Feb 2004, Trade and investment agreements

TRADE AND INVESTMENT AGREEMENTSSOMO BULLETIN ON ISSUES IN GARMENTS & TEXTILES

Number 4, February 2004

The SOMO Bulletin on Issues in Garments & Textiles is a bi-monthly on-line publication of the Centre for Research on Multinational Corporations (SOMO) that presents critical issues of interest to those working to improve conditions and empower workers in the global garment and textile industries. Each edition of the bulletin focuses on one specific topic. Unless otherwise indicated, information presented is drawn from SOMO research. All editions of the bulletin can be found at the SOMO <www.somo.nl> and Clean Clothes Campaign websites. Content of the bulletin may be freely reproduced or distributed, with appropriate attribution.

TRADE AND INVESTMENT AGREEMENTS

This bulletin seeks to examine the influence of regional, bilateral, and preferential trade and investment agreements on the garment and textile industries worldwide. Researchers and industry analysts suggest that investment in the garment and textile industries following the phase-out of the Multifibre Arrangement (MFA)in 2005 will be influenced by an interplay between investment agreements, buyers" demands, and trade agreements (regional, bilateral, and preferential). This bulletin will specifically address how such agreements influence both the sourcing and buying decisions of brand name and retail companies and investment in manufacturing units (factories). Their impact on workers wages and conditions and the response of labour activists will also be explored. The relationship of trade and investment agreements to the MFA and a brief overview of the situation for agreements in the garment industry following the last round of World Trade Organisation (WTO) talks in Cancun will be covered. The bulletin concludes with a summary of issues to be considered by activists in relation to these agreements.

WHAT ARE BILATERAL TRADE AND INVESTMENT AGREEMENTS?

Increasingly bilateral trade agreements (involving two parties) and plurilateral agreements (those involving more than two parties) are made, according to the WTO. Since 1995, the WTO has been notified of 149 new trade agreements. Today there are 215 trade agreements in force, with the majority being free trade agreements (in which countries set trade terms with specific countries) and the rest mostly customs unions (agreements in which a common external tariff is set between countries and trade policy is harmonized). About 80% of these 215 agreements are bilateral agreements and the rest plurilateral (WTO Secretariat: 2003).

Bilateral agreements are binding international agreements made between two countries, or a grouping of countries, such as the European Union (EU), and another country. Bilateral trade agreements can deal with the trade of specific goods, such as the US-Cambodia Free Trade Agreement on textiles (signed in 1999, originally for a three- year period and extended for a further three years on December 31, 2001). However, bilateral agreements can also deal with a broader range of goods, services, and investments. Such agreements have the effect of providing companies in one country with access to industrial and service sectors in another. Such industries and service can include financial, telecommunications, computer, construction, education, health and tourism services. Though agreements covering a range of goods, services and investments can include garments and textiles, agreements focussing only on garments and textile are currently not common.

Investment agreements play and will continue to play a role in encouraging further foreign direct investment (FDI) into the development of facilities (factories) for the production of garments. Trade agreements can encourage FDI as well. It is important however to note that FDI flows do not have to be facilitated through an investment agreement and that other factors are also important in attracting FDI. For example, investor friendly laws, the establishment of free trade or export processing zones (FTZ/EPZs) that provide infrastructure and/or restrictions on union activity, and other national policies favorable to foreign investment.

Many governments are simultaneously involved in multilateral and bilateral trade negotiations. The WTO, established in 1994 as a result of the Uruguay round of negotiations of the General Agreement on Tariffs and Trade (GATT), currently has 148 member governments and oversees the multilateral trading system. This also includes overseeing the Agreement on Textiles and Clothing (ATC), which is the agreement that implements the phasing out of quotas under the Multifibre Arrangement (MFA - also known as the Multifibre Agreement). According to the WTO, around three-quarters of world trade is conducted under bilateral and multilateral trade deals. WTO rules say the purpose of bilateral or regional trade agreements should be to facilitate trade between constituent countries and not to raise barriers to the trade of other WTO members who are not parties to whatever agreement is negotiated.

The US imposes import duty on garments of around 17%. This is often reduced to zero, through regional or bilateral trade agreements, if raw material from the US or country where the garments are sewn is used. EU Import duty on garments is lower (around 8.9%) and is only applied to garments from a small number of countries. Theoretically over 100 countries are not liable to import duty on garments to the EU. However, rules of origin, negotiated through regional, bilateral or preferential trade agreements, apply to garments that are considered import or duty free. This means that the raw material used to make the garments must be either local or from the EU. If they are not then the EU charges the duty rate applying to the raw material supplier - almost always at the highest rate (Flanagan: 2003). For example; Bangladesh garments currently have quota and duty free access to the EU, however under rules of origin 50% + 1 of the material used must be either local or European. It is not possible for Bangladesh to meet these criteria on its garments so import duties are paid.

ACTIVISTS CHALLENGE TRADE AGREEMENTS

In September 2003 the fifth round of WTO talks collapsed because an agreement could not be reached between the participating countries on starting negotiations on issues such as investment, competition policy, government procurement, and market access for agricultural and non-agricultural products. Especially the emergence of a strong alliance of developing countries within the context of WTO talks has been instrumental in forcing developed countries to take their views into consideration. The responses by activists worldwide have been mixed. The failure of these talks may signal the end of the global multilateral trading and investment system under the WTO, an important goal that has been pursued by activists worldwide for the past decade. Some activists see this as a victory for developing countries who they see as having united to successfully block the position of the wealthier and more powerful developed countries. However, the rules and framework of this global economic system of free trade envisaged by the WTO remain.

After the failed Cancun negotiations the United States will continue negotiating free trade agreements with selected countries. According to US Trade Representative Robert Zoellick the US has Free Trade Agreements with six countries and is currently negotiating a further 14 (Foo & Bas: 2003). Based on currently available research it is difficult to predict whether or not tariffs, alone, negotiated in trade agreements will play a decisive role in the sourcing and buying practices of companies. Tariffs on garments are perceived as about half of the costs of quota (Nathan 2002). It is expected that regional, bilateral and preferential trade agreements will give some advantage, depending on their rules of origin requirements and other terms, over countries without such agreements. However these agreements can change frequently, which will probably lead to instability in the industry and rapid changes in market share. With the number of regional and bilateral trade and investment agreements increasing worldwide and the phasing out of the quota system more insight into such processes is important. Some industry analysts predict the growing, decisive, importance of tariffs: "With textile quotas being removed [under the ATC] by the end of next year [2004], differences in US import tariffs will play a decisive role in selecting producers in low-cost countries" according to an article written in Emerging Textiles immediately after Cancun (2003).

Acknowledging that the textile and garment sector will come under additional strains worldwide, Lamy called for the use of the EU's Generalised System of Preferences (GSP) to help least developed countries and urged other developing countries to grant duty free access to imports from LDCs. High tariff and non tariff barriers should be dismantled said Lamy (Bangkok Post, 2003).

Currently the EU applies common rules of origin on products imported from countries within the Association of South East Asian Nations (ASEAN). This means that clothing produced in one ASEAN country with raw materials from another ASEAN country fulfils the EU rules of origin requirements. By 2005 the EU plans to set up a similar system within the European-Mediterranean area (EU Communication: Oct 2003).

THE MFA AND THE LINK TO TRADE AGREEMENTS

The MFA set the rules for international trade in textiles and garments. It was created in 1974 by developed nations (namely the US and Europe) under the General Agreement on Tariffs and Trade (GATT) and was in effect until 1994. Developed countries believed the MFA would protect their industries through quotas by limiting imports from developing countries where labour and costs of production were cheaper. Quotas have constrained imports from Asian countries, including China to the EU and US (Miner:2002). Although criticised severely, especially by developing countries, the quota system was repeatedly extended. For many developing countries (for example Sri Lanka, Bangladesh, and Honduras) the MFA led directly to the development of the garment industry. Under the Uruguay round of GATT talks the WTO was established to supervise the implementation of world trade agreements. Also under this round the ATC was made. The ATC phases out the quota system of the MFA under the WTO.

The phase-out of the MFA does not mean that developed countries have given up on trying to regulate garment and textile trade with developing countries. Instead, this will be done through a variety of measures. For example regional, preferential and bilateral trade and/or investment agreements, which can include tariffs or import duties. Non-tariff measures, such as rules of origin, anti-dumping measures and legislation will also play an important role. For this reason understanding the role and impact that trade and investment agreements can and do have on the sectors is increasingly important.

Some industry analysts predict an increased consolidation in the industry as quotas are phased out. The U.S. State Department predicts that "companies who currently purchase goods from 40 to 60 countries will shift to 20 to 30 by late 2005 or early 2006. By 2010 the number of foreign suppliers could drop to one quarter to one third of the present number" (Foo & Bas: 2003).

The intensification of competition in the garment industry after the phase-out of MFA quotas might very well have a negative effect on workers rights. Increased competition in the labour intensive garment industry leads buyers to demand higher quality at lower prices with faster and more accurate times which might lead to demands for: greater flexibility (the right to hire and fire at will); long hours of work; unsafe work; non-implementation of existing labour laws or inadequate laws to protect workers.

REGIONAL TRADE AGREEMENTS
EXAMPLE #1 NAFTA

Due to the North American Free Trade Agreement (NAFTA) and the Caribbean Trade Preferences Act (CBTPA) Mexico and the Caribbean nations will have more competitive tariff levels that have been negotiated through these agreements. However, the advantage of these tariff levels is not expected to be enough to outweigh the impact of the removal of quotas. Differing tariff levels alone, without quota allocations/restrictions, will not give substantial competitive advantage to one country over another in so far as sourcing decisions are concerned. China is now the number one supplier of clothing to the US. In the last two years, 325 of Mexico's 1,122 garment factories have closed down, 220,000 workers have lost their jobs. Many of these factories, owned by foreign investors moved elsewhere, some to China.

Since 1994 when NAFTA was created an estimated 450,000 jobs in the American garment industry were lost. Many more jobs than this were created in Mexico, but often under worse conditions.

With the looming Free Trade Agreement of the Americas (FTAA) it is anticipated that more jobs will be lost in Mexico, the US ,and Canada, while more jobs will be created, with worse working conditions, in Haiti, Guatemala, or Brazil and outside of Latin America in China and India (Foo and Bas, 2003).

THE INFLUENCE OF REGIONAL AND BILATERAL AGREEMENTS ON THE GARMENT AND TEXTILE INDUSTRIES

Bilateral agreements between two countries have sometimes been building blocks for regional trade and investment agreements. For example the US-Canada bilateral free trade agreement was the forerunner to the regional North American Free Trade Agreement (NAFTA), which binds together Canada, the United States, and Mexico in terms of trade and investment. NAFTA in turn has greatly influenced negotiations for the proposed Free Trade Area of the Americas (FTAA), which will cover 34 countries (Choudry: 2002). According to UNCTAD, bilateral investment agreements can also reflect the position that a country would take in regional trade agreements (UN: 2000).

Regional and bilateral trade agreements give developed countries some control over where their garments are imported from, by negotiating measures within agreements such as: differing tariff levels, rules of origin, anti-dumping measures, or other forms of preferential trade, such as the GSP. According to industry analyst Mike Flanagan "[Garment] importing countries have greater scope under current WTO rules to inhibit exports [from other countries] if they want to." He also says that governments of developed countries who want to protect their industries post quota still have three options available: Import duties; WTO sanctioned temporary measures: and non WTO sanctioned measures (Flanagan: 2003).

REGIONAL TRADE AGREEMENTS, EXAMPLE: #2
THE AFRICAN GROWTH AND OPPORTUNITY ACT

The African Growth and Opportunity Act (AGOA), which went into effect in 2000, authorizes the duty and tariff-free export of garments from currently 37 sub-Saharan African countries to the United States. This preferential access to the U.S. market, as well as low labour costs, and access to EU markets under the Cotonou Agreement, have been a powerful lure for investors, particularly from Asia. Researchers report that southern Africa has drawn Asian investors mainly from Taiwan, Hong Kong, Malaysia, and Sri Lanka. For example, Nien Hsing, a Taiwanese multinational corporation established two garment factories in Lesotho garments and is currently constructing a textile mill to take advantage of the new AGOA requirements.

Currently, the AGOA agreement allows for garments to be made from any material (i.e. there is no requirement for the material to be of US or African origin) for most of the countries covered by the agreement, however, this provision expires September 30, 2004. After that date clothing must be made from local (i.e. from one of the 37 African countries) or US material and thread to gain duty free access to the US. Third World Network's Africa secretariat says: "The requirement for US raw materials to be used will work against the ability of African countries to develop, either individually or together, their own domestic raw materials base to textiles, and therefore undermine the development of integrated textile industry in Africa. Moreover, importing US raw materials for use in textile production may turn out to be expensive in view of transport and other costs, which means in the end African textiles products exported to the US may not be competitive after all." The New York Times writes "Struggling African cotton farmers are forced to compete with products from affluent American agribusiness whose rock bottom prices are made possible by as much as $3 billion in annual subsidies" (New York Times 2003).

AGOA demands that African countries eliminate barriers to all US trade and investment in Africa, including that US firms be given equal treatment to African firms, and demands further privatisation, the liberalisation of service sectors, the removal of government subsidies and price controls. It also links AGOA to participating countries' guarantee of international labour standards, and demands that African countries not engage in any act that undermines US national security and foreign policy interests.

(de Haan and Philips, 2002, de Haan, Koen and Mthembu, 2003, Aziz Choudry, 2002)

INVESTMENT AGREEMENTS AND PRODUCTION OF GARMENTS

Bilateral investment agreements can facilitate both foreign investments in a country and the development of an industry. This was the case when a bilateral investment agreement was signed between Taiwan and Malawi in 1995. This agreement led to Taiwanese investment in the Malawi garment industry. Two Taiwanese owned companies dominate the sector, employing approximately 5,500 of the 10.000 workers in the garment industry in Malawi. When looking at the influence of the AGOA it becomes clear that not only is the investment agreement instrumental in facilitating investments but favourable trade agreements as well. With changes to the rules of origin under the AGOA foreign investors in Malawi take the view that if the AGOA no longer benefits the production of garments in Malawi then they will move elsewhere (De Haan, Koen and Mthembu: 2003).

Usually under investment agreements foreign companies must be given access to industries referred to in the agreement under the same or better terms that exist for local investors ("no less favourable" is the wording that is often used). This could mean that a government would be prevented from granting more favourable treatment to a local firm.

EXAMPLE #3:
BILATERAL TRADE AGREEMENTS AND QUOTAS

A bilateral textile trade agreement between the United States and Vietnam, reached in April 2003, that will remain in force until the end of 2004, provoked strong reactions from the garment industries in both countries.

The American Textile Manufacturing Institute (ATMI) criticized the agreement for causing job loss in the U.S. only to benefit companies that seek to "save pennies per garment." Reportedly large US MNCs, including Nike, Gap, and K-Mart, sent letters to US Trade Representative Robert Zoellick urging him not to impose quotas on Vietnamese exports.

According to ATMI President Willis C. Moore "...these quotas are enormous, just one of them sets the knit shirt category at 164 million shirts, or one for every adult person in the United States." Meanwhile, the chairman of the Vietnam Textile and Garment Corporation slammed the $1.7 billion ceiling set on the country's exports by the US, believing that the agreement aims to limit Vietnams export capacity to the US and ability to compete in an open market in the lead up to Vietnam joining the WTO at the end of 2004 (Delta Farm Press, 2003; Just-style.com, 2003).

UNIT PRICING AND THE CONNECTION TO TRADE AND INVESTMENT AGREEMENTS

Quotas add to the price of a garment. Currently available information suggests that the removal of quotas could reduce the price of a garment substantially, perhaps up to one third of the price paid to the factory. However most industry literature suggests that this reduction in overall cost per item of clothing, as a result of the abolition of quotas, will be passed onto the consumer through cheaper priced clothing (just-style.com, 2003a).

"Many discounters like Wal-Mart and other chains will immediately try and pass as much as possible of this saving to the consumer to capture market share. Other retailers and merchants will be forced to follow suit and this could lead to a further downward price spiral" (just-style.com; 2003a).

The capturing of market share by the giant discounters such as Wal-Mart creating virtual monopolies, through the tools of free trade such as advocating zero tariffs, duties and quotas through agreements is another trend that is detrimental to workers, as the downward spiral in retail pricing may see a further reduction in the margins of manufacturers. This in turn leads to manufacturers, usually subcontractors along the supply chain, to look for ways to cut costs, which translates into lower wages, more insecure, unsafe and informalised employment for workers who have few other viable alternatives. Additionally these monopolies can apply tremendous pressure on governments, either directly or through IFIs (international financial institutions) to further deregulate workers wages and conditions.

The criteria set out in trade agreements can establish links between costs and the ability for businesses in one country to trade with those in other countries (SOMO: 2003).

EXAMPLE: #4
PRODUCTION COST OF A BLOUSE IN MADAGASCAR

To a make a blouse approximately one meter of fabric is needed, which costs about US$ 1.96 to $2.38 per meter in Madagascar. The added costs (labour, electricity, rent, etc) will cost about $0.67. For export to Europe under the Cotonou Agreement between the African, Caribbean, and Pacific group of states (ACP) and the European Union (EU), 60% of the garment's value ("added value") has to be attributed to the ACP region. With a simple blouse, that takes approximately 12 minutes to make, the 60% value added level will not be met unless the cost of the fabric is factored in, and therefore locally-produced fabric will have to be used. However if the producer is making a more complicated garment, for example one that take 55 minutes to produce, they can reach the 60% added value level just with labour costs and other direct costs. In such a case, they could use cheaper fabric (approximately US$1.26 per yard) that is produced in Asia (SOMO, 2003).

LABOUR RIGHTS AND TRADE AND INVESTMENT AGREEMENTS

With the abolition of quotas the costs of garments will be less. What is not passed on to consumers will, according to some activists, no doubt be kept as an increase in profit by retailers and brand name companies. Campaigners have suggested though that the money that will become available opens new possibilities to improve labour rights.

There is no consensus in the literature and research on who the winners and losers will be once quotas are abolished, new regional trading agreements and blocs established, and more bilateral trade and investment agreements signed. Labor rights activists note the negative impact that the terms of some trade and investment agreements can have on labour practices. Critics fear that trade and investment agreements are likely to force open economies further, liberalise essential services and patent local knowledge while delivering little in the way of increased market access for goods, including garments and textile, from that country. Rights activists are concerned that governments and MNCs will be the beneficiaries, in this context: China and India will benefit substantially; it is likely that Pakistan, Vietnam, Turkey and Jordan will also benefit; it is predicted that the impact on countries such as Sri Lanka, Indonesia, Philippines, Mexico and Caribbean countries will be negative; and possible that the industry will be decimated in Mauritius, Bangladesh, Dominican Republic, Fiji, and many sub Saharan African countries -- this list is not meant to be exhaustive. Most industrial analysts see the productivity in countries like China skyrocketing, but on the downside there are still large scale violations of workers rights taking place (ex. prohibition on independent trade unions). In this sense, many fear that workers in the post-MFA "winning" countries will not be winners at all.

Very little opposition by unions and activist organisations to bilateral trade and investment agreements related to the textile and garment industries has occurred. This is possibly due to a lack of awareness and understanding of these agreements, their impact on the garment and textiles industries and the fact that these agreements are usually broader than textile and garments. Most agreements are negotiated secretly and the text of the agreements, if it is made public at all, is usually just prior to the signing of the agreement. The text is written in legalistic language that can be difficult to understand. There is an urgent need to develop a greater understanding of agreements and their likely impact on workers in the garment and textile industries.

The most high profile opposition to a regional agreement has been protests against NAFTA and the proposed FTAA, where the biggest concerns revolve around the liberalisation of services, such as education, utilities (water, electricity), and health. These impact negatively on the poor, workers and ordinary people - for further information see for example www.stopftaa.org. There has been some opposition to bilateral trade and investment agreements. For example the Korean Confederation of Trade Unions (KCTU) and the Federation of Korean Trade Unions (FKTU) opposed the Japan-Korea bilateral investment agreement (signed in 2002) because it sought to protect Japanese investors and disadvantage Korean citizens and workers. They said it strengthened the dominance of Japanese firms, that Korean labour practices would not be respected, and it would lower environmental standards. New Zealand activists managed to stall the New Zealand - Hong Kong bilateral agreement in 2002, which included garments, voicing grave concerns about the rules or origin contained in the agreement (Choudry:2002).

EXAMPLE #5:
TRADE AGREEMENT AIMED AT IMPROVING LABOUR CONDITIONS

In a report from the International Confederation of Free Trade Unions (ICFTU), "Cambodia: textile workers face a gloomy future": "In January 1999, the governments of Cambodia and the United States signed a trade agreement on textiles and apparel aimed at improving working conditions in the sector in Cambodia. The agreement, originally covering a three-year period, was later extended until December 2004. It offers Cambodia the possibility of increasing its textile export quota every year (from 18% to the maximum) if it can prove that its labour laws and the international standards governing this sector are being duly applied. The ILO (International Labour Organisation) has to prepare two reports a year on compliance with these criteria. The reports are based on factory visits carried out by a team of inspectors known as "monitors". Although the US government is under no obligation to take these reports into account, they undoubtedly have an impact on its decision. At the outset, employers in Cambodia were none too happy about agreeing to these ILO inspections. But greater confidence has been gradually built up, thanks to the regular increases in export quotas since the system came into force, and the fact that the monitors discuss the reports with the companies before they are published. Irregularities detected by ILO monitors in a company are not quoted in the next report. The companies are given a period of grace during which they can take measures to ensure compliance, failing which their names are published in the following report. The Cambodian unions support the ILO inspections but point out that it would make more sense if government inspectors carried out these inspections, on condition that they were well equipped and not corrupt" (ICFTU:2004) The impact of this agreement has yet to be thoroughly evaluated and it remains to be seen to what extent real and sustainable improvements to labor practices in the Cambodian garment and textile industries have been made.

Directly including demands to ensure workers rights in trade and investment agreements has been one approach to address concerns about the impact of such agreements, however this is a controversial strategy. Many see the labour standards/trade linkage as a disguised form of protectionism for developed countries and argue that non-trade issues such as workers rights, that are fundamental human rights and not commodities, should not be included in trade agreements and rules. Another argument, sometimes linked to this one is that free trade and investment is fundamentally anti-worker and so cannot be made more "worker-friendly" by the inclusion of wording about labour standards (usually referred to as "social clauses"). However, some believe that it is wrong to reward countries with lower labor and environmental standards with increased trade and argue for the inclusion of labour and environmental standards in trade agreements as one way of ensuring some protection for workers rights. This debate remains unresolved with very differing viewpoints.

More awareness raising on trade and investment agreements is needed, as well as more research on their link to labor practices. Cooperation is needed between labor rights activists to develop an agenda for action to address the serious concerns outlined above.