Remarks by Ambassador William A. Heidt at the Better Factories Cambodia 15th Anniversary Celebration

Better Factories Cambodia 15th Anniversary Celebration [U.S. Embassy photo by Un Yarat]
Sofitel Phnom Penh Phokeethra
October 18, 2016

Your Excellency Ith Samheng, Minister of Labor and Vocational Training; Your Excellency Pan Sorasak, Minister of Commerce; Okhna Van Sou Ieng, Chairman of the Garment Manufacturers Association of Cambodia, distinguished representatives of the Royal Government of Cambodia, distinguished representatives of the International Labour Organization and Better Factories Cambodia program, representatives of Cambodian trade unions, fellow members of the diplomatic corps, ladies and gentlemen.

Thank you all for participating in today’s celebration of the fifteenth anniversary of Better Factories Cambodia. I am very grateful for this opportunity to reflect on the many successes of our first 15 years and to begin thinking about the challenges we will face as we build toward the next 15 years.

I would like to do two things with my time today. First, I’d like to talk about some of the lessons from the early days of Cambodia’s garment industry and the establishment of the BFC program. And then I’d like to discuss how some of these lessons may apply to the future of the garment and footwear – and hopefully travel goods – industries.

My personal interest in Cambodia’s garment sector stems from my work as the U.S. Embassy’s Economic and Labor Officer here in Phnom Penh back in the late 1990s. This is when Cambodia’s garment industry began its explosive growth thanks to some farsighted entrepreneurs and government officials, thousands of very hardworking Cambodian workers, and two very important trade agreements between Cambodia and the United States.

My first historical point is one that should make all Cambodians proud. It’s easy to take garment sector for granted today, but the fact that it happened at all is really an amazing thing. Remember it was Cambodia’s first export industry ever, and was born just five years after UNTAC. Cambodia had a small and very poor population. Most factories ran on expensive diesel generators.

All inputs had to be imported. Most workers were unskilled and had never worked fixed hours or punched a clock before. It was critical that the road to port and port were in good shape. (National Route 4 was one of the last major road projects USAID did—good investment.)

Second, from the beginning, the garment industry was built on a partnership between Cambodia and the international community. Cambodia seized an opportunity, but the door was opened by the international community, back then principally the United States.

There were two key agreements between Cambodia and the United States that paved the way: our 1996 Bilateral Trade Agreement, which granted Cambodia what we then called most favored nation status and in effect opened the U.S. market to Cambodia, and our 1999 Bilateral Textile Trade Agreement, which integrated Cambodia into the global textile trading system of the time called the Multi-Fibre Arrangement, or MFA.

The unique thing about our textile agreement was that it included powerful incentives for the Cambodian garment industry to bring itself into compliance with international labor standards and Cambodian labor law. As Cambodia demonstrated increased compliance with labor standards, the United States offered Cambodia quota bonuses of as much as 18 percent a year.

This translated directly into millions of dollars of additional business for factory owners, and in a system of fixed quotas, was a powerful incentive for them to adhere to international labor standards. It was the only agreement of this type the United States ever signed.

It’s difficult to overestimate the impact of these agreements. In 1995, Cambodia sold exactly zero garments to the United States. A year later, when we signed our bilateral trade agreement, the country’s total exports to the U.S. amounted to just $3.7 million.

But just three years after that – my last year in Phnom Penh – approximately 120 garment factories had sprouted in Cambodia and exports to the United States reached $700 million! By 2004, garment exports had doubled again. They have continued to rise to the present day.

Third, Cambodia’s timing was very fortunate. Cambodia’s rise as a garment producing country came six or seven years before the end of the MFA, which gave new producers some protection by slotting them into a global quota system that restrained competition between countries.

This means that Cambodia didn’t have to deal with cutthroat competition from established suppliers at the beginning. It also came as concerns over globalization and ethical sourcing were rising among both buyers and consumers.

The key point is that by the time our quota bonuses ended in 2005, and the world transitioned to a much freer, quota-less system, the BFC was up and running and Cambodia had established itself as a competitive and ethical supplier of garments. It was the darling of the international apparel trade back then, if you will. I’m not sure this would have happened had Cambodia started five years later, or five years earlier.

My fourth point builds off this and is the most germane for this conference. Looking back, as someone involved with the birth of the industry, it’s clear that the BFC was critical in building global confidence in Cambodian suppliers in the early years of the garment industry, an effect that has carried through to today.

When the U.S. and Cambodia agreed on the quota bonus system in 1999, it was clear that both sides would need a reliable source of information on working conditions and practices inside the factories for the system to work. How else would the U.S. be able to fairly decide on the size of the quota bonus?

For the very first year of the system, that basically my role, and one of the main things I did during my time in Phnom Penh was visit garment factories, one or two a week for most of my assignment.

But this was obviously not a sustainable system, so our two governments turned to the ILO, a UN institution that to that point had been focused on monitoring how countries – not companies – complied with international labor standards.

Until that point, the ILO had never monitored the private sector or engaged in on-the-ground inspection of workplaces. This was not a role that came easily to the ILO—the first drafts of the project agreement that eventually became the BFC were focused on traditional capacity building at the Ministry of Labor, not on direct factory monitoring.

But to its credit, the ILO saw the importance of trying something new, and worked with the United States and Cambodia to make it happen.

This is how Better Factories Cambodia came about. Looking back after 15 years, it’s fair to say that the program has been successful to the point that the ILO has since founded Better Works programs in eight countries that reach millions of workers.

For fifteen years, BFC has provided rigorous, evidence-based reporting that shows the world that Cambodian manufacturers are living up to international labor standards and ensuring decent conditions of work. In my view, this reputation is worth protecting above all.

The Government and GMAC deserve a lot of credit for supporting BFC, both 15 years ago and today. Many people were uneasy because the BFC was a new program responsible for a function that had traditionally been performed by the Labor and Commerce Ministries. But very honestly, in the late 1990s and first five years of this century, neither ministry had the capacity to properly regulate an industry growing at such explosive rates.

So when I look back at the growth of the sector over the past 20 years – now up to 700 factories with almost 700,000 workers and over $6 billion in exports – I don’t think we would have gotten there without the BFC.

So now I would like to flash forward 15 or so years to the present. What lessons can we take from the early growth of the industry and the establishment of the BFC program to today’s vastly different competitive environment?

I’d like to comment briefly on three important ones—the issue of timing, the need for a new international partnership to support the industry, and the role of the BFC program going forward.

First, the issue of timing. Cambodia’s economy has seen huge growth, and some diversification over the past ten years, but garments and footwear remain the dominant export sectors and are critically important for Cambodia. Cambodia is basically a middle sized garment producer, definitely a significant player but not as large as, say, Bangladesh, China, or Vietnam.

By most measures, garment and footwear exports have continued to increase, even if they have leveled off to the United States in recent years. The number of factories seems to have stabilized more or less around 700. The overall impression is one of an established, successful industry.

But if you take a step back, look at the broader competitive environment, and talk to international buyers, there is a real sense of unease about the future of the industry.

The excellent report the BFC commissioned last summer outlines very effectively the challenges facing the industry—growing competition from Vietnam, especially in the context of Vietnam’s membership in the TPP and new trade agreement with the EU, the lack of vertical integration in the industry, stubbornly high electricity and logistics costs, undeveloped industrial relations, and the need to upgrade workers’ skills are just a few.

These issues will be the subject of much of this afternoon’s discussions. So I won’t give a detailed analysis of them. But I do think that they point for the need for very focused and committed leadership on the part of the Cambodian Government now. I hope such a focus and commitment will be one of the outcomes of this conference.

This brings me to my second point, about how to rebuild an international partnership to support the growth and development of Cambodia’s garment and footwear industries. As I mentioned before, there was a very strong international partnership behind the industry’s birth in the late 1990s.

There was an incredibly strong commitment by the United States, other foreign partners, the ILO, and global brands to help Cambodia build its first, competitive export industry. I remain very proud of my small role in that effort.

But the world, and the international textile and apparel business, have gotten much more complicated in the years since. Many new suppliers have emerged, or are now emerging. Some of these are larger than Cambodia, and could be very strong competitors, and some are much poorer, and will receive a lot of international support. All want a slice of the global trade.

But Cambodia has some very strong advantages in this new, more competitive world as well:

  • First and foremost, it has the reputation for quality and ethical sourcing it has developed with the help of the BFC.
  • It has an increasingly skilled, and very committed workforce, and a well established and effective manufacturers association.
  • It has improving logistics and infrastructure, symbolized by the Government’s decision to join the WTO’s Trade Facilitation Agreement.
  • It has significant support from foreign governments, including the United States and the European Union, which overtook the U.S. as the largest market for Cambodian garment and footwear exports back in 2011—until Brexit!
  • In that context I would note that President Obama recently enacted a major expansion of U.S. GSP duty free treatment for travel goods and accessories for Cambodia and 42 other LDCs. This market opening will help Cambodia diversify its economic base and further alleviate poverty. Increased exports of travel goods to the United States could create up to 100,000 new jobs for Cambodian workers.
  • There is also a strong commitment by international brands to continue sourcing in Cambodia and work collaboratively with producers and the government to fix problems in the industry. You will of course here from some of them later today.
  • Various foreign assistance agencies, including USAID, are implementing programs to support the industry. Among other programs they support the Arbitration Council as well as programs to improve health care for the largely female workforce.
  • And very interestingly, social enterprises are emerging that offer novel ways to improve living conditions for workers, at little to no cost for employers. They are active in many other countries, and want to expand their work in Cambodia too.
  • My point is that Cambodia’s garment and footwear industries have a lot of friends, but we need to be organized. So I hope one result of this conference will be a decision by the Government to gather its friends together, set out a plan or vision for how it wants the sector to develop, add some deadlines to force action, and kick off a process to restore a sense of dynamism to the industry. The United States would be an extremely willing partner in such an initiative.

Finally, I’d like to close with a few words about the role of the BFC going forward. The U.S. Government has supported the BFC program financially since the very beginning. We are delighted that the Government, GMAC, and ILO will sign an agreement this afternoon to extend their partnership through the BFC program. This will help ensure that Cambodia continues to be known as an ethical supplier, which to me, should be central to Cambodia’s “brand.”

If you take a step back, the BFC program is one of the key institutions shaping the garment industry, along with the Commerce and Labor Ministries, GMAC, the various labor federations, the Arbitration Council, and the minimum wage setting process.

In my view, the challenge for Cambodia is to strengthen all these institutions to improve the overall management of the sector. I frankly think the debate about whether Cambodia “needs” the BFC is mistaken—Cambodia needs stronger institutions across the board if it is to compete in the global apparel trade.

In the longer term, we should absolutely begin thinking about a “BFC 2.0” model – taking the rigorous inspection regime BFC has pioneered and working with the Ministry of Labor and Vocational Training as it gradually takes an independent role in factory inspections.

But as this process unfurls, I would encourage all parties to focus relentlessly on protecting Cambodia’s brand as an ethical supplier.

I’ve been speaking for too long and we have two other very interesting panelists, so let me stop here. I would like to thank you once again for participating in this important event, and I urge all of you to continue your excellent work in creating sustainable, inclusive growth for all Cambodians.

Thank you very much.