Bringing HOPE to Haiti’s Apparel Industry: Improving Competitiveness through Factory-level Value-chain Analysis

Bringing HOPE to Haiti’s Apparel Industry Improving Competitiveness throug h Factory - level Value - chain Analysis November 2009 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized II B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY Bringing HOPE to Haiti’s Apparel Industry Improving Competitiveness through Factory-level Value-chain Analysis PREPARED FOR Commission Tripartite de la Mise en Oeuvre de la Loi HOPE (CTMO-HOPE) as part of a technical assistance program led by the World Bank with funding from the Multidonor Trust Fund for Trade and Development SUBMITTED BY Nathan Associates Inc. November 2009 Cover photo © Marc Lee Steed for the Association of Haitian Industries C ONTENTS III Contents Glossary vii Acknowledgments xi Executive Summary xiii 1. Introduction 1 Apparel Industries Worldwide 2 Apparel Value-Chain Elements 5 U.S. Apparel Trade Trends 7 Labor Rights in Apparel Industries 9 Report Organization 12 2. Apparel Trade Program Benefits and Trade Flows 13 Comparison of Benefits Under HOPE, CBTPA, and DR-CAFTA 13 Haiti‘s Trade With the United States 19 3. Overview of Haiti’s Apparel Industry 23 Institutional Players 23 History 25 Factories, Ownership, and Industrial Zones 28 Government Support to Encourage Exports 30 Range of Products and Customers 31 Factory Size 32 Investment Intentions 34 Ports and Shipping 34 Haiti‘s Labor Sector 35 4. Haitian Apparel Industry Cost Analysis 41 Factory-Level Cost Analysis 42 Benchmarking Haiti‘s Costs 43 IV B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY Productivity 50 Product Cost Analysis: Men‘s Chinos Trousers 52 Product Cost Analysis: Men‘s T -Shirts 52 Summary of Apparel Cost Analysis 59 5. Conclusions and Recommendations 61 Appendix A. Composition of CTMO-HOPE Appendix B. Haiti’s Apparel Manufacturers Appendix C. Comparison of Benefits under Trade Agreements Appendix D. Meetings Appendix E. Sources Consulted ILLUSTRATIONS Figures Figure 1-1. Apparel Industry Value-Chain, Global and in Haiti 5 Figure 1-2. Regional Sources of Supply to U.S. Apparel Market 9 Figure 2-1. Value of Haiti's Exports ($US Millions) 20 Figure 3-1. Key Institution al Players Shaping Haiti’s Apparel Industry 25 Figure 3-2. Ownership in Haiti’s Apparel Industry 28 Figure 3-3. Haiti Population Pyramid, 2009 36 Figure 4-1. Chinos, FOB Costs 58 Figure 4-2. Chinos, CIF Costs (Including Duties Paid) 58 Figure 4-3. T-Shirts, FOB Costs 59 Figure 4-4. T-Shirts, CIF Costs (Including Duties Paid) 59 Tables Table 1-1. Summary of Strategic Initiatives in Haiti 3 Table 1-2. U.S. Apparel Imports, Top 25 Suppliers ($US Million) 8 Table 2-1. Haiti‘s Leading Trade Partners ($US Thousands) 18 Table 2-2. Value of Haiti‘s Export s ($US Millions) 20 Table 2-3. U.S. Apparel Imports Under Trade Preference Programs 21 Table 2-4. Haitian Factories‘ Reported Ex port Destinations 22 Table 2-5. U.S. Apparel Imports Under HOPE 22 C ONTENTS V Table 3-1. Key Actors and Policy and Market Variables Influenced 26 Table 3-2. Haiti‘s Political History and Global and U.S. Apparel Trade Developments 27 Table 3-3. Fabric Sourcing Patterns (Number of factories) 32 Table 3-4. Factory Size, by Number of Sewing Machines 33 Table 3-5. Factory Size, By Employees 33 Table 3-6. Factory Investment Priorities (Number of factories) 34 Table 4-1. Factory-level Cost Analysis Per Product 42 Table 4-2. Cost Comparison 44 Table 4-3. Labor Cost Comparison (January – June 2009) 45 Table 4-4. Comparison of Tax Incentives 50 Table 4-5. Productivity Targets, Casual Pants or Jeans 51 Table 4-6. Cost Analysis: Men‘s Chino Trousers 54 Table 4-7. Cost Analysis: Men‘s T -Shirts 56 Table 5-1. Strategic Considerations for the Apparel Industry 64 Exhibits Exhibit 3-1. Haiti’s Apparel Companies 24 Glossary ADIH Association des Industries d‘Haïti (Association of Haitian Industries) AGOA African Growth and Opportunity Act BASC Business Alliance for Secure Commerce BC Beneficiary country/countries BFC Better Factories Cambodia BSR Business for Social Responsibility BTA Bilateral textile agreement C. Convention CBERA Caribbean Basin Economic Recovery Act CBTPA Caribbean Basin Trade Partnership Act CBI Caribbean Basin Initiative CFI Centre de Facilitation des Investissments (Center for Investment Facilitation) CFPO Centre de Promotion des Femmes Ouvrieres (Center for Promotion of Women Workers) CIF Costs plus insurance and freight CLED Centre pour la Libre Entreprise et la Démocratie (Center for Free Enterprise and Democracy) CMT Cut, make, and trim CODEVI Compagnie pour le Développement Industriel (Industrial Development Company) CSH Coordination Syndicale Haïtienne (Haitian Union Coordination) CTH Conféderation des Travailleurs Haïtiens (Confederation of Haitian Workers) CTMO-HOPE Commission Tripartite de Mise en Oeuvre de la Loi HOPE CWG Competitiveness Working Group DR Dominican Republic DR-CAFTA Dominican Republic-Central American Free Trade Agreement DSNCRP Document de Stratégie Nationale pour la Croissance et la Réduction de la Pauvreté (National Strategy for Growth and Poverty Reduction) DZF Direction des Zones Franches (Free Zone Department, of the Ministry of Commerce and Industry) VIII B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY EDH Electricité d‘Haïti (Haitian Electricity Authority) ELVIS Electronic Visa Information System ENAM Ecole Nationale des Arts et Métiers (National School for the Arts and Handicrafts) FIAS Foreign Investment Advisory Service FOB Free on board FTA Free trade agreement FTZ Free trade zone GAL Guaranteed access level GDP Gross domestic product GSP Generalized System of Preferences GTC Groupe de Travail sur la Competitivité (Competitiveness Working Group) HOPE Haitian Hemispheric Opportunity through Partnership Encouragement Act HTG Haitian Gourde HTS Harmonized Tariff System IADB Inter-American Development Bank IFC International Finance Corporation IHSI Institut Haitien de Statistique et d‘Informatique ILO International Labor Organization ISPS International Ship and Port Facility Security Code ITUC International Trade Union Confederation KwH Kilowatt-hour LDP Landed duty paid LM Linear meter MFA Multilateral Fibre Arrangement MINUSTAH United Nations Stabilization Mission in Haiti MMF Man-made fiber MOISE Mouvement des Organisations Indépendentes Intégrées and des Syndicats Engagés (Movement of Independent, Integrated Organizations and Engaged Unions) MPCE Ministry of Planning and External Cooperation MAST Ministère des Affaires Sociales et du Travail (Ministry of Social Affairs and Labor) NAFTA North American Free Trade Agreement QIZ Qualifying industrial zone SME Square meter equivalent SONAPI Société Nationale des Parcs Industriels (National Industrial Parks Company) TAICNAR Technical Assistance Improvement and Compliance Needs Assessment and Remediation program TEU Twenty-foot equivalent unit G LOSSARY IX TPL Tariff preference level TRQ Tariff-rate quota USAID U.S. Agency for International Development USCBP U.S. Customs and Border Protection USTR Office of the U.S. Trade Representative VAT Value-added tax WRAP Worldwide Responsible Apparel Production WTO World Trade Organization Acknowledgments Sponsored by the World Bank‘s Latin America and Caribbean Economic Policy Sector Unit and conducted at the request of Haiti‘s Commission Tripartite de Mise en Oeuvre de la Loi HOPE (hereafter, CTMO-HOPE), this study received generous financial support from the governments of Finland, Norway, Sweden, and the United Kingdom through the Multidonor Trust Fund for Trade and Development. This study was carried out under the guidance of the World Bank and CTMO-HOPE. The World Bank team consisted of Yolanda Strachan (PRMTR), Emmanuel Pinto Moreira (LCSPE), and Luc Razamifandimby (LCSPE). The analysis was undertaken by Nathan Associates Inc. and its partners, Werner International and the Centre pour la Libre Entreprise et la Démocratie (CLED). The report was prepared by Don Feeney of Werner International, and Lynn Salinger and Jane O‘Del l of Nathan Associates. Industry survey data were collected and analyzed by Jean-Robert Joseph, a consultant to CLED, assisted by Allison Russell and Emma Fawcett, summer interns from the New School for Social Research (New York). The authors would like to express their gratitude to the factories whose senior managers explained company operations and who provided us with extensive detail on income and expenditures. To preserve confidentiality, sources of cost data are not named here and company data have been adjusted in the report so that individual companies cannot be directly identified. The authors are especially grateful to ADIH‘s Georges Sassine for arranging our access to factories, CTMO- HOPE‘s Lionel Delatour for his fervent conviction of the importance of this work and his commitment to the industry, and CLED for providing the highest quality of support during our stay in Haiti. Together, their efforts ensured that our work was brilliantly organized, without which this report could not have been completed. The authors are also grateful for comments received from Cornelia Staritz, Paul Brenton, Thomas Farole, and Ian Gillson, Briana N. Wilson, Robert Krech, and Jean-Louis Warnholz. Executive Summary Thirty years ago, Haiti‘s apparel industry was a reliable supplier of assembled goods to the U.S. market and employed as many as 100,000 workers. Chances were pretty good that U.S. baseball pitchers were throwing balls sewn in Haiti, and that U.S. children were sleeping in pajamas sewn in Haiti. The intervening years have been difficult for Haiti, marked by a struggle to stabilize governance, to institutionalize respect for political and human rights, to modernize infrastructure, and to encourage environmental stewardship rebuild after decades under the poor leadership of the Duvaliers (1957 – 1986). Meanwhile, businesses around the world have built supply chains that deliver raw materials from the most efficient capital-intensive economies for processing in the most productive labor-intensive economies. The global economy has rewritten the rules of trade, eliminated quotas on textiles and apparel, and spawned preferential arrangements and free trade agreements across multiple geopolitical partnerships. In this context, what trade advantages, if any, does Haiti‘s apparel industry have and what are its strengths? In 2008, the United States —one of the world‘s largest consumer markets despite the current economic recession — extended trade preferences to Haiti. The Haitian Hemispheric Opportunity through Partnership Encouragement Act, or HOPE II, grants Haitian apparel exports duty-free entry into the United States. At the same time, Haiti remains a beneficiary under the Caribbean Basin Trade Partnership Act (CBTPA). HOPE II allows Haitian apparel factories flexible use of third-country materials in production, subject to value-added requirements and quantitative limits (expiring in 2011) and quantitative limits only for woven and knit apparel (expiring in 2018). To stimulate textile industry development and regional trade integration, CBTPA extends benefits to garments made from fabrics produced in the region of U.S. yarn. Together, HOPE II and CBTPA give Haiti an advantage over all other U.S. trade partners in the most valued trade benefit for apparel: the right to use fabrics produced outside its borders — whether from the United States, U.S. trade agreement and trade preference partners, or third countries — to manufacture apparel, export it to the United States, and qualify for duty-free benefits. HOPE II grants Haitian apparel exports duty - free entry into the United States . XIV B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY In designing HOPE II, U.S. lawmakers provided maximum flexibility and required that apparel factories respect labor rights — such as rights to organize, bargain collectively, and be free of employment discrimination — in order to qualify for benefits. As mandated by HOPE II, Better Work, a multicountry program managed by the International Labor Organization and the International Finance Corporation, was recently established in Haiti as the Technical Assistance Improvement and Compliance Needs Assessment and Remediation (TAICNAR) program. In addition, the legislation includes a provision that apparel produced in Haiti can be exported from the Dominican Republic to the United States. This accommodates goods produced in Haiti along the Haitian – Dominican border in the free trade zone at Ouanaminthe. Foreign inve stors are taking notice of the rebirth of Haiti‘s apparel industry. The industry currently employs only 25,000, but 23 companies — all but one in Port-au-Prince — manufacture a wide assortment of clothing items. Ten of these companies represent Dominican, Korean, and U.S. investors, and several have indicated their intention to expand their workforces. Brazilian investors also seem eager to invest in Haiti. CODEVI , Haiti‘s largest single apparel factory and the only one outside Port-au-Prince, represents an experiment in Haiti. Owned by Grupo M of the Dominican Republic, the factory is located in a free trade zone on the Dominican border, employs between 3,700 and 4,000 workers and is ready to add several hundred more, and is the only apparel factory in Haiti whose workers are represented by a labor union. Electricity, telecommunications, and transport to and from ports are all provided in the Dominican Republic. In Haiti, ―free trade zones‖ and ―industrial zones‖ qualify for similar benefits and support. Haiti‘s investment laws allow for temporary admission of raw materials needed for export-oriented industries, and customs officials work effectively with manufacturers to ensure timely inspection of containers at the factories. Aside from the generous terms of access to the U.S. market under HOPE II, Haiti‘s labor force is its biggest asset— in terms of cost and quality. The low minimum wage of 70 Haitian Gourdes ($1.75) per day that was in effect during the study period was raised to 125 HTG ($3.13) on October 1, 2009, with further increases scheduled in October 2010 (150 HTG) and October 2012 (200 HTG). Total earnings of workers in the apparel industry, inclusive of production quota bonuses, are in excess of the minimum wage today. While not the lowest worldwide, these labor costs are competitive with regional and global benchmarks. Just as important, Haiti‘s apparel workers are eager for steady employment and are reliable — despite low wages and high costs associated with employment (e.g., transport to and from work, meals away from home, occupational health concerns, workplace stresses). Absenteeism and turnover are both low at 2 percent and 4-6 percent per year, respectively. And in late 2009, a training center being designed with input from [TC] 2 , a leading U.S. center for applied apparel industry research and training will begin training sewing operators and mid- level personnel for what is expected to be an expanding labor force. Forty percent of Haiti’s apparel factories are foreign - owned o r joint ventures. Haiti’s labor force is its biggest asset — in terms of cost and quality. E XECUTIVE S UMMARY XV To take full advantage of its trade agreements and its solid, reliable workforce, Haiti‘s apparel industry has to meet challenges in general infrastructure, factory productivity, and international image. First, the two most commonly cited infrastructure constraints are unreliable and costly electricity and the dwindling supply of available industrial space. Electricity costs for industrial users are an extremely high 23 U.S. cents per kilowatt-hour — well above regional and global benchmarks, and soon to be increased by the Haitian Electricity Authority. Unless curbed by special tariffs, these costs will discourage development of a textile industry, a longstanding dream of planners in Haiti‘s apparel industry. Industrial space is reportedly still available in Port-au-Prince — some 100,000 square meters were said to be open in August 2009. But with urban areas growing at rates three times that of the overall population, Haiti needs to plan for its future now and consider which other coastal towns might provide platforms for industry development. Donors are addressing these constraints by working to improve energy sector governance, electrical generation capacity, and electrical distribution security, and to plan and finance new industrial parks in Port-au-Prince and elsewhere, such as in Cap-Haïtien. The World Bank and International Finance Corporation are financing efforts to reduce losses and expand supply in the energy sector, and the Inter- American Development Bank will fund strategic planning for expansion of industrial space. Second, compared to global industry ―standard times‖ the produ ctivity of Haiti‘s apparel operations is low. Many factories operate at 35 to 40 percent of standard. In a well-run factory, productivity rates are between 60 and 75 percent of standard, as consistently achieved in various countries. The current challenge for Haiti‘s industry is to increase its levels to 50 percent of standard, or better. Third, Haiti‘s apparel firms have a reputation as being little more than T - shirt manufacturers — but in reality they manufacture a surprising range of fairly complex products. Most are made of 100 percent cotton fabrics, but factories also work with woolens and manmade fiber fabrics. Factories operate as cut-make- trim companies, subcontractors, and even full-package service companies. Some have automatic fabric spreading or computer-aided cutting or manufacturing facilities, others offer their own pattern marker and embroidery capabilities. They produce for a wide range of clients in North America, including two well-known undergarment and activewear companies (Hanes and Gildan) and a wide variety of fashion, performance, active, and work wear companies. In fact, none of the following points of ― common wisdom ‖ about the industry are true: Haiti only makes T-shirts and workers lack the skills to do more. In fact, Haitian operators are skilled in needle work and produce a wide range of products, even tailored men‘s suits . Haitian firms dominate the local apparel industry . Haiti already attracts foreign investors to its industry. Forty percent of companies are joint ventures or foreign owned. Electricity costs for industrial users are well above regional and global benchmarks. Haiti’s apparel firms should increase productivity to 50 percent of standard, or better. XVI B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY Hanes and Gildan dominate Haiti’s commercial landscape . These two renowned North American brands are significant, but are better viewed as anchors in a diversified customer network. Haiti’s factories only assemble garments from knit cotton fabric sourced from the Dominican Republic. Haiti‘s factories source fabric from all over the world, manufacturing garments of cotton, manmade fiber, wool, and other fabrics. Haiti’s apparel factories only provide cut, make, and trim services. A number of Haiti‘s factories offer specialized sourcing and production services. Haiti’s apparel industry is not yet taking advantage of HOPE . Haiti‘s apparel firms are responding to HOPE II trade opportunities, and the relative share shipped under HOPE has increased significantly in 2009. These are significant findings. Haiti‘s apparel industry presents global investors and apparel buyers advantages and challenges. On balance, prospects are quite good, with the industry likely to expand, perhaps even double, in the coming two years. No other supplier matches Haiti for its wages, trainable and dedicated workforce, trade preferences into the U.S. market, and physical proximity to customers (hence, short delivery times to market). Our findings on production costs a lso bode well for the industry‘s competitiveness. Haiti‘s apparel c ompanies are profitable and able to attract business — and are expanding as a result. Average pay levels in Haiti‘s apparel companies are high, and electricity costs paid by the industry are high but manageable. In most firms, productivity levels are a concern; improving worker nutrition may be one simple way to boost productivity. Haiti‘s apparel industry is starting to grow again. Business, labor, and government leaders recognize the importance of the industry to economic growth and poverty reduction, and appear ready to ensure that HOPE II leads to meaningful economic activity, employment, and improved welfare for Haitians. To help ensure such an outcome, Haiti should consider all possible niches it might fill in the global industry. Factories should commit to achieving higher productivity and to using various production management methods to smooth workflow through factory production lines without unduly taxing production personnel. Mindful of the TAICNAR program‘s focus on labor rights compliance and remediation, the industry should prepare now for unionization among a larger share of the apparel workforce. Private electricity generation capacity and industrial zone space, in Port-au-Prince and possibly in Cap-Haïtien, should be pursued. Finally, the energy and enthusiasm of Haiti‘s industry, labor, and government leaders, engaged through Commission Tripartite de Mise en Oeuvre de la Loi HOPE (CTMO-HOPE), should be tapped in shaping a new im age for Haiti‘s apparel industry abroad. Haitian firms are skilled in needle work and produce a wide range of products, even tailored men’s suits. Haiti’s apparel firms are responding to HOPE II trade opportunities. 1. Introduction In October 2008 the United States Congress enacted legislation that gave the Republic of Haiti expanded, flexible access to the U.S. market for its apparel exports. The Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2008 (HOPE II, updated from the original legislation passed in 2006) was welcomed for its potential to revitalize a decaying industry, attract new foreign investment, expand formal sector employment, and jumpstart growth and opportunity fo r Haiti‘s people. A presidential commission, the Commission Tripartite de Mise en Oeuvre de la Loi HOPE (CTMO-HOPE), works to ensure successful implementation of the legislation. 1 The purpose of the analysis of Haiti‘s apparel v alue-chain in this report is to provide a comprehensive view of the advantages and challenges of manufacturing in Haiti relative to manufacturing in the Caribbean and Central America and elsewhere . It situates Haiti‘s attributes and suggests priorities for improving its competitiveness relative to that of other suppliers. An apparel buyer in the United States today juggles an impressive list of potential suppliers from China and elsewhere in Asia and from Latin America and beyond. Each country offers a uniq ue combination of workforce skills, business environment, costs, ―full - package‖ services, proximity to raw material or to end markets, preferential access to the U.S. market, and thus competitiveness. This report helps readers to see how Haiti fits into this ever-changing global apparel market kaleidoscope. Research for this analysis was conducted using a combination of instruments, including (1) a structured survey questionnaire, in which three-quarters of the industry participated; 2 (2) detailed cost analysis for two standard products made in Haiti — knit T- shirts and woven men‘s ―chino s ‖ trousers— using cost data collected from nine firms; and (3) rapid appraisal interviews of representatives of Haiti‘s apparel industry and its broader private sector, Haiti‘s labor sector, donor organizations and donor-funded programs, and government, to understand the policy and business environments in which the industry operates. Field work took place between July 20 and August 15, 2009. In addition, trade benefits available to Haiti under the HOPE II 1 See Appendix A for information on the composition of the commission. 2 Appendix B lists Haiti‘s apparel manufacturers. 2 B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY agreement were compared with those available under the Caribbean Basin trade preference program, and with those available to Haiti‘s competitors under the Dominican Republic (DR)- Central American Free Trade Agreement. Findings presented here aim to enrich understanding of the industry in light of several strategic discussions being held in Haiti today (Perito 2009) . Haiti‘s National Growth and Poverty Reduction Strategy Paper, prepared in 2007 and updated in 2009, is being implemented with broad support from the donor community, including the United Nations, multilateral development banks, and bilateral donor organizations (Republic of Haiti 2007; Collier 2009; IADB 2009a). Special United Nations envoys to Haiti — former U.S. President Bill Clinton and his deputy Dr. Paul Farmer, co-founder of Partners in Health — have been engaged in these discussions, including discussions with Haitians residing abroad. The Haitian Diaspora Unity Congress held its second annual international conference in Miami in August 2009 to strategize overseas Haitians‘ support for their homeland. A Haitian Presidential Commission on Competitiveness has issued its ―Shared Vision for an Inclusive and Prosperous Haiti,‖ facilitated by the OTF Group. The apparel cluster is among five priority growth clusters identified in the strategy, and the Competitiveness Working Group is developing priority actions for it (CWG 2009). In the apparel sector, industry stakeholders have been developing a strategic vision for the industry‘s future in Haiti (ADIH and I -Trade 2009). That vision aims for the industry to become a global supplier of choice, not only for apparel, but for home furnishings and accessories, increasing industry value-added to $1.6 billion worth of sales, one-third of which is to come from full-package operations, and expanding employment to 200,000. Table 1-1 summarizes strategic initiatives. As discussed more fully below, the Better Work Haiti program of the International Labor Organization and International Finance Corporation (ILO/IFC) launched the TAICNAR program on July 1, 2009 to address factories‘ compliance with core labor standards . In presenting a detailed, survey-based analysis of apparel industry operations to date, this survey complements this strategic planning. Apparel Industries Worldwide Around the world, apparel companies defy the odds. Clothing items are produced for the world market in countries where the minimum wage is $1.50 per day and in countries where it is $15.00 per day, in factories clustered next to the seaport in an industrial or free trade zone and in factories that spread around an inland capital city and send their filled containers by truck on a four-hour ride to the nearest port, in countries that enjoy free or preferential trade relations into their lead markets and in countries that do not. There is no one formula for success, as many different kinds of garments, human resource and skill sets, sourcing patterns, I NTRODUCTION 3 and value-chain strengths and weaknesses allow for the creation of infinite niches by various producers around the globe. Table 1-1 Summary of Strategic Initiatives in Haiti Initiative Lead Other Key Actors Strategic Role of Apparel Industry National Growth and Poverty Reduction Strategy Paper Haiti Ministry of Plan ning and External Cooperation United Nations & Columbia University‘s Earth Institute Manufacturing not considered to be a ―growth vector,‖ though the textiles are seen as a ―highly promising area.‖ From Natural Catastrophe to Economic Security Professor Paul Collier, Oxford University Prepared for the United Nations Secretary - General With advantages of HOPE II, garments production seen as logical lynchpin of economic recovery strategy. ― From the important perspective of market access Haiti is now the worl d‘s safest production location for garments.‖ Shared Vision for an Inclusive and Prosperous Haiti Presidential Commission on Competitiveness OTF Group Apparel considered to be one of five priority growth clusters for Haitian economy; priority actions bei ng defined. Apparel Industry Strategic Plan and Roadmap ADIH I - Trade Project, led by Chemonics Int‘l, supported by USAID Holistic vision; analysis of strengths, weaknesses, opportunities, and threats; consideration of marketing, communications, and busine ss environment priorities. Better Work Haiti ILO/IFC ADIH, CTMO - HOPE Responsible for the Technical Assistance Improvement and Compliance Needs Assessment and Remediation program. That being said, the global apparel industry is undergoing tremendous consolidation in the wake of the 2005 elimination of multilateral quotas on textiles and apparel trade. Production in far-flung places such as Saipan (part of the U.S. Commonwealth of the Northern Mariana Islands in the western Pacific) and Namibia (in southwest Africa) has ground to a halt. Even production in once prospering platforms is contracting. For example, shortly after the United Nations‘ Transitional Authority in Cambodia ended in 1993, apparel sector employment was under 20,000; it grew in ten years to 250,000 workers, then peaked in 2008 at about 350,000 workers (Salinger et al. 2005; EIC 2008), before losing an estimated 50,000 jobs to the combination of global recession, competition, and industry consolidation. In Lesotho, apparel industry employment soared from under 10,000 in 1999 to over 50,000 in mid-2004, four years after the African Growth and Opportunity Act (AGOA) was implemented; however, by 2005, garment industry employment in Lesotho had fallen to 40,000 under pressure from an overvalued currency and looming changes to origin requirements under AGOA (Bennet 2006). Moreover, the global economic slowdown has reduced apparel imports into the United States by 10-20 percent, as of the first half of 2009, depending on whether one looks at volume or value statistics. Thus the challenges facing a relative ―newcomer‖ to the global apparel trade, such as Haiti, are daunting. This underscores the importance for Haiti to attract foreign direct investment, and the value-chain savvy that it brings, into its apparel industry. 4 B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY The apparel industry has been an engine of growth and industrialization for developing countries around the world. It is one of the first formal sector opportunities to provide jobs and often higher incomes to its workforce, relative to their other livelihood opportunities. The attractiveness of such employment is underscored by the rural-to-urban migration that typically accompanies the emergence of an apparel industry. However, the ―easy‖ advances made by early industrializers, such as South Korea, are not as easily replicated today. Whereas the industry‘s internal logic was driven by the need to diversify sources of manufacturing in order to get around constraints imposed by textile trade quotas (i.e., before 1995), the internal log ic today is driven by retailers‘ desires to offload as many risky dimensions of the business as possible to vertically integrated, globally networked, technologically savvy, and socially responsible producers. These are likely to be far fewer in number, although buyers also strive to maintain some diversification for risk management. As workers gain experience and skills the processing of relatively simple goods such as clothing, higher value-added manufacturing activities in footwear, automobile components, toys, and sporting goods typically begins to take hold. Eventually, with continued industrialization and economic growth, industrial sectors push into increasingly sophisticated manufacturing of electronics components, machinery, and the like. As manufacturing skills advance and the value-added of products produced increases, wages also rise. This can lead to displacement of an apparel industry, as alternative employment in higher paying manufacturing pulls labor away and apparel manufacturers re-establish themselves in country‘s with more abundant and less costly labor supplies. This pattern has been observed in a number of European, North African, and Asian countries. With its heavy reliance on women workers, the apparel industry has also been an engine of empowerment for uneducated and low-skilled women in many countries. Access to earned income contributes to a new independence for women workers, many of whom shed the confines of their rural traditions as they move to cities to take up assembly work (Kabeer 2000; Gammage et al. 2002). Some portion of that income may be remitted home to support families‘ investments in agriculture, children‘s and siblings‘ education, and other priorities. Industrial work, however, also may expose apparel workers to new risks, potential rights abuses, and the costs of being in the workforce for long hours each day. This in turn puts additional stress on families, as traditional means of food preparation and care of children and the elderly must be adapted to women‘s long working hours. Yet w omen‘s employment in garment factories may be steadier, with a more reliable income stream, than the terms of employment faced by their male counterparts. Uneducated, low-skilled men are likely to be employed in informal sector jobs (e.g., construction, transportation, fishing) that offer few labor protections and even more variable income streams. In cases where women workers are married, this can introduce new pressures on traditional gender roles within the family. As is discussed in Section 3 below, Haiti‘s apparel industry— like the economy overall — has had a turbulent history. Increasing factory jobs in the apparel industry, coupled with independent I NTRODUCTION 5 monitoring to ensure that core labor standards are respected in the factories (as discussed further below) , could provide real hope to Haiti‘s apparel industry — and to the thousands of men and women who draw income from it — once again. Apparel Value-Chain Elements Globalization of the apparel value-chain has been apparent for more than three decades. The term ―value - chain‖ encompasses the entire range of activities ( Figure 1-1), from fiber production, through spinning, weaving or knitting, wet processing, apparel design, sampling, cutting, assembly, finishing, shipping, inventory management, and retailing, that results in consumers being able to purchase the clothes they want in stores, through catalogues, or via online retail sites. In Haiti, activities center on cutting, assembly, and finishing of garments, as detailed in Figure 1-1. Figure 1-1 Apparel Industry Value-Chain, Global and in Haiti These stages in the value-chain may be undertaken by different companies, distinct in ownership and management, connected through contractual relationships. Or they can be undertaken by diversified groups that manage some combination of these activities. Apparel industry expert David Birnbaum (2009) argues that location no longer matters to apparel buyers. Instead, what matters to retail customers is that they have full-service partners who can provide a range of goods and services, designing apparel lines, producing samples, sourcing (or Retail Shipping, inventory m a n a g e m en t Cutting, assembly, finishing Spinning, weaving, knitting Appar el design Fiber production Finishing and packing QC, in - factory inspection Sewing and assembly Laying, cutting, trimming fabric Pattern & marker making Import & warehouse raw materials Global Haiti 6 B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY even developing and contracting for the production of) the necessary raw materials, organizing the manufacturing, delivering finished quality goods exactly when needed in distribution centers or stores, and communicating or physically meeting with customers. ―The location of the plant and machinery becomes irrelevant,‖ he notes. In order to understand why textile and apparel industries locate where they do, it is important to understand the relative differences in their requirements. Manufacturing of textiles is capital- and energy-intensive, costing about $12 to $25 million for weaving mills and $50-$70 million for spinning mills. 3 Textiles production therefore concentrates in countries where the cost of electricity is reasonable, capital is available, and political and policy environment is predictable so that the significant investment is less likely to be at risk. On the other hand, manufacturing of apparel, in factories that cost $3 to $5 million to build, 4 takes place in countries all around the world, under a variety of geographic and economic conditions. Their most pressing requirement is a steady supply of labor. For the global apparel industry, there is no one formula for success, though a number of core elements are essential to a flourishing industry:  Unit costs, especially with regard to wages, space rental, and electricity, kept competitive through implementation of productivity-enhancing management methods to take advantage of every opportunity for increased efficiency and quality along the chain.  Availability of industrial space, skilled workforce, and working capital.  Stable working environment, with minimum of political and civil instability.  Verifiable compliance of factories with core labor standards.  Facile access to overseas markets, both to procure raw materials and to sell final goods.  Efficient trade processing to speed inputs and outputs across borders.  Visible, serviceable, and reliable relations with retail buyers. In addition to these core elements, each apparel enterprise seeks its own niche in the business, whether it is the ability to source and finance purchase of raw materials, the production of high volumes of simple goods, the ability to change production lines frequently for maximum order flexibility, sewing operators who are known for their advanced needle skills to produce complex garments, the ability to adjust markers to reflect product design changes, the addition of value through such processes as silk-screening or embroidery or special washes, the capacity for electronic integration of production controls with buyers‘ inventory management systems, the ability to replenish buyers‘ orders with minimum delay , management of trade logistics beyond the factory gate, and so on. Tighter integration with customers‘ information and 3 Investment figure benchmarks from Birnbaum (2009). 4 Ibid. I NTRODUCTION 7 logistics systems is an additional plus, as apparel retailers‘ increasingly shorter fashion cycles require ever more frequent supply replenishment and tight inventory management. Trade agreements or preference programs that confer duty advantages from a particular country increase the relative attractiveness of some production platforms, although many Asian countries of course succeed in garment exports despite their lack of such an advantage. Of the top ten suppliers to the United States only two — Mexico and Honduras — enjoy such advantages, and their U.S. market shares have diminished over the last five years. U.S. Apparel Trade Trends China dominates global apparel production, supplying nearly one-third of the value of all U.S. apparel imports in 2008 (see Table 1-2), 5 and U.S. buyers have come to expect increasing full- package servicing capability from apparel manufacturers, possibly including raw material sourcing and trade financing, as well as design, product development, sampling, and patternmaking services and help with raw material and final product inventory management. Thus the challenge for Haiti‘s apparel industry is not only to e xpand production to take advantage of HOPE II benefits and broaden employment opportunities, but to build capacity for these value-addition skills in order to strengthen the competitiveness of the Haitian apparel industry relative to other global suppliers. It is noteworthy that while the global economic slowdown has clearly affected total U.S. demand for apparel, not all countries have been affected equally. As of August 2009, the values of imports from China and Vietnam, for example, were down 6 and 5 percent, respectively, while the value of overall apparel imports was off 14 percent. Of the top 25 suppliers to the U.S. market, three countries are actually shipping increased total value to the United States, viewed on an annualized basis, namely Bangladesh (up 2 percent), Egypt (up 2 percent), and Haiti, up an impressive 22 percent, comparing 2009 annual equivalent imports values with 2008. 6 This is one of the strongest indications of the impact of the HOPE II legislation on Hai ti‘s reviving apparel industry. 7 5 The value of U.S. apparel imports has declined 14% (volumes down by 10%) due to the economic recession, using a twelve-month annual equivalent of imports shipped through August 2009, compared with the value of 2008 shipments. 6 In volume terms, Vietnam (up 2 percent), India (up 10 percent), Egypt (up 3 percent), and Haiti (also up 3 percent) are enjoying increases in SMEs shipped, based on annualized equivalents of imports through August 2009, compared with last year. 7 And, similarly, of the Qualifying Industrial Zone arrangement to Egypt, requiring minimum Israeli content in Egypt‘s apparel exports in order to benefit from duty -free access to the U.S. market. 8 B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY Table 1-2 U.S. Apparel Imports, Top 25 Suppliers ($US Million) 1995 2000 2005 2006 2007 2008 Aug - 09 Annual Equiv World 34 , 649 57 , 232 68 , 713 71 , 629 73 , 923 71 , 568 41,145 61,718 1 China 3 , 518 4 , 499 15 , 143 18 , 518 22 , 745 22 , 922 14,437 21,656 2 Vietn am 17 47 2 , 725 3 , 222 4 , 358 5 , 223 3,316 4,974 3 Indonesia 1 , 183 2 , 055 2 , 875 3 , 670 3 , 981 4 , 028 2,648 3,972 4 Bangladesh 1 , 067 2 , 116 2 , 372 2 , 998 3 , 103 3 , 442 2,351 3,527 5 Mexico 2 , 566 8 , 413 6 , 078 5 , 297 4 , 523 4 , 015 2,235 3,353 6 India 1 , 098 1 , 786 2 , 976 3 , 1 87 3 , 170 3 , 073 2,044 3,066 7 Honduras 919 2 , 323 2 , 622 2 , 440 2 , 511 2 , 604 1,319 1,979 8 Cambodia 1 808 1 , 713 2 , 151 2 , 425 2 , 376 1,225 1,838 9 Pakistan 550 920 1 , 259 1 , 412 1 , 499 1 , 490 858 1,287 10 Sri Lanka 928 1 , 472 1 , 650 1 , 682 1 , 573 1 , 467 843 1,265 1 1 T hailand 1 , 037 1 , 820 1 , 808 1 , 840 1 , 766 1 , 668 838 1,257 1 2 El Salvador 582 1 , 583 1 , 619 1 , 408 1 , 486 1 , 534 836 1,254 13 Guatemala 682 1487 1816 1666 1451 1388 721 1,082 14 Philippines 1 , 541 1 , 895 1 , 830 2 , 002 1 , 722 1 , 362 700 1,050 15 Italy 967 1 , 400 1 , 354 1 , 309 1 , 437 1 , 333 610 915 16 Nicaragua 74 336 716 879 968 934 562 843 17 Jordan 15 43 1 , 083 1 , 253 1 , 145 972 514 771 1 8 Egypt 234 406 444 625 697 742 506 759 19 Peru 125 383 800 844 814 794 411 617 20 Dominican Rep 1 , 731 2 , 425 1 , 849 1 , 548 1 , 057 841 405 608 21 Taiwan 2 , 049 2 , 064 1 , 134 1 , 005 861 721 335 503 22 Haiti 72 251 406 450 452 412 335 503 23 Malaysia 675 781 678 686 683 639 309 464 2 4 Canada 770 1747 1273 1167 960 699 305 458 25 Hong Kong 4 , 189 4 , 486 3 , 511 2 , 811 2 , 035 1 , 553 211 317 N OTE : Figures represent imports of both knit/crocheted garments (HS 61) and woven garments (HS 62). S OURCE : U.S. Department of Commerce, Office of Textiles and App arel, Major Shippers’ Reports (accessed September 3, 2009). Figure 1-2, which shows the changing shares of regional contributions to U.S. import demand, highlights the extent to which Asia‘s share has grown and Latin America‘s and North America‘s shares have fallen since the end of multilateral trade quotas in 2005. Shares from Africa and the Middle East/North Africa regions, on the other hand, have remained small. I NTRODUCTION 9 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1995 2000 2005 2006 2007 2008 2009 N Amer MENA LAC Eur Asia AFR Figure 1-2 Regional Sources of Supply to U.S. Apparel Market N OTE : Figures represent imports of both knit/crocheted garments (HS 61) and woven garments (HS 62) and are estimated based on the top 35 supplier nations into the U.S. market through June 2009, which represent 98% of total supply. S OURCE : U.S. Department of Commerce, Office of Textiles and App arel, Major Shippers’ Reports (accessed September 3, 2009). HOPE II has generated considerable investor attention in Haiti and abroad. Some foreign investors (e.g., Dominicans, Koreans, and Americans) have already established garment assembly operations in Haiti, either in the Ouanaminthe free trade zone (FTZ) on the northern Haitian border or in Port-au-Prince. Brazilian investors are expressing strong interest in Haiti and have undertaken joint missions to Washington with CTMO-HOPE to learn more about Washington‘s expectations regarding the legislation and the trade act ivity it is creating. As mentioned above, Haiti‘s Center for Investment Facilitation, located within the Ministry of Commerce and Industry, provides one-stop servicing for those seeking to launch commercial activities in Haiti. 8 Labor Rights in Apparel Industries Apparel industries have not always performed well with regard to respect for human rights. Abuses of labor standards have been observed in apparel factories ever since the days of the Industrial Revolution in the United Kingdom and the Lowell textile mills in Massachusetts in the early- to mid-1800s. Today, however, a broad consensus exists that labor rights are 8 Their French-language website is www.cfihaiti.net . An English version is expected to be operational soon. 10 B RINGING HOPE TO H AITI ‘ S A PPAREL I NDUSTRY fundamental human rights (Compa and Diamond 1996), as stated clearly in the 1948 Universal Declaration of Human Rights and the 1998 ILO Declaration on Fundamental Principles and Rights at Work. The ILO considers eight Conventions (C.) to represent ―core labor standards,‖ including C. 29 and C. 105 regarding forced labor, C. 87 and C. 98 on freedom of association and collective bargaining rights, C. 100 (equal remuneration) and C. 111 against employment discrimination, and C. 138 (minimum age) and C. 182 (worst forms) on child labor. Haiti is a signatory to all eight, having most recently ratified C. 138 regarding child labor in June 2009. In the 1990s and 2000s a number of highly visible labor rights abuse scandals rocked the global apparel industry. Brand label manufacturers and retailers were hit by consumer boycotts in response to allegations of child labor, labor union harassment, and substandard working conditions. Haiti‘s appa rel factories were not immune. A report by the National Labor Committee (NLC), a U.S.-based worker rights advocacy organization, highlighted labor rights concerns in Haiti‘s apparel factories, including violations of work hours and minimum wage laws and sexual harassment of apparel workers (Verhoogen and Kernaghan 1996). Several U.S. companies were singled out as buyers of goods from those factories, and sourcing bans on Haiti ensued. Global apparel companies have learned that consumers hold them responsible for respecting labor rights and decent working conditions, even when they are not directly responsible for manufacturing. Apparel producing countries are learning that buyers may be reluctant to do business with them if their labor sector is weakly governed. Failure to ensure compliance with labor standards, therefore, carries a potential cost in terms of lost sales to apparel companies and lost market share to producing nations. To address the need for improved labor sector oversight, a variety of public and private extra-governmental institutions have evolved over the last ten years to monitor working conditions inside factories. The aim of these institutions is to ensure greater transparency throughout the apparel value-chain regarding working conditions and degree of compliance with core labor standards (Polaski 2006). 9 One early such institution is the voluntary Worldwide Responsible Apparel Production (WRAP) certification, endorsed by the American Apparel Manufacturers Association in 1998. 10 The London-based MFA (Multilateral Fibre Arrangement) Forum, a private industry organization established to help the industry navigate through the end of the era of multilateral trade quotas, and international buyers‘ forums organized under the auspices, for example, of the San Francisco-based Business for Social Responsibility, provide the industry with opportunities for learning on this topic, and for interacting with manufacturers and local 9 For a fuller discussion of labor sector issues, including legal framework, labor organizations, government institutions, and labor markets, see Wheeler and Salinger (2009). 10 Information on WRAP certification can be found at www.wrapapparel.org . Five factories from Haiti are listed as WRAP-certified on this website (accessed September 4, 2009). As stat