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Restrictions on imports of textiles, apparel, and nonrubber footwear have been a contentious issue over the past decade. During that time, the Congress has come close several times to overriding Presidential vetoes of bills aimed at tightening existing quotas or imposing new ones on these imports. By contrast, the Uruguay Round of negotiations to expand the General Agreement on Tariffs and Trade (GATT) includes proposals to phase out the Multifiber Arrangement (MFA). This arrangement exempts textile and apparel trade from the standard GATT prohibitions on import quotas. Also, the proposed North American Free-Trade Area (NAFTA) will probably reduce or eliminate tariffs and other restrictions on textile and apparel trade between the United States and Mexico.

The Congressional Budget Office (CBO) has studied the history of the three industries' economic health and the economic effects of the major proposals for changes in protection. Proponents of quotas most frequently cite job protection as the reason for protecting such established industries as textiles, apparel, and nonrubber footwear. CBO concluded that tariffs and import quotas are a costly and inefficient means of preserving jobs in these industries. Published estimates of the annual costs to consumers of current trade restrictions are generally in the range of $39,000 to $53,000 for each job the restraints retain in the textile and apparel industries.

Furthermore, estimates of the annual net welfare costs of these restrictions to the economy (that is, the amount by which the costs to consumers and the government exceed the benefits to U.S. firms, workers, and the government) are in the range of $3,600 to $19,200 for each job retained in the textile and apparel industries. CBO's estimates for the nonrubber-footwear industry are higher for the costs per job retained and the annual net welfare loss.
 

PROTECTION AND COMPETITIVENESS OF THE THREE INDUSTRIES

The textile and apparel industries benefit from some of the most substantial and long-lived trade protection granted by the United States in recent times. High tariffs on textile and apparel imports date back at least to 1930. Tariff rates for these three categories of merchandise have remained significantly higher than tariffs for merchandise as a whole, although they are drifting downward (see Figure 1). Clothing and accessory tariffs have fallen from about 30 percent to 20 percent in the last two decades. Textile and footwear tariffs have fallen to about 10 percent during this period.

Quotas as well as tariffs play a key role in restricting competition for these products. Quotas were imposed on imports from Japan in 1936 and again in 1956. (The term "quota" here refers to any kind of numerical limit on imports imposed by or as a result of pressure from the United States. In addition to standard quotas, these limits include what are sometimes referred to as "voluntary restraint agreements," "voluntary export restraints," gentlemen's agreements," or "designated consultation levels.")

The Multifiber Arrangement was designed as a "temporary" system of rules to restrict competition from exporting countries employing low-cost labor. The MFA has been extended several times since it was first introduced, and is currently scheduled to expire in 1992, although some bilateral agreements expire at a later date. The MFA differs from basic GATT principles in several key respects: it employs quotas as well as tariffs; the quotas are aimed at specific exporting countries (and always "low-wage countries"); and its procedures for applying quotas are more expeditious than most trade remedies.

As of April 1992, the United States maintained quotas or import restraint agreements on 37 countries that as recently as 1990 accounted for 63 percent of U.S. textile imports and 88 percent of U.S. apparel imports (see map in Figure 2). The quotas primarily affect developing countries. Although five of the 10 largest suppliers of U.S. textile imports and one of the 10 largest suppliers of apparel imports are industrialized countries, all of the countries currently covered by quotas or restraint agreements are developing countries. Asian and Pacific Island countries have been a target of these restrictions; 16 of the 37 restraints apply to countries in this part of the world. (See Table 1 for a listing of countries and the dates of the quotas or agreements.)

The nonrubber-footwear industry is not as protected as the textile and apparel industries, but is more protected than most other manufacturing industries. Except for one temporary set of restrictions from 1977 to 1981 on imports from Taiwan and Korea, the United States has not used import quotas to protect this industry. Import tariffs, however, have averaged two or more times the average tariff rate for all merchandise imports.

Although the three industries are frequently grouped together in discussions and legislation relating to trade, each has fared quite differently against foreign competition over the past 30 years. Domestic textile production is relatively competitive. In determining the impact on the U.S. economy, the balance between imports and exports is more important than which country supplies the goods that U.S. consumers purchase. For example, if we exported our entire production and imported an equal amount for our consumption, the exchange would have the same effect on the U.S. economy as if we produced all of these goods for domestic consumption and imported or exported nothing.¹ Figures 3 A, 3B, and 3C demonstrate the relationship between imports and exports for textiles, apparel, and nonrubber footwear during the 1980s. They show that imports and exports of textiles are small and roughly in balance, and that the vast majority of U.S. consumption comes from U.S. production. The gap between imports and exports for apparel and nonrubber footwear has grown steadily during this period. Compared with domestic consumption, U.S. imports exceed exports by 34 percent for apparel and 74 percent for nonrubber footwear.

Taken together, corporations in the apparel, leather, and leather products industries, as well as those in the textile industry, have been as profitable as, if not more profitable than, the average for all manufacturing corporations in the United States since 1978. They have consistently had, however, a significantly lower ratio of dividends to equity. The protection that the industries have received from imports has undoubtedly influenced their profitability.

Figures 4A, 4B, and 4C show the percentage of imports coming from Asian and Pacific Island countries. The region has long been dominant as a supplier of U.S. textile and apparel imports. The region supplied roughly 60 percent of U.S. textile imports over the past decade, with no particular trend toward greater or less dominance (see Figure 4).² The region's share of U.S. apparel imports peaked at 84.2 percent in 1982 and has declined ever since. But this might just be the result of the rise and growth of new suppliers while Asian and Pacific Island suppliers remain constrained by quotas. The region's share of U.S. nonrubber-footwear imports increased over the decade from 44.5 percent in 1980 to 65.0 percent in 1991.

Over the past 10 years, the dominant role has shifted among countries in this region. For example, Japan's share of U.S. textile imports declined from 15.3 percent in 1980 to 7.3 percent in 1991, and India's share declined from 9.6 percent to 4.4 percent. Meanwhile, China's share rose from 5.3 percent to 14.9 percent (most of this rise has occurred within the last three years), Hong Kong's rose from 4.2 percent to 10.3 percent, and South Korea's rose from 4.8 percent to 12.4 percent and then declined to 9.2 percent. South Korea's share of U.S. nonrubber-footwear imports rose from 11.7 percent in 1980 to 32.2 percent in 1990 before declining slightly. China's share rose from 3.4 percent in 1988 to 18.4 percent in 1991. Taiwan's share declined from 27.4 percent in 1980 to 10.3 percent in 1991.  

SIGNIFICANCE OF THE INDUSTRIES TO THE U.S. ECONOMY

Historically, the textile and apparel industries have been large and significant elements of the U.S. economy, but they have declined substantially over the past few decades. The nonrubber-footwear industry was much smaller to begin with and has declined even more.

Employment and economic activity is illustrated in Figures 5 and 6. The textile industry's share of total nonagricultural employment in the United States declined from 1.71 percent in 1960 to 0.63 percent in 1990; the apparel industry's share declined from 2.28 percent to 0.93 percent; and the nonrubber-footwear industry's share declined from 0.45 percent to 0.06 percent. These declines continued trends that date back at least 50 years. Shares of the three industries in total assets of manufacturing corporations and shares in the value added by manufacture tell the same general story. Of course, the industries are not spread evenly throughout the country. They are more important to the economies of several Southeastern states, where they employ larger shares of the labor force, than they are nationwide. Apparel workers in California, New York, Pennsylvania, and Texas are numerous, but their shares of the large labor forces of these states are not far out of line with the national average.

Pay in the three industries is generally low, as shown in Figure 7. In 1990, average hourly earnings of production workers in the textile industry were only 80 percent of the average for all private nonagricultural industries, and the average for the apparel and nonrubber-footwear industries was only 66 percent.
 

CAUSES OF THE INDUSTRIES' PROBLEMS

All three industries are labor-intensive, which affects their competitiveness. U.S. apparel and nonrubber-footwear production have lost market share in part because the industries are labor-intensive and must pay prevailing U.S. wages, which are high compared with wages in developing countries. In conjunction with the competition from foreign production that uses low-cost labor, the high labor intensity helps explain why pay in these industries is so low in comparison with that of other industries in the United States. (Another part of the explanation is the relatively low levels of skill required by these jobs.) Tables 2, 3, and 4 present a more detailed picture of relative labor costs in these three industries.

Figure 8 demonstrates that the ratio of capital costs to labor costs is higher for the textile industry than for the other two industrial groups. The textile industry is approximately as labor-intensive as the rest of U.S. manufacturing. Consequently, it has remained competitive in international markets and has retained market share. The inroads of foreign competition have not caused its declining employment. Rather, the cause has been rapid rates of growth in labor productivity. Labor productivity has grown faster in the textile industry than it has in the U.S. manufacturing sector as a whole. This growth has benefited the industry by improving its competitiveness. It has also benefited the consumers of textiles, who see the lower prices and higher quality that have resulted from it. Productivity has grown faster than the domestic demand for textiles, however. Thus, the industry needs fewer workers to fill that demand. Trade deficits and surpluses in this industry have never been substantial. Therefore, competition from imports may have forced the domestic industry to improve productivity, but has not seriously affected employment.
 

PROPOSALS FOR CHANGES IN PROTECTION

Two recent proposals for changes in the protection accorded the three industries merit mention. The first, a significant element of the Uruguay Round of negotiations, would gradually phase out the Multifiber Arrangement, which provides the legal basis under the GATT for the current quotas on imports of textiles and apparel. The second, currently under negotiation with Mexico and Canada, would set up a North American Free-Trade Area encompassing the United States, Canada, and Mexico. If a NAFTA is enacted that phases out restrictions on textile and apparel trade between the United States and Mexico, and a Uruguay Round agreement phasing out all restrictions on textile and apparel trade worldwide is not passed, then imports of apparel from Mexico might displace some imports from Asian and Pacific Island countries. The phasing out of the Multifiber Arrangement is most relevant for this briefing.

Eliminating the MFA would probably benefit consumers substantially and harm domestic textile and apparel production to a somewhat lesser extent in absolute dollar terms. Since the textile industry is fairly competitive, eliminating the quotas on apparel would have a greater effect than eliminating the quotas on textiles.

According to estimates from a study by the International Trade Commission, in 1987 the U.S. quotas on textile imports were equivalent to an average tariff of 21.8 percent and the quotas on apparel imports were equivalent to an average tariff of 28.3 percent. The study presented further estimates showing that eliminating all U.S. quotas and tariffs would cause a net welfare gain to the United States of $2.4 billion to $2.6 billion per year and reduce employment in the textile and apparel industries by 233,000 to 291,000 jobs. These job figures represented 13 percent to 16 percent of all employment in these industries in 1987. By these estimates, each job that the restrictions retain in the textile and apparel industries costs the United States roughly $9,000 to $10,000 a year. Eliminating all U.S. trade restraints, however, would have more far-reaching effects than the mere elimination of the MFA and the modest tariff cuts that are being negotiated.

The term "retained" is used here rather than "saved" because no jobs are actually saved in the economy at large. Trade restrictions have no permanent effect on the level of total employment in the economy. Rather, they affect the distribution of employment among industries. Trade restrictions on textiles and apparel reduce the number of forced job changes from those industries to others and thus can be said to retain jobs in them.

Estimates from other studies put the annual net welfare cost of these restrictions in the range of $13,000 to $19,200 for each job they retain in the apparel industry and $3,600 to $15,300 for each job they retain in the textile industry. Consumer costs, which are the net welfare cost plus transfers of wealth from consumers to domestic producers as a result of higher prices, are much higher. Estimates range from $39,000 to $46,000 for each job retained in the apparel industry and between $50,000 and $53,000 for each job retained in the textile industry (see Table 3).

The Uruguay Round will most likely result in a modest reduction, but not complete elimination, of tariffs accompanying the elimination of the MFA. This combination of changes would result in smaller total dollar gains and smaller job losses in the industries, but the ratio of dollar gains to job losses (or, equivalently, the cost per job retained by the restrictions) should not be any lower. Similarly, the fact that other countries will also be eliminating their import quotas at the same time that the United States does will reduce the dollar gains and job losses but should not have much effect on the ratio.

The proposed North American Free-Trade Agreement would similarly affect these industries, although the magnitudes would be smaller for several reasons: trade is being liberalized with only one country--Mexico; quotas on imports from Mexico have not been binding in recent years; and some increased imports from Mexico will probably adversely affect other import suppliers rather than U.S. producers. On balance, the U.S. industries may benefit from increased trade in textiles, apparel, and nonrubber footwear with these countries. The United States is a net exporter of textiles to Canada and Mexico, and our trade in such commodities as carpets increased when trade was liberalized between Canada and the United States in the last few years.

The United States is a net importer of apparel from Mexico. Although CBO has not attempted the calculations, the combined effect of textile and apparel trade with Mexico could well be favorable to the United States because exports of textiles for the apparel industry there have increased. This development might occur as a result of diversion of apparel imports from traditional suppliers--such as those in Asia--to Mexican suppliers, who would be in a newly favorable position to supply low-cost products. The precise manner and length of time for such a transition is unclear at this stage. More important, the exact nature of the NAFTA remains to be resolved.

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1. In this example, consumers in both countries would actually be worse off if there were no trade because U.S. customers would be deprived of the imported items they prefer, and foreign consumers would be deprived of U.S. goods.

2. The region's share might have jumped in 1989, as indicated by the figure, but this may only be a result of the U.S. switch in classification systems from the Tariff System of the United States, Annotated (TSUSA) to the Harmonized System (HS).