Textile Industry Trends in the Global Economy
I. Executive Summary
The objective of this paper is to examine how the development of a textile industry contributes to economic growth in the global economy. Because textile manufacturing is a labor-intensive industry, developing countries are able to utilize their labor surplus to enter the market and begin the process of building an industrial economy. Emerging economies then look outward to develop an export strategy based on their comparative advantage in labor costs.
Textile production and consumption is an increasingly global affair as production continues to shift to developing countries. Developing countries have seen an explosion in the growth of their textile exports, and for many countries textiles are a significant portion of their total exports. In response to increasing competition from low-value imports from developing countries, industry leaders in developed countries have made significant capital investments in order to increase productivity and move into advanced market sectors.
There are several trade agreements in place that impact world textile trade. The African Growth and Opportunities Act, Andean Trade Preference Act, and Trade Promotion Act are each designed to liberalize textile trade and provide equal market access to both developing and developed countries. Despite the potential economic and social benefits, the effectiveness of these trade policies is limited by special interest politics in the developed world. The presence of a political economy in developed countries can affect both the formation of and the adherence to international trade agreements; industry leaders can still appeal to the World Trade Organization or their Trade Representative to protect domestic industry.
II. Textile Industry
Development in the Global Market
In order to achieve economic growth and development, policy makers first encourage the formation and growth of domestic industry. Through labor force mobilization and capital development, a country shifts its basic factors of production from primary products, such as localized agricultural goods, to industry. In recent years, the World Trade Organization and other multilateral institutions have emphasized the importance of allowing developing nations to enter the world market in order to achieve economic growth and development. Recognizing the power of international markets, policy makers develop an export strategy based on their comparative advantages in order to compete in an increasingly global economy
Textile manufacturing is primarily a labor-intensive industry; because emerging economies have a surplus of unskilled labor, the creation of a textile industry in a developing country is both feasible and attractive from an economic growth perspective. Many countries view the creation of a domestic textile industry as “an initial rung on the ladder of industrialization”(U.S. Congress Office of Technology Assessment Special Report 81).
III. Industry Growth in Developing Economies
The textile industry is now “clearly a global enterprise”(U.S. Congress OTA Report 81): production shifted to countries with a comparative advantage in labor-intensive manufacturing, and products are shipped all over the world for consumption. Across a variety of countries, we see that developing nations are claiming an increasing share of the global textile market. From the mid-1960s to 1998, “the developing countries’ share of world textile exports grew from 15 percent to 50 percent…[and] total exports of textiles and clothing by developing countries as a group reached $213 billion in 1998”(Finance & Development). Textiles compose a large portion of many developing countries’ total exports. For example, “textiles accounted for 51 percent of Pakistan’s merchandise exports in 1990, … 83 percent of Bangladesh’s merchandise exports in 1999, and 89 percent of Cambodia’s in 2001”(Finance & Development).
The textile and apparel industries also compose a substantial part of Latin American manufacturing exports. Although the region only captures about 3% of the world textile trade market, exports have grown by an average of 24% over the last two decades (Lord 37). Latin American producers face stiff competition from the East Asian countries: nearly half of the producers of synthetic and blended textiles closed in São Paulo, Brazil because of the intense penetration of imports from South Korea and China (Macario 112).
The East Asian countries saw an explosion in the growth of textile exports between 1963 and 1984, capturing 45% of the exports to OECD countries by 1984. China, South Korea, and Taiwan in particular saw their collective export volume grow from US$42.4 million in 1963 to US$3315.2 million in 1984 (Cline 140).
Case Study: China
The successful development of an internationally competitive textile industry in China directly contributed to the economic growth of the nation. In 1950 China’s industry growth stagnated as the country found itself unable to capture the power of its extensive labor surplus; however, the economic reforms of the late 1970s allowed the industry to transform its existing industrial base into one that controlled 22% of textile exports from developing countries (Yang 3).
China’s textile industry was primarily controlled by urban state-owned enterprises until the late 1980s. Eventually the public sector enterprises gave way to township and village enterprises (TVEs), allowing the industry to capture the unskilled labor resources of the rural economy. By 1996, TVEs controlled 61% of textile output and 98% of apparel output. TVEs found success in the domestic and international market because of their responsiveness to market demand, incentives for productivity increases, and lower rural wage costs (Yang 8). TVEs also provided a vehicle to bring meaningful employment to the rural sector, allowing unskilled workers to enter the economy and contribute to the nation’s industrial growth.
IV. Industry Trends
in the Developed World
The textile industry in developed countries has often found itself unable to compete with low-value goods made with cheap labor in developing nations. As a result, textile industry jobs continue to move out of industrial countries and into developing countries (U.S. Embassy). According to Senators Jesse Helms (R-NC) and Ernest Hollings (D-SC), the textile and apparel industry has lost 700,000 jobs since NAFTA’s implementation in January 1994; North Carolina alone lost 124,700 jobs. Textile output has fallen 22.2 percent since 1994, and apparel output has declined more than 14 percent.
However, the focus of production shifted into advanced market sectors and the industry has maintained profitability by making sizeable capital investments in computer and mechanization technology (Cline 56, 84). Between 1975 and 1985, U.S. textile mills reinvested 80 to 85 percent of their retained earnings, spending $1.4 billion per year on new plant facilities and equipment. Between 1984 and 1986 this figure rose to $1.6 billion per year. Firms invested in computer-controlled systems and robotics in order to improve productivity while cutting labor costs (U.S. Congress ATO Report 91-2).
Glen Raven Mills, Inc., a textile manufacturer in North Carolina, employs a “five minute rule:” if the product requires more than five minutes of labor, production is shifted overseas. As a result, domestic production concentrates on specialty fabrics, which continue to succeed in the domestic and overseas markets. However, even in the specialty fabrics divisions, the fabric is produced domestically and then shipped to China to cut and sew the fabric into finished products.
V. Textile Trade Policies
The nature of global textile production and consumption patterns threatens domestic workers in industrial nations. As a result, developed nations have succeeded in limiting market access to countries with a comparative advantage in production by employing quotas, tariffs, and other barriers to trade. Developing countries have also taken steps to protect their domestic market from other developing and developed countries: “developing nations want the growing textile and apparel markets within their countries for themselves”(U.S. Congress OTA Report 83).
In 1984, tariffs in developing countries averaged from 25 to 75 percent; Brazil imposed tariffs of up to 205 percent. Bolivia, Egypt, and Afghanistan outright ban certain imports; furthermore, developing countries with the largest exports also tend to have the highest tariffs (Finance & Development) to ensure their domestic industry will not be threatened. For example, the “ASEAN countries (Association of Southeast Asian Nations), China, and South Asia have tariffs ranging from 20 to 33 percent on textiles and from 30 to 35 percent on clothing”(Finance & Development).
The creation of international trade agreements to reduce textile trade barriers in developing and developed countries is imperative for the mutual benefit of importers and exporters around the globe. Protectionist policies in developed countries harm consumers in the domestic economy as well as potential competitors in the global economy. As a result of protectionist policies in developed countries, the Trade Policy Research Centre of London estimated that each textile job saved cost consumers an excess of $700,000 (Bovard 53). Poor families, who comparatively spend more of their income on low-cost clothing that is subject to high tariffs, are especially hard hit. The U.S. Association of Importers of Textile estimates that the poor spend 8.8% of their disposable income in costs created by protectionist policies (Bovard 50-51).
Protectionist policies directly impact exporters in developing countries because they are crowded out of the global market. “Each job saved in a developed country by tariffs and quotas is estimated to cost about 35 jobs in developing countries.” In addition, quotas and tariffs cause a direct welfare loss of around $24 billion per year and lost export revenues of $40 billion (Finance & Development). These figures can only begin to demonstrate the need to remove trade restrictions. Again, developing countries stand to gain substantially from removal of their own barriers (Finance & Development).
A. Multifibre Arrangement and the Agreement on Textiles and Clothing
The Multifibre Arrangement (MFA) was instituted in the WTO in 1974 to “achieve the expansion of trade, the reduction of barriers to such trade, and the progressive liberalization of world trade in textile products. While the MFA appears to be ideologically supportive of expanding free trade in the textile industry, it was mostly used to protect developed countries from low-value imports from developing nations. Therefore, the WTO adopted the Agreement on Textiles and Clothing in 1995 (WTO website).
The ATC takes place in four stages designed to gradually integrate the textile industry to GATT rules. 16% of textile products will be traded according to GATT rules by the end of 1997, 33% by year-end of 2001, 51% by year-end of 2004, and 100% starting in 2005. These figures are substantially higher than what is set forth in the MFA: MFA contains a mandatory provision to increase the number of imports not subject to quotas by 6% a year (WTO website).
The International Monetary Fund estimated in 1984 that removing MFA quotas and tariffs from textile goods could substantially increase exports from developing countries to developed nations: an 82% increase is possible from developing nations to countries that participate in the Organization for Economic Cooperation and Development (OECD) alone (Bovard 48). The ATC is set to expire in 2005, when 100% of textile trade will comply with GATT rules. However, most countries back-loaded the products excluded from protectionist policies: many of the products excluded early in the process were not restricted in the first place nor are they most sensitive to import competition.
B. African Growth and Opportunities Act
President Clinton signed the African Growth and Opportunity Act into law in May of 2000 to increase the region’s meager participation in global trade (Export America 20). AGOA helps Sub-Saharan countries import machinery, technology, and other equipment necessary to fuel industrial growth. AGOA will also increase African countries’ access U.S. markets by increasing Export-Import Bank activity and encouraging the formation of lasting commercial relationships (22).
In the first half of 2001, U.S. imports from AGOA countries grew seven percent; knit and woven apparel imports in particular grew by 28 percent. Madagascar, Mauritius, Lesotho, and South Africa all posted particularly large increases in textile exports. AGOA has also significantly encouraged investment in the region’s textile and apparel sector by U.S. and other investors. These commercial improvements have also contributed to strengthening economic and policy reform in African countries; reforms then have a positive effect on the creation of industry (Export America 22).
Case Study: Kenya
Kenya, which acceded with AGOA provisions in January of 2001, is seizing the opportunity to rebuild and firmly establish its textile industry. The government established Export Processing Zones (EPZs), which have the potential to create thousands of jobs, in order to commit the nation to extract maximum advantage from AGOA. In 2001 Kenya earned over $70 million from textile exports to the U.S., an astonishing 200 percent increase over its revenue in 2000. Thirty-nine enterprises were operating in the 23 current zones at the end of 2001, and 3 new EPZs are being added. Thus far, direct employment has risen significantly from 6,500 jobs in 2000 to 13,400 jobs by the close of 2001 (Omondi).
Nicholas Biwott, Kenya’s Trade and Industry Minister, asserts that the increased export earnings from textile products over the past two years have meaningfully benefited the economy: “the garment factories that were closed down have been re-opened, six new ones established, and eighteen others are in the process of opening.” He submitted that as of April 2002, AGOA is directly responsible for the creation of 30,000 jobs; furthermore, he expects the figure to double towards end of this year with the opening of several factories currently under construction (Omondi).
Developing nations can take advantage of trade agreements by encouraging foreign direct investment and promoting industry expansion into foreign markets. For example, Kenya has taken advantage of AGOA by creating EPZs and aligning their domestic policies and laws with the regulations stipulated in the trade agreement. Many other African nations recognize the economic opportunities provided by AGOA, including Ugandan Ambassador Edith Ssempala, who publicly stated AGOA “will help Africa move on the trade front and away from aid dependency, and we cannot expect to be spoon-fed forever.” Senegal’s Ambassador, Mamadou Seck said, “AGOA provides dignity for us by allowing us to take care of ourselves, and giving us a sense of ownership in our development” (Omondi).
Developing countries can also use trade agreements to advance domestic social agenda. Kenyan Ambassador believes AGOA will contribute greatly to Kenya’s development, noting that “the majority of our textile workers are women, and this act will help to empower them” (U.S. Embassy).
Foreign investment is likely to be a critical factor in sustaining future growth. The United Nations Conference on Trade and Development reports $13 million has been pumped into Kenya alone thanks to AGOA. Using funds provided by the U.N. Trade and Development agency and the Office of U.S. Trade Development, Kenya plans to revive its cotton industry by training farmers and improving crop irrigation. These efforts are geared toward improving ginning, spinning, weaving, and the overall capacity and quality in their domestic garment manufacturing. This vertical integration should help reinforce the industry and sustain future development (U.S. Congress).
C. Trade Promotion Act and the Andean Trade Preference Act
Congress passed the Trade Promotion Act in August of 2002, after a period of lengthy and heated debate over the exact provisions of the Act. TPA gives the President full negotiating authority in creating trade agreements and is designed to create more “open, equitable, and reciprocal market access [and to] reduce or eliminate barriers and other trade distorting policies and practices”(Tomkin 3).
TPA also reauthorized the Andean Trade Preference Act of 1991, extending duty-free treatment of 6,000 products from the region. However, much like AGOA, apparel entering duty-free must be made of U.S. fabric dyed and finished in the U.S. Andean apparel made from regional fabric can only compose 3% of U.S. imports until 2006, and certain textiles would be ineligible for duty-free treatment all together (Tomkin 9). Both provisions limit the effectiveness of the act and the benefits available to Andean countries.
VI. Political Economy Considerations
While economists and politicians generally agree that sustainable development, economic growth, and the reduction of poverty are worthy goals for developing nations, it is more difficult in practice to implement policies that achieve these goals. Textile manufacturers in developed economies have traditionally influenced state and federal policy through lobbying and the financial support of Congressional members. Powerful industries have proven their ability to influence policy makers to implement protectionist policies, as demonstrated with the recent steel tariff increases. As long as interest group politics dominate policy making, we can expect that government policy will serve the needs of industry, not consumers. The WTO regulations aspire to reduce the possibility that individual governments act in a way that hurts free trade.
Even with larger trade agreements like AGOA or ATPA, interest group politics directly affect the exact terms of the trade package. TPA passed on a one-vote margin in the House in November of 2001; four textile-state Republicans voted in favor of the bill in exchange for a provision requiring that garments entering duty-free from the Caribbean, Latin America, or Africa be made from fabric dyed and finished in the U.S. Without this compromise, the passage of the entire trade package would have been threatened.
Interest group politics that dominate policy-making in developed countries threaten liberalized trade in the global textile market. Even when the ATC brings all textile products under WTO trading regulations, countries can still create barriers to trade. Industry leaders in the U.S. can appeal to the United States Trade Representative or other federal agencies in cases of alleged dumping, illegal trans-shipment through countries that receive lower tariff rates, or environmental violations in order to receive reprieve from competition from abroad.
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Tomkin, Robert. Trade Promotion Authority: CQ House Action Report. July 26, 2002.
“Trade with Sub-Saharan Africa” Export America. December 2001.
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Yang, Yongzheng. “China’s Textile and Clothing Exports: Changing International Comparative Advantage and its Policy Implications.” Asia Pacific Press, 1999. http://ncdsnet.anu.edu.au/
<http://usembassy.state.gov/osts/tzl/wwwhtp24.html> [link no longer working]