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Bush Battles the Chinese Sock Threat

Mises Daily: Thursday, December 29, 2005 by

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After five months and seven rounds of contentious negotiations, the Bush administration and the American textile lobby got what they wanted: a cap on China's booming export business in the sensitive trade.

The agreement sets quotas ( or "safeguards " in security speak) for nearly half of the Chinese textile exports to America, such as bras, baby socks, bath towels, wool suits, window shades, etc.. Thus are American consumers protected from the presumed disaster of paying too little for these essentials of life.

The agreement comes on the heels of a similar arrangement between Beijing and the European Union, and less than a year after the expiration of a decades-old system of textile quotas that had both governed and distorted the trade.

The cartelization of the global textile trade dates back to the 1950s when America coerced a major developing exporter, Japan, into short-term "voluntary" export restraint arrangements with quotas, which became commonplace between developed countries seeking to protect an influential domestic industry and poor countries seeking to shield nascent export opportunities from retaliation. Such deals evolved into the Multi-Fiber Arrangements, which institutionalized governments' management of the trade. The 1995 Agreement on Textiles and Clothing abolished the MFA over a ten-year transition period, freeing textiles in a manner consistent with global trade rules beginning January 1, 2005.

For China's competitive textile industry, the prospect of quota-free trade was an immensely appealing inducement for its government to join the World Trade Organization. Since January 1 Chinese exports of clothing and textile products to the United States, the world's largest textile market, have jumped more than 40%.

Anxious about Beijing's growing economic clout and nebulous military ambitions, the Bush administration has invoked safeguard clauses embedded in China's conditions for WTO membership to unilaterally re-institute limits on import levels of individual product lines. In the eleven months since the expiration of the MFA, the administration has exercised this option for 19 categories of clothing.

The appeal of the accord struck between the American and Chinese governments is clear. Washington constrains foreign competition in 34 textile product lines without having to rule out further trade restrictions or annually renew the quotas, as would be the case with the 19 items it had already subjected to safeguards. Beijing pockets average growth rates of about 15% per annum in the pertinent textile categories over the life of the agreement, which exceeds the 7.5% per annum ceiling America must admit under China's WTO accession agreement.

Unhelpful intervention

Nevertheless, the justification and efficacy of government meddling in trade matters — especially in the case of Washington's embrace of textile quotas — is dubious. Not only are political means counterproductive, but such interventionist measures tend to generate real dislocations in its wake where only supposed ones existed.

According to politicians, labor unions, and threatened domestic manufacturers, the textile industry is another example of US job losses to Chinese firms supported by a militaristic government and an artificially cheap currency. Although the American trade deficit to China has doubled since the latter's WTO accession in 2001, such a raw analysis ignores the context of changing economic circumstances in the Far East.

Manufacturing is moving out of high cost Asian countries to China, meaning that while America's deficit with China has grown, its trade gap with other Asian nations, including Japan, is decreasing. Indeed, Asian investment in Chinese assembly plants translates into even lower prices for labor-intensive consumer goods ultimately purchased by Americans. Moreover, to decry a cheap yuan while turning a blind eye to the Fed's printing press, much less the presence of US military personnel in over 100 countries, smacks of hypocrisy.

Such circumstances rarely convince state officials to stand idle when the tenor of public opinion makes it imperative for politicians to act to protect "strategic" or "sensitive" industries. Utilization of the state's unique ability to prohibit, limit or allow economic exchanges within its territory enables it to elevate the narrow interests of one class of producers over retailers and consumers, as is the case with textiles.

Advocates of trade restrictions are bolstered by an intrinsic collective action problem that allows a relatively small and politically connected industry to apply the state's coercive apparatus to compel a much larger and diffuse lot of consumers and retailers to purchase its wares. Without quotas, textiles producers stand to lose significantly, while superficially it makes scant difference to consumers to pay a dollar extra for an article of clothing.

It is estimated that the quotas will cost American consumers $3-$6 billion annually, but whether Washington's gambit will provide predictability to the textile trade or shore up ailing domestic companies is less certain.

Unresponsive to profit and loss and reliant on confiscating property for its existence, the supposedly omnipotent state cannot intimately know the intricacies of the textile or any other market better than profit-motivated firms, much less gauge consumer preferences. This lesson was powerfully evident after the EU struck a textile bargain re-establishing quotas with China in June.

EU officials grossly underestimated domestic retailers' willingness to exploit the brief window before the imposition of quotas to apply and receive import licenses for a volume of textiles well above the threshold endorsed by their respective governments. The upsurge in orders, driven by the desire of European retailers to serve the needs of consumers, quickly exceeded most of the quantitative restrictions established for the 10 categories of textiles covered in the EU-China agreement.

Almost 87 million articles of clothing amassed at European ports — precipitating artificial shortages, bringing some small retailers to the brink of bankruptcy, and attenuating consumer choice — before the EU reluctantly admitted the items in September. In America textile products covered by the temporary safeguard quotas have filled up so quickly that alternative sources have had to be found and hundreds of thousands of Chinese clothing goods were held in abeyance at US ports prior to the November accord with Beijing.

Hung out to dry

Although American textile producers have been coddled by Washington for several decades, they are nonetheless in a precarious position. Over the past five years, domestic textile and clothing manufacturers have shed approximately 400,000 jobs, more than 30% of their workforce — despite being granted ten years to adjust to the demise of the MFA. Unable or unwilling to properly plan and invest for a competitive global market, textile lobbies and allied politicians have preferred to stymie liberalization and petition for renewed quotas every step of the way.

Quotas for nearly two-thirds and then half of the textiles covered by the MFA did not expire until the year 2002 and January 1, 2005, respectively. Few categories dear to developing country producers were liberalized until the last possible day, as America chose to eliminate quotas in relatively capital-intensive textile products early. Conversely, retailers have been continuously assailed by recurring impositions of safeguards quotas and given virtually no time to adapt to the US-China quota agreement.

What's more, Washington's textile intervention may even accelerate the undoing of its intended beneficiaries in two respects. First, with exports in low value-added textile products subject to quotas, Chinese firms will likely opt to move up the value chain into direct competition with American manufacturers that generally do not compete head-on with the Chinese and cannot compete on the basis of cost.

Secondly, other Asian countries will fill the void created by the coerced reduction of Chinese clothing exports to America. In the face of unfettered Chinese competition, India's clothing exports to the US this year nonetheless rose 34%, Bangladesh 24%, and Indonesia's exports 17%.


  The State is Dying: $30

If that is not enough, the leverage Washington exercises over Beijing in the textile arena per China's WTO accession expires in 2008, leaving American textile manufacturers and their political backers fewer insular trade policy tools to distort the global division of labor and deprive American consumers and retailers the benefits of free trade.

Rather than fearing China, it is instructive to note that five decades ago a developing Japan, now the world's second-largest economy and critical trade partner of America and the EU, was a target of textile protectionism. Likewise, 20 years ago South Korea, Hong Kong and Taiwan comprised over a quarter of the world's textile exports only to move on to the production of higher valued-added goods. It is to be hoped that the Chinese economy will continue to develop and soon cede textile production to even poorer parts of the world so that their economies too may grow.


Grant Nülle is a Research Fellow with the Ludwig von Mises Institute. He can be reached at grantn007@yahoo.com. Comment on the blog.