have an even playground,” he said. “When you have an uneven playground, at one stage you have to integrate yourself into the world system. But you must give enough nourishment to the weaker groups, so they can gain strength and play in the field. There should be some mechanisms, a capping system, so some share of exports to the U.S. market is maintained.”