Thanks to an entrepreneurial family from Hong Kong, the Pacific island of Saipan has been a beachhead for Asian businessmen squeezing past American trade barriers for two decades.

In an odd echo of the trading concessions that once lined the Chinese coast, Asian companies created a virtual fiefdom on the isle almost 6,000 kilometres southwest of Honolulu, at once outside the reach of important American laws but with special access to United States markets.

Thousands of young village women from China work and live in isolated compounds, stitching together brand-name clothing made of fabrics brought from the mainland.

The last touch added to the garments is a ``Made in the USA'' label.

The label is legitimate because the island, smaller than Lantau, has been under US control since its seizure from Japan during World War II. That's not about to change, but Asian manufacturers are poised to retreat from Saipan because the privileges they enjoy here won't be worth much come New Year and the expiry of the Multi-Fibre Agreement. This treaty has governed global trade in textiles and apparel since 1974 and set a framework of market quotas for developing countries' exports.

``The only real reason to be in Saipan is to circumvent quotas,'' says John Lawrence, Democratic Party staff director for the US congressional committee on workforce issues. ``These are Chinese factories, Chinese workers and managers and it's Chinese cloth.''

Few doubt that most of this production will move to China once the quotas that limit mainland exports to the US and other markets end. It's just a matter of how fast and how completely manufacturers pull out.

A purchasing official for a major US clothing brand, who spoke on condition of anonymity, says he expects factories to largely empty out by 2008. That's the latest the US can restrict Chinese imports under a special provision on avoiding import surges negotiated between the two governments.

Decisions about moving will come down to cost. ``Garments are made where it's most economical to do so,'' says Henry Tan, chief executive of Luen Thai Holdings and vice-chairman of Tan Holdings.

Until now, that's been Saipan for Hong Kong-listed Luen Thai, which makes clothes for Polo Ralph Lauren, Liz Claiborne, DKNY and other well-known brands.

Tan's family pioneered the development of Saipan's garment industry, opening the island's first plant in 1983. His family had emigrated to nearby Guam a decade earlier to venture into shipping, real estate and movie distribution, then moved their headquarters to Saipan when they realised the opportunity the island's unique status presented.

Though close together and both US possessions, Saipan and Guam are in different legal positions.

Guam has been part of the US since 1899 and is subject to all US laws. Saipan and 13 smaller islands in the same chain only formalised their relationship with Washington in 1975; the new Commonwealth of the Northern Mariana Islands retained the right to set its own minimum wage, taxes and Customs controls and establish separate immigration controls.

The idea was that the Northern Marianas would set tighter immigration controls than the mainland US to keep indigenous ethnic groups from being overwhelmed by asylum seekers and other migrants.

But the laid-back islanders never got around to it.

The Tans took advantage of the island's unguarded frontier by bringing in workers from Hong Kong, the Philippines, Bangladesh, and other Asian nations to make ``Made in the USA'' clothes. Other Asian apparel makers followed suit.

The major Asian exporting countries were already shipping the maximum volume allowed under US clothing quotas. Manufacturers in Saipan could avoid quotas since the island is a US territory and its products aren't formally exports.

After several years, foreign workers outnumbered natives, but the Northern Marianas government largely accepted this because the new industry sparked Saipan's economy, providing customers for supply and service companies.

Taxes and fees paid by the island's 26 manufacturers account for a third of government revenues and the industry accounts for almost half of all jobs on the islands, according to the Saipan Garment Manufacturers Association. Tan Holdings, which owns the main newspaper as well as insurance, fishing and a spectrum of other ventures, is Saipan's biggest single employer and taxpayer.

As China opened up, mainland workers rapidly took the place of women from other Asian countries.

Today about three-quarters of Saipan's garment workers are Chinese. In September, the US Equal Employment Opportunity Commission filed suit against one factory for alleged discrimination because it hired Chinese to replace 100 experienced women from the Philippines, Thailand and Bangladesh.

Chinese companies settled into Saipan too as the mainland rapidly bumped against its own quota limits.

Now the tide is rolling out. Richard Pierce, executive director of the manufacturers' association, says 10 per cent fewer garments are being produced now than at the peak between 1999 and 2001. Factory employment has fallen about 20 per cent in the last year.

``Most of the factories are not as profitable as they used to be,'' he says.

Falling global clothing prices have reduced export sales by 20 per cent from their peak. ``Buyers dictate the prices now,'' Pierce says.

The end of quota limits will add to the squeeze. Manufacturers who hold quota rights from China now pay for the privilege, but that charge will disappear after January 1. More significantly, Saipan manufacturers are required to pay a minimum wage of US$3.05 (HK$23.80) an hour. That's 40 per cent less than the US minimum and about 10 times higher than the minimum in Guangdong.

Typically, labour costs represent 15-20 per cent of the value of a garment, according to the anonymous US clothing buyer. The US imposes import tariffs, which are not ending this year, on clothing from Asia and most other countries at a similar rate.

``Right now we're on the edge,'' says Pierce. ``People are worried.''

What will tip the balance between salaries and tariffs are costs such as logistics. In China, companies can save on shipping fabric, buttons and other supplies to Saipan and speed up order delivery times.

Luen Thai has been investing heavily in Guangdong and will soon double its production capacity with huge new plants, making China its main base in place of Saipan.

``When quotas are eliminated,'' says Tan, ``there will be a major consolidation of countries of manufacture as well as of vendors.'' He expects garment manufacturing to be concentrated in just three or four countries instead of the 30-50 today.

  
The Tans aren't closing down yet in Saipan. ``There's too much uncertainty,'' says Tan, noting seesawing headlines each day about potential US import restrictions, China's possible imposition of export taxes and other post-quota developments. Luen Thai is also maintaining plants in the Philippines and Cambodia.

The departure of the factories could remove a source of embarrassment for Saipan. A series of press exposes in the late 1990s depicted brutal factory conditions there with reports of cramped, rat-infested barracks, inadequate toilet facilities, forced unpaid overtime, beatings, coerced abortions, overheated factory floors, locked exits and other abuses.

The Tan plants were no exception. The US Labour Department sued six Tan companies in 1991 for forcing Chinese labourers to work up to 84 hours a week without overtime (US law requires companies to pay 1.5 times the regular hourly rate for work in excess of 40 hours a week) and paying less than Saipan's minimum wage.

The Tans settled by agreeing to pay the workers US$9 million but negative publicity led clothing giant Levi Strauss & Co to stop buying from the Tans. 

Following numerous smaller cases brought by the Labour Department and the Occupational Safety and Health Administration (OSHA) against other plants, officials in president Bill Clinton's administration proposed curtailing Saipan's legal exemptions. The drive foundered on opposition by congressional Republicans, who were extensively wined and dined by the Tans. A picture of family members with President George W Bush hangs above Tan's desk in Hong Kong.

However, in 1999, anti-sweatshop group Global Exchange publicised the discovery by OSHA inspectors of a mass food poisoning case involving 1,100 workers at two Tan factories. Global Exchange claimed 50 workers had fallen ill in a smaller incident a month before.

Global Exchange, along with the main US garment workers union and three other groups, had just orchestrated the filing of three huge lawsuits in US courts targeting the Saipan factories and their major US customers, including The Gap, J Crew, The Limited, Tommy Hilfiger, Levi's, Abercrombie & Fitch and Calvin Klein.

Demanding US$1 billion in damages, the suits charged the clothing buyers with a ``racketeering conspiracy'' to perpetuate factory abuses on Saipan, especially the system whereby workers incurred big debts to recruitment agents then had to surrender their passports until they worked off the debt and reimbursed employers for food and board.

The last of the lawsuits was dropped in January after 26 US clothing companies and 23 Saipan manufacturers agreed to fund a US$20 million settlement; only Levi's refused to join but it halted all purchases from Saipan in the meantime. The Tans agreed to pay US$2.2 million as their share of the settlement and adopted their own ``Unified Principles of Social Responsibility and Practice'' pledging to provide the ``best cared for staff''.

The court settlement will reimburse up to 30,000 workers for back wages and the companies also pledged to implement an extensive independent monitoring programme to ensure compliance with OSHA and Labour Department standards.

The court fight ended the worst abuses, but the scope of improvement should become clearer when monitors make their upcoming first report. Some problems continue. One factory last month agreed to US$238,000 in back wages not paid earlier this year.

The ``Made in USA'' label previously carried value over and above its usefulness in avoiding import tariffs as some American consumers showed a patriotic preference for domestic goods. Certification of clothes as made in sweatshop-free conditions could also bring a slight premium with some shoppers. But despite reports by some activist groups that conscientious manufacturers are showing new interest in Saipan, few expect the Chinese juggernaut to be slowed.

``The consumer is focused on price,'' said congressional aide Lawrence.

The manufacturers' association is fighting a rearguard action to make Saipan production more favourable. ``We're just looking for anything that could try to help,'' Pierce says.

Under one proposal the group recently persuaded the Northern Marianas government to ask Congress to allow the ``Made in the USA'' label on products with just 30 per cent of their value added in Saipan, down from 50 per cent now. Pierce says the lower ratio is used for most other industries and also used in some cases with clothing imports. With this move, fabric cutting would be done in China while Saipan workers would focus on sewing.

Another proposal would exempt Chinese workers from paying into the US Social Security system. South Korean and Filipino workers are exempt from this 7 per cent assessment by treaty, but the lack of an agreement between the US and China means Chinese labourers have paid an estimated US$270 million that they cannot recover.

Regardless of how fast the Tans shift to China, they aren't abandoning Saipan. Instead, they are betting on a China-fuelled revival of tourism, the only industry that's ever come close to rivalling textiles on the island.

The Tans have bought two hotels on Saipan and Henry Tan said a deal for a third will soon be complete. Their Century Tours business recently opened offices in Hong Kong and Shanghai to promote the island and began chartering flights from Shanghai to Saipan.

Tan is excited that Continental Airlines moved last month to redirect its flights from Hong Kong straight to Saipan. A pending agreement between local officials and the China National Tourism Administration to designate the islands as an approved destination for mainland tour groups could return Saipan's tourism industry to its previously buoyant level, he predicts.

The hotel business also relies heavily on foreign workers, but it's not clear whether laid-off garment workers will be able to become housekeepers. Samuel McPhetres, an instructor at the Northern Mariana Islands Community College, says residents are concerned that a rapid factory shutdown could strand many of the remaining 12,000 foreign garment workers, ironically leaving these Chinese labourers to idle alongside their countrymen who fly in to laze on the beaches.

zach.coleman@globalchina.com