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Bringing Labor Issues into the Cambodian textile agreement

Sheridan Prasso

Cambodia is the testing ground for an unprecedented experiment in international trade: a bilateral agreement with the United States that links its textile quotas to the certification of improvements in working conditions in its garment factories.

Five years after the agreement was reached, Cambodia has experienced a number of positive results that can be linked directly or indirectly to the agreement: strong and sustained GDP growth at a time when other manufacturing export countries in Asia experienced stagnant growth or recession; a strengthening of its labor laws to international standards; working conditions for factory employees that can be considered a model for other developing countries; and a recognition by international clothing retailers that garments sourced from Cambodia can be certified as produced under fair labor practices.

Cambodia also experienced some negative effects from this agreement: an increase in acrimonious labor-management relations resulting in strikes, strife and violence that damaged Cambodia’s reputation overall as a welcoming recipient of foreign direct investment; and an increase in costs to manufacturers that may have had the effect of deterring future investors who can find cheaper manufacturing bases and more compliant labor forces elsewhere.

HISTORY

The United States and Cambodia signed the unprecedented deal on January 20, 1999: In exchange for the United States agreeing to increase the amount of textiles it allowed to be imported from Cambodia, the Cambodian government agreed to allow international monitors into its garment factories to observe working conditions and certify whether they were improving. Future increases in textile quotas were to be conditional on improvements, on Cambodian factories being in “substantial compliance” with internationally recognized core labor standards as determined by the International Labour Organization. In other words, the more the Cambodian garment industry improved its labor conditions, the more garments it would be allowed to export to the United States.

The bilateral trade agreement, forged by the Clinton Administration, was the first time that the United States had agreed to swap favorable trading terms for good labor practices. It was designed to be a new tool of U.S. foreign policy to encourage adherence to global labor standards, and to be a model for other trade agreements around the world. The agreement, initially covering a period of three years, was extended by the Bush Administration for an additional three years, and was to be in effect through December 31, 2004 - a date by which Cambodia expected to join the WTO and subsequently see the removal of textile quotas for all WTO members on January 1, 2005. When the extension was granted on December 31, 2001, the Bush Administration’s U.S. Representative Robert Zoellick called the textile agreement “an excellent example of the way trade agreements lead to economic growth and promote a greater respect for workers’ rights.”

The agreement also marked a significant victory for U.S. trade unions. Hit by the exodus of garment factory jobs to less expensive labor markets overseas, labor unions had been lobbying the U.S. Trade Representative to link labor standards to textile imports. The American Union of Needle Trades and Industrial & Textile Employees (UNITE) acted as the nexus, rallying other garment unions and non-government organizations to lobby heavily for the linkage of trade and labor standards. They have been keenly watching Cambodia’s progress and attempting to determine the success of the agreement, in order to be able to push for the same links in future trade deals with other countries, such as Vietnam. In trade negotiations with Hanoi over forging a bilateral textile agreement, which began in spring 2003, it was unclear to what degree the USTR negotiator was willing to push for a link, even though Trade Promotion Authority legislation (TPA), part of the Trade Act of 2002, contains a vague requirement to address labor and environmental concerns in future trade agreements.

Democrats in the U.S. House of Representatives are exerting pressure. On February 25, 2003, several Democratic members of the House Ways and Means Committee sent a letter to Zoellick urging him to include strong labor provisions in any textile agreement with Vietnam, lest the achievements in Cambodia be undermined and garment exporters be encouraged to quit Cambodia in favor of less-regulated Vietnam. Vietnam’s total textile and apparel exports to the United States increased from $49 million in 2001 to $952 million in 2002, a 1,829% increase. Yet Vietnamese textile and apparel exports to the U.S. still account for only 1.6% of total U.S. apparel imports. The Bush Administration clearly has less of an appetite for actions in support of U.S. labor unions than the previous Democratic one, and any eventual agreement with Vietnam is unlikely to be very similar to Cambodia’s. Linkages between trade and labor conditions could be bartered in exchange for more U.S. access to the bigger and more lucrative Vietnamese market.

Cambodia had little leverage in its negotiations. An impoverished country recovering from a legacy of war and genocide, it has a mere $3 billion economy and an annual per capita GDP of $260 (among the lowest in the world). It is highly dependent on foreign aid. It was keen to develop export-led growth and saw the garment industry as a key means to achieve this if it could only gain access to U.S. markets that were blocked by tariff barriers. (A recent agreement with the European Union abolishes all tariffs for Cambodian garments as well.)

Implementation of the provisions was extremely slow. The United States agreed to pay the bulk of the costs of monitoring and contributed an initial $1 million to a $1.4 million fund to task the ILO with setting up a monitoring system. (The remainder was split by the Garment Manufacturers Association in Cambodia and the Cambodian government.) It took more than a year for the ILO to even begin entering Cambodian factories to begin the process. The first report, of conditions than were better than international expectations, was issued in November 2001. Cambodians were frustrated with the slow pace of the process, complaining publicly that they had improved factory conditions and had suffered serious labor unrest from emboldened unions without the promised results of an increase in the U.S. textile quotas. Cambodia’s textile quotas for 2002 were increased by a bonus of 9% (out of a possible 14%) on top of the minimum 6% annual increase as required by the agreement. Previous annual quota increases had been 9%. By 2002, Cambodia’s quotas had exceeded its ability to meet capacity, and it left part of its quota partially unfilled for that year.

LESSONS LEARNED

Cambodia’s experience indicates that the linkage of trade with good labor practices can have both positive and negative consequences, many of which balance each other out.

1. There are possible significant economic benefits for a developing country: a boost to economic growth, an enormous improvement in factory working conditions, the attraction of foreign direct investment, the creation of 160,000 new jobs, and the passage of modern labor laws.

Many of these, however, are simply the result of an increase in exports, which could have been accomplished by simple, unrestricted access to U.S. markets.

Before the agreement was reached, Cambodia’s economy grew 1% in 1998, in line with other Asian countries suffering the effects of the regional economic crisis. Exports that year totaled $785 million, $292 million of that, or 38%, to the United States. By 2001, after the first three years of the agreement, Cambodia’s economy grew 5.4% and total exports were $1.268 billion, with $843 million of that, or 66.5%, going to the United States. The increased exports to the United States, to a level nearly triple what they were, were almost entirely garments. Cambodia’s economy grew 6.3% in 2002, a rate higher than most other Asian countries except for China.

Cambodia’s working conditions improved significantly under the agreement. Many factories brought facilities into compliance with international standards of their own accord. Others were brought into compliance under pressure from the ILO monitors and NGOs. As a result, the most recent ILO report found Cambodian factories to be in “substantial compliance” with international standards, according to the following measures:

  • There is no evidence of child labour;
  • There is no evidence of forced labour;
  • There is no evidence of sexual harassment;
  • There has been improvement in the correct payment of wages though this remains a problem in a number of factories;
  • There has been improvement with regard to ensuring that overtime work is undertaken voluntarily though this remains a problem in a number of factories;
  • There has been improvement in ensuring that overtime hours are within legal limits though this remains a problem in a number of factories;
  • There has been improvement in ensuring freedom of association, including protection against anti-union discrimination, though this remains a problem in a small number of factories; (International Labour Organization, Sixth Synthesis Report on the Working Conditions Situation in Cambodia's Garment Sector, June 2003)

In order to compel factories into compliance, the Cambodian government agreed to draft, implement and enforce a modern Cambodian Labour Code. Previously, labor laws were a mosaic of pre-1975 statutes modeled on French law, communist-era legislation dating from 1979-1991, statutes put in place by the U.N. Transitional Authority in Cambodia in 1991-1993. In most other aspects of the law, this is still the case, but the labor provisions have been brought up to international standards.

Foreign direct investment in Cambodia grew from $120 million in 1998 to $129 million in 1999 to $136 million in 2000. Malaysia, followed by Taiwan and China, is the largest foreign investor in Cambodia. The garment trade is the largest manufacturing industry in Cambodia, attracting $363 million worth of foreign investment in 337 projects. Tourism is the largest sector overall, with $3.68 million invested in 854 projects.

2. Cambodia may benefit from a reputation as a safe-haven for fair labor standards for international retailers concerned about consumer “sweatshop” backlash.

The international certification from the ILO that Cambodia’s garments are produced under fair labor practices - in a kind of “safe haven” -- gives a certain degree of reassurance and cover to retailers concerned about their brand images among consumers, particularly those stung by allegations of sweatshop practices in the 1990s. Gap, The Limited, Abercrombie & Fitch, Adidas, Ann Taylor, Kmart, Wal-Mart, Nike, OshKosh B’Gosh and Reebok are just some of the retailers who buy garments manufactured in Cambodia. According to international trade groups and U.S. officials, many of them are pleased to be able to have the protective cover of fair labor practice certification. As a result, more international retailers concerned about their reputations among consumers may be lured to these garment subcontractors in Cambodia, particularly if more sweatshop violations are exposed in the Asian countries directly competing with Cambodia for manufacturing contracts.

American advisers sent from labor union offices in the United States have been pushing the ILO to issue some kind of branding, stamp or insignia to certify garments that made under fair labor practices.

3. Labor unrest also increased in the initial period, damaged the country’s reputation as a friendly port for foreign investment, and raised the costs of manufacturing.

Cambodia’s high labor standards did not come without a price. Emboldened by international attention and advisors sent out from labor union offices in the United States, Cambodia’s labor unions grew strong and well-organized. They staged wildcat strikes for better working conditions. They succeeded in raising the minimum wage from $40/mo. to $45/mo. in 2000 - a wage higher than in Laos and in several provinces of China - but not without several violent clashes that killed a number of people and damaged Cambodia’s international reputation. International manufacturers seeking a cheap, compliant workforce would need to find other countries in which to operate.

The costs of monitoring and bringing factories into international compliance also raised costs to manufacturers. Cambodia’s garment manufacturing association was required to pay part of the cost of the ILO monitoring program (initially, $200,000), and factories were responsible for spending the money needed to bring facilities into compliance with international standards.

Comparatively, it costs $4 to ship one ton of goods 1 kilometer in Cambodia, compared to $1 per ton/km in Vietnam. This is a significant gap in a world that, ultimately, will be without protective trade barriers.

CONCLUSION

Long term, it remains unclear whether the garment industry will remain a vital, thriving part of Cambodia’s economy and its primary engine of growth. It is possible that the resulting higher costs of manufacturing will be offset by international retailers willing to pay a premium for a labor-conditions safe haven. It is also possible that Cambodia’s higher costs will drive manufacturers to other lower-cost, less-regulated countries such as China, particularly after 2005 when all textile quotas for all WTO members are removed and Cambodia (with poorer infrastructure and undeveloped access to markets) must compete with China for foreign manufacturers on the same playing field. If that happens, Cambodia’s garment-industry-led boom will go bust and the country will likely go into recession if it does not develop other means of spurring domestic growth.

It also remains unclear whether future U.S. administrations will continue to use the agreement’s provisions as an ongoing foreign policy tool.

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