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TextlJes and Apparel

Chan 1Textiles and Apparel:History of Trade Protection

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-111e history of pr()(ection in Ihe

textiles and apparel industry is longand complicated. Chan I lists the tradeagrt.'emenls negotiated over the past 32yt:ars ;lnd ilJustr:ates how the level of

protection has risen. 'In;1 1957 agreement. Japan vOlllntar-

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employment. anocher may lose. TIlequestion Ihis anicle addresses is: Whalare Ihe employment efTects in theSoUlhwest of protecth'e trade policies?I examine three cases of trade prolff­lion. lextiles and apparel. steel, and3ulorllobiles. These are among the

largest industries in Ihe United St3tesand 3re well-known examples of pro­te(1ioniSl: policies.

AmeriClns are incre'.lSin~ly con­exmed alx>ul lhe size and per..lS­

tence of the V.S. trade delicit. The

Vnited StatL'S. which was Ihe world'slargest creditor nine years ago, c. nowthe world's largeSl: del}(or, As 3 re.ull,proleclioni,s{ sentiment is on Ihe rise.Proponents of trade protL"CIion claimthat Americans 3re exponing manufac­luring jobs and 3rgue that Irade re­straints bolster over.lll employment,panicul:trly in the protected induslry.

The intent of trade restr:aints is to

increase the competitiveness of thc pro­

teeted domestic industries. By raisingthe price or limiting the supply ofimponed goods, domestic proouccrsgain a greater market share. IkncfilS

also now to industries that supply theproteeted seclor. Consequently, allthese industries experience increasedemployment. Tr:ade protcetion, how.e\'er, imposes costs on the economy 3Swell. Consumers face higher pricesbec-Juse trade restraints increase Ihedomestic price of the ProleclL"d goodand its impon subslilUles. Higherprices also afTe<1 ()(her linns that

purchase the Prole<1ed good as aninput. Again, consumers P3Y higherprices. Higher prices reduce sales and.Iherefore, employment. TIle key ques­lion is: Does trade proleclion increaseor decrease overall employment?

Because the industrial compositionof the v3riOUS C.S. regions difTers. lheregions may face unequal employmenteffects. \\nile one region ma)' g3in

TradeProtection:

Its Effect onthe Southwest

This document was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org).

Table 1Net Changes In Southwest Employment Resulting from Trade Protection

Textiles andProtected Industry: Apparel Steel Automobiles

(Number of Jobs)Affected Industry:Food and Kindred Products -54 -103 -6Textiles and Apparel Products 8,759 -85 -3Other Nondurables 11 -565 4Lumber and Wood Products 54 -88 -6Other Durables -20 -9,345 -511Transportation 135 -1,127 -164Communication and Utilities 103 -858 -28Wholesale Trade 29 -1 ,071 -52Retail Trade -461 -3,258 -259Finance, Insurance andReal Estate 261 -798 -50Services -39 -3,060 -381

Total 8,778 -20,358 -1,455

ily agreed to restria its exports offabrics to the United States. As a result,imports from other countries, including

Hong Kong, Portugal, Egypt and India,qUickly replaced the Japanese g<xxls.In 1961, the United States reached aone-year agreement with other textileexporters, called the -Short Teml

Arrangement on Cotton Textiles. - Thesucceeding, long Term Arrangement onConon Textiles, broadened productcoverage and extended from 1962through 1973.

Increased produdion of man-madefibers induced the United States to seekeven wider product coverage. In 1974,the United States reached an expandedagreement with its trading partners,known as the "Multifiber Arrangement,­

which prOVided an internationalfmmework for negotiating bilateralagreements. The l\lultifiber Arrange­ment has since been renewed threetimes, each time covering a widerscope of prodUdS and countries. Thecurrent agreement, which will extendthrough 19')1, includes 54 developedand developing countries.

The tariff or eqUivalent rate forimports of textiles and apparel rosefrom 20 percent in 1957 to 30 percentby 1982. As the level of protection

increased. the costs and the benefits ofthese trAde agreements increased aswell. These tariff or equivalent mtescaused the domestic price of textilesand apparel to increase by 16 percentin 1974 and 24 percent in 1984. Anextensive stud~' by Gary Hufbauer.Di::tne Berlinger ,ltId Kimberly Elliottestimates that consumers paid from59.4 billion in 1974 up to 527 billion in

1984 because of the higher import anddomeslic prices of textiles and clothing.Domestic produccrs gained slightly lesson average; estimates f'"Jnge from 58.4billion to 522 billion. l

I-ligher import prices for textiles :md

apparel enabled American producers toincrea~ their domestic market share.In 1984, U.S. employment in the textile

:mJ apparel industry was 640.000 jobsabove its free tmde level. About 29,600of those additional jobs were in theSouthwest (Arizona. Louisiana. Newt-Iexico, Oklahoma and Tex:ls).

Protection also stimulated employmentin industries that supply inputs 10textiles and apparel production. Iestimate that the Multifiber ArrAnge­ment 111 increased employment in theSouthwest by 40.800 jobs. TIlis figureincludes Ihe increases in both the

textiles and apparel industry and its

suppliers.On the other hand, industries using

textiles faced higher input prices. As

increased costs were p:lsscd on to theconSllmer, sales declined and nnnsreduced production. In the Southwest,the 24-percent increase in domestictextile prices occurring in 1984 causeda loss of 32,000 jobs. On net, there­fore, protectiOn of textiles and ;Ipparelmeant only 8.800 additional jobs in theSouthwest.

Chart 2Nel Change in Employment Resulting fromProtection in Textiles and Apparel

NumDe' o! JoOs

5.029

Table 1 lists the net changes inemployment in different sectorsresulting from trade protection, Thefirst column lists the effects of theMultifiber ArrJngement Ill. SomesedOrs gained in employment whileolher SC(10rS lost jobs as a result oftrade proledion. TIle textile andapparel industry alone had a netemployment gain of 8.800 jorn>. Theretail trade industry suffered thegreatest loss in employment.

Chart 2 shows the net gains inemployment for each of the five stales.W1hile Texas gained the most inabsolute employment, the number ofjobs created in Oklahoma was a largerpercentage of its total employment.Oklahoma's employment increased by

0.16 percent, while the other fOllrstatcs' employment increased byaround 0.1 percent.

Steel

In 1969, in:1O effon to forestall a billlimiting U.S. imports of stecl..Japan and

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members of the Europe:m EconomicCommunity voluntarily agreed torestrict their exports to the UnitedStates. This agreement expired in 1974and was not renewed (C!Jm13). In1978. the United St;ltes imposed theTrigger Price Mechanism, whicheSlablished import reference pricesbased on estimates of Japanese costs ofproduction, profit margins and tr.ms­port:l.tion costs. Countries exportingsteel below the reference price weresubjected to expedited antidumpinginvestigations. Countries found dump­ing steel on the intern:nional market­place-seiling steel ;\broad at a pricebelow their estimated costs of produc­tion-faced increased trade barriers.

By January 1982. American steelcompanies had flied 110 antidumpingpetitions against II COllntries. In aneffon to settle these petitions, theUnited States negotiated a voluntaryrestrnint agreement with Japan andimposed a quota :l.g:linst the Europe:lnEconomic Community. In 1984 and1985, other sK.oe1 exporters :Ilsonegotiated voluntary restmint :lgree­ments with the United States. whichwere scheduled to e~pire september1989. President Bush recently an­nounced that the agreements will beextended into 1992.

Like clolhing :md textiles. the levelof protection for the U.S, st(.oel industryincreased with every new agreement

Chart 3Carbon Steel:History of Protection

TarillO/EQUival8f1l Ral8W8fcenl}

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Chart 4Net Change in Employment Resulting fromProlection in Steel

Numt>&r of Jobs

reached. [n 1974. lhe tariff or equiva­lent mte was llbout 13 percent. Itreached 30 percent by 1984. Thesetariff or equiv:llent rates C'J.used theprice of domestic steel to rise by 5percent in 1974 and 12 percent in 1984.To Americl.O consumers, the estimatedannu:Il cost of higher steel pricesincrea.sed from 52 billion in 1974 to

56.8 billion in 1984. G:lins to domesticsteel producers increased from 51.3billion to 53.8 billion over the sameperiod.

The gains in employment caused bysteel protection are more limited thanthose caused by tmde restr.lints intextiles and a.pparel. The tl"Jderestraints in 1984 allowed steel produc~

ers to expand their domestic produc­tion and. as a result, to increase theiremployment natiOnally by 9,000 jobsabove the frce-tl"Jde level. Because lheSouthwest produces very little steelrelative to the rest of the coumry.imporl restrictions increased employ­ment by only 400 jobs in the region,My input-outpllt analysis indicates th:\Iprotection created 1,300 jobs in steeland steel-supplying firms. On thenegative side, the Southwest is :1 largesteel user. As a result of [he 12-percentincrease in domestic steel prices. 21.600jobs were lost beouse st,--"Cl-using finnssuddenly faced higher input costs.Consequently, net employmem in theSouthwest decreased by 20.300 jobs..!

The second column of Table 1shows the employment effects ofprotection in steel. Because sK"C1 is :1.0

input in the production of so manygoods, employment decreased in all ofthe industries listed. The largest loserwas the geneT'"JI durable goods cate­gory, which includes heavy steel-usingindustries such as tmnsportationequipment, machinery, and otherfabricated metal products. The retailtl"Jde and service industries incurredthe se<:ond and third largest losses inemployment.

Ch:l11 4 shows the net losses inemployment for each of the five statesin the Southwest. Texas incurred thegreatest losses in employment. Thetrade restraints in steel caused a loss of10.900 jobs in Texas. New Mexico lost3,500 jobs, while the other three stateseach lost about 2.000 jobs. NewMexico lost the gre:ltesl percentage ofjobs-itS employment decreased by1.06 percent. Employment in louisianadecreased by 0,16 percent, while eachof the other three states suffered jobreductions of around 0.2; percent.

Automobiles

Although steel import restrJ.ints inthe mid·l980s hurt the automobileindustry, car proou(.'tion was buoyed byits own protection. In April 1981,Americans negotiated a voluntaryrestraint agreement with Japan to limilJapanese exports to the United States.The restraints on Japanese car importsgreatly increased the production ofdomestic cars, as well as prices andindustry profits. From 1980 to 1985.the value of U.S. car production

Chart 5Automobile Production and Imports

Million Dollars

:o]~~!=t/I_. =:7' i4:::1970 197~ 1980 19M'-I ~

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increased almost 200 percent (Chal1 5).

Over the pre<:eeding five years, it in­creased only 43 percent. When thevoluntary restraint agreement expired inApril 1985, the United States did notask Japan to extend it. Since then,however, Japan continues to voluntarilylimit car exports to the United States,although at a less restridive level.

The voluntary restr:J.int agreementwith Japan cost American consumersmuch more in higher prices thandomestic producers gained in increasedproduction and profits. The agreementbetween Japan and the United StatesC"J.used the price of imported cars toincrease by II percent. This led to a4.4-percent increase in the price ofdomestic automobiles in the UnitedSt;ltes. Consumers paid 55.8 billion,and producers gained 52.6 billion in1984 as a result of the higher price ofcars.

On a national level, the voluntaryrestr;tint agreement with Japan saved55,000 jobs in the auto industry. Thistranslates into 2,400 jobs in theSouthwest. In 1984, the automobileand its supplying industries gained4,700 jobs in the Southwest. Industriesin the Southwest that purchase cars,however, los! about 6,100 jobs. Thismeans that the Southwest incurred anet loss in employment of 1,400 tabs asa result of the volumary restraint agree­ment with Japan.

While there was a net loss inemployment in the Southwest as awhole. Oklahoma :md Texas experi­enced a net gain in jobs as a result ofthe volumary restruint agreement withJapan. As Chart 6 shows, Arizona,louisiana and New Mexico lostemployment. The third column ofTable I lists the employment changesin different industries as a result of thevoluntary restrJint agreement withJapan. Most of !he induslries listedincurred a dedine in employment, withthe exception of the generul non­durable goods category. TIle dUr:J.blcgoods industries lost about 500 jobs.The second and third highest losers intemlS of employment were the retail

Chart 6Net Change in Employment ReSUlting fromProtection in Automobiles

Numbllf 01 Jobs

-0;,,- '" "

·1.500

sales and service industries.The single protective phase tempo­

rarily improved the aUlOmobileindustry's profitability. Productionincreast.'d substantially while thevoluntary restruint agreement was inplace. ;lnd domestic automobile pro­ducers st.'emcd to become moreeffident in the mid-l980s. In 1988, thethree largest U.S. automobile compa­nies markt.-'ci their highest profits ever.This year, however, sales of Japanesecars arc soaring once again, and do­mestic automobile sales arc dropping.'

Conclusion

Tmdc prOlt."<:tion produces bothwinners and losers. Consumers alwayspay for !rude protcction in the fonn ofhigher import and domestic prices. Ifthe protected good is an input in theprodudion of other goods, thoserelated industries are hun by the highercost and limited supply of their input.The protected industry and its suppliersare the only dear winners in the shortnln.

In the three cases r examined, thenet effects of trude protection are,overJIl, negative for the Southwest.Tmde protection in the textile andapparel, steel and automobile industriesled to a net loss of 13,000 jobs in theSoulhwesl. The trade restraints intextiles and app3re1 alone. however,increased employment for the South­west. J'rote<:tion in the steel industry isthe most h3mlful to the region.Because steel is used in the production

of so many products, steel importrestr"ints negatively affed employmentin the region.

The only industry in the Southwestgaining employment from trudeproteclion is textiles and apparel.Duruble goods and retail trade indus­tries consistently lost jobs. Contrary tothe arguments advanced by proponentsof trude protection, tr"de restraints donot increase overull employment-atleast not in the Southwest.

-linda Iiunter

1 The tariff or equiv31ent rute refers tothe 3ctual t:lriff rate, or if a quota wasimposed, the eqUivalent tariff thatwould have led to the same level ofimports as the quota.1 Consumer cost and producer cost es­timates are from Iiufbauer, Gary Clyde,Diane T. Berlinger, and Kimberly AnnElliot. Trade Protection in/he United

Slates: 31 CaseS/tidies, WashinglOn,D.C.: Institute for InternationalEconomics, 1986..I Arthur Denzau also estimates theregional employment effects ofprotedion in the steel industry in hisarticle, "liow Import RestrJims ReduceEmployment,· Center for the Study ofAmerican Business, Formal PublicationNumber 80, June 1987.• WallStreetjoumal, May 23.1989.