Textile Protectionism in the Trans-Pacific Partnership

In the 224 years since the first Congress, textile and apparel protectionism has been a continuous feature of U.S. trade policy. High tariffs, “voluntary” export restraints, safeguard restrictions to limit the effects of “market disruption,” 30 years of comprehensive import quotas under the Multifibre Arrangement, antidumping and countervailing duty restrictions, “special safeguard mechanisms” related to China’s entry into the WTO (which were used to effectively extend quotas for three years), carve outs, and convoluted “rules of origin” in trade agreements to ensure the contentedness of America’s textile magnates have defined U.S. policy since the founding of the republic.

This analysis (Threadbare Excuses: The Textile Industy’s Campaign to Preserve Import Restraints) gives much of the background, with this bulletin (Cutting the Cord: Textile Trade Policy Needs Tough Love) providing some additional detail. But following is a brief rundown of the elements essential to understanding textile protectionism in the context of the TPP negotiations.

Although people speak of the “textile and apparel industry,” as if it were one in the same thing, they are distinct industries. Textile production is capital-intensive, sophisticated in its applications, and concentrated in rich locales (e.g., U.S., Canada, EU, Hong Kong, Korea, Taiwan), with a few exceptions (e.g., China, India, Turkey, Pakistan). Textiles (yarns and fabrics) are the central inputs for apparel production, which is labor-intensive, involves, primarily, the cutting and sewing of fabric, and is dispersed in developing countries across the globe. Although there is still some apparel manufacturing in the United States —primarily companies producing uniforms for the military (protected by “Buy American” provisions of the Berry Amendment) and smaller-scale operations serving the high fashion markets in New York and Los Angeles —most U.S. apparel manufacturers saw the writing on the wall decades ago, and shifted production operations to Mexico, the Caribbean, and Central America.

Without U.S. apparel production, then, one would think eliminating tariffs on imports would be unobjectionable, delivering real benefits to all who wear clothes. Instead, the United States still maintains tariffs on clothing that amount to 10-times the average U.S. tariff. The most recent WTO Trade Policy Review of the United States found that:

(In addition to the peaks referenced above, if one also considers antidumping and countervailing duty measures against imported lumber, steel, cement, appliances, flooring, paint, nails and other building materials, U.S. import restrictions predominantly target clothing, food, and shelter, life’s basic necessities, which penalizes lower-income Americans the most, resulting in what amounts to a regressive tax trifecta. Congrats!)

Ponder this. The simple average U.S. tariff on all goods in 2012 was 4.7 percent (calculated as the average tariff applied to 10,511 tariff lines). However, the applied tariff rate for U.S. imports in 2012 (calculated as duties paid divided by customs value) was 1.3 percent, which confirms that there is a higher incidence of importation of products subject to low- or zero-tariffs (which, in turn, confirms the protectionist, anti-consumer nature of tariffs). For apparel products (catalogued in Harmonized Tariff Schedule Chapters 61and 62), the average applied rate of duty was 13.1 percent in 2012, with importers paying as much as 32 percent on some articles of clothing.

Why the high duties in the absence of meaningful U.S. apparel production? Because the U.S. textile industry insists on preserving those tariffs as leverage to compel foreign apparel producers to purchase their inputs. Preferential access is conditioned on use of U.S. textiles. The high rates of duty apply generally, to all “normal trade relations” partners. But those duties are much lower or excused entirely for trade agreement partners, provided that the finished garment comprises of textiles made in countries that are signatories to the agreement. In most U.S. trade agreements, the United States is the only signatory with a meaningful textile industry.

In the TPP negotiations, as in most existing U.S. trade agreements and preference programs, the United States is insisting on what is known as a “yarn forward” rule of origin, which extends preferential tariff treatment to clothing that is cut and sewn in the free trade agreement or preference area from fabric woven of yarn spun in the free trade agreement or preference area. Among TPP countries, only the United States (and to lesser extent, Japan) has a significant textile industry, so the rule will greatly restrict the benefits of expanded clothing trade because the clothing exporters (Vietnam, primarily) will be limited in their choice of suppliers.

U.S. textiles are already more expensive than China’s, India’s, Korea’s or other non-TPP countries’ textiles that Vietnamese apparel producers might otherwise purchase. Conditioning duty-free access on the use of U.S. textiles would essentially eliminate the competition, enabling U.S. textile exporters to raise prices further. It would also limit the apparel offerings of Vietnamese producers, who —in the absence of alternative suppliers —would have less leverage to demand and expect the types and colors of fabrics, according to their production schedules, that best comport with the design of the final product. Or, alternatively, the Vietnamese could just forego the duty-free access, purchase textile inputs from China, and pay the higher duty.

All of these options nullify, to varying degrees, the expected benefits to U.S. consumers of the enterprise of forging a trade agreement in the first place, and suggest the TPP is less about freeing trade and more about governments negotiating contracts and carving up markets on behalf of their chosen industries. Rather than compete on quality and price with the world’s few textile producers for the business of the world’s multitude of apparel producers, the U.S. textile industry has convinced the U.S. government to do its bidding. Accordingly, under the “yarn forward” rule, the gains from clothing trade accrue to textile producers, not to clothing consumers.

Like everyone else, textile producers are entitled to divert their resources from production, R&D, and other productive endeavors to K Street to make a political case. But the public shouldn’t believe for a moment the peddled fallacies about this industry struggling to survive and being one import surge away from extinction. This is a highly sophisticated industry, comprised of some 9,000 firms, with market power concentrated among to top 50 companies (about 60% of sales). Apparel producers account for only 16 percent of the textile industry’s revenues, the bulk of which come from producers of home furnishings, carpeting, conveyer belts, tires, medical devices, and aerospace parts. Even if the industry lost some apparel producers as customers on account of real competition (as opposed to trade managed through yarn-forward), it has plenty of other revenue sources to cultivate. Meanwhile, single working mothers raising children might be able to stretch their budgets further on account of lower-priced clothing.

Negotiations to forge a so-called 21st century trade agreement with 11 other Pacific-Rim nations could result in an agreement that makes Americans more free to transact how and with whom they choose. But not if the U.S. textile industry —coddled since the 18th century and expecting more of the same — has its way.