Lovely Professional University

TERM PAPER- MGT 512 TOPIC: -Textile Industry Of PHILIPPINES

Submitted to:
Mrs. Reeta Kumari Course Instructor, MGT- 506 LPU

Submitted by:
Amrit Tandon MBA IB Regst # 10907213 LPU

Index
1. 2. Declaration Acknowledgement Page no: 3 Page no: 4

3. 4. 6 5. 6.

Preface Introduction- Philippine Textile Industry Background Textile Trade Scenario

Page no: 5 Page no: Page no: 6 Page no: 6

(Post WTO) 7. 8. 9. 9 Quota Phase Out Export Statistics Importance to the Economy Page no: 7 Page no: 7 Page no: Page

10. Impact of Tariff & Non Tariff no: 10

11. Tariff Reform Program 12. FDI Philippines 13. Investment Opportunities 14. Investment Barriers

Page no: 11 Page no: 11 Page no: 12 Page no: 12 Page Page no: 15

15. Trade Related Investment Measures no: 13 16. Reference

DECLARATION
I, Amrit Tandon, student of Lovely Professional University have completed the Project on:

Philippine Textile: To study the industrys trade scenario and analyse the trend related with it. Give suggestions to make it more effective and efficient.

The information given in this project is true to the best of my knowledge.

(Amrit Tandon)

ACKNOWLEDGEMENT
First of all I would like to thank the Lovely Professional University and take the opportunity to do this project as a part of the M.B.A. Many people have influenced the shape and content of this project, and many supported me through it. I express my sincere gratitude to Mrs. Reeta Kumari for assigning me a project on Business Environment, which is an interesting and exhaustive subject. He has been an inspiration and role model for this topic. His guidance and active support has made it possible to complete the assignment. I also would like to thank my Friends who have helped and encouraged me throughout the working of the project.

Last but not the least I would like to thank the Almighty for always helping me.

PREFACE
This project is undertaken to fulfil the project work component of the M.B.A programme in 1st Semester. My project guide from L.P.U is Mrs. Reeta Kumari.

This term paper is based on the study of the trade scenario the textile industry of Philippines and studying its contribution to the world textile trade.

Philippine Garments and Textile Industry

INTRODUCTION
The garments industry is definitely one of the growing industries in the country. Based on the manufacturing census, its share to total employment rose from 4.3 percent in 1972 to 16.6 percent in 1988. This figure, however, may even be considered as underestimated since it does not include the household based subcontractors of the garment exporters. Similarly, based on the manufacturing census, the share of the industry to the total value added in manufacturing rose from 1.0 percent in 1972 to 5.8 percent in 1988 (Austria 1994). Using national income accounts data, the share of the garments and, to a much lesser extent, footwear industries to the total value added in manufacturing rose from 3.4 percent in 1972 to 6.4 percent in 1994. Garments exports accounted for 3.3 percent of total merchandise exports (at constant prices) in 1972, with such share rising to 20.6 percent in 1994.

Industry

Background:

(pre

complete

industry

wto

integration) The Philippine garments and textile industry started from a cottage-type industry in the early 50s. From then, it has expanded, strongly positioning itself as the countrys leading non-traditional export. From US$36 million worth of garments and textiles exported in 1970, it has grown tremendously, reaching its first billion dollar in year 1987. The Philippine government and the private sector undertook aggressive joint marketing efforts that helped sustain the industrys performance through the 90s despite the Asian crisis. In year 2000, the industry breached the three billion dollar mark. With the policy reforms and initiatives currently being undertaken by the Philippine government to guide the industry towards enhanced competitiveness, a number of garment exporters have expressed confidence in surviving the anticipated competition.

Textile trade scenario (post industry - WTO integration)

From a cottage-based industry in the late 50s, the Philippines garment industry expanded rapidly in the 60s. When the ATC was signed in 1974, the quota allocated to the Philippines propelled the growth of its garment

manufacturing sector. The value of garment exports ballooned at an impressive rate from US$36 million in 1970 to US$2.4 billion in 2003. Most of the quota garment exports (almost 83%) were shipped to only one marketplace: the United States. The garment sector reached its peak in 1991 when it represented up to 35% of total export shares and had a workforce of roughly one million. However since the mid-1990s, the garment sector has steadily and continuously declined although it has remained the second highest foreign exchange earner next to the electronics sector. As of March 2005, the value of apparel and clothing exports decreased by 16.6% (US$149.23 million) compared to the same period last year (US$179.01 million). As early as 2001 and 2002, the local garment and textile industry had already been badly hit by a US$198 million export loss when several specific items such as baby clothing and luggage products were liberalized. This sent a clear and worrying signal of the times looming ahead for this Southeast Asian country. In the US market, the Philippines have been quickly losing its competitive edge against leading Asian exporters such as China, Vietnam and India. After ranking number 11 on the top 30 clothing exporters list in the US market for three consecutive years, the Philippines slipped last year to the 13th position. In the past ten years, its share of the US clothing market shrunk from 4.3% (1994) to 2.8% (2004) while Chinas share increased from 11.4% to 13.8% in the same period. None of the neighbouring Southeast Asian competitors such as Indonesia and Thailand have suffered such a sharp fall.

The Agreement on Textile and Clothing: Stages of Quota Phase-Out description:

January 1995: 1990 for January 1998: volume January 2002: January 2005:

Integration of at least 16% of the import volume of textile and clothing Integration of another 17% of the 1990 import Integration of another 18% Total integration of all textile and clothing

For over three decades, the Philippine textile and garment industry had secure access to big markets such as that of the European Union and the United States through the Agreement on Textiles and Clothing (ATC), commonly known as the Multi-Fibre Agreement (MFA). This legal instrument benefited this Southeast Asian country, like other small garment producers, as it entered the global clothing trade with an assured imports quota. However the final stage of the ATC phase out since 1 January, 2005 threatens this privileged position as it has ushered in a few cheap-labour heavyweight Asian producers such as

China, whose exports were previously restricted, and enabled them to export as much as they can.
.

Export Statistics:
The chart below shows the Philippine export of garments and textiles based on Textile Export Clearances (TECs) issued by the GTEB as of 31 December 2002. Significant findings on said data are: The US remains the countrys top export market, accounting for 74% of total garments and textile exports. Other important markets include non-quota markets and the European Union, both with 12% share, and Canada with almost 3%.

GTEBs final tally was a positive turnaround from the earlier trend ending third quarter 2002, which was down by 6%. Total performance improved and the decline was reduced to 2% at the close of the year, posting dollar revenues at US$2.84 B from US$2.90 in 2001. Export figures to the EU and non-quota markets indicate positive growth at 11% and 10%, respectively. Exports to Canada likewise increased by 2%.

The decline of exports to the U.S. continued to decelerate from 7% last quarter to 5% at the end of 2002. Even though consumer confidence in the U.S. remains relatively low, analysts say, it appears to be stabilizing. By major product classification, garments are their highest revenue earner, which account for 86%. This is followed by non-garments, which include luggage, home textile furnishings, tents, nets, industrial clothing, etc., with 10%share. Textile products like fabrics, yarns, threads and fibers, contributed 4%. Textile exports in 2002 grew by 32% to US$128 M vs. prior years figure of US$97 M. Garments growth was 1% from US$2.41 B to US$2.44 B. Non-garment exports, which were mostly luggage and bags, declined by 30% from US$389 M to US$273 M.

The growth in textile exports can be attributed to the textile companies success in shifting to non-quota markets like South Korea, Egypt, Cambodia, India and Jordan.

Importance of the Industry to the Philippine Economy:

The industry remains the Philippines second biggest dollar earner, next to electronics. It has contributed an average of eight percent (8%) to the countrys total export earnings for the past five years (1997-2001). As of 2001, the Philippines have exported garments and textiles to 110 countries, with some 1,200 manufacturers, 240 traders and 1,150 subcontractors contributing to the industrys performance. The industry is the leading employer of the manufacturing sector. It has an average employment of about 400,000. This figure is 14% percent of total employment of 2.9 million for the manufacturing sector as of 2001. The electronics industry has employed 300,000 workers (10%) as of that period.

Impact of tariff and non tariff barriers on Philippines Textile Trade

From 1974-1994, trade in textile and clothing with the United States, European Union and Canada has been governed by the quota system under the Multi Fibre Agreement (MFA). In 1995, the Uruguay Round under the World Trade Organization came into effect and integrated textiles and apparel into the mainstream by removing all quotas over a ten-year phase-out. At the stage of attainment of political independence in 1946 the countrys economic development, the import substituting industries were not efficient enough to compete against imports. And so the government, prodded by interest group lobbying, put up

high tariffs and import restrictions to protect local industries. Thus, begun the regime of high and widely dispersed tariffs, which gave protection to local industries. The revenues that the tariffs delivered to the government provided the extra appeal. However, under this high and widely dispersed tariff structure, balance of Payments problems emerged and persisted. The protected import substituting industries grew, but a bias against exports was structured into the economy. The high and dispersed tariffs brought additional costs. Smuggling was encouraged. A good deal of resources got spent not in creating wealth but in diverting the governments revenue share to private pockets. Given these undesirable outcomes, policymakers started a reform process towards a low and narrowly dispersed tariff structure with a uniform rate as the final goal. The tariff reforms showed positive results but its implementation was bereft with difficulties.

THE TARIFF REFORM PROGRAM in the 1980s

The Tariff Reform Program (TRP), which was carried out in 1981-1985 consisted of a wide- ranging revision of the Philippine tariff system. It was geared towards reducing or phasing out tariff protection which were deemed excessive, obsolete, or which the burden of protection outweighed the returns. It involved narrowing the range of tariffs from zero to 100 percent to 0-50 percent, and phasing tariff adjustments on fourteen sectors i.e., food processing, textiles and garments, leather and leather products, pulp and paper, cement, iron and steel, automotive, wood and wood products, motorcycles and bicycles, glass and ceramics, furniture, domestic appliances, machineries and other capital equipment and electrical and electronic industries. As a result of the TRP, the average nominal protection rate (NPR) was reduced from 34.6 percent in 1981 to 27.9 percent in 1985. A series of tax reforms from 1983 to 1985 gradually unified the sales taxes on imports and import substitutes, removing the additional protection from the differentiated sales tax rates. By 1985, the mark-up rate2was also reduced to a uniform of 25 percent on semi-essential and essential goods and was eventually removed in 1986. The removal of import licensing requirements was resumed in 1986. As of 31 December 1989, 2,4273 items were liberalized. Among the items where import licensing requirements were removed, included fresh fruits, iron and steel products, canned sardines and mackerel, fabrics and textiles, synthetic resins, pulp and paper and cement. Despite certain difficulties, the Philippine government in line with her commitment in the ASEAN, reduced duties to zero on 60% of its products in the Inclusion list of the Common Effective Preferential Tariff scheme of the ASEAN Free Trade Area (FTA). The Philippines is also participating in the negotiations for the FTA between ASEAN and China, and is currently negotiating with Japan for an FTA under the Japan Philippines Economic Partnership Agreement.

IMPLICATIONS OF LIFTING OF QUOTAS:

After ranking number 11 on the top 30 clothing exporters list in the US market for three consecutive years, the Philippines slipped last year to the 13th position.5 In the past ten years, its share of the US clothing market shrunk from 4.3% (1994) to 2.8% (2004) while Chinas share increased from 11.4% to 13.8% in the same period. None of the neighbouring Southeast Asian competitors such as Indonesia and Thailand have suffered such a sharp fall. Another negative implication of the progressive lifting of the quotas is the increase in overnight closures that leave more and more Filipino workers jobless and payless at the same time. This scenario sounds dramatically familiar to the 36-years-old sewer Liberty Abille. The Subic-based factory where Liberty was working shut down after declaring bankruptcy. The workers who had unsuccessful negotiated a Collective Bargaining Agreement (CBA) for two years filed a case to recoup the money against the Korean management who fled the country with a PhP3 million debt. As of March 2005, the value of apparel and clothing exports decreased by 16.6% (US$149.23 million) compared to the same period last year (US$179.01 million). As early as 2001 and 2002, the local garment and textile industry had already been badly hit by a US$198 million export loss when several specific items such as baby clothing and luggage products were liberalized. This sent a clear and worrying signal of the times looming ahead for this Southeast Asian country

FDI- PHILLIPINES Investment Opportunities

There is a vast range of investment opportunities in garment production related services such as sample making, fabric designing, pattern-making, washing, dying, printing and finishing. There is also an opportunity for investment in the commercial production of indigenous fibers such as banana, pia, abaca, ramie and silk, which are abundant in the Philippines. Incentives offered to investors include: income tax holidays; additional deduction for incremental labor expenses during the first five years from registration; tax and duty exemption from taxes and duties on imported spare parts when brought in through the firms own bonded manufacturing warehouses; unrestricted use of consigned equipment; employment of foreign nationals; and tax credit for imported raw materials used for the exported products.

INVESTMENT BARRIERS

Significant restrictions apply to foreign investment in the Philippines economy. The 1991 Foreign Investment Act contains two "negative lists" collectively called the "Foreign Investment Negative List," enumerating the areas in which foreign investment is restricted. The Act requires the government to update the negative list every two years. A new list is scheduled to be released in the first quarter of 2009. List A reflects foreign investment restrictions mandated by the Constitution or specific laws. The list includes sectors in which investment is reserved for Philippine nationals (e.g., mass media, small-scale mining) and sectors in which foreign equity participation is limited to a certain maximum share (e.g., natural resource extraction, where foreign equity is limited to 40 percent). List B contains limitations on foreign ownership imposed by the executive for reasons of national security, defense, public health, safety, and morals. Sectors covered include explosives, firearms, military hardware, and gaming activities, with foreign ownership generally limited to 40 percent. List B also restricts foreign ownership in certain small- and medium-sized enterprises (firms capitalized at less than $200,000) to 40 percent. The 1987 Philippine Constitution bans foreigners from owning land in the Philippines. The 1994 Investors Lease Act allows foreign companies investing in the Philippines to lease land for 50 years, renewable once for another 25 years. Deeds are often difficult to establish and records are poor. The deeds and property infrastructure is full of ambiguities, which makes it difficult to establish clear ownership and to lease land, a situation that is further exacerbated by the fact that the court system does not settle cases in a timely manner. U.S. and other foreign industry consider unresolved disputes regarding land claims constitute a significant barrier to investment in the mineral exploration and processing sector.

Trade Related Investment Measures

In 1999, the Philippine Department of Justice determined that a 1987 executive order mandating the use of locally-produced raw materials by the soap and detergent industry conflicts with the Philippines obligations under the WTO Agreement on Trade-Related Investment Measures. Nonetheless, it has not repealed this executive order. In addition, regulations governing the provision of Board of Investment administered incentives impose a higher export performance requirement for foreign-owned enterprises (70 percent of production) than for Philippine-owned companies (50 percent).

CONCLUSION:
The industry expanded rapidly during the 1960s and 1970s but has recently experienced a decline. This has been due mainly to tougher conditions in

export markets and a failure to invest in new manufacturing technology. Exports have been a key driver of growth in the past. The country used to be one of the largest sources of imported garments for the major markets of North America and Western Europe when exports from its major competitors were held back by quotas. However, the arrival of a new world trade regime at the beginning of 2005 has caused serious damage to the countrys international competitiveness. As a result, China and other Asian countries are capturing an increasing share of these markets. Even so, in 2005 the textile and garment sector was the Philippines second largest source of export earnings with a 6.2% share, although this was down sharply from 10% in 1997. There is an urgent need for the industry to restructure into larger manufacturing units, and to re-equip itself with modern high-tech machinery in order to secure greater economies of scale, higher productivity and an improvement in its competitiveness. On an encouraging note, there has been a substantial increase in foreign investment in the past five years. Much of this has come from other Asian producers who, more and more, are regarding the Philippines as an attractive location for textile and garment activities. Research and investment is also going into the development of indigenous fibressuch as abaca, banana, pineapple and silkin order to ease the countrys serious lack of locally sourced raw materials.

Reference:
(http://www.emeraldinsight.com/Insight/viewContentItem.do? contentType=Article&hdAction=lnkpdf&contentId=1509191) paid article http://www.icrier.org/pdf/WP172.pdf phi- http://tradelin http://www.researchandmarkets.com/reports/363760/prospects_for_the_textil e_and_garment.htm http://www.icftu.org/www/PDF/RP_Garment_Report_170605edited_260605EN. pdf http://dirp4.pids.gov.ph/ris/dps/pidsdps0608.pdf

http://www.ustr.gov/sites/default/files/uploads/reports/2009/NTE/asset_upload _file263_15500.pdf http://www.mofa.go.jp/policy/economy/apec/conference/present0409/philippi nes.pdf