Fashion giant accused of smuggling scam

Mexico claims multinational chain Zara is abusing agreement by importing cheap clothes from Asia

As autumn approaches, and fashionistas swoop upon the new season's collections of the clothing giant Zara in high streets across the globe, a shadow looms over the Spanish multinational. Mexico has accused Zara of abusing preferential trade terms to smuggle in clothing labelled Spanish but actually made in factories in Asia.

The Mexican government's customs authority has launched an investigation into whether Zara, an offspring of the hugely successful Inditex empire, is falsifying the origin of its clothes to benefit from lower import duties.

Inditex denied the allegations yesterday, which threaten to cast a stain upon Zara's austere, tightly run fashion empire much admired even among upmarket competitors for its winning formula of combining hi-tech rapid-response production methods with low-profile management.

Zara barely advertises: word of mouth spreads the message of cheap, rapidly changing high fashion across five continents. And its boss Amancio Ortega - Spain's richest man and 18th in the Forbes ranking, with a fortune put at £6.5bn - is famously reclusive and modest.

But now Mexican textile producers have put pressure on the government to crack down on a suspected scam, screaming for protection from the onslaught of the Spanish retailing juggernaut. Zara, they claim, is exporting Spanish-labelled garments to Mexico that are actually made in Asia and should incur higher import duties. Mexican imports from the EU receive favourable treatment under a Mexico-EU trade deal, and pay 5 per cent duty. Asian products, by contrast, pay 35 per cent, except for goods from China on which a huge 300 per cent duty is slapped.

Inditex prides itself on producing 80 per cent of its garments in Europe, mostly at its Arteixo factory outside La Coruña, north-west Spain, and in workshops and front rooms throughout Galicia and northern Portugal, where meticulous craftsmanship coexists with poverty and low wages.

Only 20 per cent of its products are produced in Asia, the company says. Oxfam recently named Inditex among Spanish companies subcontracting workers in Moroccan sweatshops. Inditex denies exploiting subcontracted labour. Last year, unions in Galicia compaigned for better pay and conditions, complaining that Inditex ignored demands for more sociable shifts and better job security.

Such is Zara's economic importance in Spain and its grip upon Galicia that complaints are slow to emerge.

Every Spaniard knows of the shirt salesman from La Coruña who created cheap and cheerful housecoats that he cut by hand, four at a time, on his sister-in-law's kitchen table then hawked around the stores of his home town. That was in 1963. Not until 1975, the year Franco died, did Amancio Ortega, now 67, open the first Zara in a spacious shop in the main street opposite La Coruña's top department store. As Spain threw off dictatorship, Ortega's vision turned young women off twinkly cardigans and polka dot ruffles and taught them to love the beige trouser suit. "Zara's aim was to democratise fashion," said the first annual report in 1999 before launching on the Spanish stock exchange. "We offer accessible fashion, inspired by the taste and lifestyle of modern men and women."

Zara shops - 530 of them in 44 countries worldwide, 17 in the UK - occupy the best locations in town and their spare glass and steel styling and sophisticated displays stand comparison with top designer boutiques. Zara has also become Spain's best known export, an international symbol more potent than Tio Pepe, more lucrative and cutting edge than Real Madrid. It is among the most globalised operators in a still largely parochial sector.

But Mexico's customs authority has focused on globalisation's seamy underbelly, causing Zara's advance to world domination in accessible fashion to falter for the first time.

If the accusations are proved, Inditex could be hit by economic sanctions, and could even lose its right to export into Mexico. Until the inquiry is concluded next year, the company must pay a deposit of the full 35 per cent to the Mexican authorities. The Mexican market is vital to Inditex. It has 91 shops in Mexico, 31 Zara outlets and 22 of its sister chain Bershka, the third largest number after Spain and Portugal.

Mexico generates €300m annually for Inditex, and accounts for 7.5 per cent of its world sales.

The inquiry is prompted by the fact Spanish labour is dearer than Mexican, so Spanish goods should cost more than home-produced ones. But they do not. "We don't know where they come from," said Salomon Pressburger, president of the Mexican Chamber of Clothing. "They're labelled Spanish, but we suspect they come from China," Mr Pressburger said in yesterday edition of the Madrid financial daily Cinco Dias.

By pressing the government to crack down on Inditex, Mexican textile producers are seeking to overcome a crisis in their sector, undermined by contraband and pirate products. Hundreds of firms have closed in recent years, suffocated by cheap Asian imports.

Mexican campaigners crossed continents to compare labels, prices and places of origin of identical products, and pursued the companies they call "triangulators" who orchestrate the global trading web.

"It's completely normal," Inditex told Cinco Dias. "We can produce exactly the same garment with the same quality and the same fabrics in two different countries."