Must-read: Mongolia is trading up

[HenryTo]

Law of unintended consequences - from the Baltimore Sun. Quotas on Chinese imports = more expensive clothes for U.S. consumers and no jobs saved in the U.S. textile industry. Ironically, Mongolia's manufacturing economy has only been holding up because of quotas implemented by the world's developed countries.
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Mongolia is trading up
Limits on Chinese textile exports provide a lifeline to a neighbor.

By Gady A. Epstein
Sun Foreign Staff

May 31, 2005

ULAN BATOR, Mongolia - For proof that China's surging textile exports to the United States this year have been putting people out of work, look no further than the rows of unmanned sewing machines in Zheng Chenli's shut-down factory - in Mongolia.

Zheng's MCX garment factory was one of about 80 textile plants owned or partially financed by foreigners, including more than 20 plants financed by entrepreneurs from China, that operated here for years, solely to get around quotas that capped China's exports of clothing to the United States.

When the quotas expired Jan. 1, thousands of manufacturing jobs were lost, just as the United States feared. Many of the newly unemployed, however, were in places far from the United States, including the 370 Mongolians at Zheng's factory who made pants for J.C. Penney and Target stores.

But this and other recently closed Chinese-owned factories will soon come alive again because of the Bush administration's intensified trade battle with China.

With the United States putting new trade limits on textiles saying "Made in China," Zheng and other Chinese factory owners are preparing to hire workers again to make clothes saying instead, "Made in Mongolia."

The long, winding road of global outsourcing will once again stretch all the way to Ulan Bator.

Before the Bush administration announced this month the new limits on imports from China, "we could only listen to heaven to decide our fate," Zheng said last week. "Now, we can restart our production. We can survive again."

One unintended consequence, it seems, deserves another. That a Mongolian textile industry even exists is almost solely a result of global trade quotas that had made it impossible in recent years for Chinese factories to sell all that they might have to meet American demand for inexpensive clothing.

"Basically, we shouldn't be here," said Ronald Zeidel, executive director of an American-owned MAGIC Suit factory here, which makes suits for J.C. Penney, Men's Wearhouse and smaller retailers. "We should never have been here. The only reason we're here is because of the quota. It's an artificial situation."

Trade tensions are now the lifeline for Mongolia's textile industry. Chinese manufacturers and other companies are rushing back to Mongolia or expanding operations to fill orders for American clothiers and retailers such as Ann Taylor, Liz Claiborne, Sears and J.C. Penney.

What does this all mean for American consumers? Inevitably, the "Made in Mongolia" label means more expensive clothes.

Just months after laying off workers, factories are scrambling to hire, but the pool of textile workers here, about 30,000 people, has remained relatively small. A bidding war among factories for workers has begun, factory bosses say, and salary packages that once hovered around $100 to $120 a month, including food and transportation, could double for some workers.

"We have to pay more to get those workers back," said Zheng, who hopes to hire more than 100 workers soon and add others when he can find them. "There's competition between us and other factories. We have to pay as much as them and get as many workers as we need."

Then the clothes have to get to a port, traveling for days by truck or rail to the Chinese city of Tianjin, southeast of Beijing, for shipping to the United States. This can add as much as 15 percent to the cost, the main factor making Mongolian products more expensive, factory bosses say.

What keeps Mongolia competitive are the American trade quotas, and similar European trade limits - at least until World Trade Organization rules forbid such protective limits after 2008.

"It's going to be a haven for companies coming here from China to get around this quota for the next two or three years," Zeidel said. "In three years, they're going to be in for a big fall, when the safeguards come down, because nobody should be here."

The quirky, fragile position of this export industry high on the Mongolian plateau is an indicator of the far-reaching impacts of U.S. and Chinese economic power. A policy decision made in Washington targeting one country, ostensibly to protect American jobs, can mean new jobs and higher paychecks elsewhere.

This is much the same situation that has historically created or boosted textile industries in many countries in the developing world. The textile industries of Asian countries from Bangladesh to Indonesia will benefit from the new American quotas, as U.S. buyers shift their purchases away from China.

But Mongolia, which shares a long border and a long history with China, is a natural destination for Chinese manufacturers looking to outsource their work to meet American demand.

Mongolia was the seat of Genghis Khan's 13th-century empire that dominated a substantial part of the known world, but it became a possession or pawn of its neighbors for subsequent centuries. It was part of China until it won a Soviet-engineered "independence" in 1921, becoming a satellite state under Moscow's dominance for the next 70 years.

The Mongolia that emerged from the shadows of the collapsed Soviet Union in the 1990s was agrarian and economically depressed, a dependent trading partner of Russia and China, with few industries other than mining.

To this day, nomadic herders on horseback roam the countryside, and almost half of the work force are herders and farmers. The population density outside the capital is about three people per square mile

Mongolia might have been left behind as it tried to develop private enterprises after communism's collapse. The decades-old textile quotas limiting the exports of other Asian countries became an opportunity for Mongolia to create another industry.

Exports of clothing and other textiles from Mongolia grew from virtually zero a decade ago to about $137 million last year, with most of the products headed to the U.S. market, according to Mongolian government statistics.

A thriving "gray" economy here also feasts on the weak bureaucracy inherited from the communist regime, which means that some of the textiles coming out of Mongolia may have been made in China but are merely tagged "Made in Mongolia" to get around quotas.

But millions of shirts, pants, socks, suits and other clothes are made here each year. Many of the workers making them see their livelihoods shift with the prevailing winds of trade politics.

Enkhtuya Choijil, an experienced textile worker sewing pants at the Chinese-owned Five Star factory, said orders to her factory had dropped substantially in recent months, cutting her pay as much as three-quarters, to less than $25 a month.

"The last three to four months, it was really depressing," said Choijil, 50, the mother of seven. She has no idea what was behind the fluctuations in her fortunes, but in recent weeks her spirits have risen.

"People are saying that from June, we'll have good orders," Choijil said. "Our lives will improve, so we really, really hope for that."