Alliance Notes: Force Majeure in the Apparel Industry; Forced Labor Risk in the Global Supply Chain

Monday, April 27, 2020

This Week at the Alliance



Webinar: How Emerging Market Countries and Companies Will Fight the Coronavirus and Climate Change (4/28 9:30 EDT / 14:30 BST)

Join the Alliance and Reuters Events for a live, interactive panel discussion of EM’s fiscal capacity to chart a sustainable course through coronavirus, global recession and climate change. 

Our lineup features NDC Partnership’s Jahan Chowdhury and the Inter-American Development Bank’s Gianleo Frisari in conversation with Alliance Directors Claire Meier Underhill and Fergus McCormick. The panelists will explore:

  • What fiscal space do emerging markets have to combat the pressures of pandemic, economic fallout and climate change?
  • How are EM climate change best practices changing in light of the current crises?
  • Will sustainability-based stimulus packages be de facto or de jure, and can they revive growth and deliver financial returns in the wake of Covid-19?

Register now.

Next Week:

On Tuesday, May 5, 2:00 EDT / 19:00 BST / 18:00 NZST (note the changed time), the Debt and Fiscal Governance Working Group will feature Ian Ball, Professor of Public Financial Management, Victoria University of Wellington and Chair of the Audit Committee for the financial statements of the New Zealand Government. While with the New Zealand Treasury (1987-1994) he was responsible (as Director of Financial Management Policy and Central Financial Controller) for the design and implementation of New Zealand Government’s financial management reforms. New Zealand is considered the gold standard for public financial management. Professor Ball will discuss the effect of the coronavirus crisis on public sector balance sheets, and how fiscal policy and public financial management could change in the wake of the pandemic.

Force Majeure in the Apparel Industry

Women work in a garment factory in Bangladesh. © Tareq Salahuddin under a Creative Commons Attribution 2.0 Generic license

With the approach of International Workers’ Day on May 1st, it is becoming clear that “workers of the world”—particularly those in emerging markets—are facing a uniquely challenging environment as the global coronavirus pandemic wreaks havoc on every aspect of daily life. 

In a recent analysis, the UN’s International Labor Organization (ILO) wrote that the Covid-19 crisis may wipe out 7% of working hours globally in the second quarter of 2020, equivalent to 195 million full-time jobs. In developed economies, sectors most at risk include accommodation and food services, manufacturing, retail, and business and administrative activities. 

In emerging and frontier economies, with their large informal sectors and central role of governments as providers of formal employment, the ultimate impact on household incomes from the crisis could be just as severe as in developed countries. However the most impacted sectors are likely to be different, and while the job losses may be slower to unfold they may take longer to be reversed. 

One industry that is a big provider of formal employment for several frontier markets and faces near-term challenges is textile manufacturing. Bangladesh, Vietnam, Cambodia, Ethiopia and Myanmar are all countries for whom garment and footwear represents a big share of exports and a large source of steady jobs, even if these are relatively low-paying compared to the rest of the world. 

Most of the major global apparel and footwear brands source production from these countries, generally through third-party suppliers that they contract for specific product lines. In the midst of the Covid-19 pandemic, with many clothing stores closed until further notice, many big retailers have used clauses in their contracts to cancel work that is no longer needed. 

A recent brief by Professor Mark Anner at the Center for Global Workers’ Rights at Penn State University (“Abandoned? The Impact of Covid-19 on Workers and Business at the Bottom of Global Garment Supply Chains”) surveyed Bangladesh employers in late March to gauge the impact of the crisis on  garment workers. He writes: 

Since the coronavirus pandemic took hold, more than half of Bangladesh suppliers have had the bulk of their in-process, or already completed, production canceled. 45.8% of suppliers report that ‘a lot’ to ‘most’ of their nearly completed or entirely completed orders have been canceled by their buyers; 5.9% had all of these orders canceled. Many are making dubious use of general force majeure clauses to justify their violations of the terms of the contract. 

When orders were canceled, 72.1% of buyers refused to pay for raw materials (fabric, etc.) already purchased by the supplier, and 91.3% of buyers refused to pay for the cut-make-trim cost (production cost) of the supplier. As a result of order cancellations and lack of payment, 58% of factories surveyed report having to shutdown most or all of their operations. 

More than one million garment workers in Bangladesh already have been fired or furloughed (temporarily suspended from work) as a result of order cancellations and the failure of buyers to pay for these cancellations. Suppliers in the survey reported that 98.1% of buyers refused to contribute to the cost of paying the partial wages to furloughed workers that the law requires. 72.4% of furloughed workers were sent home without pay. 97.3% of buyers refused to contribute to severance pay expenses of dismissed workers, also a legal entitlement in Bangladesh. 

Behaviour from the big brands has been varied: Anner’s report cites a number of apparel companies as having made commitments to pay for work in progress: H&M, Inditex, Kiabi, PVH (with deferred payments), Target (USA) and VF. Since his report, other brands have come forward with new pledges, such as the UK’s Primark, which had initially cancelled its orders but subsequently offered to fund lost wages of contracted workers.  A website managed by the Workers Rights Consortium (WRC), Covid-19 Tracker: Which Brands Are Acting Responsibly toward Suppliers and Workers?, is being regularly updated with commitments by 27 major global brands.

The situation continues to evolve. All garment factories in Bangladesh have been closed since March 25th to fight the spread of the virus, and some international brands looking to place new orders as parts of the world reopen to commerce have been unable to do so. The Bangladesh government has stepped in to support lost wages with an USD$8 billion stimulus package (2.5% of GDP).  Nevertheless Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association, has spoken of the risk of an “apocalyptic” outcome, with potential job losses of up to 10 million. 

Even as conditions in some destination markets start to improve, and once factories in Bangladesh and other exporting countries reopen, it is likely that limited fiscal buffers and lack of social safety nets in these countries will prolong the negative impact of the shock on garment producers. 

Investors in global clothing retailers and brands would do well to advocate for generous support of suppliers in developing countries through these trying times. This is not only the ethical thing to do, but also the smartest: maintaining an intact network of suppliers will make for an easier recovery, once underlying markets start to rebound. – Andrew Howell

Forced Labor: A Global Supply Chain Risk

Bangladeshi migrant workers carry fresh vegetables to the capital city in Assam, India. © Koshy Koshy under a Creative Commons Attribution 2.0 Generic license

The International Labor Organization (ILO)’s latest estimates figure that 24.9 million people are victims of forced labor globally. Millions more are now in danger of being forced into exploitation in the dire economic environment brought on by the coronavirus pandemic. According to the ILO, forced labor “refers to situations in which persons are coerced to work through the use of violence or intimidation, or by more subtle means such as manipulated debt, retention of identity papers or threats of denunciation to immigration authorities.” A human rights abuse that has no place in a fair economy or just world, forced labor poses serious legal and reputational risks to global supply chains. 

Source: Based on data from The Global Slavery Index (2018).

Forced labor implicates markets and companies on all sides of the world. While the practice of forced labor is most prevalent in developing nations with weak laws and enforcement, the problem has an extensive global footprint. Sixty-one percent of coerced workers are employed in private-sector commodity businesses such as agriculture, manufacturing and mining, often producing goods for export, including to developed countries. (According to the Walk Free Foundation’s Slavery Index, G20 countries import $354 billion of high-risk products annually, the top five of which include laptops, textiles, fish, cocoa and sugar cane.) Furthermore, recent studies have shown that many more workers are laboring under force in Europe and the US than previously thought, especially in industries that use migrants for seasonal labor, such as farming. 

The disruptions that the pandemic has caused in global trade have highlighted the complexity and interconnectedness of today’s supply chains, drawing attention to the unknown risks that enter when production is outsourced or conducted through a string of intermediaries. Many large global companies only have relationships with their Tier 1 suppliers and lack knowledge about their lower-tier suppliers. This exposes them to the risk of human rights abuses taking place in their supply chains, often in conflict with their policies, as Nestle’s own investigation revealed about its Thai seafood supply chain. Most recently, a report by the Australian Strategic Policy Institute identified 83 well-known brands whose supply chains included Uyghurs forced into factory labor. The failure of a company to monitor and enforce humane labor standards throughout its business can inflict significant damage on its brand and reputation, as demonstrated by the case of Badger Sportswear.  In other cases, the  exposing of forced labor practices could lead to supply chain disruptions, legal and compliance issues and lawsuits and financial penalties.

As “S” has leapt to the forefront of ESG, investors are showing increasing concern about hidden social risks, such as human rights issues in supply chains. On April 21, 2020, in a statement coordinated by the Investor Alliance for Human Rights, 103 investors with over US $5.0 trillion in assets under management called on governments to implement mandatory human rights due diligence rules for companies, making the case that voluntary measures continue to leave significant gaps in human rights protections. Earlier, in March, an investor coalition representing $4.5 trillion in assets wrote to 95 companies demanding action on human rights due diligence. The targeted companies, which include well-known­­­­­­ names such as Gazprom, Starbucks and Costco, had all scored zero on human rights due diligence in the 2019 Corporate Human Rights Benchmark (CHRB). The Benchmark tracks 200 companies from four industries—Agriculture Products, Apparel, Extractives and ICT Manufacturing—across 100 indicators based on the UN Guiding Principles on Human Rights on issues such as forced labor, protecting human rights activists and the living wage. 

It is a self-evident truth that forced labor, a form of slavery, is unacceptable in our modern age. In advocating for strict corporate standards for human rights protection, investors not only affirm this; they also take responsibility for making it so. – Nadine Cavusoglu 

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