Garments industry, on the death throes?

The country’s garment and textile export sector used to be a $3-billion sunrise industry in the 1990s. But the difficulties in overcoming the challenges brought by the end of the MFA, or the Multi-Fiber Agreement, which grants preferential tariffs to the country’s exports of garments and textiles, have pulled the growth back.  The industry has been on a downhill since then.

The MFA advocated quota allocations in identified textiles and garments that are for export to developed countries from developing countries such as the Philippines, India and Vietnam. In 1995 the MFA was replaced by the Agreement on Textiles and Clothing (ACT), which aimed to assimilate the garment and textile sectors, and stop restrictions in the MFA, including quota allocations. This led to the full adoption of the General Agreement on Tariffs and Trade (GATT), and put an end to the quota system by year 2005.

Countries, such as ours, which depended on quotas endured difficulties leading to closure of factories and downsizing. At present, the industry still has enormous promise which could generate jobs. I was told that the Board of Investments (BOI) is  bent on procuring market access in key export markets such as Japan, Europe and the United States, through free-trade agreements and preferential trade arrangements (PTA), including the Generalized System of Preferences (GSP), and the GSP+. But is this the reality?

Exactly two years ago, DOF Secretary Sonny Dominguez and one of his “bright boys,” Undersecretary Tonette Tiongko, briefed journalists about the proposed tax-reform program that later metamorphosed into TRAIN 1 and 2. But the program had a backside: the recast of the overall economic policy, chucking the export-oriented economic strategy and readopting the import substitution policy of the postwar period.

The overall reversal of economic strategy, according to Tiongko, has rested mainly on the findings of Filipino economists that the World Bank-imposed, export-oriented economic strategy has hardly replicated the successes of Japan, Taiwan and South Korea, all export-driven economies. The Philippines did not prove to be a viable laboratory of the World Bank economic doctrines and prescriptions, as exports had remained dismally low, while Filipino workers continued to go elsewhere to seek greener pastures.

The change in economic doctrines had serious repercussions on one of the bright spots in the export sector —the Philippine garment industry. Not all export-oriented industries performed dismally. The garment industry used to post encouraging performance, as it was always the second-best performer for several years.

Unfortunately, Philippine Statistics Authority data on merchandise exports show that the once-mighty local garment industry has slid from being the second-largest merchandise exporter after electronics in the early 2000s to 15th by 2017. The P140 billion in exports in 2000 dropped by more than half to P65 billion in 2017.

The garment-export decline started in 2004, when the Philippines lost its quota in the US market. But it had rebounded when the Aquino administration worked to revive it. In 2013, the Philippines entered into an agreement for GSP+ (Generalized System of Preference plus) with the European Union (EU). The GSP+ agreement contains provisions that include PTA with EU member- nations for certain commodities/products from the Philippines. One of the commodities is garments.

Countries like Vietnam and China did not have the privilege the Philippine garment industry enjoyed. The Aquino administration successfully negotiated the agreement to revive the garment industry, which became moribund for a while because of the loss of the US market quota.

By extension, the PTA accord with EU likewise revived the then-ailing textile industry because it required Philippine garments to enter the EU market with duty-free privileges, if the local garment manufacturers used fabrics that were domestically manufactured (knitted or woven).

The slow death of the garment industry is not limited to the 2016 de facto change of overall economic policy to import substitution. Prior to 2016, the slow strangulation of the garment sector started in July 2014, when the tax credit incentive system for BOI-registered textile mills was unilaterally suspended. Department of Finance officials cited alleged fraud committed by an obscure DOF line office which dispensed tax credit certificates to textile manufacturers.

The fraud allegation was not established, even after the Commission on Audit had stepped in to conduct an audit that lasted for three-and-a-half years, or 44 months. The COA started its audit of the One Stop Shop and Duty Drawback Center (OSS Center) in January 2015, but released its final audit only in July 2018. The lengthy and long-drawn final audit report is posted on the COA web site.

The final COA report has become controversial because of the contentious technical aspects raised in the report. Garment and textile manufacturers are up in arms against the sweeping conclusions of the final report, prompting them to make official exceptions. The final report is on appeal.

In her April 12 letter to COA Chairman Michael Aguinaldo, Margarita de la Rama, president of the Garments Business Association of the Philippines (GBAP), said the long-drawn audit process had triggered losses for the garments industry, even as she challenged the appropriate state agencies to file charges against the garment firms involved in fraud.

De la Rama also cited the drop of $1.6 billion in export earnings of the garment sector and loss of jobs for 400,000 workers. She decried unfair competition from foreign firms, and urged state auditors to refrain from writing the obituary for the garment and textile industries.

During their 2016 press briefing, Dominguez and Tiongko explained that part of the shift in overall economic policy is the rationalization of fiscal incentives, including the abolition of the tax credit certification system from which a number of garment and textile firms had received refunds of their taxes as incentives.

It has been pointed out that many textile and garment firms have been largely  dependent on the tax incentive system. In the absence of appropriate alternatives, however, these manufacturers were left with no choice but to continue making do with what was available to them.

The tax incentive system has been instituted as part of the export drive of the country. Export-oriented firms usually rely on the tax incentive system to enable them to compete in the world, stay financially afloat and sustain their growth.

 

For comments and suggestions, e-mail me at mvala.v@gmail.com.

 

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