September 30, 1985

September 30, 1985 | Backgrounder on Trade, Economic Freedom

Why Limiting Textile Imports Would Hurt Americans

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458 September 30, 1985 WHY LIMITING TEXTILE IMPORTS WOULD HURT AMERICANS INTRODUCTION Hundreds of trade protectionist bills are overflowing the House and Senate hoppers. Almost all of them are hurried reactions by the lawmakers to the mounting U.S. trade deficit. All woul d force Americans to pay higher prices for tens of thousands of products and would impose a heavy burden on the U.S. economy that would destroy American jobs In this protectionist atmosphere, the Reagan Administration is considering the renewal of the Mult i-Fiber Arrangement (MFA the latest in a series of international agreements that have governed textile trade since 19

61. The MFA, with some 50 signatory parties allows for special restrictions on textile trade beyond those allowed by the General Agreement on Tariffs and Trade (GATT the multilateral agreement that governs most world trade. The current MFA expires next June. Before then, a new agreement must be concluded or else textile trade will be subject to no international standards or rules to prohibi t unfair practices.

Meanwhile, President Reagan faces pressure from Congress to tighten textile trade. The Senate is holding hearings on a measure sponsored by Congressman Ed Jenkins (D-GA) (H.R. 1562, S. 680) that would cut the percentage of foreign goods allowed into the U.S market. The Jenkins bill would be tantamount to abrogating the current MFA.

Ronald Reagan should use the MFA renewal to demonstrate concretely that he is strongly opposed to protection and the way it penalizes American consumers. Dis tressingly, however, it is expected that, in order to placate protectionists in Congress, the Administration will seek to tighten MFA trade restrictions by including hitherto exempt fibers and by slowing the rate at which textile imports are allowed to gr o w. That would be a serious mistake. The U.S. already suffers from one of the world's most restricted This policy adds over $20 billion a year to textile import policies consumers1 shopping bills for textile products. The Reagan Administration estimates th at the textile legislation currently before Congress would add at least another $12 billion to consumer prices.

The current restrictions, moreover, have delayed seriously needed modernization of the U.S. textile industry. The U.S. also has violated MFA rules on a number of occasions, further restricting textile trade.

U.S. textile manufacturers argue that imports have severely damaged their industry, creating mass unemployment among textile workers. Yet the failure of U.S. textile companies to rehire emplo yees laid off during the 1981-1982 recession is better explained by the U.S. textile industry's introduction of new technology and the resultant increased efficiency.

A tighter MFA, or worse, passage of the Jenkins bill would harm U.S. efforts to open for eign markets further to U.S. exports. The Reagan Administration is seeking a new round of GATT talks as a means of liberalizing world trade. But many Less Developed Countries LCDs are now threatening to boycott such talks, claiming that the U.S discrimina tes against trade in goods that they would like to export such as textiles.' Further U.S. restrictions of the textile trade would likely keep the LDCs away from trade liberalization talks.

Textile trade instead should be brought under the provisions of the GATT, from which it is currently exempt.- Many sectors of the U.S textile industry would remain competitive, even with freer trade in textiles realistic plan for structural adjustment. And President Reagqn should veto import control legislation that woul d cost the American consumer billions of dollars in higher textile costs The Administration should negotiate a process to phase out MFA.

Uncompetitive sectors should be phased down under a HISTORICAL TRENDS IN TEXTILE PRODUCTION Te xtile manufacturers in the U.S. maintain that the decline of the industry is due to unfair practices by foreign producers. Yet the worldls experience with the trade indicates strongly that textiles are closely associated with the stage of a countryls econ o mic development. Newly industrializing countries and regions historically have turned to textile production to spur economic growth making initially requires much less capital investment and less sophisticated equipment than more highly valued industries l ike autos or computers. Lower-skilled labor, usually abundant in such countries, can be profitably employed Textile 2 Inevitably, as a country or region advances industrially, a stepped-up demand for labor leads to higher wages, making its textile industr y vulnerable to competition from new emerging nations. This has been the pattern since the beginnings of the Industrial Revolution in British textile production during the late 18th century industry spread to other parts of Europe as the British moved on t o produce such higher-valued goods as steel and locomotives. The U.S industrial revolution also began with textile plants in New England.

As heavy industry grew in the Northeast, textile production moved to the Southern states, especially to the Carolinas.

Since the end of World War 11, worldwide production of fabrics upholstery, carpets, and industrial textiles, has been shifting inexorably to the newly developing countries from the U.S. and Europe and most recently from Japan (see Table I). In clothing p roduction the trend was similar (see Table 11 The Employment and Production in the Textile Industry Table I Textile Production ,Textile Industrv Emlovment 1953 1970 1980 1953 1970 1980 Developed countries 82% 70% 65 Developing countries 18% 35 100% 100% 1 0 0 Table 48% 34% 27 52 66 73 100% 100% 100 I1 Clothina Production Clothina Industrv Emlovment 1953 1970 1980 1953 1970 1980 Developed countries 92% 80% 75 Developing countries 8% 20% 25 100% 100% 100 67% 49% 39 33% 51% 61 100% 100% 100 1. Z. A. Silberston, The Multi-Fiber Arrangement and the U.K. Econo'mv (London: Her Majesty's Stationary Office, 1984 p 8. From GATT sources 2. Silberston, OD. cit 3During the 1970s, such newly developed Asian countries as South Korea and Singapore became leading textile expo r ters predictably, they in turn are feeling competitive heat from other industrialized countries, and losing textile sales to such emerging economies as Sri Lanka, India, and China. Meanwhile, well-developed countries such as South Korea and Singapore are d iversifying their mix of industrial production, stressing steel, autos, and electronic goods Now DEVELOPMENT OF THE MFA The Multi-Fiber Arrangement is the latest in a series of multilateral agreements dealing with the textile trade. In 1957 the U.S. set q u otas on textiles from Japan. Two years later, the U.S. went on to raise the problem of "market disruption!# in textile trade. It maintained that sudden increases in imports did not allow sufficient time for American manufacturers to adjust to new market c onditions.

With other developed countries the U.S. argued that textile production was still very important to industrialized economies and vulnerable to foreign imports. Consequently, the U.S. sought a special arrangement to exempt textiles from the normal GATT principles promoting free trade.

The U.S. was successful in winning support for special restrictive trade rulfs for textiles, and the following treaties have since been concluded 1) Short Term Arranaement (1961 and the Lona Term Arranqement (1962, r enewed several times through 1973). These arrangements, signed by nearly 50 countries, covered trade in cotton textiles and clothing. They allowed, contrary to the GATT most-favored-nation rules, import controls that discriminated against particular count i-ies. And also contrary to GATT, importing countries were not required to compensate the countries suffering restrictions.

It was intended that these controls should be applied only when imports caused an actual threat of market disruption hoped that appr opriate restrictions would follow an agreement between importers and the exporting countries affected And it was Under these agreements, quota limitations--also illegal under the GATT-could be imposed on textiles lower than the actual percentage share of t he market held by the But the limits were not to be 3. Stuart M. Rosen, et al, The Renewal of the Multi-Fiber Agreement: An Assessment of the Policv Alternatives for Future Global Trade in Textiles and ADDarel, report prepared by Weil, Gotshal Manges, New York, 19

85. Also see Silberston 4exporting countries the level of imports to the country suffering the trade restrictions was permitted 2) MFA I (1973-1977 The growing use of synthetic fibers, such as polyester and acrylic, together with the global econo mic problems of the early 1970s, prompted the first Multi-Fiber Arrangement. The MFA imposed quotas on artificial and natural fibers to regulate trade. But it also sought to expand trade eventually by urging those countries imposing restrictions to devise policies to bring about the structural adjustment of their domestic textile industry, such as gradually eliminating noncompetitive segments Moreover, at least a 5 percent ann-,l growth in The 5 percent yearly growth of the earlier import quota levels was r aised to a 6 percent minimum under the new MFA, which also allowed unused portions of allowable quotas to be carried over from one year to the next. When charges of market disruption were made importers were required to consult with exporters about propos e d controls. Unilateral restrictions were allowed only after such consultations. The alleged threat of market disruption alone, as opposed to actual market disruption proved after the fact, was sufficient to permit bilaterally agreed upon restraints, but n o t unilateral controls. In addition a Textile Surveillance Body (TSB was set up under the GATT to monitor the trade rules of the MFA 3 MFA .I1 (1978-1981 The first MFA was to last until 1977 when a new agreement was to be concluded. As the renewal date app r oached, the industrialized countries, still recovering from the post-1973 recession, pressed for additional protection for their textile industries. Thus the renewed MFA was generally more restrictive than its predecessor, especially in the way it applied to developing countries. For instance, MFA I1 allowed for bilateral Iljointly agreed reasonable departures" from such MFA provisions as the requirement that quota levels increase by at least 6 percent annually textiles. The U.S. made extensive use of 8tre a sonable departuresm1 in order to keep quota growth low It also focused more on the clothing trade than on general 4) MFA I11 (Dec. 1981-July 1986). The second renewal of the MFA appeared to move toward trade liberalization. For instance, it ended llreason a ble departures" from MFA provisions, and it reemphasized the need for structural adjustments of the textile industries in countries restricting imports provision to dampen the effects of import increases resulting from legitimate use of underutilized quot a s for sensitive products But MFA 111 also included an Ilanti-surgell 5- THE U.S. AND THE MFA I It is ironic that the first multilateral textile trade agreement was called the Short-Term Arrangement; this Iltemporary" protection has now lasted twenty-five years. And the original agreement, intended to allow orderly adjustment in the cotton trade, has since grown int4a protectionist monster covering over a hundred fibrous commodities.

Rather than promoting liberalization and market adjustment, the MFA has be come a permanent instrument of trade restriction, encouraging U.S. textile producers to seek more and more protection.. Instead of structural adjustment, the U.S. textile industry, under the MFA, has instituted cost cutting and modernizatiop only after im port controls failed to turn back foreign competition.

The impact on the consumer has been severe along with high U.S. tariffs on textile imports, currently cost thf U.S. consumer between $23 and $38 billion a year in higher prices as much as $630 annually for a family of four. In addition, capital and labor are diverted from more efficient sectors of the economy The MFA quotas Despite the tighter trade restrictions and GATT exemptions allowed unger the MFA, the U.S. has violated the treaty on a number of o ccasions. For example, in August 1984, the U.S. unilaterally changed its rules for determining the c0unt.y of origin of textile imports. The new definitions were contrary to established international practice. The Textile Surveillance Body (TSB), set up b y the MFA to monitor treaty compliance, found the U.S. in violation of the agreement violation.

The U.S. has done nothing to correct the 4. The Reagan Administration itself maintains that it has imposed "an unprecedented number of new quotas Ambassador Ric hard H. Imus, testimony of April 3, 1985, before the House of Representatives, Ways and Means Trade Subcommittee 5. Record capital spending and modernization has occurred in the last, few years in the face of rising imports. See Scott Kilman and Linda Wil l iams While Textile MakenBemoan Imports, They Are Modernizing TOO The Wall Street Jou rnal, September 14, 1984, p. 1 6. The $23 billion figure is an updated calculation from Michael C. Munger The Costs of Protectionism Center for the Study of American Busi n ess Working Paper #80, Washington University, St. Louis. The $38 billion figure is a recent Reagan Administration estimate 7. Weil, Gotshal Manges report, QD. cit 8. Edward Hudgins New Textile Import Rules: More Study Needed Heritage Foundation Issue Bull e tin No. 111, September 4, 1984 6- Despite its original purpose, the MFA has not eased the process of structural economic adjustment; it has actually been a source of delay. Nor has the MFA led to trade liberalization; it has instead strengthened the force s of trade protectionism in the U.S THE JENKINS BILL As the Administration considers its position on the renewal of.

MFA, it faces pressure from Congress to seek even tighter restrictions on textile trade. By rolling back permissible import levels, the Jen kins bill would be far more restrictive of trade than the current MFA In burdening American consumers and slowing down world trade this would be an economic calamity for both the U.S. and the rest of the world. The Reagan Administration estimates that U.S . retailers would pay 14 billion (or even twice this figure) in higher wholesale prices for tpextile and apparel prices as a result of this legislation. Indeed, a study by the International Business and Economic Research Corporation (IBERC) estimates thht c onsumer prices for textiles would rise between 15 and 30 percent The impact of the legislation on the employment picture is just as disturbing textile jobs lost since 1980, the annual cost to consumers of saving each job would be 70,000, while the average salary per textile worker is approximately $15,0

00. But the job gains in the textile industry fact, only about 70,000 jobs might be created, implying a cost of 200,000 per job economy if textile import controls were enacted, due directly to the reduced f low of imports and to billions of consumer dollars drained from the nontextile sector. gBERC calculates that the retail sector alone could lose 61,000 jobs. Notwithstanding job losses Even if the legislation reinstated all the 200,000 certainly would be l ess than 200,0

00. The IBERS estimates that, in I However, jobs would be lost elsewhere in the elsewhere in the economy, the result would be a net jobs--with a price tag of $1.5 million per job gain of only 9,000 9. See Fact Sheet attached to June 19, 1985 letter from Secretary of the Baker 111, and other members of the Administration's Economic 'Policy Treasury James Committee.

A 10. Laura M. Baughman and Thomas Emrich, Analysis of the.Cost of the Textile and ADDarel Trade Act of 1985, June 1985 report prepared by International Business and Economic Research Corporation (IBERC 11. Ibid 12. Ibid 7- FOREIGN IMPORTS AND THE U.S. TE XTILE INDUSTRY Supporters of further textile trade restrictions and a tighter MFA argue that, for the U.S. textile industry to survive, there must be a substantia1,decrease in the market share captured by imports.

Even if this were true, it would not justify sweeping protectionism and heavy burdens on the consumer. Yet it is not at all clear that the U.S. textile industry does face destruction by imports.

Proponents of increased textile protectionism argue that, since 1980, imports have cost over 200,000 jobs out of the industry workforce of 2,100,0

00. However, closer inspection reveals that most of these jobs were lost between 1980 and 1982, while between 1982 and 1984 there was a modest gain in employment (see Table 111 Table I11 Emlovment and Textile I mDorts Employment Change in ~mports, in Percentage import employment millions of change sq. yds material 1980 2,111,000 1980-1982 4,884 1980-1982 200,700 +10 0 2 1981 2,067,000 5,775 1982 1,910,000 5,935 1982-1984 1983 1,905,000 +32,000 7,706 1982-1984 30 . 9 1984 1,934,000 10,170 The greatest increase in imports, it should be noted, occurred during this later period, when employment was on the rise. Clearly the U.S. economic recovery drew in more imports, but it also helped the domestic textile industry. An d the failure of the U.S. textile industrv to rehire all the 200.000 workers laid off durincr the recess& can be explained by improved productivity, not increased imports. According to the American Textile Manufacturers Institute 13 A Second Look at the Ne ed for Textile Import Legislation," report prepared by the Retail Industry Trade Action Coalition (RITAC August 1985 14. Kilman and Williams, QD. cit 8capital fpending in the U.S. industry in 1984 reached $1.7 billion.

Technology has become a key characteristic of what was once a labor intensive industry production process, and shuttleless looms imported from Europe and Japan weave four times as fast as the older, American-made machines.

Some 30 percent of U.S. mills have such looms., Thus the evidence poi nts strongly to increased efficiency as the major cause of lower total industry employment. Between 1982 and 1984, the output of broadcloth from U.S. mills actually increased by 11.7 percent, fo6 instance, while employment in that sector dropped by 2.8 pe r cent Computers now direct parts of the THE MFA'S ADVERSE EFFECT ON U.S. EXPORTS The effects of a tighter MFA (or still worse, of the restrictions being proposed in Congress) would go well beyond the textile industry entire cause of worldwide trade liberal i zation and probably lead to retaliation in many areas of trade would be particularly harmful to U.S. exporters, because it would serve to perpetuate the debt crisis of the less developed countries LDCs) 0 A more restrictive textile agreement would jeopard i ze the Further, a more restrictive MFA I I The debt crisis is a major factor in the slow growth of U.S exports; Many LDCs are already threatening to boycott the new GATT round currently sought by the U.S., and some are threatening to withhold debt repayme n ts. These countries maintain that, while the U.S. seeks free trade for goods and services in which it is competitive, it refuses to consider liberalization for goods in which the LDCs are competitive-such as textiles. A tighter U.S. trade policy toward te xtiles would give LDCs very little incentive to enter a new GATT round. And failure to achieve a new GATT round would mean a further deterioration of the international trading system, resulting I in fewer opportunities for U.S. exports.

Tighter restrictions on textile imports into the U.S. would exacerbate the debt crisis by reducing the ability of LDCs to obtain foreign exchange-and thus to purchase American goods and services.

The Latin American debt crisis has had an especially adverse impact on U.S. ex ports. Between 1981 and 1983 U.S. exports to that region plummeted from $41.9 billion a year to just $25.2 billion, a 40 15. RITAC report, go. cit 16. Latin American Trade Review 1984: A U.S. PersDective, U.S. Department of Commerce April 1985, p. 30 9per c ent drop.16 U.S. sales of manufactured goods, such as machinery transportation equipment, and aircraft, experienced a 50 percent drop from over $17 billion in 1981 to'around $8 billion in 1983 Protectionist policies in the U.S especially in such a crucial area to Third World countries as textiles, would dampen economic growth in the LDCs and hence aggravate the debt crisis. While some LDCs would gain under the Jenkins textile bill, others would be big losers For instance, this legislation would roll back i mports from Brazil by 80.5 percent, from Indonesia by 81 percent, from China by 59 percent, from Thailand by 64$ercent, from Taiwan by 47 percent, and from Pakistan by 41 percent.

Kong, which maintains virtually no barriers against U.S. goods, would suffer a 17 percent cut on top of the restrictions added in 1984 by U.S. redefinition of customs rules. Such cutbacks would have a devastating effect on these economies-which would soon be manifest in lower demands for U.S. exports Even the free trade colony of Hong CONCLUSION The I1temporary1l protection of the U.S. textile industry has lasted for twenty-five years, forcing the U.S. consumer to pay tens of billions of dollars in higher costs for textile products.

Modernization by the U.S. textile industry has been delayed by this protectionism, and U.S. exports have been hurt. Thus it is time for the U.S. to liberalize the-textile trade, not to consider further restrictions.

To encourage liberalization, the Reagan Administration should take the following actions 1) Veto leaislation that would impose tiahter restrictions on textile imports.

The Administration must do all that it can to block congressional action that would cost the American consumer billions of dollars in higher textile costs aim of endincr the acrreement at the end of that Berio4 2) Renew the MFA for only one more five-year period. with the Ideally, the U.S. should simply abandon the MFA outright when it expires next year. But since the textile trade has been controlled 17. Inside U.S. Trade, V o l. 3, No. 25, June 21, 1985, quoting a Commerce Department internal study. Figure for Taiwan is from IBERC study, PD. cit, Table 2 10 - for twenty-five years, an adjustment period is necessary to minimize the painful effects of adjustment 3) Brina the tex tile trade under the rxovisions of the GATT svstem.

Phasing out the MFA would not mean completely free trade in textiles, as desirable as that might be. Currently the textile trade is exempt from the provisions of GATT, and so merely allowing the MFA to ex pire could lead to unfair trade practices. To avoid this textiles should be phased into the GATT system, which would bring freer trade in textiles U.S. quota restrictions would have to be converted to tariffs, which are legal under the GATT. Claims of inj u ry from foreign textile imports should be handled under Sec 201 of the Trade Act of 1974, which governs such cases in other industries. The inclusion of textiles would strengthen the GATT system, making progress in trade liberalizationomore likely 4) If n e cessarv, develop a serious proaram to allow an orderlv phasina down of noncompetitive seaments of the U.S. textile industrv Much of the U.S. textile industry would survive with freer textile trade, but some sectors would undoubtedly prove to be uncompetit i ve situation of the U.S. textile industry, some temporary, limited adjustment aid might be necessary to reduce the problems associated with the prudent contraction. In addition, weaker sectors of the industry could be exempted from all U.S. antitrust laws , except the provision of the Sherman Act prohibiting any business from restricting trade. This step would allow mergers, joint,ventures, and coordination of efforts to salvage marginal parts of the industry Workers and communities engaged in textiles are u nderstandably concerned about the future of the industry seem to offer these Americans at least a temporary solution. But whether in the form of a tougher MFA or in congressional legislation restrictions on trade are counterproductive and dampen the entir e economy. History shows that the manufacture of textiles is highly suited to emergent economies undergoing rapid industrialization with low labor costs. If the U.S. is to retain a large textile industry, it thus must encourage technical innovation to boos t American productivity. Import controls will only slow down this necessary process, while damaging the economies of countries that are essential markets for U.S. exports Both Japan and Germany have successfully phased down uneconomic segments of their tex tile industries. Given the special I i Import restrictions may They breed retaliation Edward L. Hudgins, Ph.D.

Walker Fellow in Economics 11 -

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