The New York Times has been running an excellent, if sporadic, series of articles on the global garment industry and the implications of the end of the Multi-Fiber Agreement (MFA) at the beginning of this year. A cover story yesterday focused on the twin challenges facing Lesotho’s garment industry – China, and the weak dollar.
The Multifiber Agreement (MFA) is a Nixon-era set of tarrifs and quotas designed to protect the US garment industry from the peril of an actual free market where other countries might outcompete US industry on a cost and quality basis. Extended and expanded by virtually every administration since, the MFA is an amazingly complex set of rules that govern the tarrif structure for each piece of clothing imported into the US, dependent on the type of clothing, country of origin of fiber, country in which the fiber was spun into yarn, woven into fabric, cut into pieces or sewn into a garment.
Because the US is such a huge import market for clothing, the MFA has had the effect of encouraging garment manufacturing in countries which were granted large quotas (usually through bilateral agreements or larger trade agreements like AGOA – the African Growth and Opportunity Act) dampening the industry in others (especially China), where quotas were set low. The existence of a US-export focused garment business in countries like Lesotho, Mauritius, Cambodia and Mongolia is due in no small part to import quotas that exist under the MFA.
Because the Multifiber Agreement makes such a mockery of the US’s committment to free trade, it’s been under global pressure to phase out the agreement for years. And, on January 1st of 2005, the agreement was “phased out” – though the fact that 85% of total tarrifs were removed on a single day points to the fact that there wasn’t much phasing in the approach. What happens now? Most commentators believe that China, which now claims 20% of the global garment market, will increase its share to 45-70%. If China is the big winner, the losers include both US garment factories, and garment manufacturers in small developing nations.
(My background information on the Multifiber Agreement is largely from Pietra Rivoli’s excellent “The Travels of a T-Shirt in the Global Economy”, which I’ll be reviewing for WorldChanging in the next few days.)
Lesotho’s economy is critically dependent on the garment industry – 90% of the country’s manufacturing jobs are in the garment sector. And Lesotho looked like it was one of the countries that might survive China’s expansion in the wake of the MFA. Several US brands – notably Nike, Levi Strauss and GAP – source from Lesotho because the country has an excellent record for good labor conditions, unlike China. Lesotho’s competitive advantage is the absence of sweatshops.
But that may not be enough to survive the second front of an attack – the falling dollar. The euro has risen 52% against the dollar since 2002, and in the same time period, the South African rand has doubled in value. This is terrible news for Lesotho, which pegs its currency, the maloti, to the rand. Three years ago, a pair of jeans might have sold to Levi Strauss for $10, or 120 maloti – it still sells for $10, but that’s now 60 maloti, making it difficult for a manufacturer to pay maloti-denominated salaries. As a result, Lesotho’s garment manufacturers are laying off workers and shuttering factories.
Lesotho’s garment industry is likely to survive. By 2007, AGOA will require fabric to be sourced in Africa for African-sewn goods to qualify for AGO-status – there’s a major denim mill in Lesotho, and the country’s garment factories will likely find a continued market producing jeans. But the impact of US and China policy on the developing world makes me think about some of the scarier dynamics of our trade policy.
Most US consumers don’t feel the pain of our weak dollar because so many of our imports come from China, which pegs the yuan tightly to the dollar. The frequency of the “made in China” label on products in WalMart is a direct consequence of this currency peg – China is happy to keep the yuan artificially weak because it makes imports attractive to the US market. And the Bush administration is happy with a weak dollar because a) it makes US exports like cars attractive to a European market, b) strengthening the dollar would require reducing budget deficits. China helps the US maintain a weak dollar by supporting our endless apppetite for debt, buying huge amounts of US treasury bonds, which finance our government overspending.
What happens if China lets the yuan float freely and stops buying US treasuries? Well, Lesotho’s happy – with a fairly valued yuan, Lesotho’s garment industry looks more competitive with China’s. But we’ll have a much harder time affording those jeans in the US – the dollar would likely fall sharply if the Chinese started moving dollar assets into euros or yen. In response, the Federal Reserve would likely raise interest rates to make US treasuries look more attractive… making corporate, consumer and mortgage debt more expensive.
With Chinese goods at WalMart more expensive, consumers would find themselves borrowing more, at higher interest rates. Some will get in trouble with credit debt and find themselves looking at bankruptcy as a way out. (Thank goodness the Bush administration has already thought of this, and taken steps to make it harder for middle-income Americans to file for bankruptcy, in one of the most cynical pieces of legislation in American history.)
As Chinese manufacturing readies itself to kick Lesotho’s ass, it’s worth thinking through some of the environmental and human rights implications of this dominance. China’s labor costs are so low, in part, because of “hukou”, China’s laws concerning residency. Every Chinese citizen is assigned residency in a particular region of the country – during the cultural revolution, tens of millions of people were assigned rural citizenship, where they found themselves in abject poverty. If you are assigned to a rural hukou, it is very difficult for you to travel and work in an urban center. To protect yourself from being sent back to your home village, you are willing to work at lower cost than urban residents in factories, and you are less likely to report unsafe workplace conditions, management’s failure to pay you or other labor abuses.
Our insatiable appetite for cheap consumer goods encourages China to keep in place a system that makes economic migration a criminal act. And China’s “economic miracle” has an incredible environmental toll. As Pan Yue, Deputy Director of China’s State Environmental Protection Administration, notes in a recent interview with Spiegel, well-summarized on WorldChanging, China is incredibly inefficient in its use of raw materials: We are using too many raw materials to sustain this growth. To produce goods worth $10,000, for example, we need seven times more resources than Japan, nearly six times more than the United States and, perhaps most embarrassing, nearly three times more than India. Things can’t, nor should they be allowed to go on like that.
The results of this resource abuse: incredible environmental degredation, and a political, economic and military foreign policy that supports dictatorships worldwide in search for new resources. Pan Yue’s interview alludes to environmental factors directly causing 70-80% of cancer cases in Beijing. And China’s need for oil encourages it to support governments like the one brutalizing Sudan… with Chinese-made guns.
I’m grateful to the NYTimes for putting a dense story about Africa and monetary policy on its front page – a nice reminder that there’s news we need to know even if we don’t know we need it. And for Rivoli’s book, which has these issues front and center in my mind after reading it.