US embassy cable - 05PRETORIA2238

UNCLAS SECTION 01 OF 02 PRETORIA 002238 
 
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, ECON, ETRD, SF, USTR 
SUBJECT: LABOR UNIONS TURN TO RETAILERS TO SAVE THE 
SOUTH AFRICAN APPAREL AND TEXTILE INDUSTRY 
 
REF:  (A) PRETORIA 1365; (B) PRETORIA 448 
 
1.  Summary.  According to South African industry 
representatives, China currently holds 86% of the apparel 
market for imports in South Africa.  Unions blamed increased 
imports for contributing to job losses of up to 40 000 in 
the apparel and textile industry.  The Congress of South 
African Trade Unions (Cosatu) has called on South African 
retailers to sign a code of conduct, with the labor union, 
to set a target of 75% local content for clothing products 
on shelves.  Retailers rejected this gross interference in 
the competitive dynamics of the supply chain and have blamed 
the strength of the rand, illegal import activity, and the 
inability of industry to cope with modern consumer demands 
for the industry falling behind international competitors. 
South African apparel and textile exports to the United 
States declined by 30% during the first quarter of 2005. 
End Summary. 
 
2.  According to the clothing and textile industry, cheap 
Chinese imports remain one of the biggest problems facing 
the apparel and textile industry in South Africa.  Helena 
Claasen, economist at the Textile Federation, said Chinese 
clothing imports grew by 394% since 2001 and China currently 
holds 86% of the clothing market for imports in South 
Africa.  According to the Congress of South African Trade 
Unions (Cosatu), this has contributed to job losses of up to 
40 000 in the South African clothing and textile industry 
from January 2003 to March 2005.  Industry complains that 
retailers pressure local manufacturers to reduce prices and 
frequently use examples of offers of cheaper imports to 
exert further downward pressure. 
 
3.  Industry representatives assert that unlike in the 
United States and the European Union, the South African 
clothing and textile industry has not, up to now, made use 
of any of the WTO measures available for protection. 
According to Jack Kipling, president of CloTrade and 
chairman of the Export Council for the Clothing Industry in 
South Africa, safeguard measures under the China protocol 
would be the most suitable of all WTO measures available to 
the industry.  He noted, however, that, because the surge in 
imports already commenced in earnest in 2001,and the 
controls are based on the average of imports over the past 
three years plus a 7% per annum normal growth, the base is 
already too high for these measures to be effective. 
Industry regards the safeguards and anti-dumping application 
process to be too complex, time consuming and costly to 
bring any speedily relief to the industry.  Alec Erwin, 
Minister of Public Enterprises, indicated that the South 
African government does not intend taking measures to curb 
cheap Chinese apparel and textile imports. 
 
4.  In an effort to save the industry from shedding more 
jobs, the labor union, Cosatu, called on South African 
retailers to sign a code of conduct with the labor union, to 
set a target of 75% local content for clothing products on 
shelves.  Zwelinzima Vazi, Cosatu's general-secretary has 
threatened mass action to enforce the proposed code of 
conduct, which could include pickets of retailers and 
shopping malls, human chains, sit-ins, boycotts of foreign 
goods and mass attendance of annual general meetings of all 
retailers.  The National Economic Development and Labor 
Council (NEDLAC) has given COSATU the go-ahead to give 
clothing retailers a 14-day notice, to indicate the start of 
a programme of mass action.  In addition, COSATU has called 
on the government to take safeguards measures against 
imports. Another complaint is that the Sector Education and 
Training Authority (SETA) for the textiles sector is not 
providing adequate training for workers, and consequently 
the higher quality textiles with greater value-added cannot 
be produced here. 
 
5. South Africa's major clothing retailers, Foschini, 
Truworths, Woolworths and Edgars Consolidated Stores, issued 
a statement on May 16, 2005 rejecting calls by the labor 
union to sign a code committing them to prescribed local 
procurement targets.  They regard it as a gross interference 
in the competitive dynamics of the supply chain, which would 
have a negative effect on consumers, retail business, and 
the South African economy.  They feel that the local South 
African clothing industry does not have the capacity to meet 
75% of all local retail requirements when it comes to the 
variety, volumes and prices as currently demanded by the 
South African consumers.  South African retailers said, 
however, said that they were still committed to the local 
industry, and would continue to source locally, but would 
not commit to local procurement quotas. 
 
6. Retailers highlighted the following issues as the main 
reasons for the industry falling behind their international 
competitors.  First, the strength of the rand over the past 
three years.  Second, illegal import activity and import 
under valuation.  Third, the inability to cope with modern 
consumer demands. 
 
Illegal imports 
--------------- 
 
7.  In an effort to reduce and eliminate illegal imports and 
transshipment, the Minister of Trade and Industry published 
regulations that prohibit the importation into or the sale 
of textiles, clothing, shoes and leather goods in South 
Africa, unless it is labeled in such a way that it is clear 
in which country the goods were produced.  These regulations 
came into force on May 23, 2005.  South Africa now also 
complies with a national control system to monitor 
compliance to country of origin rules.  Retailers indicated 
they welcomed the country of origin labeling scheme and 
fully supported it. 
 
Rand strength 
------------- 
 
8. There is increased support for the idea that government 
should act to weaken the rand.  Ian Plenderleith, Deputy 
Governor of the Reserve Bank, stated that the rand's gains 
against the dollar in the past 6 months were unwelcome and 
hurting exporters.  The African National Congress (ANC) also 
called for a more competitive exchange rate to support the 
apparel and textile industry.  The rand has, since these 
remarks were made, lost value to the US Dollar and traded at 
R6.63/$ on May 30, down on the R6.34/$ two weeks earlier. 
Marisa Fassler, economist at JP Morgan said that attempts by 
policy-makers over the past two years to jawbone the 
currency weaker have largely been futile.  She said that the 
recent calls for a more competitive exchange rate coincided 
with a sharp rally in the dollar and that the movements in 
the currency markets should remain the dominant driver for 
the value of the rand. Trevor Manuel, South African Minister 
of Finance, raised serious concern about adopting an 
official policy to defend a particular level of the rand 
exchange rate.  Lionel October, deputy director-general at 
the Department of Trade and Industry, said that from an 
industrial policy point of view, a competitive exchange rate 
is important, but should not be the basis for a competitive 
strategy, rather there should be focus on finding niche 
markets for South African products. 
 
9.  The latest United States International Trade Commission 
(USITC) statistics indicate that South African apparel and 
textile exports to the United States declined by 30% during 
the first quarter of 2005.  Jack Kipling acknowledged in an 
article for Business report that the situation in which the 
clothing industry in South Africa finds itself can be 
attributed directly to the effects of globalization and 
trade liberalization.  He explained that the clothing 
industry is the most global of all manufacturing sectors, 
extremely competitive and price sensitive and therefore the 
first sector to feel the effects of globalization. 
 
FRAZER