From Vol. 33, No. 2, 2005

ICCR is a coalition of 275 faith-based institutional investors, as well as socially responsible investment firms, public pension funds, foundations and universities. ICCR members have engaged apparel companies and retailers on supplier standards issues for more than ten years. ICCR members have pressed companies to work with their suppliers to improve wages and working conditions in the factories from which they source and to contribute to the sustainability of the communities where their factories are located.

In the past few years ICCR members have raised concerns with corporations about how workers, communities, suppliers, factories, countries and shareholders will be impacted by the expiration of the Multifiber Arrangement (MFA) on January 1, 2005. The expiration of quotas is likely to create a crisis in a number of economically poor countries where workers and communities will be adversely impacted as some factories close, consolidation occurs and apparel production moves elsewhere.

Although this event is arguably the most significant change to affect the global apparel sourcing system in twenty years, we have found that little information is available to allow shareholders and other stakeholders to assess how companies are addressing this significant event. These changes in the global apparel system could over time disrupt the lives of millions of workers and impede the economic development of a number of countries. We therefore sent a letter and key questions to sixty-five apparel companies and retailers in 2004 to obtain more information about how companies were approaching this critical development in the global apparel system.

This report analyzes the responses we received, raises critical questions about the sustainability of local communities in a post-MFA world and makes recommendations to companies to act responsibly, and along with other actors-governments, international institutions, nongovernmental organizations and unions-do what is possible to avoid negative impacts on workers and communities as apparel supply chains consolidate and some factories close. This report will be the basis for follow-up in company dialogues with a number of the companies surveyed to gain a clearer understanding of how companies and their suppliers are responding to the MFA expiration and to seek responsible action to address the impacts on workers and communities in the countries where their products are made.

Introduction
History of the Multifiber Arrangement:

From 1974 through 1994, the Multifiber Arrangement (MFA) governed world trade in the textile and apparel industry. The MFA provided the basis on which the United States (US) and European Union (EU) countries restricted imports from developing countries. Under this system, quotas for textile and apparel products were negotiated each year on a country by country basis, assigning the quantities of specified items which could be exported from developing countries to the US and EU. The quota system was originally introduced to protect the domestic industries in the US and EU. However, it resulted in many developing countries being able to build up textile and apparel sectors while gaining access to markets and shelter from the pressures of global competition. Because exports from any specific country were limited based on fiber content and type of apparel article, each factory in each country was able to carve out production space based on this quota system. This system kept production spread throughout a multiplicity of factories and countries, and in large part helped produce the global supply chains we see today, where an individual corporation may source from seventy or eighty different countries.

Some Countries at Risk:
Bangladesh
Cambodia
El Salvador
Honduras
Lesotho
The Philippines
Sri Lanka
Thailand

In 1994, during the Uruguay Round of negotiations related to the World Trade Organization, an agreement was reached to phase-out the MFA in four stages over ten years resulting in the expiration of the MFA on January 1, 2005.

The End of Quotas
Without the MFA, many poor countries that have benefited from quotas are now going to be forced to compete with producers elsewhere, especially China, the country that many expect to gain the most from a quota-free world. There are many variables and uncertainties related to the impact of the quota phase-out on various actors, but thousands of apparel factories could close and millions of workers could lose their jobs, particularly in countries where the domestic apparel industry developed primarily in response to the quota system.

For example, according to experts, Bangladesh could lose a million of the 1.8 million jobs in its textile and apparel industry that developed under the quota system. The consequences are serious-85.8% of Bangladesh's total merchandise exports in 2001 were textile and apparel products. Workers laid off in the apparel sector will have a slim chance of getting a job in other sectors of the Bangladeshi economy. This situation is particularly difficult for women, who represent 90% of the workforce and have acquired a new social status with jobs in the industry. There is no safety net for the unemployed, no state social-security plan and no unemployment benefits.

Without quotas, clothing brands, retailers and suppliers will have greater flexibility to consolidate their supply bases in those countries that provide the best business opportunities.

Why ICCR Is Concerned
ICCR members have engaged apparel companies and retailers on supplier standards issues for more than ten years. ICCR members have pressed companies to work with their suppliers to improve wages and working conditions in the factories from which they source and to contribute to the sustainability of the communities where the factories are located. We have urged companies to adopt codes of supplier conduct based on internationally recognized human rights and labor rights standards, including the International Labor Organization's (ILO) Core Labor Standards. We have promoted effective internal and independent monitoring systems, remediation of problems found, training and education of workers and managers on labor compliance, and involvement of local community stakeholders in social compliance and public reporting.

We have encouraged brands and retailers (companies) to create stable relationships with suppliers and to stay in factories to use their influence to improve conditions for workers, rather than terminating contracts when problems are found.

Against this backdrop of sustained engagement with corporations on global labor standards issues, we have also raised concerns with corporations about how workers, communities, suppliers, factories, countries and shareholders will be impacted by the expiration of the Multifiber Arrangement. The phase-out of quotas is likely to create a crisis in a number of economically poor countries where workers and communities will be adversely impacted as some factories close, consolidation occurs and apparel production moves elsewhere.

Despite the social and financial risks related to the quota phase-out, very little information is available to allow shareholders and other stakeholders to judge how companies are addressing the challenges posed by changes in the global apparel system that could over time disrupt the lives of workers and impede the economic development of some countries.

Need for Information and Evaluation
Several years ago, ICCR members and associates began raising the question of the impact of the quota phase-out with a number of apparel companies where we participate in ongoing dialogues related to labor compliance and monitoring in their supply chains. As we learned more from our partners around the world about the potential negative impacts of the phase-out on workers, we asked corporate representatives whether they were planning for various contingencies. We found that, in most instances, there were no ongoing discussions related to the MFA phase-out.

In the Spring of 2004, members of ICCR's Contract Supplier Working Group decided to send a letter and key questions to apparel companies and retailers to obtain more information about how they were approaching this critical development in the global apparel system. The letter said in part:
"The expiration of MFA raises two related concerns, both of which may present significant risks and lead to the relocation or to the closure of apparel factories in developing countries, which in turn could lead to a drastic decrease of jobs in textile and apparel industries in those countries. In particular, we are concerned that the expiration of MFA:

(1) Will have significant economic impact upon developing countries in Africa, Central America, the Middle East and South Asia; and
(2) May have significant negative impacts upon our company's supply chain."

We asked companies to respond to some key questions, including:
o Does the company have a written strategic plan to address the phase-out?
o Has the company made any commitments to continue to source its textiles and/or apparel goods from developing countries likely to experience negative impacts from the MFA phase-out?
o Has the company made any provisions, either independently or in collaboration with its suppliers, other companies, international institutions or governments, to establish funds to provide compensation, re-training or alternative employment as a response to job displacement?

The letter was sent to sixty-five companies in the summer of 2004. We received responses from twenty-nine from September to December 2004.

The analysis of the company responses below does not mention specific companies by name. The analysis focuses on what can be learned from the pattern of responses we received from this universe of companies and on the questions the survey responses raised. The section following the analysis then addresses lessons learned and provides recommendations for next steps.

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Article written by ICCR's Contract Supplier Working Group