December 17, 2004

Most economists estimate the net gain to the world economy of this change at $6.5 billion annually, and a few believe the true figure could be as much as 10 times that. For Western consumers, the burden of quotas has accounted for about half the cost of some finished garments, and between 10% and 30% of the costs of others, clothing industry sources figure.

So the demise of quotas is unalloyed good news for the cause of free trade, right? Well, not exactly. As far as the politically powerful U.S. textile lobby and its allies on Capitol Hill and in the White House are concerned, the Big Bang is just the starting gun for a new round of trade warfare, this time against China.

The Chinese clothing war is based upon a widespread fear throughout the mill towns of the American south, where it is recognized that China has the clear competitive advantage in the rag trade. Low-wage (non-union) southern U.S. states once were happy to lure jobs away from New England and New York City. Now they cry foul when economic logic dictates that such employment can be performed more efficiently by low-wage (non-union) Asian countries. Already desperate in the early 1990s, the domestic textile lobbyists hatched their current battle plan to use the leverage of the U.S. government to disrupt the Chinese clothing industry. Now, the plan is coming together.

In the past year, Washington has already re-imposed restrictive quotas on Chinese-made brassieres, dressing gowns, knit fabric and socks. And the Bush administration is considering hitting China with additional quotas on more than a dozen other big-ticket items that are staples of everyday life, ranging from blouses to underwear, pants to sheets, as well as various yarns, woolens, and synthetic fabric.

The American trade warriors have won the first battles. Advance orders for apparel from China for the fall and winter of 2005 have been thrown into uncertainty, as beleaguered importers and retailers scramble for alternative reliable sources of supply in case a particular item of Chinese clothing is hit with new quotas. And that is just one part of the game plan.

Of course, the U.S. textile protectionists don't much like competition from other low-wage Asian states like Indonesia and Cambodia, either. But while clothing quotas expire for all other members of the World Trade Organization on Jan. 1, China agreed to subject itself to one-year special "safeguards" quotas on individual products until 2008 as part of the political price for its WTO accession. "These petitions are the only things that can stop a Chinese takeover of the U.S. market," asserts Cass Johnson, who is the president of the National Council of Textile Organizations.

Lobbyists like Mr. Johnson rattle off the numbers. China holds more than 21% of the global market for textiles and apparel. In 2003, Chinese exports of garments and fabrics to the U.S. amounted to $11.6 billion, almost 15% of the U.S. market. While this year's numbers aren't yet in, China's U.S. market share is known to be creeping above 17%. China already holds some 70% of the market in countries like Australia and Japan that have no such quotas. Beyond the statistics, the U.S. lobbyists tremble when they consider that Chinese silk shirts sell in Hong Kong for about $11. It's hard to find cotton T-shirts made in the U.S. for under $20.

America's war against Chinese clothing will wreak havoc in the marketplace for the next three years. But the bottom line is inexorable: the U.S. protectionism simply won't work in the long run. China will eventually win this war.

The decades of quotas have slowed the demise of the once-proud American clothing industry, but they haven't stopped the inevitable decline. Mill towns throughout the American south have been slowly dying for many years, despite the quotas. If those quotas had worked as advertised, North Carolina would still be the T-shirt capital of the world. These days, about 95% of the clothes that Americans wear are imported, according to U.S. government statistics compiled by the American Apparel and Footwear Association.

Ten years ago, the still-protectionist AAFA insisted that even a 10-year phase-out of quotas wasn't enough. But the association changed its tune. President Kevin Burke recently took a swing through China, where he visited his members' new manufacturing operations.

Imposing new quotas on a range of clothes from China may well succeed in diverting orders to other countries in Asia, Latin America, or the Caribbean, at least until 2008, but they won't bring jobs back to America. "What difference does it make if Americans buy clothes made in India or China?" asks Laura Jones, the executive director of the United States Association of Importers of Textiles and Apparel.

After quotas had been lifted on Chinese bras in 2002, Chinese exports bounced up 232%. When the domestic textile lobby howled, U.S. officials re-imposed new quotas on Chinese bras in December 2003. Last year, China's share of the U.S. cotton bra market fell by 27%. But countries like Honduras were happy to take up the slack. Thanks to the new restraints on China, Honduran exports of bras to America rose by nearly 70%.

The declared purpose of the new quota on bras was to save U.S. jobs. However, Americans only make a miniscule number of bras. In late 2003, I asked Secretary of Commerce Don Evans, who had just approved the new quotas on China, how many American workers were then stitching bras. "I have no idea," Mr. Evans grudgingly admitted.

At least James Leonard III, the Commerce official who presides over the textile police, offered a more forthright answer last month when I asked him how many American jobs the government had intended to save with quotas on China last year, and how many jobs had been saved. "We did not make any calculations as to how many jobs were to be saved," Mr. Leonard acknowledged.

If the U.S. textile lobbyists aren't so good at economic calculations, they sure know their politics. In the 1993 North American Free Trade Agreement with Canada and Mexico, the domestic lobby was successful in inserting a provision called the "Nafta yarn-forward" rule of origin. The yarn-forward rule allows clothing from Mexico or Canada to be imported into the U.S. duty-free, but only if those clothes are sewn from fabric first woven in the United States.

During the past decade, U.S. trade negotiators for Presidents Bill Clinton and George W. Bush -- textile protectionism is staunchly bipartisan -- then insisted that similar yarn-forward rules were inserted into preferential trade deals with Jordan, Singapore, Chile, Morocco and Australia, as well as pacts with various other African and Caribbean trading partners. The idea was to disadvantage the big Asian competitors, especially China.

The strategy worked, sort of. In 1992, Mexico held only a 5% share of U.S. clothing markets, but after Nafta was launched two years later, Mexico's exports of clothing north of the border shot up dramatically. By 1999, Mexico held 18% of the U.S. market. But since then, Mexico's market share has declined to about 10%, while China's has been rising. Here is another example of how preferential trading schemes only slow down the inevitable.

The second part of the U.S. war plan involved a calculated delay. The 10-year quota phase-out that ends on Dec. 31 was part of the deal that sealed the Uruguay Round of multilateral trade negotiations that created the World Trade Organization in January 1995. To give the textile lobby some political wriggle room, the phase-out was deliberately backloaded into unequal phases.

Phase One, from January 1995 until January 1998, "freed" a few items like seat belts, umbrellas, and garden hoses, which were not even under the quotas in the first place. Phase Two, running to Jan. 2002, removed quotas for the likes of baby clothes, which weren't being produced in the United States. Phase Three, from January 2002 to Dec. 31, 2004, at least liberalized a few products that are readily identifiable to adults: luggage, bras, and dressing gowns (the later two items, of course, were quickly put back on quotas). The remaining more than 80% of quota items involving clothes that people wear when fully dressed -- pants, suits, shirts, blouses, coats -- all come off quota in the Big Bang on New Year's Eve.

The idea was to give domestic protectionists who had not used the previous decade to adjust to global economic realities the opportunity to protest that they were being suddenly driven off the cliff. Such howls -- from Third World countries like Mauritius, Sri Lanka and the Philippines that (rightly) fear that they cannot compete with China without preferential access to the U.S. market -- are now fueling the present demands for special "safeguards" quotas against China.

While each item of Chinese clothing that is under attack has its own story, the new quotas on socks that the Bush administration -- searching for votes in the American south -- slapped on before last November's elections shows how the game is played. The quotas were imposed by the Committee for the Implementation of Textile Agreements. CITA is a secretive federal interagency committee that is run out of the Commerce Department and has a reputation for its unquestioning loyalty to domestic protectionists. To stretch a metaphor, this case is really full of holes.

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The skimpy six-page petition that CITA accepted was filed by a secret splinter group of the national Hosiery Association that calls itself the Domestic Manufacturers Coalition. CITA agreed to classify the identities of the petitioners as trade secrets, and withhold them from the public. CITA even refused to divulge the petitioners' identities to other interested members of the domestic sock industry -- sophisticated global operators like Gold Toe Brands, who operate in China as well as the U.S. -- who have vehemently protested the move to cap imports.

The secret domestic committee is chaired by Charles Cole, whose day job is president of Alabama Footwear, Inc. A spokeswoman for the Charlotte, N.C.-based Hosiery Association said she has been instructed to refer all calls about the domestic manufacturers committee to Mr. Cole, who declined to take my call.

The public record doesn't reveal much about Alabama Footwear, other than it is based in Fort Payne, Alabama, and is part of the Prewett family of mills. Fort Payne calls itself the Sock Capital of the World. Prewett, like other sock makers in the Fort Payne area, boasts on its Web site that it makes all-American socks from the finest machinery imported from Italy.

After looking at the secret numbers that were supplied by Mr. Cole and the other secret sock petitioners, CITA charged that the U.S. sock market has been "disrupted" by rising Chinese imports that had supposedly shot up to $91.1 million in 2003 from just $8.8 million in 2001, and appeared to be rising this year to more than $170 million.

However, those numbers deserve a closer look. Reliable statistics are hard to come by in the U.S. sock industry, but credible industry sources estimate that probably as much as 80% of the socks that are made in America are cotton socks. In 2003, U.S. imports of cotton socks from the Dominican Republic shot up by 144.8%. While U.S. cotton sock makers might have a gripe about Dominican sock competitors, imports of cotton socks from China -- the No. 16 U.S. supplier -- were less than 1% of the U.S. market, and falling.

To show "rising" Chinese cotton sock imports, CITA threw in two other kinds of socks along with cotton: those made of man-made fiber, and wool. But while imports of man-made and woolen socks from China have indeed been rising, Gold Toe Brands and other U.S. industry leaders argued to CITA that "there is minimal production of wool socks in the United States." But CITA ignored Gold Toe's reasoning.

The CITA-accepted domestic sock petitioners' petition cites 34 examples of plant closings and employee layoff actions that it claimed caused 3,717 job losses in 2002-2003. In response, lawyers for the Gold Toe counter-petitioners cast serious doubt on the numbers. For example, on Jan. 6, 2003, Gold Toe Brands announced that it would relocate knitting and finishing operations from Newton, North Carolina to Burlingon. The domestic petitioners' chart aimed at documenting American job losses to China merely noted that the Newton facility had closed.

The domestic petitioners also listed Efland Hosiery, of Efland, North Carolina, as losing 75 jobs when it closed in 2003. Yet Efland "did not produce socks," the Gold Toe counter-petition noted. Another mill moved from Pennsylvania to Mexico-yet China got the blame.

In short, if the sock petition were required to face judicial review, it would be laughed out of court. But even though the domestic petitioners failed to establish such basics as legal standing, a valid cause of action and damages, they got the venue right: the always forgiving CITA.

When quotas were lifted on Chinese luggage in 2002, China's exports boomed, rising 497%. But the business wasn't taken from Americans, but from other less competitive luggage makers: Thailand's luggage exports to the U.S. fell by 43%, the Philippines' fell by half, Korea's by a whopping 75%, and Indonesia's by 37%.

"The luggage business 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."

Quotas aimed at China merely postpone this inevitable shift at huge cost to the American consumer. But that doesn't mean the textile lobby won't succeed. Consider how this has played out over and over again in the U.S. political arena:

In 1956, the Congress -- fearing Japanese competition -- successfully pressed President Dwight Eisenhower to limit textile and apparel imports. "The textile industry does not seek favors, but does ask, Mr. President, that the additional burden of ever-increasing imports not be added to its other troubles," Republican Sen. Frederick G. Payne of Maine declared on the Senate floor. "The industry seeks a chance to adjust, to work out its problems, so that once again it can stand strong against all competition from whatever source."

In the 1960s, Japan was still the U.S. textile lobby's favorite target. This led to President John F. Kennedy's Short-Term Cotton Agreement of 1961, which lasted about a year and then became the Long-Term Cotton Agreement. The protectionist pressures intensified during President Richard Nixon's years in the White House. As part of his southern strategy in his 1968 campaign, Nixon promised that if elected he would curb imports of textiles and apparel. The Multifiber Arrangement of quotas he initiated in 1974 was supposed to last for three or four years. Instead there have been four extensions and revisions -- until the WTO Agreement on Textiles and Clothing finally runs out this month.

Meanwhile, first Japan, then Hong Kong, South Korea, and Singapore developed their economies far beyond the garment industry and moved up the economic ladder. But in the U.S., the women who trudge into the remaining mills are the granddaughters of the women who were intended to benefit from the "temporary" protectionism of the last half century.

Two years ago, I asked Jock Nash, the Washington operative for textile magnate Roger Milliken, how long would his industry need continued protection. Mr. Nash responded by referring to Adam Smith's The Wealth of Nations, which was published in 1776. "Adam Smith said that traditionally protected industries should be weaned from protection slowly for humanitarian reasons," the lobbyist for Milliken & Co. declared. "Back then, he was talking about the textile industry. That's us."

Mr. Rushford is editor of the Rushford Report, a newsletter based in Washington, D.C. that covers trade politics.