Succeeding at Sewing; the Most Sweeping Reform in Industrial History Leaves China Poised to Rule the Garment Trade

Article excerpt

Byline: George Wehrfritz and Alexandra A. Seno (With Sudip Mazumdar in New Delhi)

John Cheh sells the shirt on his back. As chairman of Esquel China Holdings in Hong Kong, he runs a top producer of men's woven cotton shirts--or category 340Z under the World Trade Organization quota system that expired last week. "It's a high-end shirt with high yarn count. It has the feel of quality," he says, stroking his collar. Sold by Nordstrom for about $50, the label reads: MADE IN MALAYSIA.

That claim complies with the quotas hammered out by trade negotiators over the decades, to be sure. But Cheh's shirt--along with millions of other garments now sold in the United States and Europe--is a camouflaged Chinese export. The cotton grew in Xinjiang, became yarn at a spinning mill in the Silk Road oasis town of Turfan and journeyed some 3,000 kilometers by truck to be woven into fabric in China's Pearl River Delta. In local garment factories, thousands of young women cut the cloth into patterns, stitch panels together and gather buttons, zippers and clasps into kits that are then "finished" by workers who sew the pieces together in nations like Malaysia. Even the MADE IN MALAYSIA labels are made in China.

It was this wasteful supply chain that the World Trade Organization aimed to sever back in 1994, when it resolved to abolish quotas that have contorted the global garment industry like a bonsai tree. Quotas officially expired on Jan. 1 in what amounts to the largest simultaneous industrial rationalization in the history of, well, industry. What comes next is globalization's first great test of the new millennium. Most forecasts portend dramatic change: billions in savings on production costs, the death of an industry of middlemen who specialized in quota dodging and falling prices for shirts, shorts, scarves and socks as manufacturing consolidates in the nations that do it best. Nearly all analysts believe China will come out on top in a battle for control of the $350 billion industry, but not for the reasons you may think.

More than 60 countries now export garments to the West, and several dozen are likely to be driven out of the textile trade (following story). Nations like Cambodia that bet their futures on the promise of preferential access to U.S. and European consumers have now lost that special privilege. Unions and lobbyists around the world are fighting to erect new barriers to slow the exodus of jobs and contracts to China, claiming that its current and expected future dominance is built on a system of state-run "sweatshops," implying rock-bottom wages in miserable factories.

This is a distortion, at best. China's textile advantage has little to do with its wages (which are considerably higher than those in India, Indonesia or Vietnam) or even with labor costs more generally (which account for only about 10 percent of the cost of a shirt). Recent outbreaks of labor unrest in the Pearl River Delta are a story of worker expectations rising faster than wages--not "a race to the bottom," as some activists would have it.

What truly distinguishes China are its state-of-the-art factories, its rapidly improving transportation network--and its talent for exploiting the absurdities of the quota system. China estimates that it now turns out more than 20 billion finished garments a year, roughly four pieces of clothing for every person on Earth--the largest output by a single country ever recorded. And that figure does not even include the uncounted billions of kits that end up as clothes "made in" Malaysia, Mauritius or the Maldives.

China's current dominance of the textile trade extends well beyond its own official quotas, and lays the basis for its future expansion. The mainland's garment industry has grown 500 percent since 1990, from $10 billion to $50 billion, and now has 40,000 clothing manufacturers that employ some 15 million workers. In a recent Goldman Sachs poll of large American retailers, most expected China's share of the U. …