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Expiration of Textile Quota Act Takes Toll on U.S. Manufacturers

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Jan. 13, 2005--This past New Years was a big day for Jim Chesnutt. So big, indeed, that he began planning for it three years ago.

But unlike many people, Chesnutt wasn't throwing a party. Rather, Chesnutt, president of North Carolina-based textile producer National Spinning Company, was doing just the opposite: He was laying off half of his 1,900 workers, closing three factories and looking for other ways to offset his company's 40 percent revenue slump.

Chesnutt wasn't alone in his somber celebration. Throughout the textile towns of the mid-Atlantic States, company chiefs slashed payrolls in preparation for January 1, 2005, the day the Multifibre Arrangement Act expired.

From the mid-70s to 1994, textile trading was governed by the Multifibre Arrangement (MFA), which allowed countries to bilaterally negotiate quotas. With the inception of the World Trade Organization (WTO) on January 1, 1995, member countries agreed to phase out the MFA's quotas over a 10-year period. On the first of this year--exactly 10 years since the start of the WTO--the final quota was lifted, giving unrestricted access to the U.S. market.

For U.S. textile producers this is a doomsday scenario. American textile makers cannot compete with the wages in developing countries, particularly China, where wages can run as low as 41 cents an hour. The Bureau of Labor and Statistics projects that employment in the U.S. apparel and textile industry will decline 69% and 31%, respectively, by 2012.

But it's more than just low wages that makes China so competitive, said Lloyd Wood, spokesman for the American Manufacturing Trade Coalition. "It subsidies that's really getting China the market share: non-performing loans, manipulated currency, export tax rebates--you name it," he said. Chesnutt echoed Wood, calling China a "rogue nation with illegal subsidies."

Subsidies or not, one thing is certain: China's textiles and apparel sector is growing at the expense of U.S. producers. In 2003, the United States imported $12 billion of clothing from China, a 19% increase over 2002. During the same period, domestic production of clothing remained stagnant at $53.6 billion, according to a Census Bureau report. Furthermore, the WTO predicts that by 2007, 50% of all U.S. imports will be from China, three times what it is today.

Where there are losers, of course, there are winners--and they're not only in China.

Without quotas, China's production costs will fall. One such cost is the quota rent, a bidding fee manufacturers pay for the right to produce a good. The quota rent in China on a dozen trousers, for example, ranged upwards of $75, estimated Erik Autor, vice president of the National Retail Federation. Chinese manufacturers will also increase capacity, which will drive down costs.

Back home, big retailers will be able to reduce, maybe even eliminate, whole departments devoted to tracking and managing quotas. The result: lower price-tags for the American consumer.

As for the aggregate affect, the camps are divided. To much of the textile industry, the rise of China is nothing more than a wealth transfer: Millions of Americans save a few dollars on shirts, while over 600,000 textile workers lose their jobs. But retailers say the money saved on socks can be spent elsewhere, thus spurring the economy.

Autor said consumers will realize two types of savings. Discount stores, like Wal-Mart, will slash prices; higher-end stores will keep prices the same but offer better quality. "For instance, instead of 200 thread count sheets, stores will offer 400 thread count sheets at the same price," he said.

But Wood and Chesnutt are skeptical, believing that the savings from the eliminated tariffs will go into the pockets of retailers.

"At the end of the day is this going to be better for the consumers of this country?" Chesnutt said. "Probably not. We are going to take away jobs, and only fatten the bottom lines in the paychecks in the executives of retail and apparel importing companies."


JONATHAN STEIMAN

Jonathan was an early hire at TalkTo, a Matrix Partners portfolio company acquired by Path. Jonathan is currently Path's Director of Operations. You can find additional writings at www.jonathansteiman.com.




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