Trade Liberalization and the Demise
of the Local Shoe Industry

The demise of Philippine-made shoes is a result of decades of government neglect and intensified by just a few years of aggressive liberalization under the World Trade Organization.

By JP Andaquig

IBON Features

Posted by Bulatlat

Shoemaking has always been the bread and butter of 40-year-old Johnny Gaudia. Like nearly everyone else in Marikina City, shoemaking for Gaudia is a family business. He became interested in shoe production when his in-laws encouraged him to take up the craft, being shoemakers themselves.  While his in-laws produced mostly baby shoes, Gaudia and his wife decided to specialize in men's leather shoes and put up Gaudia Shoes Manufacturing in 1986. Eventually, his company diversified into the production of casual shoes, school shoes, sandals and slippers, using both leather and synthetic materials.

WORKING HARD FOR THE MONEY. Filipino shoemakers are among those affected by trade liberalization.

But the Philippine shoe industry has fallen on hard times. Gaudia Shoes belongs to the more than 80% of registered shoe manufacturers in the country that fall under small-scale and cottage industries, which are usually family-owned and produce hand-crafted shoes using only sewing and trimming machines.

Gaudia told IBON Features his company used to employ some 100 workers and received an average of 10,000 orders every month, usually from large-scale retailers and malls such as Shoemart, Plaza Fair and Gaisano Mall. Now, however, he would be lucky to accept about 100 orders in a week. More often than not, his company has no orders for weeks. He had to lay off most of his workforce and now employs only a few "on-call" workers as his production dramatically dwindled.

Gaudia, a member of the Samahan ng mga Magsasapatos ng Pilipinas (SMP), currently spends most of his time as part of the technical team formed by the Department of Trade and Industry (DTI) that regularly inspects incoming volumes of shoe imports and monitors their valuation. His efforts are an attempt to save the industry that has enabled him to send his four children to school, and to fight what he perceives as the main reason behind the industry's demise: the onslaught of cheap imports as a result of trade liberalization.

Disastrous for local shoemakers

Gaudia's experience is neither new nor unique. Since the 1990s, footwear groups in Marikina and other areas have been warning against the influx of cheap goods from China, Korea, Taiwan and other countries due to liberalization, which intensified when the country became a member in 1995 of the World Trade Organization (WTO).

True enough, shoe imports have been arriving in increasing volumes year after year. From 1997 to 1999, the country imported an average of 38.5 million pairs of shoes. By 2001-2003, the volume zoomed 56 percent to 60.2 million pairs.

And this only covers legally imported shoes. Smuggling has also reportedly become rampant although government has yet to release actual figures of the extent of the problem.

Nevertheless, the impact has been disastrous for local shoemakers, particularly in Marikina and Laguna. Almost a century of rich shoemaking tradition in Marikina was lost when many small manufacturing firms closed down, retrenched workers, sold Chinese imports themselves or entered into exploitative subcontracting arrangements with foreign corporations.

From 513 registered manufacturers in 1994, there are only 145 remaining in the country's shoe capital. More than 600,000 shoe workers lose their jobs every year and average production has dwindled from 105,000 pairs of shoes a year in 1994 to 42,000 pairs in 2003.

The downswing in demand for locally-made shoes is apparent as Filipinos continue to flock to flea markets and tiangges in Greenhills and other commercial centers, where an ordinary pair of counterfeit Nike shoes can go for as low as P300.

Due to the cheap price, only a few would purchase more expensive locally-made leather shoes even if they are marketed as made in Marikina. Add to this Filipinos' continuing preference for foreign shoe brands such as Skechers, Nike, Adidas, and Converse, most of which are subcontracted by their mother companies to factories in China and other countries with low labor costs. 

Dominated by imported shoes

Gaudia, like other shoemakers, laments the fate that has befallen the local shoe industry. He said that in the past, one can go down Shoe Avenue in Marikina and hear the sounds of workers drafting and assembling soles and shoe lasts. At present, the sounds have diminished and one can only see a few shops with stocks of finished shoes wrapped in plastic and ready to be delivered.

In the past, the local shoe industry even supported the growth of other small establishments such as panciterias and other eateries where workers would get their evening snacks. Downstream industries also benefit from the industry, such as local tanneries which produce the processed leather or animal hide needed in the manufacture of shoes.

From the 1950s to the 1980s, the SMP said that the Philippine shoe industry experienced a boom owing from strong local and international demand. During these years, many Filipinos wore locally-made shoes such as the Ang Tibay and Mabuhay brands, and carried locally-made leather handbags and purses. These products were also exported to foreign markets or ordered by local Chinese distributors for marketing in the provinces, the SMP added.

At present, 80 percent of the Philippine market is dominated by imported shoes and leather products from China. Filipino shoemakers have to compete for the remaining 20 percent of the market with imports from other countries.

Aggressive liberalization

The demise of Philippine-made shoes can be attributed to decades of government neglect and just a few years of aggressive liberalization. Imports have literally killed the local shoe industry. Even government has admitted this, but is evasive on calls to protect the sector by halting importation.

Compared to foreign shoe companies that have access to government subsidies with which to invest in improving their technologies, the local industry continues to use traditional low-tech methods, relying on the skills and ingenuity of Filipino shoemakers.

The SMP says that local shoemakers cannot compete on price alone as they are plagued with high production costs. About 75 percent of their manufacturing costs come from the sourcing and processing of raw materials such as leather hides, which they have to import since local tanneries were not developed enough to meet large-scale demand. It is estimated that around 80% of the components of finished local leather footwear for export are imported.

Worse, shoe imports are grossly undervalued. Liberalized customs rules have enabled technical smugglers to flourish, says Gaudia. An average pair of imported shoes in 1997 was valued at $12 but by 2002, the same pair had a valuation of $0.76.

Gaudia points out that the use of transaction value as the means of customs valuation have hurt local producers. Transaction value refers to the value agreed upon by the seller and the importer, and is not based on the actual cost of materials or the market price of the produce when sold in the local market. This has enabled unscrupulous importers to have their stocks undervalued by Customs inspectors. Given the seething corruption in the agency, importers are finding it easier to pay less in duties for their imports which they would sell either at knock-off prices in flea markets and discount stalls, or at its original market price in malls and high-end shops.

Crushing local industries

Liberalization in essence has allowed the greater entry of imports into the country, destroying local industries and making local production more import-dependent. And with institutions such as the WTO enforcing rules on further tariff reduction, the worst may still befall our local producers, including our shoemakers.

Gaudia pointed out that footwear is not covered by the General Agreement on Tariffs and Trade (GATT), but it was still liberalized by the government under the Tariff Reform Program.

Despite the government's thrust to liberalize and enforce an export-oriented policy, the local shoe industry never became competitive in terms of state subsidies. Unfair trade arrangements have also made it impossible for local shoe exporters to gain a greater share of the international market. With local shoe technology still way behind that of China, the US and the EU, as well as stringent safety and quality standards enforced by rich countries, exporters face an uphill battle.

Worse, footwear products are targeted for further liberalization under the WTO's upcoming Sixth Ministerial in Hong Kong this December. The reduction of industrial tariffs, or non-agricultural market access (NAMA), is one of the major issues set to be negotiated at the ministerial. People's groups and non-government organizations have warned that once this new agreement is implemented, local manufacturing industries face extinction. "Parang nakabaon ka sa lupa, huhukayin ka pa nang mas matulin (We already feel we're below the ground, and now says Gaudia.

Saving the industry

Gaudia says that the only chance for Filipino shoemakers to survive is for local consumers to return to the appreciation and patronage of local products. He calls this the economics of nationalism: ensuring Filipinos buy Filipino-made products. But this cannot be realized without full government support.

The SMP has also been making some inroads in monitoring reports of undervaluation. Though Gaudia admits that he has had many frustrations on the job, their team has been able to prevent the entry of undervalued shoes, or increased their valuation. For example, a pair of Diadora brand shoes declared as $2 per pair was revalued to $13.75 upon intervention by Gaudia's team. Unfortunately, many members of the monitoring team have received death threats allegedly from importers and customs insiders affected by their monitoring.

Nevertheless, Gaudia feels this is the best way he can contribute in saving the industry his livelihood has depended upon. 

In particular, the SMP has called on the government to undertake the following measures:

Creation of a National Footwear Authority that would safeguard and protect the interests of the local footwear industry;

Strict implementation of Republic Act 8800 which requires the imposition of safeguards whenever a deluge of imports have affected local production, and the Consumer Act which requires the labeling of products sold locally.

Formulation of a standard for quality and safety

In the long-term, however, local shoemakers, as well as other manufacturers, would benefit from the reversal of liberalization and the reorientation of government policies towards those that favor domestic producers over foreign corporations. (With reports from Joseph S. Yu) Ibon Features/Posted byBulatlat

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