The Debate about Tariffs for the South African Clothing Industry

The new Zuma government is under extreme pressure from the unions to protect jobs. Is the prospect of rising tariffs the correct way to both appease the unions and protect jobs? Will the implementation such economic policies create long-term sustainability; provide growth opportunities in the South African clothing industry?

The following articles debate these questions.

An article entitled “Zuma-ites eye higher tariff walls” appeared on the Mail & Guardian website on 19 May. This article highlights the apparent willingness of the South African Department of Trade and Industry (dti) to raise tariffs in support of certain strategic sectors which are deemed “job creators”.

After referring to a study which indicates that there is significant scope for the South African government to raise tariffs without violating the country’s World Trade Organisation (WTO) commitments, the article then implies that the differences that exist between South Africa’s applied and bound tariffs represent a “cost” to the country.

Some of the figures quoted in the M&G article appear to be inaccurate however, and thus the inferences drawn from them are misleading. Furthermore, the notion that differences between applied and bound tariff rates reflect a ‘cost’ to the economy is simply wrongheaded.Clothing and textile dutiesThe M&G article refers to a study undertaken by the South African Institute of International Affairs (SAIIA).

While the study itself is quite skeptical about the benefits of increasing tariffs, some of the data quoted in the study appears to lend support to the idea that SA has significant room to manoeuvre when it comes to raising tariffs. This, however, is not the case, at least in certain industries.

The study claims for instance that the average applied tariff for clothing and textiles is 22.4%, while the average bound duty is 35.9%. These figures are then taken to imply that the government has significant scope for increasing duties on clothing and textile imports. There are a number of problems with this conclusion.

According to South Africa’s schedule of commitments to the WTO, all clothing imports (HS lines 61 and 62) are subject to a bound duty of 45%. South Africa’s tariff book shows that the average MFN applied duty on these imports is currently 37.3% . Significantly, 88% of clothing tariff lines – including all 30 lines earmarked for an increase in duties by the dti in its Draft Rescue Package for the clothing and textiles industry - are subject to an MFN duty of 40%, only 5% lower than the maximum that could be applied.

To put this in perspective, import duties of 5% or less are generally considered ‘nuisance tariffs’, as the cost to governments of collecting them is often more than the revenue they generate. Clearly there is not that much scope for an increase in duties on clothing imports.In the case of textiles other than clothing items, South Africa’s schedule of commitments to the WTO shows that bound duties vary from 0% to 30%, with an average bound rate of approximately 21.8%.

Currently the average MFN applied rate for these goods is approximately 14.8%. Again, this difference is not that large. It appears then that the figures from the SAIIA study are inaccurate, and that they greatly overestimate the government’s scope for raising tariffs, at least in the case of clothing and textiles.

Raising duties on textiles other than clothing items makes little economic sense anyway, as a significant proportion of textile imports are used by local manufacturers as inputs in the production of clothing and other products. By increasing tariffs on these imports, the government would drive up costs for local producers, resulting in these producers becoming even less competitive, and having to charge more for their products.

This would result in higher prices for local consumers and smaller profits for local retailers. The dti has recognized the folly of increasing duties on imports which are used as inputs in local manufacturing, and has therefore proposed reducing tariffs on certain textile imports.

When examining existing tariffs, is also important to take into account the fact that average applied duties are influenced downwards by the existence of imports on which no duties are charged. Many of these imports enter SA ‘duty free’ as there is no significant production of these goods by domestic firms.

This means that the applied duties on those goods for which there is significant local production, and thus for which there is at least some sort of rationale for increasing tariffs, are likely to be much closer to bound rates than are average applied duties. The implication of this is that the goods for which there is the most rationale for increasing duties are those goods for which there is the least scope for doing so.

Another important consideration is that while the government would be able to unilaterally increase MFN applied duties to bound rates, this would have no effect on the duties imposed under South Africa’s various preferential trade agreements, including the Trade, Development and Cooperation Agreement (TDCA) with the European Union – South Africa’s largest trading partner.

In order for the government to increase duties on imports covered by these agreements, it would have to renegotiate the agreements with the other concerned parties. This is likely to be a difficult and time-consuming process, and in order to get these parties to agree to increased South African duties, the government would almost certainly have to offer them certain concessions.

This might involve the lowering of duties on other goods, which could result in certain local industries benefitting at the expense of others.Is the fact that applied tariffs are lower than bound levels costing the country?The M&G article speaks of the difference between applied and bound duties, often referred to as the ‘water’ in a tariff, as reflecting a “cost” to South Africa. This is simply not the case.

Increasing duties would indeed result in a modest increase in government revenue, provided these duties did not result in lower volumes of imports (something which is quite possible). Nevertheless, this would merely reflect the fact that South African consumers would have to pay more for their imported goods.

The increase in tariffs would represent a transfer from consumers to government, in other words, it would act as another form of consumption tax.Raising tariffs would also result in a number of indirect costs to the South African economy. These could include lower profit margins for retailers, a drop in demand for all goods following the loss of spending power that results from an increase in the prices of imports, higher input costs for firms who use imported goods as inputs in their production, upwards pressure on inflation caused by the higher prices of imported goods, costs to retailers in establishing new supply chains where higher tariffs make existing sources to costly, and a greater incentive for avoiding paying customs duties.

Given that all these costs could easily outweigh the benefits that might accrue from increased tariff revenue (as well as the protection higher tariffs might provide for some local industries), it makes little sense to describe the fact that tariffs have not been raised to bound rates as representing a cost to South Africa.

Some thoughts

Since the release of Nedlac’s Framework Document for South Africa’s Response to the International Economic Crisis there has been much talk of government raising tariffs to protect certain sectors which it believes to be strategically important.

In particular the dti has spoken of assisting industries which show significant potential for job creation. The dti regularly refers to industries such as clothing and textiles as ‘job creators’, but what exactly does it mean by this? Surely any industry could in theory be a ‘job creator’ if government throws enough money at it? Evidence shows that the clothing and textiles industry has been shedding jobs at an alarming rate for over a decade, despite (or perhaps in some cases because of?) government interventions aimed at assisting the industry.

The new minister of Economic Development, Ebrahim Patel, is quoted in the M&G article as stating that "any support that government may make available through the department of trade and industry will be evidence-based". Seeing as the clothing and textiles industry appears to be one sector that is earmarked for such support, it would be interesting to know what evidence the dti has that this industry could not only witness a halt in its decline, but could actually reverse this decline.

This is important, as government is likely to commit significant resources to assisting the industry, resources that could be used for various other initiatives. The dti also appears to be sending out mixed signals. On the one hand, the new minister of Trade and Industry, Rob Davies, is quoted in the M&G article as claiming that “we won't and can't become protectionist in our approach to the crisis”, yet he is also reported as wanting to increase tariff levels on certain imports to bound levels.

Surely this would represent a form of protectionism? Raising tariffs would also contravene the 2 April 2009 G-20 Agreement “to refrain from raising new barriers to investment or to trade in goods and services”. This would not send out the right kind of signal to other countries, and would portray SA as an unreliable trading partner.

This ambiguity in South Africa’s attitude towards tariffs displays the kind of muddled thinking that leads to an endorsement of export-led growth on the one hand, and an attempt to use protective trade policy measures to assist local industries on the other. The obvious flaw in such approaches is that if a significant amount of countries adopted similar measures, all would be made worse-off, as protectionist measures would restrict trade, thereby hampering each country’s attempts to grow exports.

The South African government sees tariffs and other trade policy measures as tools of industrial policy which can be used to achieve the country’s developmental aims. Given the lack of policy space for such measures in certain important areas, as well as the costs that would inevitably accrue from the use of these measures, is this approach sensible?
Sean Woolfrey, a tralac Researcher


Zuma-ites eye higher tariff walls
LYNLEY DONNELLY
May 19 2009

Jacob Zuma's new power brokers are signaling that a new trade regime is on the way.His new industry minister, Rob Davies, for one, said he wants to increase tariffs to the maximum allowed by World Trade Organisation (WTO) rules. In many cases actual tariff levels are significantly below those required by the WTO.Davies said that in some instances -- on a "case by case" examination -- there is no reason why tariff levels could not be taken to the bound levels allowed by the WTO.

Bound tariff rates are the maximum tariff levels a country agrees to under the WTO.South Africa is one of just a few countries that has not raised its tariff levels in response to the global financial crisis, research by the World Bank shows.South Africa, Japan and Saudi Arabia are the only G20 countries not to do so.South Africa has, in recent years, been taking an increasingly defensive stance in the WTO on liberalising trade.

But analysts believe with new ministers such as Davies at the Department of Trade and Industry and Ebrahim Patel at the new Department of Economic Development the position may quickly become an entrenched one. "We won't and can't become protectionist in our approach to the crisis," said Davies, "but we must also examine international reactions to [events].

It shouldn't only be up to individual countries with water in their tariffs to restrain themselves." "Water" is the difference between applied tariffs and their maximum bound rates and indicates how much room countries have to manoeuvre.According to research done by Peter Draper and Gilberto Biacuana of the South African Institute of International Affairs (SAIIA), goods that enjoyed the highest average applied tariffs in 2008 include textiles and clothing, 22.4%; footwear, 20.9%; and manufactured articles, 10.5%.

In all these cases SAIIA's research points to a good deal of room for the country to increase its levels to the average bound rates. For items such as manufactured goods this could rise from the 10.5% applied rate to the 30% average maximum bound rate, while items such as textiles and clothing could rise to 35.9%. Imports of machinery, mineral products and transport equipment amounted to $3-billion, $2.6-billion and $1.2-billion respectively, according to SAIIA's calculations. All these products enjoy low applied tariffs relative to their bound rate, with machinery, for instance, sitting at 4% against 30%.

If the maximum or bound tariffs are applied in this instance alone it could cost the country as much as an additional $780-million or R6.6-billion. Draper views the benefits tougher trade measures will bring South Africa with scepticism. Because the rest of the world has increased protection measures "does not mean it's right" for South Africa to follow suit, he said. He pointed to a host of problems that could arise, including the effect such as move might have on exporters and domestic consumers.Much of the concern about tougher tariff measures began with the release by government earlier this year of the Framework Document for South Africa's Response to the International Economic Crisis.

The document, put together under the auspices of Nedlac, was intended to explore ways for business, labour and government to mitigate the effects of the crisis on the local economy. It highlighted sectors in distress, including the automotive industry and clothing and textiles, which could warrant assistance from government in a bid to save jobs.Previous minister of finance Trevor Manuel was critical of any bailouts for industries already protected by trade and industrial policies.

But both Patel and Davies support sectors deemed to be job creators. Davies said there is a difference between bailouts and the financial support being proposed for troubled sectors, which will come on the back of a "serious appraisal of projects" that show potential. Similarly, Patel said the Industrial Development Corporation had been asked to prepare a report on ways it can help companies and industries in distress, based on clear criteria that must include the saving of jobs. "Any support that government may make available through the department of trade and industry will be evidence-based," Patel said.

Patel said more effective industrial policy measures to promote competitiveness and innovation would be emphasised, with a drive to strengthen industrial policy capacity.But the emphasis that local industrial policy has placed on the manufacturing sector is "a gamble" in the context of the crisis, said Brendan Vickers, senior researcher in multilateral trade at the Institute for Global Dialogue.

So far South Africa has been unable to compete with international power­houses in Asia because of high labour costs and a lack of skills and capacity. In addition, policies that emphasise economic growth on the back of exports are proving to be flawed as global demand for manufactured goods has fallen through the floor.

Ultimately, however, the way forward on microeconomic policy still remains unclear. With Manuel sitting in the presidency as head of the National Planning Commission, and Pravin Gordhan heading up the national treasury, any major interventions proposed will have to take into account what is practical, implementable and affordable.
Source: Mail & Guardian Online

Investing in Africa? A Report from the US Chamber of Commerce

An interesting study relating to the "the attitudes toward corporate investment in Africa among leading U.S. corporations -- according to senior officers of 30 American Fortune 100 corporations we interviewed."
Why has Africa not attracted more interest from the U.S. business community? We have collected all of the answers and case studies into a news release introducing a study that launched today commissioned by the US Chamber of Commerce

http://www.usafricainvestment.com

Important Notice re: South Africa's Apparl Industry

The dti TO GIVE EFFECT TO THE CUSTOMISED SECTOR PROGRAMME PROCESS

The Department of Trade and Industry (the dti) has been working intensively with all stakeholders over the last 18 months to give effect to the Customised Sector Programme (CSP) process. We are now at a point where very significant progress can be reported with respect to giving effect to the CSP. Immediate implementation of the CSP will entail four initial core programmes.

CLOTHING AND TEXTILES COMPETITIVENESS PROGRAMME (CTCP)
In order for companies in the clothing and textiles sectors to be in a position to compete with international competitors in the domestic and international markets, it is essential that they advance their operational competitiveness to world class performance levels. the dti has therefore developed a Clothing and Textiles Competitiveness Programme (CTCP) which is being administered by the Industrial Development Corporation (IDC) and consists of the following elements:

A capital upgrading programme available to clothing, textiles and footwear manufacturers via the Enterprise Investment Programme administered by the dti together with preferential loans via the IDC at prime less 5%
A firm and cluster level Clothing Textiles Competitiveness Improvement programme (CTCIP) which will be provided on an attractive cost-sharing basis.

TACKLING ILLEGAL IMPORTS
One of the most critical challenges is the combating of pervasive illegal imports within the industry, including under-invoicing. In December 2008 the South African Revenue Services (SARS) dedicated specific capacity to deal with illegal activity in the clothing, textiles and footwear sectors. It is now undertaking an ongoing series of enforcement campaigns. Either the dti or SARS can be contacted directly with information on illegal activity. the dti will be monitoring the campaign activities and work closely with SARS to agree strategic priorities.

RESPONSE TO THE GLOBAL ECONOMIC CRISIS
In light of the global economic crisis, the National Economic Development and Labour Council (NEDLAC) facilitated a framework for responding to the crisis involving all key constituencies: Business, Labour, Community and Government. The framework was made public on 19 February 2009. One of the sectors identified for priority attention was the Clothing and Textiles sector. There is an ongoing process via NEDLAC of discussing and agreeing on concrete measures. The outcome of this process will supplement the actions which are already being undertaken by the dti above.

In the interim the IDC has approved a response programme and subject to its criteria will provide funding to firms that are in distress as a result of the crisis. Clothing and Textiles firms are encouraged to contact the IDC’s Textiles and Clothing Strategic Business Unit: 011 269 3760 for further information.

REVIEWING COST STRUCTURES
As a first step, import duties on textile inputs into clothing manufacturing that are not commercially produced in South Africa have been reviewed by the International Trade Administration Commission (ITAC). This comprised the revision of import duties on especially fabrics which are not being manufactured locally and / or not available locally in sufficient quantities. The review has been finalised and is now with SARS for implementation.

A rebate mechanism will be put in place allowing for duty draw-backs on fabrics not domestically manufactured / or not available in sufficient quantities. A review of input costs to the household textiles sector has now commenced and will in all likelihood be completed during 2009. Going forward the dti will be working with the United Nations Industrial Development Organisation (UNIDO) to undertake a comprehensive benchmarking of the clothing and textile value chain in order to potentially identify further areas of achieving efficiencies.

SKILLS UPGRADING
A Skills Upgrading Programme is being finalised in collaboration with the Clothing, Textiles, Footwear & Leather (CTFL) Sectoral Education & Training Authority (SETA), Department of Labour (DoL) and the National Skills Fund (NSF). An extensive multi-stakeholder process identified that there was shortage of specific technical and managerial skills in these sectors. The skills upgrading programme seeks to address these critical skills gaps and to place a large proportion of the workforce on skills upgrading courses over the next five years.

ADDITIONAL AREAS OF WORK
During the course of 2009 three additional areas of work will be undertaken aimed at giving effect to the CSP. the dti has commissioned research on the possible introduction of a Production Incentive to supplement the CTCP over a limited duration of time. The objective of such an incentive would be to assist companies to get out of survival mode and create a greater appetite for taking up the competitiveness improvement programmes offered through the CTCP. the dti will also commence work on a medium-long term innovation and technology plan for the sector. the dti will also work to facilitate greater black ownership within the sector.

TEXTILE & CLOTHING INDUSTRY DEVELOPMENT PROGRAMME (TCIDP)
It is also appropriate to provide an update on other processes related to the sector in the Southern African Customs Union (SACU) region, notably developments with respect to the Textile & Clothing Industry Development Programme (TCIDP). The TCIDP has been in place since 1995 in various forms. However, there have been various challenges with respect to the programme.

First, it has only provided limited support to South African manufacturers since it is only available to exporters and the vast majority of South African clothing and textile production is produced for the domestic market. Second, it is potentially World Trade Organisation (WTO) unfriendly. Third, it has facilitated part of the rapid growth in imports. Fourth, there is evidence of abuse of the instrument within SACU in a variety of ways. The SACU Secretariat was tasked with developing an alternative to this programme some years ago but has not yet completed this task.

In order to accommodate both continuity of support and an expedited completion of the replacement programme that is to be finalized by the SACU Secretariat, it was agreed by the SACU Council of Ministers in December 2008 that the TCIDP would receive one final extension period until the end of March 2010. The extension would continue on the current basis but with a revised list of eligible products to be imported using the duty credit certificate.

The list of eligible products will be finalised through a NEDLAC process and then fed into the SACU process. It is anticipated that the SACU Secretariat would work in an expedited way to finalise the replacement for the TCIDP by the time it expires in March 2010, if not sooner.



Issued by: Communication and Marketing, the dti
Chief Director: Lillian Mofokeng
Mobile: + 27 (0)82 888 8362
E-mail: LMofokeng@thedti.gov.za
the dti website: www.thedti.gov.za

China Textle Industry Hurts

ANALYSIS OF CHINA'S HOME TEXTILE INDUSTRY IN JAN-FEB
Source: Asia Pulse, May 12, 2009 Tuesday 6:58 PM EST

Main economic indicators of China's home textile industry suffered a drastic setback in growth in the first two months of 2009, according to a survey on 2,414 home textile enterprises conducted by the National Bureau of Statistics.

From January to February, the total industrial output value of the home textile industry edged up 3.36 per cent from a year earlier to 21.47 billion yuan, with the growth rate 17 percentage points lower than that for the entire year of 2008. Sales value increased 4.25 per cent to 21.32 billion yuan, 16 percentage points lower than 2008. Goods delivered for export dropped 8.79 per cent to 6.32 billion yuan, down 12.39 percentage points from 2008.

In the meanwhile, the home textile sector achieved a faster profit growth and a higher profit ratio compared with the whole textile industry.

The total profits of home textile sector amounted to 816 million yuan in the first two months, up 5.09 per cent year on year, in sharp comparison with the 11.01 per cent slowdown for the entire textile industry during the period. Profit ratio reached 3.92 per cent, higher than 2.94 per cent for the textile industry in general. Sales ratio went down two percentage points from the previous-year's period to 99.27 per cent.

According to China Home Textile Association, home textile exports are facing higher risks and domestic market is under bigger pressure, as demand is shrinking in both developed countries and new emerging markets amid the global financial crisis.

Customs statistics show that China exported 2.63 billion U.S. dollar worth of home textile products from January to February, down 17.56 per cent from the same period last year. Imports fell 8.03 per cent to 143 million dollars.

According to statistics, top 10 importer of Chinese home textile products were the U.S., E.U., Japan, United Arab Emirates, Kyrgyzstan, Kazakhstan, Australia, Russia, China's Hong Kong and Canada, which together imported 1.99 billion dollar worth of home textile products from China, accounting for 75.76 per cent of total export of the country.

The top five home textile exporting provinces and municipalities included Zhejiang Province, Shandong Province, Jiangsu Province, Shanghai Municipality and Guangdong Province. The combined exports of the five reached 2.05 billion dollars, claiming 78.1 per cent of total national exports.

China's home textile enterprises has benefited from the raised export rebate rate and falling raw material prices, and managed to achieve profit growth despite market downturn.

At the same time, enterprises are still in need of further support including higher export rebate rate, cut in customs charges, free and easy financing environment and stimulus policies on quality product development, structural adjustment and industrial upgrade.

Eleven Million Jobs Lost in Global Clothing, Textile and Footwear Industry

For immediate release: April 6, 2009

Global Union Outlines Urgent Measures Needed to Assist Workers and Establish a Strategy for Recovery
Over eleven million jobs lost in the past nine months and a further three million at risk is the stark tally of the impact of economic crisis on employment in the textile, garment and footwear industry, according to the Global Union representing workers in the sectors.

Says Neil Kearney, General Secretary of the International Textile, Garment and Leather Workers’ Federation: “In many countries the clothing industry is the main sector of industry, and for workers who lose their jobs in this sector the prospects of finding alternative employment are bleak. The situation is particularly tragic for workers in developing countries where there are no social safety nets. In addition, as many as 80 per cent of the workers involved are women and again the vast majority are less than 24 years old and often the only breadwinner in their extended family.

“Migrant workers are, as always, among the most badly affected. Migrant workers typically owe recruitment fees - sometimes as high as US$5,000, the equivalent of ten years wages at the local minimum wage - and losing their jobs leaves them unable to pay off their debts. Bangladesh alone has some 6 million migrant workers, many employed in overseas textile, garment or shoe enterprises and their forced return to their country will further increase pressures.

“Those workers who are employed are often reduced to short-time working and face demands from employers for wage cuts, longer working hours and unpaid overtime, and this in an industry where wages for a standard working week usually fall well below what is needed to survive. This situation has been made worse by the fact that many buyers from brands and retailers have been demanding price cuts, often in mid-contract.

“Healthy companies that are able to expand - particularly those in the garment sector - often find themselves unable to do so because of the lack of liquidity as bank lending has dried up.
“Unfortunately trade unions in many countries, after years of suppression, are weak and unprepared for the task of adequately representing and defending workers at this crucial time, when workers are being asked to make sacrifices without any guarantee of reward when economic recovery returns.

“At its meeting in March, the Presidium of the ITGLWF outlined the urgent measures needed to assist workers withstand the pressures of the moment and to establish a strategy for recovery. Such a plan should be comprehensive and should include the following elements:

• Governments must take the lead in relieving the crisis and preparing for recovery, providing economic, industrial and social infrastructure, including social safety nets, and strictly enforcing legislation, particularly labour legislation;
• The various stimulus packages currently being rolled out need to be increased and better targeted putting emphasis on the retention and creation of decent jobs;
• Manufacturing industry must be recognized as a key and essential element of all national economies;
• The consolidation of textile, garment and footwear supply chains should be based on shifting orders to suppliers who provide decent work through respect for international labour standards and no new suppliers should be added who do not meet this criteria;
• Demands for wage cuts and the lowering of working conditions as a means of dealing with the crisis are unacceptable should be strongly rejected;
• Demands for the payment of a living wage throughout the industry should be vigorously pursued as a key stimulus for increasing local consumption and driving recovery;
• Training and retraining, particularly of displaced workers or those working reduced hours, should be an important element in preparing workers with new skills or, where the sector has a limited future, to prepare for alternative employment;
• Companies in the sector must be provided with access to credit at reasonable interest rates;
• Workers and their trade unions must be enabled to play a full role, at all level, in tackling the crisis and in the development of strategies for recovery;
• A collaborative approach, at country level, should be fostered through the creation at the of tripartite economic and social councils for the industry in all important producing nations;
• Trade unions everywhere must rise to the challenge of organizing and adequately representing workers in the face of crisis;
• The international institutions including the World Bank and the International Labour Organization must join in a global collaborative effort to ease the impact of the crisis and to plan for recovery;
• In particular, the ILO must use the crisis to drive adherence to its core Conventions and insist that Member States enact and fully implement legislation to achieve these aims;
• The MFA Forum, which includes all the key players including governments, the international institutions, including the ILO and the World Bank, buyers, manufacturers, trade unions and civil society bodies institutions must play a pivotal role in developing a comprehensive short, medium and long term action plan for the survival and growth of the industry.

Ref: ITGLWF

Rescue Plan for South Africa's clothing industry dependent on Zuma

The draft rescue plan I think is commendable even though it is very late and seems to be a reaction to the current economic crisis. This plan should have been placed on the table and the industry given space for input and deliberation even before the quotas were implemented. However, I feel no matter the intention debate around this initiative is futile until we know the economic policies of Zuma's government. The private sector should be concerned about the influence of the ANC's alliance partners will have on the future economic policies that will be created after Zuma is sworn in as the new president.

There are indications that Cosatu wants Ebrahim Patel of Sactwu to be appointed to Cabinet. Pressure from the unions will be placed on Zuma when he formulates his economic strategies to stop the tide of casualisation of labour in the market. This will definitely impact the industry and those companies that are under strain. The point is I do not think the "rescue plan" will go further until we understand the policies of the new regime and the elevated power the unions will have concerning the discourse between capitalism, free trade and the workers who brought Zuma to the presidency.


Draft Rescue Package: Clothing and Textiles
Written by Department of Trade and Industries
Tuesday, 28 April 2009

This is the proposed rescue plan for the clothing and textile industry, drafted by the Department of Trade and Industry, labour and employers which aims to prevent job losses and the continuation of factory closures within the industry.

Executive Summary
The global economic crisis has placed the South African clothing and textile industry under severe pressure. Increasing levels of imports are resulting in significant job losses with many more notices of pending retrenchments that have been issued by companies. The huge spare manufacturing capacity in China and other Asian economies pose a threat to the very existence of the sector and there are real prospects of deindustrialisation in the form of a great number of retrenchments and factory closures.

To address the impact of this crisis on the industry, the Department of Trade and Industry, together with the labour and employer parties to the National Bargaining Council for the Clothing Manufacturing Industry and the National Textile Bargaining Council have identified twelve programmes - both trade and industrial policy measures - which should be implemented.Nine industrial policy measures are proposed.

One, a production-incentive should be introduced which would allow companies to receive a subsidy based on their local production and structured in two parts:

a. A cash grant (commencing at 80% of total value and reducing over a period to 40%)

b. A competitiveness cash grant (commencing at 20% of total value and increasing over a period to 60%)

Two, the IDC needs to, on an expedited basis, make working capital loans available to companies. The loans should be structured on a more flexible basisthan the current approach, be costed at prime minus five percent and remain in place for two to three years.

Three, to save jobs and halt any possible de-industrialisation, the IDC should increase its equity exposure in the clothing and textile industry, especially in companies of strategic importance in the value-chain and/or where large numbers of jobs are involved.

Four, the newly-introduced Manufacturing Investment Programme needs to be amended to ensure increased uptake thereof and that it assists companies during this crisis. This includes expanding the types of costs covered by the programme and increasing the maximum grants.

Five, the guidelines for the new Clothing and Textile Competitiveness Improvement Programme (CTCIP), aimed at enhancing companies' competitiveness and productivity, needs to be structured to ensure maximum benefit for the industry. It should be better resourced, fast-tracked and geared towards employment retention.

Six, the industry needs a coordinated and well-resourced skills development programme that covers the full spectrum of skills requirements in support of future growth areas. The parties have constructed such a programme, which requires an annual allocation by government of R174 million. Workers whose employers would ordinarily retrench them would, where possible, be offered training layoffs, which would keep them in employment during the economic downturn but re-skill them as an investment for the future economic recovery.

Seven, all three tiers of government, together with parastatals and other state institutions, should ensure that all clothing and textiles procured by them are manufactured in South Africa, using South African inputs where available and by companies complying with tax and labour laws and bargaining council agreements.

Eight, in order to encourage legal compliance and assist law-abiding firms, any assistance by government and public institutions to clothing and textile companies should be conditional on those companies complying with tax and labour laws and bargaining council agreements.Nine, the proposals identified in the 'Framework for South Africa's Response to the International Economic Crisis' to deal with customs fraud together with several other sector specific proposals should be implemented forthwith, including the strengthening of risk management and invoice-analysis systems, setting up of a dedicated clothing unit and support for' high-profile arrests and prosecutions of offenders.

To address the current and expected surge in imports, especially from large clothing and textile producing countries trying to find new markets for goods previously destined for the United States and Europe, three trade interventions are proposed.

One, clothing tariffs should be increased from current applied rates to the bound rate of 45%, either across-the-board or targeted at the most important products.

Two, ITAC should initiate a safeguard investigation on certain clothing and home textile products with the aim of implementing provisional duties in the short term, followed by final duties. We believe that the current situation in the industry warrants the implementation of provisional safeguard measures as any delay would cause irreversible damage.

Three, the regulations governing the SACU and SADC trade arrangements should be reviewed in order to close the loopholes contained which allows neighbouring countries to be used as conduits for imports emanating from other parts of the world to come into South Africa through by-passing trade regulations.In developing this rescue package, the parties have been mindful on the one hand of the need to save jobs and create employment, and on the other hand, the reality of resource constraints.

The package is designed to develop a strong and competitive industry that would be able to sustain itself through its own resources. To reach that point requires public support. The net level of funding required will be less than indicated in the rescue package in that the public sector will make savings as a result of the replacement of the DCC scheme. In addition, the saving of jobs and companies will ensure that the fiscus is able to continue to collect revenue through company taxes, personal income taxes and value-added taxes.

This rescue package
The integration of the supply-chain means that the fortunes of large and small companies are inter-related and the rescue package is aimed at retaining a manufacturing base in the clothing and textile industry. The impact on supplier industries of a vibrant sector is positive.

1. Impact of the Crisis
The global economic crisis is placing the clothing and textile industry under severe pressure and affects the industry in several different ways.Firstly, the global clothing and textile industry is experiencing serious overcapacity. This is mainly the result of a decrease in demand in the largest markets, including the United States, Europe and Japan, due to the economic difficulties those markets are experiencing.

This overcapacity is driving down prices around the world.Large producers including China have turned to other export markets such as South Africa with products being sold to local retailers at unrealistic prices even with the Rand at its currently level against the Dollar. A significant portion of the products landing on our shores are priced as low as they are because the producers are often heavily subsidised by their governments.Preliminary January 2009 trade statistics from SARS already show a 44% increase in the value of clothing and textile imports into South Africa, compared with January 2008.

Aside from the negative effects on the local market, it is contributing to an unsustainable trade deficit.Secondly, the economic difficulties experienced in the largest markets are having an adverse effect on the exports of those firms who rely on exports for their continued existence.Clothing and textile exports decreased by 9% from January 2008 to January 2009, compared with a 15% increase from January 2007 to January 2008.

Theresult is that South Africa's clothing and textile trade deficit has increased by 65% to R1.5 billion - for January only!Thirdly, the effect of the crisis on South Africa is affecting local demand. Manufacturers report that while the domestic market is slightly more resilient than the export market, demand is dropping off. With daily reports of retrenchments and short-time across the South African economy and more and more people having less money to spend, demand for clothing and textiles goods are being affected and will continue to decrease.

This is having an adverse effect on local employment and production.Fourthly, banks are cutting back on credit and are not lending as much or as easily as they did previously. This has a significant impact on companies' access to credit and financing.

2. Effect on Employment
The past six years have already seen industry employment falling by 69,000 or 39%. The main cause of these job losses has been the continued high levels of cheap imports, both legal and illegal. While the past two years saw a decrease in the level of job losses, this was mainly as a result of the protection offered to a large part of the industry by the introduction of quotas on 31 products from China. However, with the end of the quotas and the arrival of the economic crisis, tens of thousands more jobs may be lost.

January and February 2009 already saw 2,200 people losing their jobs in the industry, according to the database of the SA Labour Research Institute.Many clothing and textile companies are facing serious problems. Already, March 2009 will see the final closure of SANS Fibres, one of the most technologically advanced plants in Africa with the loss of 1,500 jobs in only one year. One of South Africa's most prominent and oldest cotton weaving value chains are also in serious danger, with 1,700 jobs threatened.

The three largest and most prominent clothing groups have all indicated that they are experiencing severe difficulties. Retrenchments have started in some of the firms and more retrenchments are expected. A prominent black-owned firm recently had to close one of its divisions and have indicated that more than a thousand jobs at its other divisions are in a precarious position.Another group have recently closed divisions in Kwazulu-Natal with the loss of about 200 jobs.

A further 1,500 employees' jobs are in jeopardy. In addition, small firms across the country, including in Bellville, Durban, Salt River, Woodstock, Atlantis, Pretoria and East London, have notified the trade union of further retrenchments and closures in the next couple of months. We fear that we may see 20,000 industry job losses per year in the next two to three years - a return to the levels of jobs lost in the mid-2000s. It excludes the jobs that may be lost in supporting and supplier industries. This will be a devastating blow to workers and their families and will together with other negative developments in the economy, compromise South Africa's efforts to half unemployment by 2014 but especially to efforts to develop rural economies and address issues of gender equality, taking into account the employment characteristics of this industry. It would also result in people who were previously.

3. Framework Agreement
We have taken note of the Presidential Task Team's 'Framework for South Africa's Response to the International Economic Crisis' ('Framework Agreement'), specifically the fact that it identifies the clothing and textile industry as a vulnerable sector and calls for rescue packages to be developed.

The Labour Relations Act provides, in clause 28 (h) that the powers and functions of bargaining councils include "to develop proposals for submission toNEDLAC or any other appropriate forum on policy and legislation that may affect the sector and area". Parties to the National Bargaining Council for the Clothing Manufacturing Industry and the National Textile Bargaining Council have now met with the Department of Trade and Industry and have jointly identified twelve programmes - containing both trade and industrial policy measures - which should be implemented without delay.

4. Trade Measures
The 'Framework for South Africa's Response to the International Economic Crisis' identifies trade measures as a tool to be used to address import surges, dumping and the short-term crisis of vulnerable sectors. As a result of the global economic crisis, the new trade terrain is characterised by the following:

• China and other Asian countries experienced a big decrease in exports to developed countries because of the economic crisis in their major markets such as the United States, Europe and Japan• The downturn in their exports is affecting growth and employment in these large Asian exporters

• To compensate for this, they are growing exports in other markets, including South Africa• This, together with the current high level of clothing and textile imports, is resulting in a great deal of retrenchments and factory closures in South Africa.

We agree that a wholesale increase of ail tariffs in ail sectors of the economy is not an appropriate policy response and that a more targeted approach is required that decreases the price of inputs (where these would not negatively affect employment) and increases specific groups of tariff lines (where these can help to save jobs).To address this surge in imports therefore, labour, business and government have identified two trade measures that should be used: tariffs and safeguards. It has also identified an intervention regarding regional trade arrangements.

4. 1 Tariff adjustments
Currently, applied tariffs for clothing products are lower than the levels South Africa has committed to under the WTO's Uruguay Round (bound levels). This would mean that South Africa can increase clothing tariffs without it having an impact on its WTO commitments. There are two options available when dealing with tariffs: an across-the-board increase of all clothing tariffs from the applied to the bound rates or a targeted intervention focusing on certain clothing products.

Option 1: An across-the-board adjustment of clothing tariffs from the current applied rates (40% in most cases) to the current bound rates of 45%. (This would not provide blanket protection as our commitments under other agreements, such as the SA-EU TDCA and the SADC Trade Protocol, would still allow products to come into South Africa at a substantially reduced tariff rate.)

Option 2: Increase tariffs on 30 targeted clothing products. The list contains products where there is significant production and employment in South Africa and where we have seen notable trade flows into the country over the last few years. Twenty four of these products were part of the Chinese quota.

HS Code Description

6103.4 Men's knitted trousers

6104.3 Women's knitted jackets

6104.5 Women's knitted skirts6104.6

Women's knitted trousers6105 Men's knitted shirts6106

Women's knitted blouses6107.1

Men's knitted underpants and briefs6108.2

Women's knitted panties6109

T-shirts6110 Jerseys6111

Babies' knitted garments6112.1

Knitted tracksuits, excl ski-suits6115.9

Socks6201.9 Men's woven windbreakers6202.1

Women's woven overcoats6202.9 Women's woven windbreakers6203.1

Men's woven suits6203.3

Men's woven jackets6203.4

Men's woven trousers6204.3 Women's woven jackets6204.4

Women's woven dresses6204.5

Women's woven skirts62046

Women's woven trousers6205 Men's woven shirts6206

Women's woven blouses6207.1

Men's woven underpants and briefs6209

Babies woven garments6211.3 90

Men's woven tracksuits6211.4 90\ Women's woven tracksuits6212.1

Bras

There are clear advantages to option 1 in that it will provide the widest assistance to industry, avoid resort to substitution of products by importers and make the tasks of customs control easier.

However, in an effort to limit the use of trade measures to the absolute minimum, the parties agree that option 2 should be pursued, so that a focussed and defined list of products are covered

No general upward revision of textile tariffs is envisaged.In addition to these adjustments, and in order to ensure that there is a balanced approach to trade measures, there is scope to lower the effective applicable tariffs on certain products. We accordingly agree to the following:• No duty should be applicable to the following products: georgettes, chiffons and acetate linings. This should be effected through third schedule rebate provisions,• Duties on polyester fibres should be reviewed, and• Duties on cotton lint (R1.60/kg) should be removed.

4.2 Safeguards
Trade relief is needed in the short term. While tariff adjustments would assist, the extent of the protection it offers is not always sufficient taking into account the prices at which goods are imported - often with the help of subsidies, pegged currencies and a lack of rights for workers in the producing countries.The parties believe that safeguards could assist in this regard, especially provisional safeguards which would provide relief in the short term. Safeguard mechanisms are available under WTO's Agreement on Safeguards and South African law.

We request ITAG to initiate an investigation on the clothing products listed above and the most important home textile products. ITAG should fast track this investigation and ensure that provisional duties are in place within two months of the start of the investigation. This allows enough time to consult trading partners that may be affected.

Our proposal is echoed in the Presidential Task Team's framework agreement which identifies "fast-tracking of investigations and recommendations by ITAG,and that ITAG initiates more investigations' as tools to address the impact of the economic crisis.The current situation in the industry warrants the implementation of provisional safeguard measures as these are critical circumstances where delay would cause damage which would be difficult to repair. These provisional safeguards would at least provide protection for 200 days and allow ITAG to continue the process to ensure the implementation of final safeguards.In addition, consideration should be given to changing to a specific duty structure such that the total level of protection is not increased but under-invoicing and dumping is.

4.3 Regional trade arrangements
In respect of the SAGU and SADG trade arrangements, there is evidence that some countries are used as conduits for imports into South Africa that emanatefrom outside the region. This takes place through a number of different abuses of the rules, including false labelling, inflated export claims and transhipment of goods.The parties agree that the regulations governing these arrangements should be reviewed urgently in order to close any loopholes contained therein.Accordingly, a one-a-side task team will report back with proposals within four weeks.

5. Production Incentive
Currently the major incentive for the clothing and textile industry is an export incentive, the interim Textile and Clothing Industry Development Programme (TCIDP) (commonly known as the DCCS), which has a defined end-date. It was recently agreed between SACU representatives that the DCCS be extended for a final period of one year to March 2010, subject to a number of tighter rules that would be applicable.

These new rules are intended to ensure that DCCs issued after 1 April 2009 would

(a) not be tradable nor can it be sold or given to another legal entity for its use

(b) only be used for importation of input (raw materials) of the exporting company and

(c) be confined to rebate duties on products not manufactured locally.It is agreed that the rules should properly reflect these conditions.

For several reasons, the DCCS has been controversial and both government and organised labour believe that it has not been successful in building a competitive industry. It is also not WTO compliant.Government has made it clear it will not continue with the scheme beyond the temporary extension.

There is broad agreement on the need to ensure that a replacement scheme is available to industry.In order to assist the clothing and textile industry, the dti should introduce a temporary production incentive based on the full value of the current DCC (which was R280 million for 2007 and R550 million on average for the past 5 years for South Africa.) The purpose of the scheme would be to address the current profitability gap in the sector that is aggravated by the global crisis, in order to provide a short-term shield, whilst rolling out a broader competitiveness programme that would have as its goal the sustainability of the industry in the long-term. From the parties' experience, many companies urgently need a cash injection to secure their immediate future.

The temporary production incentive would assist in this regard.Companies would receive a subsidy based on their production and structured in two parts:a. A cash grant (80% of total value)b. A competitiveness cash grant (20% of total value with 15% being spent on training)Over the period of the scheme, the cash-grant component would steadily decrease to be replaced by the competitiveness component. The production incentive scheme would, over this period, merge with the Competitiveness Improvement Programme (see below). There would also be amid-term review of the scheme to ensure that the goals of the scheme are achieved.

The production incentive scheme could provide a subsidy to clothing and textile manufacturers based on the value of their total South African production. It would only apply to companies who are VAT registered, tax compliant and compliant with labour laws and bargaining council agreements.The production incentive for clothing and textiles could be calculated based on value-add - deducting material costs from sales. (This figure forms the basis of VAT payments by clothing and textile manufacturers. Companies' VAT returns could then be used to establish what level of benefit they should be receiving.) To control the claims for this incentive, claims a company makes should be linked in some way to the number of people it employs.Firms could increase the production incentive they are eligible to receive by increasing their value addition. This would encourage a movement to higher value added products.

The payout could be in the form of a grant certificate that can be redeemed from the resources identified in the 'Framework for South Africa's Response to the International Economic Crisis', including the IDC. The parties agree that the grants would be paid out subject to companies meeting the following reciprocal obligations a. commitments in respect of retaining local employment in productionb. compliance with labour standards (labour legislation, bargaining council agreements and health and safety laws)c. modest levels of executive remuneration and modest dividend payoutsd. use of half of the competitiveness grant portion for training and the other half for other competitiveness improvement measures including capex, marketing and design and product innovation e. commitments in respect of local procurement andf. partnerships at company level with the representative trade union on the rescue plan.

The cost of the facility would be offset from savings made on the duty-credit certificate scheme.

6. Working Capital
With credit harder to come by, many companies need working capital. Added to this is the fact that many banks will not entertain applications from clothing and textile companies. The 'Framework for South Africa's Response to the International Economic Crisis' makes provision for the IDC to make increased working capital available to firms in large, labour-intensive sectors. While working capital loans are available from the IDC's CTFL Competitiveness Scheme at prime minus five percent, these are linked to capital upgrading. It means that many firms cannot access it.

The IDC needs to make working capital loans available to companies in the short term. These should be applicable for demonstrated orders (even where no new machinery is involved), should be at prime minus five percent and should remain in place for two to three years. Nevertheless, certain conditions should be in place, e.g. loans can only go to compliant companies.The criteria and terms should include the following• Qualifying loans to be priced at prime minus 5 percent for the full period of the loan• Maximum loan term to be five years for working capital• Applicants must have active programmes in place, working toward best practise in operational excellence• Allocation of resources would be based on employment criteria.

7. Increased Equity in the Sector by the IDC
The 'Framework for South Africa's Response to the International Economic Crisis' indicates that the "IDC will increase the level of its equity exposure in [large, labour-intensive) sectors where possible... ' The parties believe that the clothing and textile industry is one of those sectors in which the IDC should be required to increase its equity exposure. This should especially be the case for companies which are of strategic importance in terms of the product it manufactures, its position in a value chain, the geographic area where it operates, the number of people it employs and ils technological importance.When firms are considered for an equity stake, the IDC should act swiftly and flexibly and have, as its main priority, saving jobs and hailing deindustrialisation.

8. Manufacturing Investment Programme
In July 2008, the dti launched a new incentive, the Manufacturing Investment Programme (MIP).(2)Companies can apply for grants towards investment in plant, machinery and equipment. These grants can be used for new investments or, in the case of the clothing and textile industry, upgrading of existing production capability. Thus far, there has not been a great uptake of this incentive. To ensure this incentive is focused more clearly to the current crisis and the needs of the sector, it is agreed that• the rules need to be amended to expand the number of qualifying activities to include training, R&D, supply-chain management and consultancy services on plant-based restructuring, including those initiated by the trade union and the bargaining council• the current maximum grant of R30 million per applicant needs to be increased for applicants from the clothing and textile industry and should cover up to 30% of costs for both small and large investments and companies should be able to apply for more than one project in the same district or metropolitan municipality area• the increase in qualifying investment of at least 35% above the historic qualifying investment in machinery and equipment needs to be relaxed to 10% and should be applicable for investments that were undertaken since 1 January 2008• the conditionalities set out in the production incentive scheme would apply to all claimants under this scheme.

9. Competitiveness Improvement Programme
As a further leg to the Clothing and Textile Competitiveness Programme, the dti is currently finalising guidelines for the new Competitiveness Improvement Programme (CIP). In terms of proposed rules, companies or clusters would apply to the IDC for grants to help fund competitiveness and productivity improvement programmes. Companies can have 65% of their projects funded and clusters 75%.

The funding will be for five years and individual companies will receive a maximum of R500,OOO per year and clusters R5 million per year.In light of the economic conditions and in order to ensure maximum benefit to the industry. the CIP should fund programmes to save jobs and programmes by companies, clusters and trade unions that have the effect of increasing the industry's competitiveness and productivity by addressing softer competitiveness issues, such as quality, product and design innovation, lead times and marketing.The conditionalities set out in the production incentive scheme would apply to all claimants under this scheme.

The CIP should therefore be customised to deal with the impact of the crisis on the industry by being• better resourced• fast-tracked and• geared towards employment retention.The funding requirement for the CIP is calculated to be R300m per annum. it also means that the grant for clusters and for companies should be increased from the current proposed levels to 80% and 75% respectively and the maximum grant for companies of R500,OOO per year must be increased for large manufacturers.

The economic crisis is having an impact on South African designers with demand for many of their products dropping. The CIP should cater for designers, as an important part of the clothing and textile industry and an integral player in efforts to ensure the industry moves up the value chain.For the scheme to be beneficial to the industry in the current conditions, a steering group, consisting of the dti, organised business and organised labour, should be set up to evaluate programmes against the programme's criteria.

10. Skills Programme
The 'Framework for South Africa's Response to the International Economic Crisis' states that "skills development and the promotion of learnerships and high-level skills will be an essential part of all sector recovery programmes". The strategic vision of the industry, including moving to high value added, high quality and design-oriented products, requires a highly skilled workforce at operator, supervisor and management levels. Despite progress on some fronts, a serious skills shortage remains.A weak skills base means that the sector will be stuck in commodity-type product segments competing with low-cost manufacturers.

This is neither sustainable nor desirable for the local clothing and textile industry and the people it employs. The parties believe that the sectors therefore need a coordinated skills development programme that covers the full spectrum of skills requirements in support of future growth areas. The main facilitating vehicle for the implementation of such a programme will be the Sector Education and Training Authority (SETA). The CTFL SETA already implements a number of programmes, but is under-resourced and space exists for an improvement in the allocation of resources.

The number of people on learnerships is well below the levels required.The total cost of the skills development project is envisaged to be R1.3 billion over a five-year period. It is proposed that the state contributes 68% of the cost, which requires an annual allocation by government of R174 million and industry and other sources should cover the rest. As proposed by the Framework Agreement, workers whose employers would ordinarily retrench them would, where possible, be offered training layoffs, which would keep them in employment during the economic downturn but re-skill them as an investment for the future economic recovery.

11. Procurement
The recently agreed 'Framework for South Africa's Response to the International Economic Crisis' by the Presidential Task Team identifies local procurement as an important element in the efforts to safeguard South African employment and industrial capacity. This framework agreement identifies products and sectors which should be prioritised in terms of procurement, including clothing and textiles.Government procurement should be used to assist industries that are in distress. It can help to maintain and increase employment and output levels.By procuring clothing products such as nurse and police outfits, uniforms for the defence force and navy, protective wear and hats and berets and textile products ranging from bed linen, curtains and blankets to bags and other accessories, government and state-owned enterprises can contribute to reclaiming a large part of the jobs lost in the clothing and textile industry and the jobs currently foregone as a result of imports.Currently some departments and state-owned enterprises (SOEs) procure locally manufactured goods.

However, this does not happen consistently or across the board in national, provincial and local government and SOEs such as Transnet and Eskom.While strong local procurement policies are a key element of a successful local sourcing initiative, another element is a 'buy local' campaign. This should be in the form of an intensified Proudly South African campaign to ensure the 'buy local' message reaches more consumers.To assist in this regard, the campaign should focus on the label of origin for clothing, textile, footwear and leather products.

To ensure the maximum impact from the campaign and the label itself, the regulations governing the label of origin should be amended, including by increasing the size of labels and ensuring labels are visible to consumers before purchase. The label of origin should also be policed with transgressors being prosecuted.

A grant of R10m should be obtained for a focussed campaign aimed at consumers and drawing the link with buying decisions and jobs. A label of origin campaign can also be used to market South Africa as an ethical supplier.With regards to procurement, the parties believe that all three tiers of government, together with parastatals and other state institutions, should ensure that all clothing, textiles, leather and footwear products bought by them are manufactured in South Africa, using South African inputs where available. To give effect to this, a three-person committee will review all public and SOE procurement and issue a monthly report on extent of compliance.Tenders are often silent on companies' compliance with labour laws and bargaining council agreements.

Tenders should stipulate that companies must comply with labour legislation and, in the case of the clothing sector, have a compliance certificate from the National Bargaining Council for the Clothing Manufacturing Industry or, in the case of the textile, footwear and leather sectors, comply with the agreements of the National Textile Bargaining Council or the National Bargaining Council for the Leather Industry. (See below for a discussion of the Impact of non-compliance on compliant, law-abiding companies.)Tenders often stipulate that suppliers' manufacturing plants must be approved by the SABS.

This should be applied consistently in all three tiers of government and in SOEs. If required, smaller South African manufacturers should receive assistance from the MiP and CiP to achieve the necessary standards to receive SABS approval.

12. Labour Standards
The 'Framework for South Africa's Response to the International Economic Crisis' declares:"We agree to ensure full respect for and observance of fair labour standards and national legislation, in responding to the economic crisis."The economic crisis manifests itself in several different ways, including in terms of greater pressure being exerted on the employment relationship. We are increasingly seeing a fragmentation of this relationship as companies are becoming more informal in nature.This makes these companies less likely to comply with legislation, pay taxes and emerge as significant producers and employers in future.

When the employment relationship fragments, companies are more likely to pay wages below the legal minimum levels and withhold medical aid and provident fund contributions and levies payable to government and bargaining councils.Many local clothing and textile companies are non-compliant currently and there are signs that the economic crisis is resulting in more companies becoming noncompliant.The effects of this are most severely felt by the hundreds of large and small compliant manufacturers. Non-compliance makes compliant manufacturers uncompetitive, allowing those companies breaking the law to undercut the prices of those abiding by the law.

Furthermore, a policy that seeks to base competitiveness on low wages would not be consistent with South Africa's human rights culture. On the contrary, sustainable human resource policies will allow the industry to compete in the market for high fashion and technical garments and textiles and to deliver innovative, quality products that require well-trained and productive workers.In order to assist compliant manufacturers and encourage compliance, the parties agree that any assistance by government and government institutions should only be channelled to companies complying with tax and labour laws and bargaining council agreements and, in the case of the clothing sector, have compliance certificates.

This is in consistent with our Constitution and Bill of Rights which entrenches human rights, including fair labour standards.In addition, with an important segment of consumer consciousness favouring ethical sourcing, both locally and abroad, the promotion of fair trade practices in the South African textiles and clothing industry would constitute a competitive advantage over many other developing countries. It would allow the industry to market itself as an ethical supplier in foreign markets.

As local consumer awareness grows, this can also increasingly translate into an advantage over imported products from weak labour-regime countries.This document sets out the requirement that all beneficiaries of public support (grants, incentives and tenders) should fully comply with labour standards and bargaining council agreements, in order to ensure that decent work outcomes are achieved. The requirement should be applied to all subcontractors and outsourced workplaces of a legal entity that receives such support. The strong social partnership between business and labour at industry level and the vehicle of the bargaining council inspection system and certificates of compliance should be used to ensure adherence to this requirement.

13. Customs Fraud
The 'Framework for South Africa's Response to the International Economic Crisis' sets out the major interventions needed to deal with the ongoing problems of customs fraud:'The parties acknowledge the problem of customs fraud and illegal imports and are concerned that as a result of the global economic crisis, the level of illegal imports may increase. They recognise the progress made in building an effective enforcement mechanism. They agree that urgent attention should be given and additional capacity be devoted to official enforcement capacity, including SARS, to further improve their effectiveness and impact.

To this end, it is agreed to strengthen risk management and invoice-analysis systems, set up dedicated units for vulnerable sectors (commencing with the clothing sector) and support high-profile arrests and prosecutions of offenders to combat lawlessness within the import regime.'These are applicable to the clothing and textile sector and therefore the parties agree that these should be implemented forthwith.

We believe there is a compelling employment and fiscal case for additional resources to be given to SARS for the work it is undertaking and support a grant of R20 million for the setting up of the first of the dedicated sector capacity units.We further agree to the following reforms of customs and excise•

Create a WTO compliant framework that enables SARS to effectively respond to both under-invoiced and other illegal imports,• Institute forensic investigations of high-risk and major importers and, in the event that they are only agents, of their customers,• Improve internal audits of invoices to identify suspicious transactions, including the use of SA Reserve Bank Foreign Exchange audits,• Audit end-users who sell below reference prices, as well as major importers,• Increase the rate of container inspections and establish a minimum percentage for random inspections and a 100% inspection of goods from high-risk importers,• Establish dedicated ports of entry with strong capacity,• Provide resources to allow SACU customs officials to effectively identify illegal imports, including pricing models based on South African costs and/or import values into other major economies,• Establish a sector-focused register of bona fide importers and shipping agents with tougher licensing requirements on importers,• Research parallel retailing & warehousing operations, including the proliferation of 'China towns',• Strengthen the whistle blower system,• Criminalise illegal importing, including asset forfeiture, and prosecute offenders, including high-profile cases• Dispose of illegally imported garments in such a way as to avoid disruption in the market.• Secure the support of trading partners to address illegal imports, including SACU and SADC countries,• Create a special budget allocation for the fight against illegal imports in clothing and textiles.

14. Conclusion
It is agreed to have a joint committee made up of the representatives of the parties to the two bargaining councils and the dti to fast-track implementation of this rescue package and to meet with key stakeholders, including the IDC.

(1) See Appendix 1 for a more detailed discussion on safeguards including the process and restrictions.(2) See Appendix 2 for more details on the MIP.(3) Detailed notes of and a budget for government's portion is attached as Appendix 3 and 4.

Appendix 1:

SafeguardsSafeguard measures temporarily restrict imports of a product by means of a suspension of concessions or obligations under WTO rules.

It can take the formof increased duties or quantitative restrictions. Safeguards may be applied to a product only if it has been determined that such product is being imported in such increased quantities as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products.

Factual considerations that may be analysed include the absolute and relative and amount of increase in imports, the market share taken by the increased imports, and changes in the level of sales, production, productivity, capacity utilisation, profits and losses, and employment of the domestic industry. Safeguard measures shall be applied to a product being imported irrespective of its source, even if the imports causing harm originate from one country.

The WTO's Safeguards Agreement requires, amongst others, that• reasonable public notice of the investigation be given;• interested parties (importers, producers, etc.) be given the opportunity to present their views through, for instance, public hearings, on whether or not the measures would be in the public interest; and• the investigating authority publish a report on their findings.ITAC estimates that an investigation and determination could take approximately twelve months from the time an application is submitted to the introduction of safeguards. This process can be shortened should a duty be put in place instead of quotas due to the former requiring less administrative work. ITAC has only received one safeguard application - for lysine.Below find some of the restrictions applicable to safeguards• Where quantitative restrictions (quotas) are imposed, they normally should not reduce the quantities of imports below the annual average for the last three representative years for which statistics are available, unless clear justification is given that a different level is necessary to prevent or remedy serious injury.• A safeguard measure should not last more than four years, although it can be extended to six in the case of developing countries, subject to a determination by the country that the measure is needed to prevent or remedy serious injury and evidence exists that the industry is adjusting.• Measures imposed for more than a year must be progressively liberalised.

Appendix 2:

Manufacturing Investment ProgammeOn 3 July 2008, the Department of Trade and Industry (the dti) launched a new incentive, the Enterprise Investment Programme (EIP). This programme is aimed at investments that will create jobs, advance empowerment and develop rural areas.Clothing and textile companies qualify for this incentive, specifically for the Manufacturing Investment Programme (MIP) part thereof.

Such companies can apply for grants towards investment in plant, machinery and equipment. These grants can be used for new investments or upgrading of existing production capability. In the first year, R750 million has been allocated for this grant across all industries with the amount possibly increasing in future.For investments of less than R5 million, grants up to 30% or R1,5 million will be paid out. For investments of between R5 million and R30 million, grants between 30% and 15% or up to R9 million to R4,5 million will be paid out. For investments up to R200 million, the maximum grant is 15% or R3D-million.

The dti aims to take only six weeks from the date it receives an application to grant approval. Both South African and international companies can apply.Appendix 3: Details of the Skills ProgrammeGovernment's contribution to the clothing and textile skills development project would be R174 million per year and would be used to help to fund the following aspects of such a project.Firstly, the number of employees on learnership programmes should be increased dramatically to allow a much larger proportion of the workforce to be retrained every year, resulting in a major skills upgrade in the industry within five years.

If at least a fifth of the industry's workforce (i.e. 23,000 people) are placed on learnerships over a five-year period, it would cost R552 million (or R110 million per year) at a cost of R24,000 per learnership. Secondly, industry needs to place a significant number of people on apprenticeships, including in textile trades and as mechanics, electricians, fitters and turners, millwrights and engineers. These apprenticeships last three years and are at NQF levels 3 and 4. It is estimated that 300 people would need to be placed on apprenticeships each year at a cost of R39 million per year or R195 million over five years.

This will help to address the chronic shortage of high-end technical skills in the industry, as well as create opportunities for workers to be promoted to middle and senior management.Thirdly, the budget for this project should also include a specific facility for the training of technologists: in order to train 300 technologists a year for five years, R67.5 million would be needed over the entire period.

The SETA has already started with such training, with R2.43 million budgeted for bursaries for the training of 162 technologist students next year.The training of technologists is a key component to the survival and sustainability of the industry. A higher level of skills and deeper knowledge base in this area will assist in the achievement of constant innovation. Fourthly, training is required for middle management.

This will assist to address issues of productivity and restructuring and to achieve improvements in turnaround times, product and design innovation, and quality. The SETA's skills audit also identified human resource management as a critical skills need among managers. The detailed budget in Appendix 3 sets out the areas of management training needed together with the estimated costs.

It is envisaged that about R31 million would be needed over five years for short courses and longer programmes presented by business schools and graduate programmes.Fifthly, finances should also be set aside to fund a Masters programme at tertiary education institutions. An estimate of the finances required is R4.5 million to train 30 masters students per year (or R22.5 million over five years).

This includes finances for the purchase of equipment, the offering of scholarships, the employment of at least one clothing and one textiles staff member with doctorates and extensive technical research experience and the establishment of a relationship with a top international institution offering doctorate research opportunities for successful Masters graduates.