In this section, we examine how trade, investment and labour regimes at national, regional and global levels, have influenced the dynamics of apparel RVCs in Southern Africa. These ‘regimes’ are primarily a function of public policy, but firms and trade unions also play an important role in shaping them. The interaction of these ‘regimes’ creates a framework of rules that critically enables and incentivises private actors’ decision.
Southern African apparel value chains are strongly influenced by global and regional trade regimes. At the global level, AGOA has provided most countries in SSA with preferential, duty- and quota-free access to the lucrative US market since 2001.3 For most SSA countries, these preferences come with single transformation rules of origin, which allows them to use fabrics imported from third countries in their apparel exports to the US.4 AGOA further requires member countries to fulfil a long list of compliance regulations in order to be eligible – including the enforcement of private property rights, the protection of worker rights through the ratification of ILO core conventions, the protection of human rights, the elimination of barriers to US investments, a system to combat corruption, and economic policies to reduce poverty (AGOA, 2020).
While the Multi-Fibre Arrangement encouraged the emergence of apparel GVCs in the early 1990s and AGOA provided the incentive to maintain them later on, regional trade agreements have played a critical role in the dynamics of RVCs. SACU is a long-established customs union with free trade between Lesotho, Eswatini, Botswana, Namibia, and South Africa (with no specified rules of origin). Furthermore, the SADC Trade Protocol of 2008 allows duty- and quota-free trade of apparel under ‘double transformation’ rules of origin, requiring fabrics to originate from within SADC (Staritz, 2011, 95). Unlike AGOA, SACU and SADC do not impose any other major conditionalities.
The critical role of global and regional trade agreements in shaping firms’ participation in RVCs is illustrated by the case of Eswatini. Starting as early as 2003, the country faced increasing criticism for failing to comply with AGOA’s requirements on workers’ freedom of assembly, including the free functioning of trade unions. Eventually, this led to it losing its AGOA status from 2015 (The Economist, 2014). With a rapid and sharp drop in US orders, all transnational suppliers in Eswatini had shifted their end market to South Africa by 2017. This contradicts Morris et al.’s (2016, 1259) finding on the ‘disembeddedness’ of ‘transnational producers focused on the US market’. Instead, managers of well-established Taiwanese suppliers, part of triangular manufacturing networks serving the US market, exerted a degree of autonomy to develop a regional strategy. The manager of a large plant in Eswatini stated: ‘At the beginning, my boss in Taiwan was not interested in exporting to South Africa. We tried to relocate to Lesotho, but it did not work […] Now, finally, they are sending more managers from Taiwan to help me cope with the new structure… In the long run, even if we go back to the US market, we want to continue exporting to South Africa… We cannot rely only on one market.’ (Matsapha, 19/07/19)
As noted above, it was the South African buyers that took the initiative to tap into the capacity of Eswatini’s large transnational exporters. Of seven Eswatini firms actively exporting to the US in 2011, four were directly contacted by regional buyers: ‘We didn’t approach the South African side because we are not familiar, but somehow they came to us, and asked us to do woven, which we could. We started with small orders… They helped us a lot…’ (Nhlangano, 12/07/2019). A South African buyer stated: ‘We knew their market was gone… There are not many factories of that size and capability in South Africa… It was an opportunity. They’ve got a large contingent of mechanics and supervisors from outside the country. You know, they can go to Taiwan and interview people, I can’t, I don’t have that skill…’ (Matsanjeni, 22/07/2019)
The situation in Lesotho is different. The country was never threatened by exclusion from AGOA. Consequently, shifting of foreign-owned transnational suppliers from the US to the South African market was limited compared to Eswatini. Yet, it did occur. In early 2017, out of a total of 28 Taiwanese and Chinese-owned factories employing 31,943 workers, six firms had switched entirely to supplying South Africa (total employment 4369 workers), and another two firms were supplying both the US and South Africa (total employment 1032 workers).5
Whilst most Southern Africa apparel producers can access both global and regional markets duty- and quota-free, differential tariffs for other global exporters critically shape the value chain. In the absence of a trade preference arrangement, countries import under nationally set ‘most favoured nations’ (MFN) tariffs. This is especially significant for the South African market, but also for the US where Chinese-made apparel, which often competes with SSA apparel exports, faces MFN tariffs. In 2018, China, Bangladesh, Viet Nam and CAFTA region6 were among the largest apparel exporters into the US. In the same year, China, Bangladesh, and India were the main non-SADC apparel exporters to South Africa. Table 2 summarises the tariffs these countries face to access the US and SACU markets and further compares them with the tariffs faced by SSA apparel exporters.
All but AGOA and CAFTA countries face up to 32% MFN tariffs when entering the US market. However, for the products that SACU countries export most to the US (i.e. men’s trousers, women’s trousers, and men’s shirts) MFN tariffs range between 0% and 14.9%. Therefore, SADC and SACU countries’ advantage over their global competitors ranges from 0% to 14.9% for the US market. This is considerably lower than the advantage they enjoy when exporting to South Africa, where all major non-SACU/SADC competitors face a 40–45% MFN tariff.
To get a better sense of how tariff regimes affect sourcing, we compare unit values for the top two products exported by Lesotho, Eswatini, Madagascar and Mauritius that are common to the US and South African markets. With the exception of Mauritius, unit values are consistently higher for the same products when exported to South Africa than to the US (Fig. 7). On the one hand, the relatively higher unit values characterising regional exports reflect a demand for short-run products with a higher fashion content. Here, it is argued, regional production networks allow for more flexibility and increasing speed-to-market via a rapid turnaround (Morris et al., 2011, 2016). On the other hand, the outcome of Fig. 7 is in line with the statements provided by suppliers, which suggests that the South African market is less price competitive. The manager of an Eswatini factory explained:
‘To do business with the US, you need to be a huge company. When they place the order, they tell you “this is Bangladesh and Cambodia’s price. What price can you give to me?” If Bangladesh or Ethiopia charges USD 4, we have not only to do to the same, but they say we need to do it at USD 3.5 because we have the duty advantage… The US market is all about big volumes and low prices. South Africa instead [demands] smaller volumes but pays better prices.’ (Nhlangano, 13/09/2019)
Whilst Eswatini was officially reinstated into AGOA in 2018, as of December 2019 no firm had shifted back to the US market. Crucially, when asked why they are not reverting to the US market following reinstatement, five firms previously engaging in overseas exports mentioned ‘competition and lower profit margins’ as major factors (Fig. 8). The other main factor was the complex bureaucracy and auditing required to fulfil AGOA requirements. The managing director of a large Taiwanese firm, indicating tension between his own regional preference and his head office, stated:
‘I’m not very interested in going back to the US, but I get pressure from my main office in Taiwan. The problem is the price… US buyers are looking for an AGOA country to supply their product, but they’re still asking us to compete with the Bangladesh on price, but it’s not fair! My main office still has to consider this… Maybe we will do some business with US buyers, if we select the better price customers only…’ (Matsapha, 11/07/2019).
The manager of another factory in Eswatini was also sceptical of a potential return to AGOA, especially on stricter conditionalities: ‘You need to have documentation for everything. They [US buyers] have more requirements than the South Africans. They want the company to be like a 5-star hotel… They need to check everything, doors, waste, workers… With South Africa we just follow the local laws…’ (Nhlangano, 17/07/2019)
As discussed in section four, the number of South African-owned apparel production plants in Eswatini and Lesotho rose significantly over the last two decades. Along with trade preferences, a critical motivation for South African FDIs was attractive investment packages. In both Lesotho and Eswatini, investment regimes have had three main pillars: (i) establishing investment promotion agencies (i.e. the Lesotho National Development Corporation (LNDC) and the Eswatini Investment Promotion Agency (EIPA)) to reduce times and costs of setting up factories in the country; (ii) developing a package of tax incentives available to foreign investors; and (iii) granting access to industrial infrastructure, e.g. factory ‘shells’ in industrial parks with subsidised rentals.
LNDC and EIPA were set up in 1967 and 1988, respectively, to promote foreign investments. Their scope has been to help investors fast-track compliance with tax and labour laws, provide information on standards and trade compliance across export markets, and manage the provision of factory shells. For instance, as of 2019, LNDC and EIPA were allocating ten shells per year over the next 4 years in Eswatini and 11 shells at a new site in Lesotho (Dlamini, 2019).
Tax incentives have also been a major plank in the strategy to attract FDIs. In Lesotho, since 2004, foreign investors benefit from a reduced 10% corporate income tax, no withholding tax on dividends, and tax-free repatriation of profits. In the early 2000s, Eswatini introduced a special tax dispensation for exporters under AGOA: an income tax on profits of only 10% (compared to the normal rate of 27.5%), and a 15% withholding tax on dividends paid to foreign shareholders. In addition, since 2007, both countries enjoy a SACU provision for duty- and VAT-free access to capital equipment and the possibility for firms to operate through ‘deferred accounts’, which allow them to effectively discount VAT and import duties on fabrics imported from outside SACU. Lesotho and Eswatini introduced double taxation agreements with South Africa in 1997 and 2004, respectively, exempting South African investors from paying taxes in South Africa for income generated in the two SACU countries.
In Eswatini, EIPA crucially facilitated links with South African buyers for three transnational producers and helped them shift to the South Africa market when suspension from AGOA loomed. The facilitation included the extension of fiscal benefits previously restricted to overseas exporters. Since then, all large firms previously exporting to the US have renegotiated their preferential treatment to cover their South Africa exports. The manager of a large Taiwanese-owned plant explained:
‘I asked the government to allow me to shift to the local market. I had to ask, because when we came, we had preferential fiscal treatment granted because of AGOA. I asked, why don’t you allow me to do SACU production, I can get better prices and workers can get better salaries? So, eventually they agreed. Other factories followed me […] I’m the leader of this idea’. (Nhlangano, 13/09/19)
The majority of South African investors in Eswatini also report benefitting from the local government’s investment dispensation, particularly the lower corporate tax rate, but this is secondary to the attraction of low labour costs. Furthermore, as argued by an official at EIPA, there is no need to assist South African investors with trade because they know the market, but ‘lower taxes in a system that allows duty-free exports’ are an attraction (Mbabane, 08/07/2019). The manager of the first South African plant to relocate to Eswatini also explained: ‘It is very easy to start a business in [Eswatini]… This happens via EIPA. EIPA has improved… It is now a more welcoming and helpful environment’ (Johannesburg, 04/07/2019).
Regional trade regimes and investment regimes facilitated the growth of apparel RVCs between South Africa and Lesotho and Eswatini. Yet, sharp differences between the labour regimes in these countries critically contributed to this process.
While minimum standards regulation can be quantified and relatively easily compared, labour regimes are more complex and are for the most part the result of enabling provisions. The system that emerges is therefore determined largely by how trade unions and employers use the national legislation. This caveat aside, there is no doubt that South Africa has a much more developed labour regime than those in Lesotho and Eswatini. In South Africa almost all workers are covered by labour legislation, there is a national minimum wage, legislated minimum conditions of employment and some sectoral minimum wages and conditions, freedom of association and organisational rights, a well-established centralised collective bargaining system, protection against unfair dismissal, effective dispute resolution institutions, a health and safety statute, workmen’s compensation and unemployment insurance, and an extensive (but poorly functioning) training system. The labour regimes in Lesotho and Eswatini share only some of these features and do not match the levels at which standards are set and rights protected in South Africa.
In the apparel sector, it is collective bargaining that sets South Africa apart from Lesotho and Eswatini. Legislation in South Africa includes a framework for the voluntary establishment of sectoral bargaining structures called bargaining councils and provides a mechanism through which collective agreements reached in the bargaining councils are extended to apply to all employers and employees in the sector. Agreements reached at the National Bargaining Council for the Clothing Industry (NBCCI) currently regulate minimum wages, conditions of employment, and social benefit funds for all workers in the apparel sector.
Lesotho does not have equivalent collective bargaining provisions. Its legislation protects freedom of association but provides no support for organisation by trade unions or a framework for collective bargaining at either firm or sectoral levels (Godfrey, 2013; 2015). Eswatini, on the other hand, has a framework for the establishment of joint negotiation councils which is similar to that of South Africa, including a mechanism to extend agreements. However, trade unions in Eswatini have not yet managed to establish such a council for the apparel sector, effectively rendering these provisions irrelevant at this point in time.
The differences between the labour regimes become sharper when one shifts the focus from the ‘enabling provisions’ to the way in which the apparel trade union in South Africa has used NBCCI to improve sectoral wages and working conditions. The Southern African Clothing and Textile Workers Union (SACTWU), was formed in 1989 out of a series of amalgamations of textile and clothing unions, in a period when progressive trade unions burgeoned in South Africa. The amalgamations left SACTWU well positioned: it was the only trade union in the apparel sector and it had a very high level of representation amongst workers (Maree & Godfrey, 1995, 131–133). From its inception it sought to increase historically low wages and to merge the regional industrial councils into a national council. This was achieved in 2002 with the creation of the NBCCI. In the years that followed, the labour cost differentials narrowed between the major clothing manufacturing centres in South Africa as well as between these centres and rural areas (Godfrey, 2013).
Bargaining by SACTWU to raise wages, while tariffs came down and local manufacturers rapidly lost market share to cheap imports, saw the sector shrink and restructure. The solution for some manufacturers was to relocate to neighbouring countries that had weaker trade unions, limited or no collective bargaining, and much lower labour costs. One such firm explained the rationale to relocate to Lesotho as follows:
‘The main emphasis of why we started in Lesotho was purely from a cost point of view, because the labour rates are much cheaper in Lesotho than in South Africa. The second thing is you can work a full 45-h week here. And the third issue is you are not so hamstrung with the unions and all these fancy regulations that they have in South Africa. Those are the three main criteria.’ (Maputsoe, 29/06/2011)
The South African owner of another firm in Lesotho stated:
‘At the end of the day if you’re trying to sell this product for R100 and your wage cost is R35 you are on a hiding to nothing [referring to South Africa]. You have to have Swaziland and Lesotho… And it is purely because you can come here [Lesotho] and compete globally… And all you do [in South Africa] is get hounded by the bargaining council the whole time, who are the “Gestapo” for the unions…’ (Maseru, 06/12/2018)
Our fieldwork in Eswatini found that six of the seven (still active) suppliers that initially relocated from South Africa identified ‘union pressures and higher wages’ as the primary motive for relocating (Fig. 9). Other reasons for moving include: Eswatini’s attractive investment policy (4), AGOA single transformation rules of origin (3), better security (2), and direct support from the government (2). As the manager of a South African production unit that moved to Eswatini explained: ‘The main reason why we left [South Africa] is because of the bargaining council and the union… They were hammering us and we just couldn’t run our business. Eswatini offered a competitive edge into South Africa…’ (Matsapha, 24/07/2019)
Wages are the major component of labour costs. While sector-wide wage rates are negotiated annually at the NBCCI, unions in Eswatini and Lesotho are less well organised and collective bargaining is limited. In Lesotho, there are five rival trade unions in the apparel sector, none of which is well organised. In the absence of wage bargaining at the firm level, unions engage in annual multipartite consultations facilitated by the Wages Advisory Board, which then recommends an increase for the sector. The situation is better in Eswatini: the major trade union in the sector, the Amalgamated Trade Union of Swaziland (ATUSWA), is recognised as the representative of their workforce by five of the 21 apparel manufacturers, but as at 2019 only two had concluded a collective agreement with it. ATUSWA, furthermore, does not have sufficient representation in the sector to push for the establishment of a joint negotiation council. In its absence a minimum wage is periodically set by a Wages Council together with the Ministry of Labour and Social Security.
Apparel employers in Eswatini are however less accommodating than those in Lesotho: by informal agreement firms pay exactly at the prescribed minimum wage and have made a concerted attempt to avoid collective bargaining with ATUSWA. The spokesperson for the Eswatini Textile and Apparel Traders Association (ETATA) stated it ‘will deal only with trade-related issues. [It] will not engage in collective bargaining with unions or in negotiations over labour regulations’ (Matsapha, 11/07/2019). Our interviews also revealed considerable dissatisfaction with one employer who had allegedly ‘broken ranks’ to negotiate higher wages with the union.
In light of the above, the steep regional wage differentials, which motivated South African manufacturers to relocate, remain, and with their close proximity make Lesotho and Eswatini attractive sourcing options for South African retailers. In August 2019, the weekly minimum wage of a trainee and a qualified machinist in South Africa ranged between ZAR 806-857 and ZAR 909-1164, respectively, in Eswatini and Lesotho they were less than half, ranging from ZAR 284 to ZAR 391 for the former and from ZAR 418 to ZAR 492 for the latter (Fig. 10). If one were to add social security contributions to the minimum wages, the gap is even wider.
Differences with regard to private governance provide a further factor favouring regional supply. While exporters to the US must comply with US retailers’ codes of conduct, the same is not true within RVCs (Godfrey et al., 2019). These codes and the auditing that accompanies them is one of the reasons suppliers in Eswatini do not want to revert to the US market. Conversely, with few exceptions, such codes do not exist or are comparatively less demanding in RVCs. As reported by a factory manager in Eswatini: ‘US audits were nonsense. They ask us to observe human rights, stop bag searching, reduce overtime… If you export to the US market you have to comply. […] South African buyers are more understanding. They don’t touch these issues because they know what’s going on. They are not worried with this as long as you deliver.’ (Nhlangano, 17/07/19)
Not much has therefore changed since Staritz’s (2011, p.188) survey found that ‘only two [South African] retailers stated that labour compliance is important in their sourcing criteria’. To date, only one of the Top-6 has committed to ethical sourcing by joining the UK-based Ethical Trading Initiative (ETI), thereby binding suppliers to ETI’s base code. The other five retailers vary from making only vague statements of intent in their annual reports to taking tentative in-house steps towards greater scrutiny of labour conditions at suppliers. Further, the practice of sourcing via intermediary agencies – known as design houses – allows South African retailers to screen themselves from association with labour conditions at supplier factories (in 2019, 12 out of 21 plants in Eswatini were contracted via design houses) (Pasquali & Godfrey, 2020). The low concern for labour standards among South African lead firms is further evident in Lesotho, where in 2010 the ILO launched the Better Work Programme to enforce compliance in country’s apparel industry. Yet, while most suppliers to the US, under pressure from their buyers, joined the programme, South African retailers would not endorse the programme with the result that almost all South Africa-oriented suppliers refused to join it (Godfrey et. al., 2019).