May 9, 2000

May 9, 2000 | Backgrounder on Trade, Economic Freedom

Choosing to Lead: Liberalizing Trade in Textiles and Apparel

The efforts of the World Trade Organization (WTO) to promote free trade include the liberalization of America's textile and apparel industries, one of the most heavily protected sectors of the U.S. economy. Economists estimate that nearly 40 percent of the gains from lower prices and increased production realized by the liberalizing of trade under the WTO's Agreement on Textiles and Clothing (ATC)--approximately $16 billion--is attributable to a reduction in quotas on textiles and apparel.1 Reducing trade barriers further would enable U.S. consumers to purchase these products at lower prices and promote economic growth in very poor countries that produce them.

Regrettably, however, the United States has done little of substance to liberalize its textiles and apparel trade. Consequently, some analysts predict that in 2005, when liberalization of this sector should be complete, over 90 percent of apparel products still will be eligible for a quota.2

America's textile and apparel industry, despite policies protecting it, has been in decline for decades. The sector, which has lost approximately 30 percent of its workforce since 1989, comprises just 1 percent of total non-farm employment in the United States. The average wage paid in this sector is far below the national average--nearly 20 percent below for the textile industry and 33 percent below for the apparel industry.3 The United States is continuing to protect a declining sector of its economy at significant cost to American consumers and some developing countries.

The Clinton Administration now stands at a crossroads. It can continue putting on a facade that the United States is reducing its barriers in the textile and apparel sector, or it can adopt a leadership role and demonstrate that America is willing to take the steps necessary to liberalize this sector. If it does not, other countries--especially developing countries--are likely to adopt its current approach and implement their own protectionist policies. After all, they might well ask, if the world's largest market fails to open its borders to competition, why should they?

THE POLITICS OF TEXTILE AND APPAREL TRADE

Liberalizing trade in the textile and apparel sector by reducing tariffs and quotas has been a sensitive issue in almost every trade debate throughout the post-World War II era. It was a key issue, for example, during the debate on the North American Free Trade Agreement (NAFTA), and the recent debate in Congress on expanding trade with countries in Africa and the Caribbean.4 Indeed, a major achievement of the WTO was that it included the liberalization of the textile and apparel sector.

Agreement on Textiles and Clothing.
The United States agreed to liberalize the textile and apparel sector when it signed the WTO's Agreement on Textiles and Clothing in December 1994. For the United States, this liberalization includes eliminating quotas on goods from 38 countries.5 Once quotas on a product have been removed, a tariff will be applied according to the agreement. The ATC prohibits the reapplication of a quota on that product.

Liberalization of the sector is to occur over a 10-year transition period (1995-2005), with certain milestones along the way. For example, the United States was to have eliminated 33 percent of its quotas by January 1, 1998. All quotas are to be eliminated by January 1, 2005. After textile and apparel items are assigned a tariff, every country will face the same tariff rate under the WTO, and the stage will be set for the gradual reduction of these tariffs.

Costs and Benefits of Liberalizing Trade.
Trade liberalization in this sector entails both costs and benefits. There is little disagreement that liberalizing the textile and apparel industries would mean that some workers in these industries would lose their jobs. Often, workers who believe they would be affected lobby their politicians for protection from foreign competition. Politicians respond to their plight by passing protectionist legislation, and the barriers enacted increase costs for U.S. consumers. Thus, focusing the debate on short-term costs creates decisions that hurt consumers in the long run and ignores the benefits that liberalizing the textile and apparel sector could produce.

It should be noted that workers who are displaced by the liberalization of this sector are not left stranded. Since 1974, the Trade Adjustment Assistance (TAA) Program has offered them financial aid and training opportunities. Moreover, the growing U.S. economy creates numerous opportunities for them to find new employment, albeit much of it in other sectors. According to the Bureau of Labor Statistics, for example, 19 million new jobs were created in the United States during the past decade alone.6

Textile and apparel workers who lose their jobs have only a slightly more difficult time in finding a new job than do workers in other industries. One study found that nearly 90 percent of workers who had lost their jobs in the textile and apparel sector found a new job, compared with the national average of 93 percent. More significant, the study found that the workers who found a new job outside of the apparel industry experienced a 34 percent increase in pay.7

For Americans, the benefits of liberalizing textile and apparel trade are numerous. First, consumers would save an estimated $24.4 billion8 that they now pay in higher prices and inefficient use of resources.9 Because eliminating quotas in the textile and apparel sector would allow developing countries to increase their supply of these products, the cost of these products would fall. U.S. consumers pay significantly more for an imported textile and apparel product today than they would under free trade.

Consider, for example, the case of ladies' hand-knitted wool sweaters from China. The United States limits how many of these sweaters can be imported each year. This limit raises the cost of each sweater by about $12, increasing the wholesale price by 38 percent (see Chart 1).10 For cheaper products made of fabrics such as cotton, the effects of the quota are more severe. Eliminating the quotas would result in significant savings for a family of four, which typically spends approximately 5.5 percent of its disposable income on textile and apparel products.11

Second, resources would be used more efficiently. Resources are often used inefficiently because quotas have created incentives for entrepreneurs to engage in less valuable activities than they would otherwise. For example, they may invest in the textile and apparel industry because the quotas make the industry appear to be a more viable investment than it otherwise would seem to be. Despite the profits they can earn, production is inefficient; the same goods can be produced elsewhere for less cost. Without the quota, entrepreneurs would invest their scarce dollars in more efficient activities. And investing in U.S. industries that can produce goods at a lower cost contributes to the growth of the American economy and better-paying jobs.12

Quotas also create an inefficient use of resources overseas, raising the cost of imported textile and apparel products to American consumers. To avoid quotas, foreign textile and apparel producers will relocate their factories or ship their products to another country that does not impose the quota. For example, to sell its products to the United States, one Hong Kong company set up cashmere-knitting factories--to make a product out of wool from Mongolia and Northern China--in Madagascar, an island country off the southeastern tip of Africa.13 The United States does not impose quotas on cashmere from Madagascar. Producers will undergo significant costs (that could be avoided if a quota were not in place) to increase their sales beyond the quota limit. Such costs limit the gains American consumers could realize from trade.

Helping Developing Countries.
Developing countries also stand to gain from liberalization of the textile and apparel sector because of the importance this sector plays in those economies. For example, 77 percent of the imports from Bangladesh--which has a per capita income of less than $300--comes from its textile and apparel sector.14 The textile industry is the third largest source of foreign income in the Dominican Republic, employing over 140,000 people.15

Currently, 80 percent of U.S. quotas are imposed on countries with per capita incomes averaging less than $10,000--which is approximately the annual salary of a minimum wage worker in the United States; many foreign workers earn well below this amount.16 Because quotas limit the amount that a country can sell to the United States, they necessarily limit the production of these products in developing countries, which in turn limits employment opportunities. Developing countries, which already suffer high rates of unemployment, cannot afford to have their unemployment rates increased even more by U.S. policy.

Unemployed workers in developing countries do not have the opportunities that the unemployed have in the United States. Because opportunities are more plentiful in America, unemployed workers in the United States can find a new job in a relatively short period of time: The median amount of time it takes for someone to find a new job in the United States is 6.4 weeks.17 Moreover, as noted above, the United States maintains a safety net to assist workers who are temporarily displaced and a special program for those who lose a job due to trade.18 In contrast, when a factory shuts down in a country such as Bangladesh or the Dominican Republic--prompted in part by prohibitive U.S. quotas--the unemployed have no safety net available. For these workers, opportunities for new employment simply do not exist, and the alternative is dire.

While removing U.S. quotas is not a panacea for developing countries' problems, eliminating quotas on one of the most important industries in these countries would help to encourage growth, increase production, create more stable jobs, and alleviate some of the abject poverty.

IMPLEMENTING THE ATC

America's implementation of the terms of the WTO's Agreement on Textiles and Clothing has raised serious questions about the likelihood that the United States will complete the liberalization of this sector by 2005. To date, although the United States has liberalized 33 percent of its quotas, it has been on commodities that have no need for liberalization. For instance, to meet the requirement in the ATC that 33 percent of textile and apparel products have no quota imposed, the United States included parachutes and tents on its list of commodities to be liberalized.19 Neither of these products has ever been subjected to a quota. Thus, listing these types of products made it easier for the United States to meet the ATC's requirements, but stretching the terms of the liberalization agreement also diminished the credibility of the United States regarding its intention to meet its obligations in the future.

The Administration plans to liberalize most of the apparel sector toward the end of the transition period: The number of products in the apparel sector scheduled for liberalization by January 1, 2005, is five times the number liberalized over the entire 10-year transition period. But the President and some of the legislators who agreed to the ATC will no longer be in office in 2005. Putting off the bulk of the liberalization until the end of the transition period means that other federal officials will bear the political repercussions. Moreover, deferring the political costs of this agreement to another Administration weakens the certainty that it will be implemented as planned.

The textile and apparel lobby is likely to apply great pressure on the United States to ignore its obligations. Indeed, there are signs that this increased pressure is already occurring. The American Textile and Manufacturers Institute--the trade association representing textile and apparel producers--recently released a report stating that the WTO is a "costly failure" for the U.S. textile industry.20 It evaluated the progress in 27 countries on U.S. access to these markets and concluded that little progress has been made. The report fails to mention any of the problems the United States is having in fulfilling the ATC's requirements, such as including non-quota products in its list of commodities to be liberalized; yet it points out the failings of developing countries in meeting their targets. Some analysts believe the report could be the first step in seeking repeal of the ATC.

The Administration, for its part, is implementing delaying tactics to thwart implementation of the ATC, which allows signatories to impose quotas on other countries during the transition period if they can demonstrate that "a particular product is being imported...in such increased quantities as to cause serious damage, or actual threat thereof, to the domestic industry producing like and/or directly competitive products."21 To date, this "transition safeguard" mechanism has been used 39 times--25 times by the United States.22 In most of the cases, either the United States rescinded its quota before the case was reviewed by the WTO or the WTO ruled that the United States failed to demonstrate evidence of "serious damage" to the industry and recommended that the United States rescind its position.

Most of the U.S. claims occurred early in the transition period, and the United States has lessened its use of the safeguard measure over the past two years. However, the temptation for the industry to seek use of this option will increase as the end of the transition period--when the bulk of U.S. liberalization is set to occur--approaches.

LIBERALIZING TRADE IN TEXTILES AND APPAREL

It is not too late for the United States to regain its leadership position in trade matters. With five years left in the transition period, Washington has ample time to increase efforts to liberalize the quota system and restore credibility to its commitment to the ATC.

Specifically, the current Administration should:

  • Accelerate the integration of textile and apparel products into the WTO by eliminating quotas.
    Particular focus should be placed on accelerating the liberalization of the politically sensitive apparel industry. Such action would demonstrate that the United States is making real reforms.

To help restore U.S. credibility to the process, Congress should:

  • Monitor the use of the "transition safeguard" measure and hold oversight hearings if the sector begins to use it frivolously, as it has in the past.
    The threat of oversight hearings--a costly and potentially embarrassing activity for industries in this sector--may make these industries more reluctant to seek the use of the safeguard mechanism as often as they have in the past. Industry reports that recommend that the United States maintain its current quota levels for countries that have not opened their markets to U.S. textile and apparel products make the retaliatory approach sound necessary. But recommending that the United States not live up to its obligations under the ATC is a poor example to set, especially for developing countries whose people rely more heavily on this sector for their livelihoods.

  • Require an annual report from the Committee for the Implementation of Textile Agreements,23 the organization in the executive branch that is responsible for monitoring the implementation of the ATC. The committee should report on how well the United States is adhering to the ATC transition schedule. Such a report would facilitate the monitoring of the use of the safeguard mechanism by Congress.

These actions would demonstrate to the rest of the world--especially countries that may experience similar problems in adhering to the ATC--that the United States is seriously committed to free trade, especially in the important textile and apparel sectors. Other countries are more likely to follow America's lead if the United States abides by its commitments. Consumers would benefit from the lower prices that followed, while the people in developing countries would benefit from an increase in sales.

CONCLUSION

A major achievement of the agreement establishing the World Trade Organization was that it included the Agreement on Textiles and Clothing, which promises to liberalize one of the most protected sectors of the United States economy. However, the Administration's record in implementing the ATC raises serious questions about the likelihood of full liberalization of this sector.

The United States now faces a choice of critical importance. It can adopt the counterproductive protectionist path recommended by the American Textile and Manufacturers Institute, which would further stall liberalization of the textile and apparel trade by maintaining or increasing trade barriers, or it can adopt a strong leadership role, demonstrating its commitment to trade liberalization by accelerating the reduction of quotas and the integration of its textile and apparel sector into the WTO and closely monitoring implementation of the ATC.

Such actions would be a good first step toward ensuring liberalization of one of the most protected sectors of the U.S. economy. Accelerating the liberalization of the textiles and apparel sector would spur economic development in some very poor countries and provide numerous benefits to the U.S. consumer.

Aaron Schavey is a Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation.

 

Endnotes

1. Laura Baughman, Rolf Mirus, Morris E. Morkre, and Dean Spinanger, "Of Tyre Cords, Ties, and Tents: Window-Dressing in the ATC?" World Economy, July 1997, p. 409.

2. Andrew Tanzer, "The Great Quota Hustle," Forbes, March 6, 2000, p. 124.

3. See U.S. Department of Labor, Bureau of Labor Statistics, at http://www.bls.gov

4. Helen Dewar, "Hill Negotiators Clear the Path for a Trade Bill," The Washington Post, April 15, 2000, p. A7.

5. U.S. International Trade Commission, "The Economic Effects of Significant U.S. Import Restraints, Second Update 1999," Investigation No. 332-325, p. 26.

6. Information available from the Bureau of Labor Statistics at http://www.bls.gov/sahome.html

7. Alfred J. Field and Edward M. Graham, "Is There a Special Case for Import Protection for the Textile and Apparel Sectors Based on Labour Adjustment?" World Economy, March 1997, p. 141.

8. Gary Clyde Hufbauer and Kimberly Ann Elliot, "Measuring the Costs of Protection in the United States," Institute for International Economics, Washington D.C., January 1994, p. 3. Cost per household calculated from WEFA data. See WEFA, World Market Monitor.

9. Resources (i.e., capital or labor) are used inefficiently when they are not used to maximize output. For example, suppose it takes 10 construction workers to build a house. If the construction company uses 15 workers to build the same house in the same amount of time that it would take for the 10 construction workers to build it, then the company is not using its resources efficiently.

10. If the cost of the tariff is not included in the cost of production, the quota increases the price by 46 percent.

11. Bureau of Labor Statistics, "Composition of Consumer Unit," Table 5. Data available at http://stats.bls.gov/csxstnd.htm#1998

12. Export-related jobs pay between 15 percent and 17 percent more, on average, than non-export-related jobs. See Denise H. Froning, "International Trade," in Stuart M. Butler and Kim R. Holmes, eds., Issues 2000: The Candidate's Briefing Book (Washington, D.C.: The Heritage Foundation, 2000), p. 782.

13. Tanzer, "The Great Quota Hustle," p. 120.

14. World Bank, World Development Indicators, 1999.

15. Charles T. Manatt, "Free Trade for the Caribbean," The Wall Street Journal, April 11, 2000.

16. Denise H. Froning and Aaron Schavey, "Breaking up a Triple Play on Poor Countries: Changing U.S. Policy in Trade, Aid, and Debt Relief," Heritage Foundation Backgrounder No. 1359, April 13, 2000.

17. Information available from the Bureau of Labor Statistics at http://stats.bls.gov/cpsaatab.htm

18. The United States maintains the TAA program for people who lose their jobs. It allows them to apply for welfare benefits. Individuals who lose their manufacturing jobs as a result of foreign imports can receive job training and job search or relocation assistance.

19. Baughman et al., "Of Tyre Cords, Ties, and Tents: Window-Dressing in the ATC?"

20. See "Promises Unkept: A Report on Market Access for U.S. Textile and Apparel Products Five Years into the World Trade Organization," March 17, 2000, available at http://www.atmi.org  . 

21. World Trade Organization, "Agreement on Textiles and Clothing," Article 6, at http://otexa.ita.doc.gov/atc.htm

22. Kenneth A. Reinert, "Give Us Virtue, But Not Yet: Safeguard Actions Under the Agreement on Textiles and Clothing," World Economy, Vol. 23, No. 1 (January 2000).

23. The Committee for the Implementation of Textile Agreements was established by Executive Order No. 11651 on March 3, 1972, to supervise the implementation of textile bilateral agreements and to propose and implement textile import restraints under the ATC and Section 204 of the Agricultural Act of 1956 (as amended). It is comprised of members from the Departments of Commerce, State, Labor, and Treasury and the Chief Textile Negotiator in the Office of the U.S. Trade Representative.

About the Author

Aaron Schavey Policy Analyst
Finance and Accounting

Related Issues: Trade, Economic Freedom