A 40-year-old agreement that allowed Western countries to limit textile imports, in particular from developing nations, expires at the end of next month. The end of the quotas is hailed by some as an important step toward a free world market. But small countries worry that they will be squeezed out of the market by China and India, who are more competitive because of their large labor and manufacturing pools. Correspondent Scott Bobb recently was in Cambodia, where some garment factories have already suspended operations, and has this report.

Inside one Cambodia's larger garment factories on the outskirts of Phnom Penh, thousands of workers are sewing colorful T-shirts for export to the United States.

The workers sit in a line of 36 sewing machines, each sewing a particular seam of what begins as a single piece of cloth and emerges minutes later as a finished shirt. With 24 lines, this factory produces more than one million shirts a month.

The garment industry is important to Cambodia's economy, contributing one-third of Cambodia's gross national product in recent years and 90 percent of its export earnings.

But the industry is under threat. A 40-year-old quota system that allowed governments to limit the number of garments imported from any single country expires at the end of 2004.

The end of quotas is expected to favor China and India, which can produce vast quantities of garments at lower prices than Cambodia and other small countries can.

The factory's general manager, Mr. Chan - who asks that his real name not be used, says buyers are already asking for discounts of up to 30 percent.

"We project that the first three to six months of 2005 will be a transition period and a very big uncertainty for the whole country."

Mr. Chan says Cambodia must import raw materials, such as fabric and needles, whereas China and India produce everything the textile manufacturers need. In addition, he says, electricity, telephones and transportation in Cambodia are expensive, raising operating costs.

On the factory floor, the employees work eight hours a day, six days a week. They earn about 60 dollars a month. Though the wages are low, the jobs draw thousands of unskilled workers, mostly women from rural areas, who send as much as half of their wages home to their families.

One employee, Lyda, says the workers are worried about the uncertainties of the coming year.

"Some are not happy because for many workers in Cambodia it means no jobs, because our factories will be closed."

Her worries are real. In the past six months, thousands of workers have lost their jobs as 80 of the country's 350 garment factories suspended operations.

Chuon Mon Thol is the president of the Confederation of Trade Unions, which represents 90 percent of Cambodia's garment workers. He notes that most who lose their jobs stay on in Phnom Penh, looking for work. He says that, combined with the 200-thousand new workers entering the work force each year, could lead to social problems.

"They don't have any skills. So they have to go to the working areas that don't require any skills, or sometimes they have to go to work with karaokes (bars), or night clubs."

He says some turn to prostitution or crime to survive.

Political analysts say the government is aware of the situation, but has been slow to respond. Corruption and the lack of a complete set of laws governing trade and investment hamper any official efforts.

There is no doubt in Cambodia that the coming year will pose tremendous challenges to the industry and many companies will not survive.

Factory manager Mr. Chan hopes to survive by boosting productivity.

He plans to install newer, faster machines and train employees to work more efficiently.

Mr. Chuon the union leader wants the government to establish programs to re-train workers for other jobs and encourage investment in agriculture, whose potential has not been realized.

Cambodian officials are also pressing the U.S. government to grant duty-free status for a few years to Cambodian garments, as the industry adapts.

However, U-S officials say Washington is not likely to grant such an exemption, believing that this will only delay the adjustments. They acknowledge there will be a difficult transitional period but predict it will be less severe than feared.

Free market advocates say the end of textile quotas ultimately will benefit Cambodia by weeding out inefficient factories and encouraging the government to enact reforms that will help growth in all sectors of the economy.

However, such assessments provide no comfort to small factories without the resources to survive the transition, and to the thousands of workers who will lose their jobs because of it.