Philippines: Garments in extremis

There are malignant signs that the garments industry is coming close to being in extremis. Since the elimination of the quotas on garments in 2005, exports of these products have been erratic.

In 2008, exports of garments fell to $1.85 billion from $2.3 billion in 2007.

Combined with textile, the industry posted $2.5 billion sales at year end 2007, compared to the 2006 where export was registered at $2.86 billion or a decline of 12.65 percent from year to year.

In 2006, total Philippine garments and textile exports grew by 11 percent in value. Exports of apparel grew by 13 percent in value while exports of textile yarns/fabrics fell by 12 percent.

In 2005, exports grew by 6 percent. While in 2004 and the three-year average in prior periods saw Philippine garments and textile exports suffering minus 4 percent declines.

Exports of garments particularly to the United States, which accounts for a big bulk of shipments have seen erratic movements.

Latest data from the Department of Trade and Industry (DTI) showed that exports of garments jumped to $2.03 billion in 2006 from $1.74 billion in 2005 and $1.6 billion in 2004. But two years before that, shipments were down, at $1.63 billion in 2003 and $1.76 billion in 2002.

Since the local textile mills or the few left of them, are unable to produce high-class fabrics for fancy clothes, the industry’s export earnings are actually limited to labor value and nominal local materials.

Already the garments and textile industry is going through very difficult phase of survival and with the recession in the US, local manufacturers cannot sell their products as American consumers are cutting down on expenses.

Industry sources said there are unconfirmed reports that major brands in the US with stand-alone boutique stores are shutting down stores across the US.

Although apparel is a basic commodity, industry still sees a major slump in point-of-sale costs in US department stores and boutiques.

The potential threat of more competition from China in Philippine exports to the US sets in this year. The US’ quota or limits to Chinese garments exports were lifted starting this year.

The government, through the newly-formed Garments and Textile Development Office (GTDO), is giving new hopes to a sector that can serve a growing domestic market while fully tapping its export potentials.

GTDO, which took over some of the functions of the now-defunct Garments and Textile Export Board (GTEB) and the import-related functions of the Garments and Textile Import Services, is working with the industry roadmapping activity to address those objectives.

Several meetings of trade officials and their counterparts in the US, have centered on how the Philippines could secure a preferential trading arrangement with that country, now that quotas have been eliminated.

As Washington is lukewarm to a sectoral free trade agreement (FTA) and prefers a full-blown FTA, both countries have continued their resolve to explore new ways to cooperate in improving its garments trade relations.

As a takeoff from that FTA proposal, a scheme is being worked out on how the Philippines can source fiber, yarn or fabric from the US at very preferential tariff rates and in exchange, garments made from these same imports are reexported to the US duty-free.

Claro Arriola, executive director of the Textile Mills Association of the Philippines (TMAP) said the scheme should also benefit the upstream side of the sector, by opening it to raw materials like yarns so the knitting and weaving subsector would flourish.

Spinning fiber, say for example, cotton, may seem like a long shot today since the country has no spinning industry to speak of. This way, both garments and textile industries benefit. But in the final analysis, Arriola said, the benefit would be more for the garments manufacturing export sector.

"The US wants to just export fabric here because that would still create American jobs. What we are saying is that we should import raw materials instead," Arriola said.

Arriola said instead of giving a 100 percent tax and duty discount on fabric imported from the US, TMAP had proposed to bring this down to say 50. Same with yarn, he said, the discount should be slashed.

Concerns of these materials leaking to the domestic market should also be addressed, by ensuring these are imported via the customs bonded warehousing.

Arriola said TMAP believes it best for the country to take stock of which categories remain strong and efficient and probably focus on these niche categories when sourcing materials from the US.

These include undergarments and children’s wear.

Schemes like these are welcome since at present, the US garments market is dominated by China. "If we can just get 10 percent (of the business) that China is getting, that would be a big boost from where we are today. If the US market is open to us, this would be (more) substantial business," Arriola said.

Other countries like Japan and China offer opportunities for the Philippines. According to Arriola, with the implementation of the Japan-Philippines economic partnership agreement, the country could tap Japan ’s specialty in finishing as well as its market for silk.

During a meeting in Washington in late 2008 under the US-Philippines Trade and Investment Facilitation Agreement (TIFA), officials discussed a trade facilitation scheme. This pertains a customs pre-clearance of Philippine apparel goods that will be shipped to US.

China is eyeing investments in the Philippines via the Garments City proposal where they will relocate and integrate their factories in Clark as hub. "We are supporting these moves because these will help revive the industry," Arriola said.

Arriola said local garments export manufacturers made profitable by their export activities should be encouraged more to sell to the domestic market. They pose little threat to the domestic producers as they are in the specialty design, selling by collection to the high-end of the market. Local brands which cater to the middle class and above middle-income level, meanwhile, currently thrive.

The garments and textile industry continues to enjoy being the country’s third largest exporter, next to electronics and mineral products.

However, the industry is challenged by increasing competition from China, Bangladesh , India and Vietnam.

Currently the industry employs close to 400,000 work force. With the global economic crisis, the industry will contribute to the increasing number of unemployed skilled workers.

A separate study conducted by economist Dean Rene Ofreneo said the textile and garment sector in the Philippines has 320,000 employees, making it the largest employer in the manufacturing sector with 11 percent of the national total.

An additional 700,000 people are employed as home-workers and small sub-contractors.

The industry expanded rapidly during the 1960s and 1970s but has recently experienced a decline. This has been due mainly to tougher conditions in export markets and a failure to invest in new manufacturing technology.

Exports have been a key driver of growth in the past. The phasing out of the Multi-Fiber Agreement in January 2005 under the Agreement on Clothing and Textiles (ACT) of the World Trade Organization (WTO) – which eliminated the quotas on exports—and the Asian financial crisis before it eventually led to the closure and/or relocation of big factories like Aris, Novelty, Gelmart, Karayom etc. in the l990s up to first half of 2000s.

Garments exports have gone up the value chain as shipments of stone-washed denims, brassieres, T-shirts and later lingeries, rose rapidly. But TMAP said the Philippines is slowly losing competitiveness in denim. Exporters produce brand names such as Gap, Ann Taylor, Liz Claiborne, Polo Ralph Lauren etc.

But studies showed that the value-added in the industry was only 30 per cent because the industry is dependent on imported textiles, yarns and machines or industries found in China, India, Pakistan, Vietnam and the developed countries.