Beyond the horizon of Jan. 1, 2005

With barely 84 days left before the lifting of quota restrictions on apparel exports to the United States takes effect on Jan. 1, 2005, local garment manufacturers are keeping their fingers crossed that the labor-intensive industry—the Commonwealth’s largest contributor to government revenue—would survive amid anticipated fierce competition with global players such as China.

While some garment companies on Saipan also maintain factories in China, Saipan Garment Manufacturers Association executive director Richard Pierce said other Korean-owned firms have already been eyeing China, particularly Jilin Province, to set up new garment factories.

Korean businessmen, who may find Jilin more accessible from their home country, own most of the 24 SGMA member factories, according to Pierce. Besides, he said Korea and Jilin have various cultural similarities. On Saipan, Pierce said Korean factories hire workers from Jilin.

“About 60 to 70 percent of Korean-owned operations would migrate to off-shore operations in China once Saipan operations are no longer profitable,” Pierce said.

The most populated country in the world, China’s huge workforce makes available inexpensive labor that results in lower production cost.

At this stage even before garment trade restrictions are put off, Pierce said there are already Saipan factories that have experienced buyers who expect freight-on-board prices to drop by 8-10 percent within six months.

“China is just a monster in the capacity that it can produce and ship to the U.S. market,” Pierce said.

China now enjoys approximately 15 percent of the garment market in the United States, according to the SGMA. Once quota restrictions are eliminated, projections are that China could easily capture 50 percent of the entire U.S. market. China’s market share for garment entering the United States could reach up to 65 percent within three years, it added.

What the SGMA hopes is that China would exercise voluntary restraint to limit its annual growth rate in the U.S. garment market to 7.5 percent. He said voluntary restraint on the part of China would conform to the textile safeguard mechanism in the World Trade Organization’s Working Party Report on China’s accession.

He said Saipan’s garment manufacturers did the same thing in 1986 to prevent market disruption in the United States. It took the local garment industry about a decade to build the consumer confidence that it enjoys up to the present, a similar experience that the SGMA believes China would have to hurdle.

Until early 2005, SGMA said the industry would remain healthy because foreign manufacturers have already exhausted their export quotas at present, resulting in local manufacturers getting advanced orders from buyers.

Declining revenues

The 2004 fiscal year ended with a slight 3.1-percent increase in CNMI factory sales to the Unites States, which reached $821 million, higher than the previous year’s $796 million. The fiscal year sales nearly equaled the $821.1 million sales in Fiscal Year 2002.

The FY 2004 sales figure, however, dropped significantly by 22 percent when compared with FY 1999’s sales, which reached $1.06 billion, the local industry’s all-time high—a one-time occurrence that has not happened since. Until FY 2003, the figures experienced consistent decline, dropping to $1.04 billion in FY 2000, and $965 million in FY 2001.

“Production volume has remained steady over the past five years, but sales, profit and government contributions are all down as a result of fierce competition for the lucrative mainland market’s consumers,” Pierce said.

The decline in sales reflected in decreases in user fees for the CNMI government. User fees for FY 2004 totaled over $30.4 million, increasing slightly from FY 2003’s $29.46 million. The total, however, dropped compared with FY 2001’s $35.7 million and FY 2002’s $30.44 million.

“The halçyon days have been over for a long time now. Almost every bit of the drops in sales and tax payments can be attributed to the selling price reductions our local factories had to make to meet buyers’ and retailers’ demands to get orders for their Saipan factories,” Pierce said.

Like foreign manufacturers, SGMA recognizes the serious threat to the local industry by the lifting of quota restrictions on Chinese manufacturers.

“We’re just riding this wave as long as we can. The only thing we can predict is that there are no guarantees that the elimination of quota restrictions, scheduled to start on January 1, 2005, will not severely affect sales at our Saipan manufacturing plants in this coming year,” Pierce said.

A decline in garment sales may significantly impact on the revenue of the CNMI government, which has been scrambling to adopt revenue-generating measures to increase annual budgetary resources.

The SGMA also estimated that the industry contributes an additional $40 million—besides the $30.4 million in user’s fees in the last fiscal year—through other taxes such as excise tax, business gross receipts tax, income and payroll taxes; and fees paid to the Commonwealth Health Center, Commonwealth Utilities Corp., Commonwealth Ports Authority, Department of Labor, and the Division of Immigration. Saipan’s garment industry accounts for nearly 16,000 jobs in the CNMI, according to the SGMA.

Pierce said the CNMI government should not increase the cost of doing business to help the garment sector maintain its competitiveness. He said the government should also re-evaluate local taxation affecting the industry. He added that the CNMI government should work with the federal government to ensure that local apparel manufacturers would obtain favorable treatment in matters affecting cost of shipment to the United States.

Government response

The Babauta administration said it is cognizant of the impending problem, saying it is closely monitoring related developments in Washington D.C.

Steve Newman, Gov. Juan N. Babauta’s legal counsel, said the administration is working with private businesses on its request to urge the U.S. government to reduce value-added requirement on garment imports.

The U.S. Tariff Code requires that 50 percent of the value of the garment has to be added locally by transformation, in terms of additional labor, packaging or other overhead costs, so that garment products coming from U.S. exporters like the Commonwealth could enter the United States duty-free.

The Attorney General’s Office earlier said that CNMI manufacturers should take advantage of the federal customs law to remain competitive when quota restrictions are lifted, adding that other garment exporters like China do not enjoy duty-free shipment to the United States.

The AGO also disclosed the enactment of CNMI customs regulations that allow garment manufacturers to import cut fabric panels into the CNMI without paying an excise tax.

“The exemption will only apply to fabric panels that are assembled for export into a finished garment, and which coincides with the United States’ 50 percent requirement for local added value,” it explained.

The AGO has drafted regulations that would introduce the concept of bonded warehouses in the CNMI. It explained that bonded warehouses pertain to buildings or other secured areas in which dutiable goods may be stored, manipulated or undergo manufacturing operations without payment of duty. Bonded warehouses currently exist throughout the U.S. and Canada.

Washington Rep. Pete A. Tenorio had assured that he would ask the U.S. Congress to lower from 50 percent to 30 percent the local add-on requirement for garment products for them to enter the United States duty-free.

Tenorio said such reduction would allow Saipan’s apparel manufacturers to lower the number of nonresident workers to reduce production cost. “When it [garment] comes here, it [the work] will only be a matter of finishing touches. It [the value-added requirement reduction] would also increase the potential for local workers to go into the garment industry.”

The SGMA said the U.S. government should limit garment imports from China in certain categories. It noted reports that the Bush administration would consider requests to limit textile and apparel imports from China, despite the anticipated challenge that the Chinese government would put up before the WTO.

The SGMA views the upcoming presidential elections in the United States as a turning point in determining a clearer picture on how trade policy changes brought on by the lifting on garment quota restrictions would affect Saipan factories’ operations. How the new U.S. administration would deal with the impending problem facing its manufacturers—including those on Saipan—would play a vital role in the survival of the CNMI’s premier industry.