US embassy cable - 04PRETORIA4527

UNCLAS SECTION 01 OF 02 PRETORIA 004527 
 
SIPDIS 
 
DEPT FOR AF/S; AF/EPS; EB/TPP/MTA 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
COMMERCE ALSO FOR HVINEYARD 
TREASURY FOR BRESNICK 
DEPT PASS USTR FOR PCOLEMAN 
 
E.O. 12958: N/A 
TAGS: KTEX, ETRD, ECON, SF, USTR 
SUBJECT: SOUTH AFRICAN APPAREL INDUSTRY -- STRUGGLING 
TO BE COMPETITIVE 
 
REF: PRETORIA 4428 
 
1.   Summary. The South African apparel industry is struggling 
because of increased imports, mostly from China, and a 
decrease in exports.  The attractiveness of low-priced quality 
merchandise from China combined with the effects of the 
stronger rand is hurting its ability to compete.  Total 
imports into the United States of South African apparel 
declined by 43.6% and textiles by 5.7% during the first seven 
months of 2004 compared to the same period in 2003.  The 
subtotal of AGOA textiles and apparel imports has also started 
to decrease.  Industry expects that the expiration of apparel 
quotas will make the situation even more difficult.  Labour 
unions and industry are calling on the South African 
government for help. End summary. 
 
2.  A leading representative of South African clothing 
exporters told econ officers on October 7 about the industry's 
difficulties in remaining competitive in both local and 
foreign markets.  He said SA Statistics indicated apparel 
imports from China had increased from 123 million garments in 
2002 to 235 million garments in 2003.  He could not be sure 
that all of this increase was actually staying in South Africa 
or going to other countries in the region, but there was no 
question that the increase in Chinese apparel imports was 
huge.  He acknowledged that most of the competition from China 
was legitimate in the sense that that country was producing 
good quality clothing at low prices.  He also cited the strong 
rand as having a major negative impact on the SA apparel 
industry's competitiveness. 
 
3.  According to the United States International Trade 
Commission data, the total value of South African apparel and 
textiles exports to the United States fell by 43.6% (apparel) 
and 5.7% (textiles) during the first seven months of 2004 
compared to the same period in 2003.  U.S. imports of South 
African apparel exports amounted to $142.9 million in the 
first seven months of 2003 but declined to only $80.7 million 
for the same period in 2004.  AGOA apparel also decreased from 
$69 million to $63.9 million during this period, representing 
a decrease of 7%.  Textile exports amounted to $19.8 in the 
first seven months of 2004, down from $21 million for the same 
period in 2003. 
 
4.  The Textile Federation of South Africa regards the 
strength of the local currency as the main reason for the 
decline in apparel export values to the US.  The rand 
appreciated by 29% against the dollar between January 2003 and 
July 2004. It traded on average at R8.68 to the dollar in 
January 2003 but appreciated to R6.13/$1 in July 2004. The 
president of the Textile Federation of South Africa lamented 
that no textile or clothing firm in the world can compete in 
an environment where a currency appreciated by such an extent 
against the dollar. 
 
5. The strength of the rand has reduced earnings from exports 
as well as the industry's ability to price its products 
competitively in world markets. This has resulted in a loss of 
market share to other exporting countries. Both industry and 
labor argue that the rand should trade between R9 and R10 to 
the dollar in order to ensure the competitiveness of the local 
industry in international markets. 
 
6. The South African Textile Federation also bemoan the strong 
rand as largely responsible for the increased apparel imports, 
especially from Asian countries.  It said that China has 
increased its share in clothing imports into South Africa from 
27% in 1996 to 86% so far in 2004.  The South African textile 
industry complains that the low production costs in China and 
other Asian countries makes it difficult for domestic 
companies to compete.  It further charges that manufacturers 
in Asia get such enormous support from their governments that 
the only real cost they experience is labor, which is about 
one-tenth of the South African textile industry average. The 
reduction of import protection and inflow of illegal clothing 
imports exacerbates the negative effect of cheap imports.  As 
a result, many local manufacturers have had to prune their 
operations, incurring closure and retrenchment costs. 
7. The Textile Federation of South Africa predicts that the 
expiration of textiles and apparel quotas under the World trade 
Organization's (WTO) Agreement on Textiles and Clothing (ATC) on 
January 1, 2005 will result in a substantial increase in the world 
market share for Asian countries, and worsen the already 
depressing situation.  Both the trade union movement and the 
apparel industry have expressed fears that importers in Canada, 
the United States and the EU will move to import cheaper goods 
from China rather than from South Africa.  China's textile 
industry is enormous compared to the South African industry. In 
terms of world-installed capacities for spinning and weaving, 
South Africa represents only 1% of that of China. 
 
8. Labor unions are lobbying the government to intervene and 
postpone the scrapping of China's export quotas, but also to 
support the depreciation of the rand. The domestic industry is 
trying to rescue itself by implementing measures such as the 
"Buy South African" campaign, which encourages manufacturers 
to source 50% of products locally. Industry is also putting 
increasing pressure on retail chains to sell locally produced 
clothing. The industry and trade unions have formed a task 
team to advise government on the impact of tariffs and quotas 
on the textile and clothing industry.  They may recommend that 
the government consider such measures as voluntary restraint 
and various co-operative safeguard mechanisms in order to 
protect local industries from Chinese and other competitors. 
 
9.  According to South African industry sources, the South 
African government has told them it will not push for a re- 
negotiation of the demise of the ACT in Geneva because "a deal 
is a deal." 
 
FRAZER