June, 2003: Cover Story

By Greg Rushford

Published in the Rushford Report

A “big bang” is headed toward the international trading system, as European Union trade chief Pascal Lamy put it last month. On December 31, 2004 the World Trade Organization’s Agreement on Textiles and Clothing will expire. The quotas that have been imposed for decades by the United States , the European Union, and Canada — rich countries all — on imports of clothing and textiles from more than 40 mostly poor countries will be history. “The world as we know it will come to an end,” textile lobbyist Jock Nash says.

            Nash, as textile magnate Roger Milliken’s man in Washington since the mid-1980s, has been one of the chief defenders of the quotas. From Nash’s point of view, the world will awaken to a quota-free world on January 1, 2005 with a gigantic free-trade hangover. “Be careful of what you wish for,” Nash warned last month, speaking to U.S. importers and retailers who are eagerly looking forward to the end of the costly, trade-distorting textile quotas. “Life will be nasty, brutish and short,” the textile lobbyist declared, referring to both the U.S. textile lobby and workers in otherwise uncompetitive Third World countries who will lose their guaranteed access to U.S. markets. Nash lamented the end of one of the world’s longest-running experiments in massive protectionism — the expiring quotas date to 1974 and President Richard Nixon’s MultiFibre Arrangement — at a well-attended May 15 breakfast meeting that was hosted by the Washington International Trade Association.

            So, is this the end of the string for the U.S. textile lobby? Not exactly. Remember, we are talking about a politically potent domestic “infant” industry that has never been weaned from protectionism. U.S. textile- and clothing makers have been protected in one way or another throughout 214 years of American independence (for a thumbnail protectionist history of the world’s oldest infant industry, see the Yankee Trader column at page two). When the quotas become history, there are plans already well underway to continue the protectionism in other forms — as long as politically feasible. 

Protectionist plans

            These plans include: (1) preferential trade deals with Mexico, Caribbean and Latin American countries, which get free access to U.S. apparel markets as long as the clothes are made of American fabric; (2) “special safeguards” quotas through 2008 that will be aimed at China, the textile lobby’s biggest competitive nightmare; (3) plans for antidumping suits aimed at taxing low-cost imports; (4) continued high U.S. tariffs, which average about 16-18 percent and for some product lines can be more than twice that. Moreover, the Bush administration has just set up a new quota scheme to cap imports of clothing and fabric from up-and-coming Vietnam . Those quotas will last until that Southeast Asian nation obtains membership in the WTO, an uncertain prospect at present. 

            In 18 months, a lot of money will be shifting to different locales in a quota-free world, although nobody seems to agree upon exactly how much. Published estimates of the value of the global rag trade range from $350 billion to perhaps $500 billion. That’s less than the more than $700 billion in global agriculture trade, but certainly enough money to fight over. Of the existing quotas that will disappear in 18 months, the European Union has 157; Canada has 239; and the United States — the grand champion in textile protectionism —has 701. Before they were brought into the WTO’s orbit when the Uruguay Round concluded in 1995, textiles and clothing were the only international-trade sector that was not covered by the multilateral trading rules which require that nations refrain from discrimination to favor certain trading partners to the detriment of others.

Costly quotas

            By any measure, these quotas — and their accompanying bureaucratic licensing and inspection regimes — have been costly. They represent about half of the cost of some finished garments, and between 10- and 30 percent of the costs of others, according to Ted Sattler, a vice president for foreign operations at Phillips-Van Heusen Corp. These costs, of course, have been passed along to consumers. Although nobody has seemed to have crunched the numbers since the early 1990s, estimates at the time had it that Americans were paying more than $20 billion more for their clothes every year. Sattler estimates that just ending quotas for 12 categories of clothing currently in China would lift a $363 million drag on the current

system.

            Guesstimates of the gains to the world economy when the quotas are lifted range from $6.5 billion annually to perhaps ten times that. Whatever the true numbers, “the message is clear — in that all studies foresee very significant increased in global welfare as a result of the conclusion of the ACT [Agreement on Textiles and Clothing],” WTO Director-General Supachai Panitchpakdi noted last month. Consumers will have reason to be happy.

            But not everyone will be happy. In fact, that has been part of the plan.

A slow phase-out

            The 10-year quota phase-out that began in January 1995 with the conclusion of the Uruguay Round of negotiations that created the WTO was the result of a trade-off that was pressed by other, more powerful lobbies: agriculture, intellectual property, and financial services. To appease the textile lobby and give it some political wriggle room, the phase-out was deliberately backloaded. To date, only about 20 percent of the quotas on textiles and apparel has been phased out.

            Phase One, from January 1995 to January 1998, involved seat belts, umbrellas and garden hoses, items that weren’t even under the quotas in the first place. Phase Two, running to January 2002, involved the likes of baby clothes, which weren’t even being produced domestically anyway. Phase Three, running from January 2002 to January 2005, at least liberalized a few products that are readily recognizable to adults who shop: luggage, brassieres, and dressing gowns.

            But the remaining 80-plus percent of quota items involving clothes that people actually wear when fully dressed — pants, suits, blouses, coats — will be freed of their quotas all at once, on January 1, 2005 . The political rationale — allowing domestic protectionists to cry that they are being suddenly driven off the cliff and are in desperate need of protectionism in other guises — has been obvious all along.

            The December 31, 2004 expiration of the quotas at the end of next year coincides with the planned timetable to conclude the WTO’s ongoing Doha Round of negotiations aimed at cutting tariffs on industrial goods. The turmoil and political anguish associated with the sudden phase-out of textile and garment quotas will give the U.S. textile industry an opportunity to protest that the time is not right for tariff reductions. Next year’s U.S. presidential and congressional elections add nicely to the political

timing.

China : the U.S. textile lobby’s biggest nightmare

            Already, the cries of anguish have begun — and they are mostly directed at China , the worst competitive nightmare for the U.S. textile lobby. How competitive is China ? Well, you can buy silk shirts there that are priced cheaper than cotton T-shirts made in the USA .

            Of the $76.4 billion in U.S. clothing and textile imports in 2002, China accounted for nearly $11 billion, the largest share of any country. Mexico ’s total textile and apparel exports to the U.S. were $9.2 billion; the Caribbean countries exported $9.6 billion; and the ASEAN nations sold us $9.9 billion. 

            According to data analyzed by Jennifer Hillman, the vice chairman of the U.S. International Trade Commission, after quotas on baby garments were lifted, China increased its exports to the U.S. by 826 percent. After the quotas on robes and dressing gowns were removed, Chinese exports shot up 540 percent. For brassieres, China ’s exports bounced up 232

percent.

            China ’s booming exports in luggage — up 497 percent after quotas were lifted — illustrates the comparative advantage. This business was taken from countries like Thailand (down 43 percent), the Philippines (down 50 percent); Korea (down 75 percent), Indonesia down 37 percent), and Mexico (down 53 percent). Why? “The business has moved to China because that’s where all the hardware is; they make the frame, the buckles, the pull-up handles, and wheels,” Washington trade lawyer Brenda Jacobs explains. “Until the quotas were lifted on luggage, companies were forced to buy all these parts in China and ship them to the other countries. It made no sense,” adds Jacobs, who represents the U.S. Association of Importers of Textiles and Apparel.

            Try telling that to the countries that can’t compete with China and have been living off quotas that give them a share of the lucrative U.S. market. While China , perhaps India and Pakistan , three or four Central American countries and also Mexico , and perhaps also two or three African countries will be able to compete, many others won’t. Message to Sri Lanka , the Philippines , Bangladesh , Nepal , most of Africa : worry. Countless workers in such countries stand to lose their jobs. As this reality sinks in, expect to hear a lot of screams. 

Domestic job losses, and slow change

            Here in the United States , the textile and apparel industries have been bleeding jobs for the last half century. Since December 1994, the textile industry has lost 273,000 jobs, and the apparel industry lost 480,000. Now there are roughly 400,000 textile jobs left in the United States , and some 500,000 apparel jobs. Quotas and tariff barriers can delay the inevitable, but not forever.

            US apparel imports held more than 97 percent of the U.S. market in 2002, an increase from 88 percent in 2001, according to the American Apparel & Footwear association. The remaining domestic apparel workers mainly live off Buy American contracts to supply the U.S. military, the quick turn-around garment trade, and some high-fashion products.        

            Some traditional advocates of quotas have moved on, however slowly and painfully. When the quota phase-out began in 1995, the American Apparel & Footwear Association made no secret of its hopes that the quotas might be extended after 2005. But AAFA’s members — currently led by an internationalist, Paul Charron, the chairman and CEO of Liz Claiborne — have adjusted to the realities of international markets, and source globally. AAFA no longer supports quotas. And even Burlington Industries, long a stalwart of the protectionist American Textile Manufacturers Institute, has plans to come out of bankruptcy by sourcing in the Far East . Clearly, the protectionist quota regime — slow death, really, for southern mill towns — hasn’t worked.

            But there are die-hards who insist that the problem hasn’t been with protectionism, but that there has never been enough of it to keep the foreigners at bay.

            Jock Nash, for example, blames spineless bureaucrats and politicians for giving foreigners too much access to domestic markets over the past forty-plus years. “This [Bush] administration, as well as every one, seems to be clueless,” Nash told the Washington International Trade Association audience last month. Some quota levels have been so high that they have never been filled, the Milliken & Co. lobbyist declared. “It would be like telling my daughter she has

to be home by 5:00 in the morning.”

Adam Smith, Protectionist?

            The articulate Nash is unmoved by critics who point out that all this protectionism hasn’t saved his industry from a long, slow decline. When asked how long his industry would need protection in the future, Nash referred to Adam Smith’s Wealth of Nations, which was published in 1776. “Adam Smith said that traditionally protected industries should be weaned from protection slowly for humanitarian reasons,” Nash asserted. “Back then, he was talking about the textile industry.” That’s us, Nash said.

            Surely, the great 18th century Scottish free-trade philosopher never imagined that he would be cited as the source to justify continued protectionism for the American textile industry into the 21st century. But you have to applaud the creativity of any advocate like Nash who happily quotes Adam Smith to argue that protectionism for his industry should continue indefinitely.

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