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Bush Battles the Chinese Sock Threat

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Tags Big GovernmentCorporate WelfareU.S. EconomyTaxes and SpendingInterventionism

12/29/2005Grant M. Nülle

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

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,

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

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

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

  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.

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