Israel’s fashion industry is suffering. What you need to know
Hundreds of apparel workers and small business owners take to the streets to protest government policies they say favor e-commerce sites and Chinese sweatshops
By Simona Weinglass, Times of Israel, published on March 12, 2018
Not far from Tel Aviv’s Rothschild Boulevard, with its trendy restaurants and startup co-working spaces, and the Neve Tzedek neighborhood, where French is spoken on the street and homes sell for $5 million, lies the considerably less upscale Eilat Street, home to Tel Aviv’s garment district.
It was on this street that posters resembling death notices began popping up in wholesalers’ shop windows two weeks ago.
“Bottom line, we’re closing,” read the posters, a play on the phrase “Bottom line, price reductions,” the catchy title Israel’s Finance Minister Moshe Kahlon gave to a recent decision to cancel NIS 800 million worth of tariffs on consumer items, including textiles.
“With great sorrow we announce the dying of businesses and the layoffs of 400,000 workers,” read the posters. “We are suffering from discrimination on the part of the government and Finance Minister Kahlon, through the failure to tax Internet imports on the one-hand, and the over-taxation of Israel business owners on the other. We, the business owners pay taxes (municipal tax, VAT, income tax, etc.) on every sale in Israel while the factory in China that sells directly to consumers pays no taxes here. Where is the equality and justice?”
Twenty-five years ago, textile and clothing manufacture was one of Israel’s largest industries. Today, only 12,100 Israelis are employed in the sector, with 85 percent of their output consumed locally. But the problem affects not just manufacturing, but Israel’s once-robust fashion retail sector, including chain stores in malls and independent stores on main streets, which are now feeling the pinch as well.
On March 7, several hundred apparel workers, fashion designers, and shop owners took to the streets to protest Kahlon’s tariff reduction policies, which they believe are killing their industry. But is Israel’s local apparel industry a dinosaur that cannot and should not survive in this age of globalization and Internet commerce? Or will the loss of local businesses at the hands of Internet giants like Amazon and Alibaba hurt Israel in the long run?
At the March 7 protest at the corner of Eilat and Elifelet Streets, Jewish, Druze, and Palestinian small business owners and workers held signs aloft protesting the policies of Israel’s finance minister.
“Moshe Kahlon, you are killing our businesses,” read one sign.
“Moshe Kahlon is fighting against Israeli fashion,” read another.
A large red banner resembling a Chinese flag proclaimed “Minister of the Wreck-onomy, Eli Cohen Express,” in a reference to “Ali Express,” the popular Chinese e-commerce site.
Many Israeli retailers, small and large, as well as the Federation of Israeli Chambers of Commerce, have recently been urging Kahlon as well as Economy Minister Eli Cohen, who is also from Kahlon’s Kulanu party, to change their policies vis-a-vis retailers.
They charge that Israeli shop owners suffer unfair discrimination compared to international e-commerce websites because there is an exemption of the 17% value-added-tax (VAT) on packages from abroad that are worth $75 or less. Although the e-commerce VAT exemption has existed since 2012, the recent financial troubles of Israeli clothing chain Honigman, with 1,400 jobs now threatened, as well as Kahlon’s recent decision to cancel NIS 800 million worth of tariffs on a variety of consumer items including textiles, have driven many in Israel’s apparel industry to the boiling point.
Fashion industry workers Maoz Dahan and Salal Hazai protest in Tel Aviv, March 7, 2018. (Simona Weinglass/Times of Israel)
Salal Hazai, a garment worker from the Druze village of Beit Jann in the Western Galilee, made the 2.5 hour trip to Tel Aviv, he said, to protest the fact that textile workers in his village are losing their livelihoods to China.
“I’ve been in the profession for 43 years,” he told The Times of Israel. “I’m a pattern maker, a cutter, I do everything.”
Hazai’s factory makes fatigues and specialized clothing for the Israel Defense Forces among other garments, but recently, the Israeli army told factory owners in Beit Jann that they plan to import uniforms from China.
“The government just reduced tariffs [from 6 percent to 0 percent] on cloth from China but also on the finished product, which is even worse. We cannot compete with China. Kahlon has made the products cheaper but he is sending thousands of workers home. It’s a catastrophe. How will we earn a living?”
Najua, a textile worker from Beit Jann, said she came to the demonstration because she fears for her livelihood.
“We live in a remote village and there aren’t a lot of places to work. I like my job. There are 300 girls in the factory and we are very close. We’re good at what we do and we’re quick learners. But they want to transfer our jobs to China.”
Najua said she earns between NIS 4,000 and NIS 6,000 a month depending on her output.
“I know it’s close to minimum wage but it’s what we have. It’s been 70 years since the state of Israel was established, and it’s international women’s day, but unfortunately we’re still struggling for our livelihoods.”
Several Tel Aviv-based fashion designers also attended the demonstration.
“I’m looking for a pattern-maker, do you know of anyone?” Hidas said to one of the demonstrators.
“It’s very important to me to produce the clothes in Israel,” Hidas told The Times of Israel. “If you’re buying fast fashion for 20 shekels you can imagine that the Chinese worker earned next to nothing.”
“But it’s hard. The market here is trying to fight against the markets abroad which are much cheaper. If you look around at the textile workers here, there are a lot of people who have been in the profession for 20-30 years. But there is no next generation, no continuity.”
Even for fashion designers, business is tough, said Hidas. “I have so many friends who are really talented and business savvy. But you hear about one after another going bankrupt. I think the two big factors affecting the industry are competition from e-commerce and from China.”
Several Palestinian factory owners who joined the protest were equally despairing, despite the fact that wages are significantly lower in the Palestinian Authority. Awad, from Nablus, who employs 150 workers, stood next to his colleague, who runs a factory with 100 employees in the West Bank town of Tulkarm. Both called on Prime Minister Benjamin Netanyahu to do something to stop their factories from going under.
“A few years ago I was doing NIS 500,000 of business a month,” said Awad. “This month it was down to NIS 52,000. We can’t compete with China. I just sold some land I had so I could keep going a bit longer, to keep my 150 workers employed. If they lose their jobs where will they go? Most of them are women and they can’t come work in Israel. We want the prime minister to do something,” he urged.
‘An unsustainable industry’
All along Eilat Street in south Tel Aviv, shop windows were filled with posters carrying the same messages as those voiced in the demonstration.
The Times of Israel popped into several of these wholesale outlets to ask if they import clothes from China or sell only Israeli manufactured clothes. Several said they sell both Israeli and foreign-manufactured clothes. Some said they import exclusively from China.
Asked why she has so many protest posters in her window if she herself imports from China, one wholesaler replied, “We import from China because we cannot afford not to. But we still are part of the Israeli fashion industry, and everyone is suffering: manufacturers, wholesalers, and retailers.”
Kahlon was elected to the Knesset in 2015 after promising to help lower the cost of living in Israel, which is the second-highest highest relative to income in the OECD, after Japan. But clothing and shoes specifically are not more expensive in Israel than the OECD average, Gilad Brand, an economist with the Taub Center for Social Policy Studies said.
The reason, he said, is that Israel’s textile industry was exposed to competition from abroad in the 1990s.
“Twenty-five years ago, there were a lot of tariffs on clothes and shoes, Israel removed them, and as a result the textile industry was decimated.”
Today, said Brand, there are 4,700 textile workers in Israel and another 7,400 people who manufacture apparel, for a total of 12,100 clothing manufacturers, or 0.32 percent of Israeli workers. Brand said he does not know how many Palestinians are employed in the industry and that if you take the fashion industry as a whole, including importers, marketers and retail workers, the number is significantly higher.
But the fact that clothing manufacture is no longer a major Israeli industry is inevitable and healthy, said Brand.
“Israel has no comparative advantage when it comes to producing clothes. We don’t have cheap labor. Since Israel’s textile industry was decimated in the 1990s, we’ve switched to more sophisticated industries like high tech.”
In 1991, Israel passed a big reform known as the “Tochnit Hasifa,” or Exposure Program, that exposed many traditional industries to competition from abroad.
“There was a huge wave of unemployment. All the traditional industries disappeared, but new ones developed — more sophisticated industries with higher salaries,” said Brand.
“The living standards of the entire country rose and prices dropped in comparison to prices abroad. No one would want to go back to the 1980s, when Israel nearly went bankrupt. We had very few exports then and a shortfall of foreign currency. Today our exports exceed our imports.”
Asked about the women in Beit Jann who have nowhere else to work, Brand said: “It’s a tragedy. It’s a problem. But the solution is not to force the Israeli consumer to buy Israeli products.”
The government should instead improve transportation for remote villages like Beit Jann and provide job retraining for its young people, while providing the older workers with early pensions and welfare benefits, he said.
“It’s much cheaper in the long run for the government to give people compensation than to subsidize an industry. Think about it, would you want their kids to go into textiles too?”
All along Israel’s boutique-lined Dizengoff Street, salespeople told this reporter that business is down due to purchases over the Internet. A wholesaler on Eilat Street said that Balfour Street in Bat Yam, the city’s main shopping drag, has many empty storefronts.
“I have clients in Bat Yam, and it used to be impossible to find a shop to rent on Balfour Street.”
Dafna Yaffe, who has been designing and selling shoes in Jaffa for 45 years, and who attended the March 7 demonstration, said there is a glum feeling among her fellow merchants.
“It’s sad to walk into stores and see them empty. Anyone you talk to, you ask, ‘How’s it going?’ They reply, ‘Don’t ask, it’s a catastrophe.’”
According to the Israel Postal Authority, in 2017, Israelis ordered 61 million packages over the Internet, a 15 percent increase from 2016 and three times the number of packages that arrived in 2011. Sixty percent of these packages contain clothing or shoes and 95 percent of them are worth less than $75 and thus exempt from VAT.
Among the most popular e-commerce sites with Israelis are Ali Express, Next, Asos, and Amazon, according to Udi Dagan, a former executive with several international package delivery companies.
In recent months, six Israeli clothing chains, including the 70-year-old Honigman, have become insolvent, and are in various stages of trying to find buyers or declaring bankruptcy. For the last several weeks, the Federation of Israeli Chambers of Commerce has been trying to persuade the Finance Ministry and Economy Ministry to either give bricks-and-mortar clothing stores a VAT exemption for purchases up to $75, or to curtail the exemption for Internet commerce.
“What we want is the chance for fair trade,” Nitzan Meir, who produces a clothing line designed by his wife called Meirav Amir Meir, told The Times of Israel at the demonstration.
“The Treasury decided to give a tax benefit to the Israeli consumer who gets a VAT exemption for packages up to $75. But the postal authority can’t handle the load and even packages worth $150 or $500 or $1000 get the same exemption. It’s not okay that we as business owners in Israel who pay taxes here don’t get it. It doesn’t allow us to compete.”
“We’re asking for fair trade,” he repeated. “That’s all. We’re not asking the finance minister to cancel the exemption on VAT on the Internet. We don’t want to hurt the Israeli consumer, it’s very important that you write that. We love the Israeli consumer. We just want a level playing field.”
Kahlon’s Finance Ministry responded to The Times of Israel in a statement that “as part of the government’s economic plan for 2019, in order to lower the cost of living, we are instituting a comprehensive plan to remove barriers to personal import of products, while protecting the public’s safety and health. These reforms are expected to save consumers hundreds of millions of shekels a year, and they will be added to other steps like the significant reduction in tariffs on commercial imports of many consumer products, and opening the vetting of commercial imports to competition and more.”
“At the same time, the government is working to improve the competitiveness of local producers by allocating NIS 1.15 billion to a program called ‘Bottom Line: Industry.’”
Economist Gilad Brand concedes that the $75 tax exemption is unfair to local retailers but doesn’t see a way out of this predicament.
“Logistically, it is too difficult for the government to charge VAT on small packages.”
Brand also acknowledges that the Israel Postal Authority is overwhelmed by the huge number of packages entering the country.
“I have heard people say that if you want to import something worth over $75, do it through the Israeli Postal Authority and not through an international delivery company. The delivery companies have barcodes and computerized systems and submit information to the authorities in an efficient way, while the Postal Authority uses the same system they used 50 years ago.”
Despite the unfairness of the situation, Brand does not think the solution is for the government to cancel VAT for local retailers.
“If you cancel the VAT for apparel, other industries will ask to do the same for them and there would be no end to it.”
To a certain extent, Brand sees the replacement of Israeli mom-and-pop fashion retailers by global e-commerce sites as the inevitable consequence of globalization and technological progress.
On the one hand, he says, small shops will close. On the other hand, “there are advantages to size. Israelis will be able to enjoy the e-commerce sites’ low prices.”
Technology and joblessness
In the United States, where Amazon.com captures $1 out of every $2 spent online, there has been a backlash against the way power is being increasingly concentrated in the hands of a few large technology companies.
As a recent article about Amazon by Stacy Mitchell argued, “Economists have recently begun to document a link between corporate concentration and rising inequality. Dominant companies, they’re finding, are funneling the spoils to a small number of people at the top. And by reducing the number of their competitors, these companies are also making it harder for workers to get a fair wage and for producers to get a fair price.”
There is also concern that large e-commerce sites like Amazon do not create as many new jobs as they eliminate.
Brand said that every developed country is contending with these problems, which are not unique to Israel, and that history has shown technological change on the whole to be beneficial and to raise the overall standard of living.
“There were much bigger technological changes in the 1930’s, when tractors started replacing farm workers.”
Brand said he is aware that some scholars believe that the current wave of technological disruption is different, and that there may not be enough new jobs to replace the ones that are being eliminated.
“I am familiar with that view but I don’t think it holds water. In my office, there is now a digital marketing person and a community manager. These are jobs that did not exist ten years ago. It’s very easy to see what is being lost and what kinds of opportunities have been closed, but we don’t always see the potential for new types of jobs and industries that will be created in the future.”