11

PERVERSE EFFECTS AND UNINTENDED CONSEQUENCES OF T-SHIRT TRADE POLICY

No More Doffers

What have been the effects of the dominance of politics over markets in world trade in apparel? The stated purpose of the protectionist regime was and remains to protect manufacturing jobs in the Western textile and apparel industries, and judged against this benchmark the regime’s success has been quite limited. But the influence of politics in redirecting trade has had a number of other consequences—mostly perverse and unintended—but both positive and negative, for rich and poor countries alike. In addition, despite the limited success of the regime in protecting employment, the American public remains much more sympathetic to trade protection than we might expect. In mid-2008, barely half of Americans surveyed had a generally positive view of international trade.¹

In the battle for the 2008 Democratic nomination, Hillary Clinton and Barack Obama seemed to be engaged in their own race to the bottom in anti-trade rhetoric as each candidate called for a cautionary approach to new trade-liberalizing initiatives and derided companies who “ship jobs overseas.”² Both met sympathetically and photogenically (and repeatedly) with laid-off factory workers, and promised to “save jobs” if elected. Though these conversations were compelling in campaign soundbites, the truth is that while the protectionist trade regime has indeed saved thousands of jobs, the employment effect has largely been in Washington among the armies of lobbyists and bureaucrats who hold the regime together, as well as their counterparts in developing countries. Textile and apparel manufacturing jobs in the United States have been vanishing, and will continue to vanish, with or without protection from imports. John McCain had a more accurate but less popular assessment than Clinton or Obama during the 2008 campaign. Visiting struggling low-tech manufacturing communities, he said, “Those jobs aren’t coming back.”

Over the past 50 years, an entire vocabulary has become extinct in American textile mills as capital and technology have replaced labor in textile production. The piece up (yarn tying), doffing (removing full bobbins), and draw in (starting the warp threads) jobs are all gone now, the victims not of competition from China but of technological progress and mechanization. While employment in the U.S. textile industry fell by more than half between 1990 and 2007, production output has been relatively steady.³ In 2007, U.S. textile workers produced approximately 60 percent more goods per hour of work than they had in 1990 (see Figure 11.1).

This pattern mirrors that of many other manufacturing industries in the United States: While employment is falling, production is steady or even rising. Indeed, for the 20-year period ending in 2007, U.S. manufacturing employment fell by approximately 20 percent, but manufacturing output increased by more than 60 percent.⁴ While textile trade rules have had some effect in keeping production in the United States by increasing the price of imports, the stated goal of the regime—to save manufacturing jobs—has been undermined much more by mechanization and technological progress than by foreign competition.⁵ Even if U.S. textile firms were completely protected from foreign competition, they would still have to compete with one another, and any firm choosing to preserve jobs rather than mechanize would soon wither from the better performance of its competitors. While the rationale for the series of “temporary” trade arrangements has always been to save jobs by giving U.S. industry breathing room in which to become competitive, the only hope for becoming competitive is often to get rid of the jobs.

Figure 11.1 Jobs and Productivity in the U.S. Textile Industry, 1990-2007

Source: BLS, NAICS 313, 314 combined.

The charge that America’s textile jobs are going to China also must square with a remarkable and inconvenient fact: China is losing textile jobs, too, and losing more of them more rapidly than has ever been the case in North or South Carolina. According to a 2004 Conference Board study, China lost almost 10 times as many textile industry jobs as did the United States during the 1995-2002 period, and textile jobs losses were the most severe of any industry in China. While production, revenues, and exports are growing, employment is shrinking because of rapid advances in technology and labor productivity.⁶ In short, textile jobs are not going to China; textile jobs are just going, period.

Own Worst Enemy

Not only has the regime failed to deliver its intended consequence—employment—it has also had the unintended consequence of reducing competitiveness across the U.S. textile and apparel complex, as members of the alphabet armies create higher costs for one another at each stage of a T-shirt’s production. Or, as Erik Autor told me, the armies are often their own worst enemies. Cotton agricultural interests such as the National Cotton Council (NCC) have succeeded in erecting import barriers for raw cotton, which has increased the raw material costs for AYSA (American Yarn Spinners). The AYSA in turn lobbied for the tariffs and quotas on yarn imports, which have limited the ability of American fabric producers to obtain the best yarn at the best prices. And finally, the quotas and tariffs applied to fabrics not only increase costs for U.S. apparel producers, they also limit the ability of apparel producers to respond to the rapidly changing fashion whims of the U.S. consumer. The narrow successes of each step in the value chain in keeping foreign competition at bay have, collectively, imperiled rather than enhanced America’s chances at remaining competitive across the production complex.

As we have seen, trade agreements contain innumerable side deals designed to protect U.S. producers. But these provisions often undermine rather than help the competitive position of U.S. firms. For example, free access under the CAFTA requires that apparel yarn or fabric be produced in a member country. This yarn-forward requirement actually often handicaps U.S. yarn spinners, who are discouraged both from exporting their yarn to more efficient fabric producers and from shifting production to more cost-efficient locations.

The regime has also introduced a regulatory risk into the already significant challenges of staying alive in this industry. Because apparel producers are never quite sure which types of textile trade policy currency will be traded away and for what, the risks inherent in forecasting policies are added to the already high normal business risks in the industry. For example, as a fabric “dyeing and finishing” provision was recently debated in Congress, firms had to consider for the better part of a year where and how to invest assets in printing technology in order to evade—or take advantage of—the new provisions. Trade agreements may be extended (or not) at the whim of the Congress, and if extended, the fabric provisions may (or may not) be modified. In attempting to carve out and preserve a piece of the pie for U.S. firms, the “preferential” agreements challenge an already debilitated industry to forecast not just markets but politics.

The economic costs of protecting the U.S. textile and apparel industries from imports have been estimated by many researchers. Though the results vary widely, most researchers conclude that the costs fall under the general category of Very Big Numbers. Surveying this literature in 1999, the U.S. International Trade Commission (USITC) estimated the annual cost of textile and apparel import quotas to be between $7 and $11 billion.⁷ The USITC estimated that the removal of all textile and apparel quotas and tariffs would have resulted in an economywide gain of $10.4 billion in 1996, but at a cost of 117,150 U.S. jobs. Using these estimates, textile and apparel protection in the United States cost approximately $88,000 per year in the mid-1990s for each job preserved. Hufbauer and Elliott estimated the consumer cost of protecting an apparel job in 1990 to be $138,666, while a later USITC study estimates the cost of textile and apparel quota at between $7 and $12 billion.⁸ Using the USITC’s most conservative estimates, 2002 textile and apparel quotas cost $174,825 per job saved.⁹ The costs of protection are not only high in dollar terms, they represent a regressive tax, which falls disproportionately on the lower-income workers that the regime is designed to protect.

Other self-defeating consequences result from apparel import quotas. The most predictable and obvious effect of the import limits has been “upgrading” by the exporting countries. When China, for example, is allocated a quota of 2,523,532 dozen cotton knit shirts or 211,076 dozen cotton dresses, producers in China have an incentive to use the quota for high-end rather than low-end products. Chinese producers are loath to waste cotton knit shirt quota by using it to sell a cheap T-shirt when the quota could instead be used to sell a high-end, combed-cotton polo shirt to L.L. Bean. The quotas have therefore encouraged China and other potential low-end producers to become high-end producers, and have in effect encouraged more high-margin, expensive clothing production to be shifted abroad. Again, my lowly $5.99 T-shirt was lucky to have made it in at all.

Friends with Benefits

The tariffs and quotas that allegedly protect the U.S. apparel industry cannot protect what today barely exists. In 2007, 95 percent of apparel purchased by U.S. consumers was imported, yet apparel tariffs averaged 16 percent, more than 10 times the 1.5 percent average tariff applied to other goods entering the United States.¹⁰ If apparel manufacturing has nearly vanished from the United States, what exactly are the trade barriers protecting?

Today, the high tariffs levied on apparel mostly protect America’s customers and its friends. The complex trade agreements create a captive market for U.S.-made yarn and fabrics, so the U.S. yarn and fabric makers have an interest in supporting their customers by maintaining trade barriers for apparel from other countries.

Perhaps more important, however, the trade barriers serve as a powerful tool with which the United States can reward its friends and allies. The high tariffs on apparel mean that countries that enjoy free access to the U.S. market have a 16 percent cost advantage over those that do not. The countries that have won this advantage have every incentive to keep their club as small as possible, and they therefore use their influence in Washington to argue for maintaining the high tariffs applied to their competitors. While the trade barriers do not protect the almost-nonexistent U.S. apparel industry, they do protect the apparel industries of America’s friends. And as long as the high tariffs remain, the United States can dangle the carrot of free access to the U.S. market as a tactic to win over important friends, and indeed to negotiate for favors completely unrelated to trade. Recent research has shown that this carrot has significant value.¹¹ The spate of free trade agreements that have been negotiated recently in the Middle East—with Bahrain, Jordan, and Oman, for example—all have been intended to win friends in this sensitive region. ¹²

Sometimes, of course, the desire to protect America’s friends contradicts directly the interests of the U.S. textile industry. This conflict was thrown into sharp relief in the days after September 11, 2001.

Wal-Mart Backs Musharraf

In the days following the terrorist attacks on the World Trade Center and the Pentagon, world leaders arguably had more vital matters to discuss, but T-shirt imports into the United States were the subject of discussions at the highest level, including President George W. Bush, Secretary of State Colin Powell, Secretary of Commerce Don Evans, and U.S. Trade Representative Robert Zoellick.¹³ Pakistani President Pervez Musharraf had aligned himself solidly behind the United States and was rewarded with an aid package worth billions. But Musharraf, as well as his commerce minister, Abdul Dawood, quickly made it clear in conversations with President Bush and Secretary Powell that perhaps the most important reward for Pakistan’s solidarity with the United States would be a loosening of the restrictions limiting textile and apparel imports into the United States. Textile and apparel represented more than 60 percent of Pakistan’s industrial employment and its exports, and the United States was by far the country’s biggest customer. But even so, Pakistan’s apparel and textile sales to the United States were restricted by tariffs as high as 29 percent and by tight quota restraints limiting imports of dozens of categories of textiles and of apparel. Even by September, many of the annual quotas were nearly full.¹⁴ Musharraf argued that the war against terrorism would be best served if Pakistan’s textile and apparel factories stayed open and the workers kept their jobs. This in turn would happen only if Wal-Mart, Target, and other U.S. retailers could more freely import cheap cotton clothing from Pakistan. Both George W. Bush and Colin Powell assured Musharraf that they would do what they could.

So, as the ruins of the World Trade Center still burned and America’s military was mobilized for the war in Afghanistan, the alphabet armies mobilized for another type of war. The American Textile Manufacturers Institute (ATMI), the American Yarn Spinners Association (AYSA), the National Retail Federation (NRF), the American Apparel and Footwear Association (AAFA), the United States American Association of Importers of Textiles and Apparel (USA-ITA), and the Union of Needletrades, Industrial, and Textile Employees (UNITE) readied for a fight, bolstered on both sides by members of the U.S. Congress.

Ron Sorini, the chief textile negotiator under George H. W. Bush, represented Pakistan. Alongside him were Erik Autor of the National Retail Federation and other kindred spirits representing U.S. importers. They argued that U.S. firms such as Wal-Mart would continue to purchase clothing from Pakistan only if the quotas were lifted and the tariffs rescinded. Wal-Mart did not have to stay in Pakistan, Autor argued. There were a dozen other poor countries willing to meet the T-shirt orders at the click of a mouse. If the factories were to stay open in Pakistan, then the United States had to loosen the noose on Pakistani apparel imports.

Not so fast, said the other letters of the alphabet. Why should the U.S. textile and apparel industry be made to pay the cost of U.S. foreign policy? The ATMI pointed to its obituaries, showing the recent demise of more than 100 U.S. textile mills and 60,000 jobs across the American South. Members of Congress weighed in with letters detailing the dire straits of the U.S. textile and apparel industries, and urged the administration not to grant Pakistan’s request. The textile industry’s argument was that while assistance to Pakistan was a fine and noble goal, taking the assistance out of the industry’s hide was not.

The two sides opened with extreme bargaining positions and began to wheel and deal. Pakistan requested the suspension of tariffs on all textiles and apparel through 2004, and a 50 percent quota increase for most categories of textile and apparel, as well as more flexibility in shifting unused textile and apparel quota to other categories. The U.S. textile industry opened with an offer to suspend tariffs on handmade carpets (then approximately 2 percent), period. The administration countered with a proposal to allow Pakistan to borrow from the following year’s quota for T-shirts, pillowcases, underwear, pajamas, and mops. Not a chance, responded the textile interests. The wrangling started before the first U.S. bombs dropped on Afghanistan and was still going on as the new government took charge and the U.S. military tanks retreated. By mid-February, however, the alphabet armies had hammered out a deal, though both sides agreed that the final deal was much more responsive to the U.S. textile industry than it was to Pakistan.

Pakistan’s request for tariff relief was rejected completely. Tariff rate changes would have required Congressional approval, and Bush knew as well as anyone the perils of taking trade matters to Congress. A few quotas were loosened so as to toss some crumbs to Pakistan, but these were for relatively low-volume goods. T-shirt quotas were not relaxed, and by April 2002, Pakistan had used up its entire year’s T-shirt quota.

A year and a half later, the Bush administration unveiled another ambitious aid program for Pakistan. It contained no provisions at all on textile trade. “They knew better than to ask us for anything,” an official at ATMI told me.

In the end, the concessions to Pakistan had amounted to little, and, in any case, the military phase of the “real” war in Afghanistan had concluded as the negotiations dragged on, so the original motivation—to help an ally in the war—was no longer so pressing. The political opposition to Pakistan’s requests had been organized, swift, and powerful. At the end of the day, George W. Bush swallowed his rhetoric about the glories of free trade as well as his black-and-white moral rhetoric to do “everything possible” to help his key ally in the war against terrorism. He instead followed in the noble tradition of every U.S. president since Dwight Eisenhower: In staring down the U.S. textile industry, he winked.

Race to the Quotas

In most global industries, managers design their supply chains to obtain the best products at the most competitive prices. Such rationality has rarely governed apparel sourcing. By plugging the apparel import dikes from dozens of countries over the past generation, the United States encouraged myriad detours and otherwise irrational moves by firms that were forced to engage in what Andrew Tanzer has called “The Great Quota Hustle.” Indeed, the astoundingly creative entrepreneurial maneuvers that have been undertaken to deal with the quota regime are as strong evidence as anything of the business acumen among Chinese managers. Managers who grew up learning to deal with the irrational regime of Mao Zedong have an advantage, it appears, in dealing with U.S. trade policy.

The Esquel Corporation, today the world’s largest producer of cotton shirts, started in Hong Kong in the late 1970s, but, unable to obtain quota to sell to the United States, shifted production to mainland China.¹⁵ When the United States tightened Chinese shirt quotas in the early 1980s, Esquel moved production to Malaysia. When Malaysian quota also became difficult to obtain, Esquel moved yet again, this time to Sri Lanka. The globe hopping continued, with the Chinese shirt producer setting up operations in Mauritius and Maldives. Other Chinese firms played the game as well, shipping Mongolian goat hair to tiny islands that had extra cashmere sweater quota. A difficulty with the system is that the countries with quota often had no expertise and few workers, so the firms were forced to ship Chinese workers to Mauritius and Chinese managers to Cambodia. The Chinese were still producing the clothing, though travel time and complexity had, of course, increased markedly.

The image of globetrotting corporations often presented by anti-globalization activists as well as by textile interests in Washington demonizes corporations for their lack of loyalty, and especially for their fleeting moves to cheaper and cheaper production locations. While this race-to-the-bottom story is indeed descriptive, it is important to note that the globe hopping we observe in the textile and apparel industries is also the result of the very policies that have been erected by the textile interests. Indeed, it has been politics as much as markets that has fueled the race to the bottom, even as politics alters the course of the race. As the Financial Times reports, the apparel industry has globalized in response to trade barriers rather than in response to open markets.¹⁶

Bob Zane, the Chairman of the U.S. Association of Importers of Textiles and Apparel, recently looked back at the decade he spent sourcing apparel for the Liz Claiborne company. He would have preferred to concentrate on building long-term relationships with high-quality suppliers, but because of the MFA, “All we did,” he said, “was run around the world chasing quota.”¹⁷

Under the many restrictive rules, cheating, by all accounts, is rampant. Though the United States employs hundreds of customs inspectors and regularly raids Chinese factories, billions of dollars in clothing made in China is labeled as if it were from other countries. One apparel importer told me that he had visited a factory of his Chinese supplier and seen “made in” labels for numerous countries on the sewing tables, and that his Chinese supplier had offered him goods “made in” Cambodia, Kenya, or Lesotho. In the summer of 2008, the Department of Homeland Security’s border protection arm seized more than 1,000 containers of falsely labeled apparel that had in fact been made in China.¹⁸ Though U.S. penalties for transshipment are severe, they make only a small dent in the illegal trade.¹⁹ Many other countries cheat as well, given the myriad complexities of the various yarn-forward-type requirements.

A number of industry participants in China told me that the quota market was rife with speculation and manipulation, where, for example, a trader with “inside information” about a large shirt order from a U.S. retailer would buy up the necessary quota in advance and resell it at a profit. According to Roy Delbyck, an American trade lawyer, quota profits are found in Hong Kong’s stunning skyline, where the riches from the quota trade have been invested in the property market.²⁰ While they may not have helped South Carolina’s textile workers, the quotas have quite clearly helped Hong Kong’s storied real estate investors.

As of 2008, quotas were in place on dozens of categories of clothing from China. Figure 11.2 shows examples of the prices at which Chinese apparel quota was trading in mid-2008. As the table shows, T-shirt quota (category 338/339) was selling for approximately $3.20 per dozen, though the quota price for knit shirts made of other fabrics was $4.20 per dozen. Quota costs added $3.30 to the cost of a dozen sweaters, and $15 to the cost of a dozen wool suits. Based on the market prices prevailing during the 2004-2008 period, the textile and apparel quotas granted to China during that period represented a gift of approximately $1.5 billion to the Chinese government.²¹

Figure 11.2 Market Prices for Chinese Import Quota to the United States in August 2008

Source: www.chinaquota.com.

It is hard to know where to start in discussing what is wrong with this picture. First, perhaps the chief complaint against China made by the U.S. textile industry is that the Chinese government subsidizes its textile industry, through subsidized inputs, easy bank loans, and tax credits. Indeed, the National Council of Textile Organizations (NCTO) counts 42 such subsidies.²² But if the Chinese government is subsidizing its industry, then the United States is subsidizing the Chinese government with, as we have seen, a gift of 1.5 billion dollars. In exchange for this gift, however, few jobs have been saved in South Carolina, though they have clearly been saved for the bureaucrats around the world who administer the regime, and they have also been saved for workers in countries such as Bangladesh and Sri Lanka who supply the goods that China cannot when it runs out of quota. While the quota regime was allegedly put in place to protect the U.S. worker, it is difficult to construct a story that concludes that the Chinese quota saves U.S. textile jobs. And if the $1.5 billion in Chinese quota could be allocated instead to the 185,000 U.S. textile and apparel workers who lost their jobs between 2004 and 2008, each worker could be paid more than $8,000 in job retraining or other benefits.

But even if the nonsensical maze of U.S. textile trade policy—the tariffs and quotas and preference programs and origination requirements—did protect U.S. textile and apparel workers—which it doesn’t—the question remains: Why do the 99.99 percent of Americans who are not textile and apparel workers put up with it?

Auggie and Aristotle Versus Wal-Mart

Needless to say, when free traders get going on textile and apparel trade policy, it is hard to get them to stop: The whole system is a blight on world trading, an island of reactionary irrationality in a forward-moving universe, and it is ineffective to boot. Today, the doctrine of free trade has virtually unanimous support among professional economists, a group almost without exception who scorn protectionism in general and quotas in particular.²³ Indeed, Douglas Irwin, the noted economic historian, suggests that the doctrine of free trade is not only a good idea but is even the best useful idea ever generated by economists:

The case for free trade has endured because the fundamental proposition that substantial benefits arise from the free exchange of goods between countries has not been overshadowed by the limited scope of various qualifications and exceptions. Free trade thus remains as sound as any proposition in economic theory which purports to have implications from economic policy is ever likely to be.²⁴

Nearly a century earlier, Frank Taussig noted that even the strongest political pressure cannot change the quality of an idea:

[T]he doctrine of free trade, however widely rejected in the world of politics, holds its own in the sphere of the intellect. ²⁵

There is perhaps no other issue, however, in which the professional opinion of economists differs so markedly from the opinion of the American public. While economists are nearly unanimous on the superiority of free trade as policy, the American public has grave reservations.²⁶ Though the public is not necessarily supportive of U.S. textile interests, it is also not supportive of unrestrained gushes of cheap goods from China. During the 2008 election cycle, support for international trade was dropping precipitously.²⁷ What accounts for this gaping divide between professional and public opinion?

In general, economists judge policies by their effects on national wealth and income, or “global welfare,” and it is inarguably true that this metric supports free trade over most, if not all, forms of trade protection. The American public, however, has other metrics in mind: metrics that are less well defined and certainly more difficult to measure. Whether the spigot pouring T-shirts into the United States from China should be closed, open, or left to dribble through an administrative maze is therefore a debate not about the best economic policy but instead about economic policy versus all of the other factors that weigh on policymakers’ decisions. It is easy to be outraged over the dominance of special-interest politics over sound economic policy, but we must also recognize that it is not only special interests, but also the American public, that remain uneasy about free trade.

Trade has always made people nervous. Douglas Irwin writes that the ancient Greeks, in particular Aristotle, were highly suspicious of international trade, even as they acknowledged its economic benefits.²⁸ While conceding that trade brought more goods more cheaply, they were concerned about a number of negative influences on civil society. This same tension today is crystallized in the many and varied debates surrounding Wal-Mart, which supplies about 25 percent of the U.S. apparel market with goods that are virtually all imported from abroad. While Wal-Mart’s provision of cheaper and cheaper imports is unquestionably a boon to the apparel consumer and to the economy at large, virtually every aspect of the firm’s behavior has drawn protests, and the very behavior that gives consumers a windfall is at the same time the target of critics.²⁹ Protestors want Wal-Mart to stop its union-bashing, and to improve its pay and benefits for employees. The company is also criticized for its merciless squeeze on supplier pricing, and for its failure to effectively monitor the working conditions in the overseas factories that produce the apparel for its stores. The cheap apparel itself is blamed for the demise of South Carolina textile mills, and the laid-off textile workers complain that the only jobs left when the mills closed were as checkout clerks behind the enemy lines, because Wal-Mart had also squeezed out the smaller stores on Main Street.

Auggie Tantillo describes the Wal-Mart squeeze cycle, in which Wal-Mart’s squeeze on its U.S. suppliers has bankrupted them, and led the firm to China where it squeezes Chinese suppliers, who in turn squeeze their own suppliers as well as their sweatshop workers. At the end of the squeeze cycle, we can buy our T-shirts for 25 cents less, so on average we are richer, but at what cost?

Auggie Tantillo has a moral view on the Wal-Mart squeeze, and he shares this view with a storied line of ancestors, beginning at least with Aristotle, as well as with an uneasy American public. A bit more stability, a bit more community, a bit more of a dike against the bashing waves from China are worth more than small savings for each of us on the cost of a T-shirt.

And while growth in consumer spending is often used to measure the health of the economy, Auggie and Aristotle also share a suspicion of the long-run effects of rampant borrowing and consumerism. In 2008, the United States had the biggest federal budget deficit—and the highest level of personal borrowing—in decades. Much of this borrowing was financed by China, which used its proceeds from selling goods to the United States to lend funds back to America. As the economy continued to stagnate in the year leading up to the election, the political response was to mail “stimulus checks” to approximately 130 million American families. Auggie was incredulous: “We’re borrowing more money from China so that people will go to Wal-Mart and buy more stuff from China? How can we think the solution to our problems is more shopping?”

Another divide between professional and public opinion relates to differing perspectives: While economists view matters nationally or even globally, many Americans take a local perspective. While free trade increases global welfare, some local workers, companies, and communities are the losers; the economic benefits of free trade are diffuse, while the costs are typically concentrated. When the benefits of cheaper T-shirts for millions across the country are placed alongside the costs of job loss for a few thousand in a North Carolina mill town, the public’s internal calculator often works much differently than does an economist’s. Judging from the political rhetoric in the 2008 election, it is worth something, perhaps a lot, to keep the manufacturing jobs—or to try to keep the jobs—in a community that is on the edge. Even when it looks futile, Americans seem to want to try.

Economists do not deny that free trade may bring concentrated losses to certain industries and workers, but the solution, most economists argue, is the compensation principle. The best economic policy is not to erect trade barriers but instead to compensate the losers. The rationale behind a variety of Trade Adjustment Assistance (TAA) programs that have been undertaken in the United States is that by taxing the millions who have benefited from cheaper T-shirts and funneling the compensation to the thousands who have lost their jobs, we can both gain the economy-wide benefits of free trade and at the same time mitigate the negative local effects.

It works better in economic theory than it does in practice. While some towns in the textile South have moved beyond this industry and never looked back, others that used to produce textiles and T-shirts seem now to produce only news stories or documentaries on life after the mill closed. These stories have a common thread: It is not just that the jobs are gone, but that the communities are gone, too, and the future is uncertain and scary. The paycheck can be replaced by the compensation principle, but everything else, as the ad says, is priceless. Especially in low-tech industries such as apparel manufacture, the losers stay losers once their jobs are gone.³⁰

Creative Destruction

Joseph Schumpeter argued that the essence of a market economy was the fluid dynamic of creative destruction, which saw the destruction of certain jobs and industries as a necessary evil for the creation of others. During the past several years, I have indeed seen the destruction during visits to many padlocked textile and apparel factories. In Alabama and North and South Carolina, my host would pull into the parking lot, and we’d take a walk around the shuttered factory. The overwhelming impression was always one of an eerie quiet, not unlike the silence of a cemetery.

The eerie quiet of the closed factories, however, contrasts markedly with the hum of activity elsewhere in the industry: As traditional textile and apparel manufacturing wanes, I have met dozens of people employed in the textile and apparel industries in the United States who hold jobs that did not exist a generation ago. Some of these jobs result from the new international business models of U.S. apparel firms; others result from the recent premiums placed by wealthy countries on environmental and social responsibility. In other words, concerns about the ravages of globalization have created their own opportunities. Finally, technical and scientific innovations are also creating opportunities. As traditional T-shirt jobs have dwindled, the T-shirt jobs of the future are emerging.

In New York, I met Michael Lambert, Director of Import Planning for Limited Brands. Michael’s team of 12 professionals is in charge of facilitating the flow of goods from the company’s far-flung international supply chain to store shelves. Every day that a shipment of apparel is held up in customs is a forgone profit, so Michael’s team works to insure compliance with the complicated trade rules. In 2008, Michael’s team was analyzing the regulatory risk associated with sourcing from various countries, as well as working to ensure that Limited Brands was in compliance with the emerging CAFTA rules. Limited Brands, like other major apparel companies, also employs hundreds in the area of “strategic sourcing.” With dozens of countries and thousands of factories to choose from, how should a company trade off factors such as price, quality, time to market, reliability, and special trade advantages?³¹ The fields of international supply chain management, strategic sourcing, and import planning employ thousands today in jobs that did not exist a generation ago.

Thousands more are employed in the fields of the social and environmental compliance of these international supply chains. In Washington, I met Caitlin Morris, Nike’s Director of Compliance Integration. Caitlin’s large and growing group did not exist a generation ago, but today employs nearly 100 people in monitoring Nike’s international suppliers in the areas of labor, environmental, and social standards. Virtually all large apparel brands have similar operations in place. Independent organizations such as Verit’ and the Workers Rights Consortium that operate with similar missions also did not exist just a few years ago.

In California, I met Patagonia’s Social Responsibility Manager, Nicole Bassett. All of Patagonia’s cotton fabrics are produced with organic cotton, and Patagonia employs a sourcing team to obtain different grades of organic cotton from Peru, Turkey, and West Africa and deliver them to mills in Asia.

In Nebraska, I met Yiqi Chang, a scientist at the University of Nebraska. Yiqi is leading a team of researchers who are developing techniques to spin yarn from corn by-products. Perhaps soon, according to Yiqi, the same cornfield will be able to power our cars with ethanol, sustain our chickens with feed, and produce yarn for our T-shirts, all with a fraction of the water and chemical use employed for these purposes today.

In the traditional textile regions of North Carolina, innovative companies are also employing researchers to meet environmental challenges. Tuscarora Yarns began life as a cotton mill in 1899, but in 2008 announced an expansion that would enable expanded production of eco-friendly yarns made from corn, soy, bamboo, and post-consumer waste.³² Not far away, textile industry leader Wellman Inc. is the world leader in processing plastic soda bottles into soft fleece. In the summer of 2008, I learned of perhaps a half-dozen industry conferences devoted to environmental innovations in the textile and apparel industries.

As creative destruction churns through the global textile and apparel industries, it churns increasingly through public policy, as well. In the fall of 2008, I spoke with Matt Priest, the top textile official at the Department of Commerce. Matt had been appointed by George W. Bush to the post, which was the same position held by Auggie Tantillo about 25 years before. Like Auggie, Matt was not yet 30 years old when he assumed the position. Auggie, Julia, and I met at Matt’s office so I could take their picture. Auggie stood in his old office, and while the view of the Washington Monument was the same, much else had changed. For one thing, the office was smaller; renovations had chopped off square feet, which seemed to Auggie symbolic of the demise of the industry.

Yet Matt Priest’s world was much more complicated than Auggie’s had been. In the 1980s, the role of the Office of Textiles and Apparel (OTEXA) at the Commerce Department had been in effect to protect the domestic textile and apparel manufacturers from foreign competition. The battle lines were clearly drawn between domestic and international interests.

“It’s not that simple, anymore,” Matt told me. The “domestic” firms that still survived were not really domestic at all. Indeed, the U.S. textile firms that survive today have survived in part because they have internationalized: They were exporters and international investors, or they outsourced parts of their supply chain to more efficient international manufacturers. The battle lines, once so clearly drawn, now often seem barely legible.

Matt Priest also sees clearly the jobs created by trade in fields such as international supply chain management, logistics, and strategic sourcing. “Manufacturing jobs are important,” he told me. “But these jobs are important, too.”

The T-shirt jobs of the future are emerging in other wealthy countries, as well. On a trip to Europe, I met Mark Holt and Mike Betts of Better Thinking, a U.K. company that designed and sells the Perfect T-Shirt (perfect, that is, from an environmental and labor perspective). I also struck up an electronic acquaintance with Eric Poettschacher of Re-Shirt, an Austrian firm that enables new-age recycling: Customers buy T-shirts from one another online while sharing the life stories associated with those T-shirts. And Hiroshi Amemiya, one of the translators who brought the first edition of this book to Japan, introduced me to Ikeuchi Towel, a firm employing wind power to produce organic towels for the U.S. and Japanese markets.

In North Carolina, I met Eric Henry, whose firm, TS Designs, produces “all-American” organic and phthalate-free T-shirts in North Carolina, while Green Label, a Virginia firm, produces similar T-shirts for sale in Nordstrom and Whole Foods. Of course, the higher wages that have priced U.S. companies out of plain-white T-shirt production are precisely the higher wages that create demand for TS Designs and Green Label T-shirts. In the summer of 2008, as the traditional T-shirt business in the United States struggled, Eric told me that his business was booming.

I also have visited perhaps a dozen textile factories in the American South that produce a variety of high-tech “fabrics of the future.” These firms produce fabrics that can staunch bleeding on a battlefield, and others that can scramble enemy radar. A variety of high-tech industrial textiles are continually developed in U.S. universities and firms. The plain-white T-shirt factory may be gone, but tomorrow’s T-shirts, developed in the United States, will be able to take a patient’s vital signs and transmit them to a physician’s computer. ³³

Interestingly, the “high-tech” textile company leaders with whom I spoke faced challenges that were much different from those faced by their colleagues at traditional textile mills. While more traditional companies—for example, those spinning cotton yarn or knitting T-shirt fabric—identified foreign competition in general and China in particular as their biggest threat, the high-tech companies almost without exception identified labor shortages as their biggest challenge. Eddie Gant, President of Glen Raven, one of North Carolina’s high-tech textile leaders, told me in 2008 that his firm was chronically short of qualified workers.

That Glen Raven experiences labor shortages while Auggie Tantillo fights job losses is explained by the harsh reality of the global economy: In the dynamic of creative destruction, what is created often cannot help those who have been destroyed. The workers who lost their jobs when the old T-shirt factories closed are often not equipped with the skills or education needed to join the factories of the future.

Whither the Dinosaurs?

It won’t be long now, political insiders told me over and over again in 2003, as if we were all standing over a comatose patient. Public opinion will shift to reflect the promise of the global economy, and the days of rampant textile and apparel protectionism and unintelligible trade barriers will soon be only in the history books. The old companies are dying, the venerable ATMI is dead, and the most legendary fighters are either dead or over 80. Strom Thurmond, the industry’s most infamous soldier on Capitol Hill, died in 2003 at the age of 100. He had been a steadfast ally since he entered the Senate in 1954, and had elicited textile promises in virtually every presidential election since then. Thurmond had not been much of a player while in his nineties, Auggie Tantillo told me, but at least they could always count on him for a vote. Jesse Helms retired from the Senate about the time of Thurmond’s death, and Fritz Hollings—perhaps the only senator to proudly still call himself a protectionist in 2004—announced his retirement a short time later. Together, Thurmond, Helms, and Hollings had served as a triumvirate textile power bloc for 30 years. Some of the young guys have their hearts in the right place, but it is just not the same. According to Auggie Tantillo, U.S. textile interests today have about half as many diehard supporters in Congress as they did in the late 1980s.

Though the industry’s political and financial fortunes are waning, Roger Milliken, by all accounts, is still going strong. Milliken is the reclusive chairman of Milliken Industries and, according to Forbes, one of America’s richest men. Milliken, like Auggie, believes in manufacturing in America, and believes that to surrender manufacturing to low-wage countries is to surrender our communities and our future. Milliken destroys his old textile machinery rather than see it shipped used to China, and supports organizations that see things his way on the subject of textile trade. Milliken is also the founding member and chairman of AMTAC, which Auggie directs. Auggie Tantillo and Julia Hughes—who agree on so little—agree on this: When Roger Milliken goes, things will be different. Milliken, while a force in the 2008 elections, turned 92 that year.

As the textile industry fades, the political power and influence of apparel retailers are growing rapidly. Wal-Mart’s PAC donated $1.5 million in the 2004 elections, making the retailer the second largest corporate donor to federal candidates. As recently as 1998, Wal-Mart’s Washington presence was negligible, but by 2003 the firm was spending $1.7 million a year to maintain three resident lobbyists in Washington, and in 2007, Wal-Mart increased its lobbying budget by 60 percent over the prior year.³⁴ Lowering trade barriers remains a crucial political objective for Wal-Mart, and it is joined in its efforts by Sears, JCPenney, Target, and other large retailers.

There is a moral to the story of the 2004 Senate election to replace retiring Fritz Hollings, surely the Senate’s ranking protectionist. South Carolina had had the worst job record in the country during the several years leading up to the election, as mill after mill closed and manufacturing jobs evaporated. The remaining textile organizations—AMTAC, NCTO, and the NTA—wanted to force the candidates to commit on the issue of trade, to make public their positions on textile job loss, on China, and on the burgeoning trade agreements. The textile industry went to work backing Inez Tenenbaum, a traditional textile protectionist. AMTAC plastered billboards around the mill towns in South Carolina (“Have You Lost Your Job ... Yet?”) and undertook a drive to register textile and apparel workers to vote.

Jim DeMint, the Republican candidate, broke ranks with every senator from the Carolinas in the past 50 years, and not only failed to support the protectionist position, but went to the other extreme and campaigned openly as a free trader. Trade was the most significant issue on which Tenenbaum and DeMint differed. As Tenenbaum promised to build trade walls, DeMint promised to tear them down. Free trade was the hope for South Carolina’s future, said DeMint, in a message not heard in South Carolina in more than half a century. DeMint pointed not to the sputtering mills but to the other factories that had come to roost in South Carolina in recent years: BMW from Germany, Michelin from France, Pirelli from Italy, Fuji from Japan, and even Haier from China. He urged South Carolinians to look forward to the role that they could play in the global economy, not backwards to the wheezing textile mills.

DeMint beat Tenenbaum handily, in a trouncing that surprised virtually everyone. On inauguration day in January 2005, Ernest Hollings, the Senate’s most ardent and unapologetic protectionist, was replaced by an almost rabid free trader.

It won’t be long now, retailers and government officials told me over and over again in the summer and fall of 2003. A year later, though, the patient was perking up, and the last of the perverse consequences was emerging. Another whole army—actually, many armies—had come to shore up Auggie and his troops from the Carolinas. They came from Bangladesh and Mauritius, Turkey and the Philippines. The developing-country clothing exporters who had sided with Julia in her efforts to get the MFA quotas lifted were having second thoughts. In dozens of different languages, they began to snarl together with Auggie.

(Unintended) Winners

The master narrative, largely unquestioned since the early 1960s or earlier, was that rich-country protectionism for textiles and apparel was yet another example in the long history of rich countries tilting the playing field against poor countries through hypocritical policies. While pressing developing countries to liberalize trade and open markets, the United States kept in place a suffocating quota system and high tariffs that prevented the developing countries from sewing and weaving their way to prosperity. But as with all master narratives, this rich-versus-poor-divide story is only partly true.

U.S. tariff policies conform to the master narrative. Textile and apparel tariffs have been largely immune from the broad cuts that have characterized trade negotiations for the past 40 years. As a result, trade between rich countries is now close to tariff-free—but imports to rich countries from poor countries face disproportionate tariff barriers because of the heavy reliance of poor countries on textiles and clothing exports. Edward Gresser estimates that U.S. tariff “peaks” (i.e., tariffs exceeding 15 percent) are virtually never applied to U.S. imports from Germany, Norway, and Japan, but are applied to almost half of the primary imports from Bangladesh, Mongolia, and Cambodia. Indeed, the United States collects more tariff revenue from Cambodian underwear than it does from Australian wine or Japanese steel.³⁵ In 2007, textiles and apparel comprised 5 percent of the value of U.S. imports, but accounted for 43 percent of tariffs collected.³⁶

Whether the various quota regimes are also consistent with the master narrative is a more complicated question. While the intent was to protect rich-country industries by limiting imports from poor countries, the effect of these import restraints has been neither uniform nor uniformly bad for poor countries. While the major cost-competitive exporters—Japan in the 1950s or China in the 2000s—have undoubtedly been constrained by the quota system, and while the global welfare losses for poor countries in aggregate have been great, the argument that the MFA has stood in the way of all developing countries’ fortunes is less compelling.

With the introduction of textile and apparel quotas, and especially with their growing reach and complexity, the effect was to constrain the large competitive exporters, but also to divvy up the lucrative U.S. market and grant pieces to dozens of developing countries that might have never sold to the United States at all. It was quota allocations, not market forces, that granted U.S. market access to baby clothes from the Philippines, underwear from Sri Lanka, and men’s shirts from Mauritius. And along with access to the U.S. market, the quotas also facilitated other forms of economic development. But the prediction that the end of the quota system will allow these countries to increase their fortunes is a shaky one: The end of the quota system will not so much allow the Philippines to sell more baby clothes as it will allow other countries to capture the baby clothes market that was once reserved for the Philippines. Observers on all sides of the debate now agree that however unsuccessful the MFA was in protecting the U.S. industry, it was successful indeed as foreign aid for dozens of small countries. Most large retailers plan to source their clothing from only five or six countries in the post-MFA world, whereas they were forced to find suppliers in more than 50 countries under the quota regime.³⁷

As of mid-2004, the very countries that had argued—demanded, even—the removal of the quotas began to have second thoughts. Maybe not, they decided. Maybe this was a bad idea after all. One by one, they called and e-mailed Auggie Tantillo.

When the third tranche of products was lifted from quota in 2002, some of the poorest countries in the world got a frightening glimpse of the future. China had been admitted to the WTO in 2001 and for the first time would be eligible to have its apparel exports removed from quota. Not only did it appear that the Philippines or Sri Lanka or Mauritius would not get a bigger piece of the pie when the quotas were lifted, it appeared instead that China would get everybody’s pie. Throughout the regime’s history, observers had become used to the gushes that followed when holes had been poked in the dike, but no one had been prepared for the gushes from China.

In most of the categories that were released from quota in 2002, China’s exports to the United States surged by more than 100 percent, with commensurate declines in the exports of the countries that had held the quota. For a number of textile and apparel categories, the gushes from China were more forceful than anything that had been observed in the postwar era. Chinese exports of baby clothes (category 239) surged by more than 2,000 percent, robes (category 350/650) by more than 1,500 percent, and knit fabrics (category 222) by an astonishing 21,000 percent.³⁸ Overall, China increased its U.S. import market share of the apparel released from quota from 24 to 86 percent.³⁹ At the same time, Chinese suppliers were slashing their prices, with wholesale prices often falling by more than half. Of course, the price declines were partly the result of the quota regime itself, as exporters no longer needed to purchase quota in order to sell to the United States. As Figure 11.3 shows, the gains for China meant losses for virtually everybody else.

Figure 11.3 Percentage Increase or Decrease in U.S. Imports of Apparel Categories Released from Quote on January 1, 2002^*

(*in Square Meters, 2004 Compared to 2001)

Source: Author’s calculations from OTEXA trade data.

Retailers were giddy at the prospect of unrestrained sourcing from China. China was the gazelle of the global apparel industry: the fastest, the cheapest, the best. Firms ranging from JCPenney to Liz Claiborne announced plans to shift most of their sourcing to China.⁴⁰ Estimates varied on the degree to which China will dominate the global trade in the post-MFA world, but there was unanimity on the prediction that China would dominate. More conservative estimates predicted that China would triple its market share of U.S. clothing imports, from 16 to 50 percent, while some industry experts predicted that China could eventually supply 85 percent of U.S. apparel.⁴¹ In mid-2004, the Esquel Corporation, which had been forced by the quota system to build factories in Mauritius, announced that it was closing up shop on the island and moving back to China.⁴²

If the surges from China were feared in South Carolina, the prospects were far scarier in a number of developing countries. Textile and apparel exports comprised more than half of manufacturing exports for a dozen countries, including Bangladesh, Mauritius, Honduras, and Sri Lanka, where the industries also provide the largest number of manufacturing jobs (see Figure 11.4). In many of these countries, the majority of the clothing exports were to rich countries that had quota constraints on Chinese apparel.⁴³ The most dire predictions suggested that the end of the MFA could mean the loss of up to 30 million jobs in the developing world.⁴⁴

Figure 11.4 Textile and Apparel as % of Manufactured Exports, 2001

Source: USITC (2004) Table 1.1.

In South Carolina, the lucky laid-off workers get jobs at IBM and the less lucky get jobs at Wal-Mart. The least lucky get unemployment benefits and trade adjustment assistance, and, if worse comes to worst, food stamps. In Bangladesh, however, there is little other industry and no safety net of any kind. Indeed, the closest thing to a safety net that Bangladesh has ever known was the secure market share provided by their MFA quotas. In 2002, Bangladesh’s market share in the goods released from quota fell by nearly 90 percent, while China’s share more than tripled. While economists predicted that the global welfare benefits from the removal of quotas were likely to be sizeable, these benefits are even more abstract in Dhaka than they are in Kannapolis, North Carolina.

Facing the impending China threat, an unlikely collection of bedfellows began to snarl together in mid-2004. Most developing countries had done an abrupt about-face and saw the quota system as their lifeline rather than as their nemesis. By July of that year, nearly 100 industry associations from 47 countries had signed the Istanbul Declaration, which called for an emergency meeting of the WTO to address the looming China threat in the post-MFA world. The new coalition literally circled the globe, with members signing on from Argentina to Zambia.⁴⁵ “Not so fast,” they seemed to say. The quotas and tariffs and crazy rules were nothing compared to what might happen next. The Chinese dragon was at the door, about to swallow North Carolina and Bangladesh and Turkey and Zambia, all in a single bite. Free trade was really, really not a good idea after all.

“See,” Auggie Tantillo told me in late 2004, pointing out his new allies from around the world who were suddenly huddled under his umbrella of politics, seeking protection from the markets and especially from China. “We’re not just a bunch of guys from South Carolina howling at the moon.”