Globalization in the Clothing Industries assignment

Globalization in the Clothing Industries assignment Words: 4351

April 10th 2008 Menno van Geloven Bianca van der Ha Steven Langerwerf Bastiaan van Wijk Globalization in your wardrobe The nature of the clothing industry is maybe best noticed after a quick peek in your wardrobe. Soon you find out that few items have actually been made nearby. Instead, the origin of most jeans, t-shirts, or sweaters lies in more exotic locations such as Mexico, Bangladesh, Madagascar or Thailand. The clothing industry as we know it today, exemplifies some characteristic issues that our global economy faces.

Due to its global organization, clothing industry flows across borders, linking companies, governments and economies of both developed and developing countries together. Millions of employees work in the industry worldwide. Some countries’ export and employment level depends mainly (if not totally) on the clothing and textile industry. Mainly due to these facts, it is no wonder that the industry has for a long time been subject to a myriad of policies. The global nature of the industry is also reflected in the figures from the World Trade Organization.

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According to their 2006 estimates, the share of clothing in the total worldwide trade of manufactures trade is 3. 8%. This is a substantial amount of money, especially if you consider the amount of jobs that correspond to this. If one looks at the export from individual countries, even higher shares can be found. The highest share of merchandise export is reached in Bangladesh, where clothing amounts to 74% of domestic merchandise export. Other countries that show high export dependence are Cambodia (71%), in Haiti (71%) and Madagascar (69%).

The global triad comes apparent when one looks at the magnitudes of trade flows related to clothing. In 2004 the biggest importers of clothing were the Western Europe, North America and Asia. The biggest exporters of clothing in this same year were Asia and Western Europe. One can conclude that the clothing industry is very global and centered on this triad. So, why is this industry so globally organized? The macro-economical reason for this is the wage-difference between countries and the fact that cotton is produced the cheapest in some distinct places.

Some other prerequisites for a global organization are: The easy transportation of the cloth due to the high value to weight ratio, the labour intensive production, and the fact that most processes do not require skilled workers or expensive machinery. Hence, barriers to entry on the production side are low, resulting in a situation where a number or producers compete fiercely to produce the cheapest cloth. In search for the cheapest production, work is often outsourced to regions where wages are even lower.

As a result, the power of productions workers diminishes and they are often required to work in bad conditions and for even lower wages. There are more downsides to a global organization of the clothing industry. For retailers, there is always a trade-off between costs and minimizing the access to markets (Dicken, 2007). Proximity to markets has lately become an important factor in choosing a place for production. The more buyers will insist on a fast product turnover (and they do), the more they will value the proximity of the production chain.

Clearly, for many customers that have a high purchasing power, clothing means fashion and they are not ????happy to be waiting for a ship from China, while the same could be produced in their backyard. In this paper we look at the clothing industry from several perspectives: First we pay attention the direct foreign investment of the industry and input/output figures. After that, we address some issues regarding transnational corporations that are active in the industry, the role nation states have and we finalize this paper by looking at the impact of the on wealth and society.

Foreign Direct Investment One of the indicators of globalization of an industry is foreign direct investment (FDI). According to the United Nations Conference on Trade and Development (UNCTAD), FDI is defined as ‘an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)’. UNCTAD, 2007) FDI can be categorized by direction; inward or outward foreign direct investment. Inward FDI is based on foreign capital invested in local resources, while outward FDI is used when local capital is invested in foreign resources. Appendix 3 shows the FDI flows per region for 2000 and 2006 and the change in per cent over this period. It gives a good overview of globalization of all industries. There is an enormous increase in inward FDI in Africa and South-East Europe and the CIS (respectively 267 and 666 per cent from 2000 to 2006), while there is a decrease in Europe and North America (22 and 36 per cent).

Also the outward FDI increased a lot in Africa and South-East Europe (436 and ??487 per cent) but the biggest increased occurs in Australia and Oceania with a change of 603 per cent from 2000 to 2006. (UNCTAD, 2007) But numbers about FDIs are not that important for the globalization in the clothing industries. FDI indicates the amount of capital that is invested while the clothing industries are mostly labour-intensive. One can better take a look at the value chain and the international flows of materials and products. Technological Changes The clothing industries have a remarkable value chain.

The chain can be divided in six stages: design, fabric production, preparing, production, distribution and consumption. (Dicken, 2007) Nowadays computer-aided systems support the design and preparing stage in the process. In 1969, for example, an automatic cutting design was introduced that made it possible to cut thick layers of cloths accurately. Also other activities in preparation, like pattern layouts, are computer supported. In contrast, information- and communication technologies had little influence in the production stage, which is characterized by the sewing of clothes.

The production stage accounts for about eighty per cent of total labour costs and this labour cannot be easily replaced by computerized machines. (Dicken, 2007) The reason for this, according to the OECD, is ‘the nature of the production process itself, where twodimensional materials, i. e. cloth that is rather soft and limp in nature, are subjected to a series of individual labour-intensive handling/assembly steps, culminating in a product which then fits/drapes a three-dimensional human body. (OECD, 2004) Thus, it is quite normal for clothing production facility to relocate the production stage to another region or outsource production, in order to lower labour costs and thus remain profitable, even in an intensifying competitive environment. Technological changes in transportation and communication have made it a lot easier for companies in the clothing industries to spread their activities. But spreading the activities caused other costs to rise.

Transportation of inputs, longer inventory holding and managerial time to coordinate the fragmented supply chain are responsible for extra costs that obviously may not exceed the cost advantages of spreading the activities. Efficient use of transportation and communication networks can make geographical distant locations in low-cost countries more appealing, especially for standardized products. (OECD, 2004) Although low wage countries are very appealing for companies to move their production stage to, there are also companies that can survive in high wage countries.

Most of these companies are fashion oriented. Fashion is rapidly changing and so is the production process. Therefore the time factor becomes even more important. Then, location advantages (for example in just-in-time delivery) often can outweigh low wages. (OECD, 2004) Global shift in numbers Based on the characteristics and the production cycle of the clothing industries it is likely that there has been a global shift to reduce costs and increase profits. But do the import and export numbers confirm this global shift? Appendix 1 shows the world’s leading exporters in 1980, 2003 and 2006.

Also the annual change in growth per country is shown. In 1980 China had a share in world clothing exports of just 4 per cent, but in 2006 China is by far the leading exporter of clothing with a share of 30 per cent. The average export growth rate is 22 per cent from 2004 to 2006. (WTO, 2007) This high rate of growth for China has also been noticed by Peter Dicken in his book ‘Global Shift. Mapping the changing contours of the world economy’. In his chapter about clothing industries he also states that ‘very high export growth rates have also occurred in Turkey, Mexico (to 2000), Romania and, especially, Vietnam’. Dicken, 2007) The highest average export growth rates from 2004 to 2006 occurred in India, Bangladesh, Pakistan, Vietnam and Indonesia (besides China). Only Vietnam has been able to continue the high export growth rates. (WTO, 2007) Appendix 2 shows the world’s leading importers. The most striking in terms of annual growth rates is the import growth rate of Turkey. The average import growth rate from 2004 to 2006 is 93 with a value of 203 for the year 2006, while their export growth rate didn’t decrease. (WTO, 2007) A possible reason for the increase in import is a consistently positive relative price effect.

Turkish clothing products have become relatively more expensive in comparison with products imported from other countries. (Taymaz, 2002) The impact of the globalization TNC’s cause a big problem in the low wage countries, because they benefit the most from the country with the lowest costs to produce their clothing. Therefore the low wage countries lower the salaries, loosen the legislation and don’t care about the environment. Their only goal is to recruit the TNC’s to their country. Therefore countries are willing to make sacrifices like poor labor situations and no environmental legislations.

Impact on the environment Together with the reason mentioned above, the clothing industry also is a fast changing industry, because the biggest part of the people of western countries found it important to dress them selves according to the latest fashion. This fashion changes every season and therefore people, and especially women, tend to buy new clothes every season. Not only does the industry have to produce more, which causes pollution, people also produce more waste. Every process of the clothing production causes environmental impact.

Walking through this process, we can evaluate the contributions to this environmental pollution of the different steps. First the fabric has to be produced. Here a division has to be made between natural and synthetic fibers. The most used and versatile natural fiber is cotton, which has a significant natural footprint. It accounts for a quarter of all the pesticides used in the United States, the biggest cotton exporter in the world. Also it is one of the most water-dependent crops. The most widely used manufactured fiber is polyester, which is produced of petroleum.

During the last fifteen years the demand for this man-made fiber has nearly doubled. During the production a high amount of crude oil is needed in order to provide the required amount of energy. Together with the released emissions of for instance volatile organic compounds and the emitting in the waste water of volatile monomers, solvents and other by-products, the textile manufactures are considered to be hazardous waste generators. The produced fibers are transported to countries with low labor costs, where the material is woven and assembled according to the western desires. This ransportation from and to the United States and Europe and the production of the clothing are not the biggest environmental polluters compared to the production of fibers and clothing, the washing at high temperatures at home and the waste it creates after being replaced by new fashionable clothes. As described above, due to competition between the low wage countries the use of chemicals and the way of dumping the waste is not or nearly legislated. Therefore this causes a lot of pollution. For instance waste products are being spilled straight into the environment. Americans throw away more than 68 pounds of clothing per person per year.

This overload of used clothing can be reduced by selling it as second-hand clothing, exporting it in bulk to sell it in developing countries or recycling the fabric. A very popular way to sell one’s clothes is by the internet. There is a significant increase in the selling and buying on auction websites. Because the goods have to be transported to the second user, this buying and selling rarely occurs between people living far away from each other. A second very popular way is to donate discarded goods to the Salvation Army and the Goodwill Industry. Since 2001 Goodwill Industries in the United States have seen an increase in its sale of 67%.

If the clothes are not sold as second-hand, they can be recycled into wiping rags for industrial uses, as fiber for use as stuffing for upholstery, insulation of for the manufacture of paper products. Although these seem to be good solutions, there are some downsides. There is such an overload of clothing, that it is impossible to sell it all to other users. Especially the amount of women’s secondhand-clothes, which is seven times higher than the amount of man’s secondhand-clothes, creates problems. It causes a big discrepancy between the prices of secondhand-clothes of men and women.

In the long run, the prices of new clothing will decline, which will also happen with the demand for used clothes, because new clothes can be bought at about the same low price as second hand clothes. (Claudio, 2007) Impact on welfare Welfare is a difficult subject to describe. Welfare refers to the economic wellbeing of an individual group or economy. The level of welfare can be measured with for instance the Gross National Product and Gross Domestic Product. GDP is the value of goods and services produced within a country. In the western countries this figure is high. The GNP is the total value dded from domestic and foreign sources claimed by residents of a country. The GNP divided by capita is a measure for national income per person. Figure 1: GNP per capita (www. countrywatch. com) As can be seen in the picture the GNP/capita in the countries where the clothing is assembled is very low. Here most people have to survive with less than one dollar per day. The race to the bottom does not improve this poor condition. As noted above countries try to minimize the costs partly by minimizing the wages. Therefore the clothing industry does not improve the GNP/capita in low wage countries.

Impact on employment Employment is measured by the amount of people that works or the amount of jobs. Due to TNC’s that found new parts of their company in low wage countries, here the amount of jobs logically increase. But in the western countries the amount of jobs decreases. The Canadian garment industry is one of the industries that is hardest hit by globalization. Since 1988 30,000 jobs in the clothing industry have been lost across the country. (UNPAC, 2006) The textile and garment industry makes up the largest source of industrial employment in the world.

A total of 30 million people are producing textiles and clothes. Most of these are women, who are mainly concentrated in the textile and sewing trades. Although this is a positive development for the low wage countries, the working conditions are very poor. The pay is very low and the work is hard. Repetitive work such as piece work creates serious health hazards. Examples are repetitive strain injury, carpal tunnel syndrome and chronic back and neck problems. The pressure is very high, which makes the workers even more reluctant to take a break. This does not contribute to a healthy work environment.

Workers are threatened with violence or no payment to make them work harder. (Claudio, 2007) In Asian countries workers are tempted to work in factories, because they are promised high wages and good conditions. Impoverished families encourage their daughters to work in these factories in the hope that they make enough money to send it home. When they arrive at the factory they see the truth: a fenced factory city called export processing zone. This is filled with workers who are paid very poor and who have to work in unbearable conditions. Some examples are impossibly long hours, forced vertime, health and safety violations, unclean drinking water and sexual violence. (UNPAC, 2006) To lead these problems in a good direction it is necessary to make agreements and policies that account for the whole world. The next chapter will discuss the policies that are being used or that are needed. Nation States and the Clothing Industry In this part we will focus on the role that nation states play in the clothing industry. As a framework, the theory of Dicken is used in our analysis. He argues that nation states play four key roles in global economic processes.

He claims that: (1) states are containers of distinctive institutions and practices, (2) states are regulators of economic activities and transactions, (3) states are competitors with other states, and finally (4) states are collaborators with other states. States as containers How should we see states as containers of distinctive institutions and practices in the clothing industry? To answer this question, we should address the notion that before clothing is produced, cotton needs to be harvested, before further processed (woven, sewed, distributed).

This first harvest stage is an important one to pay attention to, because it is the start of the production chain. Only few nation states can produce on cotton a large scale. The biggest among them are China (approximately 6. 5 million ton/y), US (4. 75 million ton/y) and India (4 million ton/y) (UNCTAD, 2008). Their competitive advantage is mainly due to natural resources these countries contain. Climate, land area and labour costs are especially important in this view (Rivoli, 2005). Apart from natural resources, nation states often contain specific knowledge or methods that will result in a competitive advantage.

This has been the case for the American cotton industry, where first slaves were used as a reliable and cheap production factor and later some technological and entrepreneurial advantages were apparent that helped the US to retain their dominant market position up until the 1950’s. States as competitors It was around this year that the American textile industry started to feel the threat of increasing competition from low wage countries (Rivoli, 2005). Because of the high income differential between the US and low wage countries involved in textile and clothing, the price of those goods seemed to drop to the bottom.

In this way we see that states compete against each other, in order to gain market power. The American cotton industry realized this danger and started to gain political power, a process that eventually resulted establishment of protectionist measures. This means, that the regulation of the internal US market was a measure actually enforced by strategic alliances of domestic producers (formerly competing, now collaborating), in order to block the way for cheap clothing from foreign nations (Friman, 1988).

Policymakers were very sensitive to these calls for protectionism, because a high number of jobs were at stake. States as regulators In general, state governments that feel the incentive to protect their internal markets have several instruments to do so. The main options are: (1) setting import quotas, (2) setting import tariffs, (3) subsidizing national industries. We will now explore some of these measures and their effects. The initial strategy of the US in 1950 was to protect their internal market by means of a regulation. The imports of cotton textile and apparel became subject of to quota.

Asian trading partners quickly responded to this policy by upgrading production to non-cotton clothing and textiles (nylon, wool), to get round the quotas. It was the US textile industry that needed a new measure to ‘close the legal holes’. It came in the form of the Multifiber arrangement. The Multifiber Arrangement (1974 ??? 1994) formed a regulatory framework for international trade in textile and clothing. It provided rules to selectively restrict imports, by means of quota, in order to avoid injury or serious damage to the industry of the importing country.

These clothing quotas were bilaterally negotiated between countries. Both the EU and the US used the MFA to protect their internal markets. The initial goal of the MFA was to create a sustainable trade system in textiles and clothing from which both the developing as the developed countries would benefit. Instead of guiding a smooth transition to a sustainable trade system, the effect of the MFA was merely disruptive (Dicken, 2005). Examples of unforeseen effects were the sudden relocation of production facilities after the quota of the home country has been reached (the cause of the udden rise of Nepal’s clothing industry), or the damage caused to internal economies of the US or EU due to scarcity of valuable production materials from abroad, such as nylons (Rivoli, 2005). Another strategy that the US government as well as the EU has followed is handing out subsidies to their national producers. (BBC News, November 15 2007) These subsidies increased the output of the national industry, therefore lowering the world price of cotton and putting more pressure on foreign competitors.

The US cotton subsidies itself were, according to some econometric studies, responsible for a world cotton price decrease of 3 to 15% (Rivoli 2005). This kind of policy is generally seen as unfair and a threat to the competitive ability of developing countries. In the last WTO agreement (the Uruguay round), member states have agreed to lower subsidies, however they are still handed out today. States as collaborators On January 1995 the Multi Fiber Arrangement was abolished as the WTO came into power. The WTO agreed on the ‘Agreement on Textiles and Clothing’ a new regulatory framework.

Under this agreement, member states have committed themselves to abandon all the quotas by January 2005. The general trend is now that clothing markets need to be more integrated and trade should be free of tariffs or quota. Governments decide this by committing themselves to the rules of supranational organizations (such as the WTO) or by engaging in bilateral trade agreements with other countries. Also, a lot of countries have regionally integrated their markets. Summarizing, free trade policy comes in three flavours: 1. Supranational organizations 2. Regional agreements 3.

Bilateral agreements The WTO serves as a supranational body in which countries collaborate in order to secure international free trade. With it’s 139 member states, it is the most influential supranational organization related to international trade. The WTO supplies member states with regulations, it is responsible for the negotiation for liberalized trade between states. Due to the collaborations in the WTO, developing countries have now gained full access to foreign markets. As a result, China and other developing countries have become a dominant player in the production of clothing.

Design, retailing and marketing is performed primarily by companies from developed countries. Three important regional agreements for clothing (based on import/export flows) are the EU, the AFTA and the NAFTA (WTO, 2006). The first is an economic union for most of the European countries, the second is a trade agreement for Asian countries, and the third is a trade agreement for Northern American countries. All these regional agreements pursue free trade, as it is thought to strengthen economic power of the member states. The NAFTA has enabled US clothing industries access to Mexico’s cheap (and nearby) workforce.

By implementing several restrictions in the agreements (tariff cuts for apparel imports from Mexico only applies if the cotton originated from the US), US policymakers use the cheap labour in Mexico without backstabbing their own national cotton producers. Apparently, some free trade agreements can be just as ‘free’ or restricted as member states like them to be. Bilateral agreements are primarily made between states that are not in a regional agreement, neither in the WTO. A big non-WTO member that exports textiles is Russia (0. 2% of their total manufactures export value, WTO, 2005).

Any textile trade between Russia and for instance the EU can become subject to a trade agreement, if both governments would have an incentive to do so. States that do not have any free trade agreements on clothing will generally charge tariffs on the imports of these products. References BBC News. (2007, November 15). US defends it’s cotton subsidies. Retrieved from the World Wide Web: http://news. bbc. co. uk/2/hi/africa/7095673. stm Claudio, L. (2007). Waste Couture, Environmental Impact of the Clothing Industry. Environmental Health Perspectives, 9. Dicken, P. (2007). Global Shift. Mapping the Changing Contours of the World Economy.

London, England: SAGE Publications Ltd. Friman, H. R. (1988). Rocks, Hard Places, and the New Protectionism: Textile Trade Policy Choices in the United States and Japan. International Organization, 42, 689-723. OECD (2004, August 13). Structural adjustment in textiles and clothing in the post-atc trading environment. Rivoli, P. (2005). The travels of a t-shirt a global economy. New Jersey, United States of America: Wiley. Taymaz (2002). Competitiveness of the Turkish Textile and Clothing Industries. Department of Economics Turkey, September 15th. UNCTAD (2007 ). The World Investment Report 2007 UNCTAD (2008). World cotton producers.

Retrieved from the World Wide Web: http://r0. unctad. org/infocomm/anglais/cotton/market. htm UNPAC (2006, March). Globalization & Clothes. Retrieved from the World Wide Web: http://www. unpac. ca/economy/g_clothes. html World Trade Organization (2005). International trade statistics 2005. World Trade Organization (2006). International trade statistics 2006. World Trade Organization (2007). International trade statistics 2007. Appendix 1 The world’s leading exporters of clothing. % share world exportsannual % change Exporter198020032006 200420052006Average China4,02330,6 19202922 European Union -26,8 12357 Hong Kong11,53,62,2 -1-11-7-6

Turkey 0,34,43,8 12606 India 1,72,93,3 0391117 Bangladesh 0,01,92,8 2423… 24 Mexico 0,03,22,0 2-2-13-5 Indonesia0,21,81,8 6161512 United States3,12,51,6 -9-1-2-4 Vietnam … 1,61,7 289… 18 Romania… 1,81,4 16-2-43 Thailand0,71,61,4 10346 Pakistan0,31,21,3 1219813 Morocco0,31,31,0 6-6145 Tunisia0,8-1,0 11-522 Appendix 2 The world’s leading importers of clothing. % share world importsannual % change Importer198020032006 200420052006Average European Union–43,6165810 United States16,430,225,66645 Japan3,68,37,411467 Hong Kong0. 90,4-7826 Russian Federation-1,62,53423220 Canada1,71,92,116141422 Switzerland3,41,71,498-15

Korea0,01,11,2862914 Australia0,80,91,02217515 Mexico0,31,30,8-15-20-6 Singapore0,30,20,87-5176 Turkey0,0-0,7542120393 Norway1,7-0,681179 United Arab Emirates 0,60,80,6407… 23 China0,10,60,5 8667 Appendix 3 Foreign Direct Investments flows FDI flow inwardFDI flow outward Region20002006% change20002006% change Europe721931566389-22%866241668698-23% North America380802244435-36%18730526185740% Africa968535544267%15268186436% Latin America and the Caribbean9780383753-14%4957749132-1% Asia15665525292861%11378716733347% South-East Europe and the CIS904069283666%318318689487% Australia and Oceania142872436271%318222352603%