Trade rule change impact Saipan’s apparel industry

As early as 2004, Saipan’s garment factories raised the alarm over the devastating effect of the World Trade Organization’s lifting of quota restrictions on apparel after January 2005. The year 2005 witnessed how such a global event could result in an economic catastrophe for the CNMI by hurting the islands’ premier industry and biggest contributor to government revenue: At least six garment factories on Saipan closed down in 2005, while many other factories downsized their operations, resulting in massive displacement of workers.

Overall garment sales until November this year reached $596 million, dropping by 20.6 percent compared with the $750 million in total sales for the first 11 months of 2004. The drop in sales reduced the government’s user fee collections to approximately $22 million, several million dollars short of the yearly average of $30 million. User fee collections contribute approximately 30 percent to the government’s revenue.

Soon after quota restrictions were lifted on Jan. 1, 2005, the Saipan Garment Manufacturers Association reported that almost all garment manufacturers in the CNMI were downsizing their operations and closing sewing lines due to declining sales. The SGMA said that losses would become inevitable as years pass unless the industry’s competitiveness is enhanced through federal trade measures.

In early 2005, nearly a hundred workers from La Mode Inc. stopped work to complain with the CNMI Labor Department about alleged nonpayment of wages. La Mode later shut down operations.

Other companies followed suit. Sako Corp. and affiliate companies Mariana Fashions Inc. and Dong Dang Fashion Corp. also shut down operations during the year, leaving hundreds of workers jobless and many creditors unpaid.

The Attorney General’s Office, which claimed that Sako had approximately $1.3 million in unpaid taxes to the CNMI government, filed criminal charges against the company and two of its officers— Hee Kun Kyun and Hyung Ki Min—for alleged intentional failure to truthfully account for and pay taxes as required by the CNMI Tax Code.

Kyun had already fled the CNMI before the AGO discovered that the businessman had seven different passports and that he used a different passport other than the one he used upon entry into the CNMI. Another Sako officer, Kwon Myung Hee, also fled the CNMI apparently to hinder the criminal investigation or to avoid possible criminal prosecution.

It appeared that Sako has other unpaid creditors, including Vicente SN. Babauta, the company’s former landlord; and the law firm of O’Connor, Berman, Dotts and Banes.

Saipan’s federal court also entered a $1-million judgment against Sako, directing the company to assign to the Equal Employment Opportunity Commission all of its deposits and account receivables. The EEOC had filed the case against Sako on Sept. 16, 2004 after some 65 non-Chinese workers complained that their contracts were not renewed on the basis of their national origin.

Collection efforts against Sako proved futile, as the company managed to sell its equipment abroad before creditors could run after the firm.

In an effort to run after garment factories’ unpaid obligations to the government, the Department of Public Health sued some 20 local garment firms over allegedly unpaid hospital bills. The department asked the CNMI Superior Court to issue temporary injunctions that would prohibit the 20 employers from removing any assets out of the CNMI. The government-run Commonwealth Health Center billed the 20 factories a total of $243,193.91 for hospital expenses incurred by their nonresident workers.

During the last month of the year, another garment factory, Express Manufacturing Inc., closed down. Hyunjin Saipan Inc. was soon added to the list of Saipan garment factories that have ceased operations.

The CNMI government has been pressing for the amendment of federal tariff rules that would reduce value-added requirement on garment imports from 50 percent to 30 percent for local manufacturers to avail of duty-free entry to the U.S. mainland.

Currently, the U.S. Tariff Code requires that 50 percent of the value of the garment has to be added locally by transformation, in terms of additional labor, packaging or other overhead costs, so that garment products coming from the Commonwealth could enter the United States duty-free.

Former SGMA executive director Richard Pierce, Gov. Juan N. Babauta’s special assistant for trade relations, has been lobbying the U.S. Congress for the federal tariff amendment, backed by the support of the CNMI’s government and private sector.

The CNMI’s cause has been gaining some allies before the federal lawmaking chambers, with the recent introduction of a bill seeking to amend the tariff law. U.S. senators Larry A. Craig (R-Idaho) and Daniel Akaka (D-Hawaii) introduced S. 1954, entitled the Insular Possessions Act of 2005.

Lawmakers from other jurisdictions—including Guam and American Samoa—have reportedly expressed support for the bill. The ball now goes to Congress to pass the legislation, which Saipan’s garment industry players view as a major step that will curtail the seemingly certain collapse of the once vibrant industry in the Commonwealth.