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12S

July 30, 1986

THE TEXTILE AND APPAREL TR .ADE ACT: SAVING JOBS AT A COST OF $4 MILLION EACH

INTRODUCTION

In light of many months of United States trade deficits, Congress seems set to try to override Ronald Reagan's December 1985 veto of legislation curbing imports of textiles and apparel fibers. This protectionist legislation, known as the Textile and Apparel Trade Enforcement Act of 1985, is based an the so-called Jenkins Bill, introduced in the House (H.R. 1562) by Representative Ed Jenkins (D-GA), and a similar bill sponsored in the Senate (S. 680) by Senators Strom Thurmond (R-SC) and Ernest Hollings (D-SC).

The legislation (H.R. 1562, Amended) would require a further decrease in the import levels of currently restricted textile and apparel products from twelve major foreign suppliers. The bill also would reduce future growth possibilities for all remaining suppliers. Overall, it would reduce total imports of apparel by 7 percent and total textile imports by 8 percent. In vetoing the legislation, Reagan correctly labeled it pure protectionism.

If the veto is overridden, the measure will reduce textile and apparel imports substantially. So doing, it will protect some U.S. jobs in the textile industry. The cost of this to American consumers, however, will be enormous. According to the International Business and Economic Research Corporation (IBERC), the textile and apparel-related provisions of the bill will protect 20,627 textile and apparel jobs. But by raising textile and apparel product prices, the bill will eliminate 20,373 jobs in American retailing. The net number of U.S. jobs saved thus is only 254, and this comes at a cost to consumers of $1.053 billion--a staggering $4 million-for each net job saved. Moreover, if foreign countries retaliate, as seems likely, the legislation could result in heavy losses of American jobs in the West and Southwest, where there are disproportionately more export-oriented jobs than in other regions of the U.S. If this happened, then the bill not only would be costly but would lead to a net loss of jobs for Americans.

The historical record of protectionism is clear. It is.not the way to deal with foreign competition. It protects jobs in one part of American industry at the cost of jobs elsewhere while forcing all Americans to pay higher prices for goods. This makes for a less efficient American economy that is less able to compete internationally.

THE "CONSUMER COST" OF EXISTING TEXTILE PROTECTIONISM

Any form of import protection, be it tariffs or quotas, has two immediate impacts: the volume of imports falls and the price of imports rises. Consumers respond by switching some or all of their purchases to the domestic product. This increase in demand for the domestic product, coupled with reduced competition from imports, permits domestic producers to raise their prices. The "consumer cost" of this switching is the extra amount of income that consumers are f orced to pay f or a smaller range of goods. 1 it is in essence a "tax" on the consumer's income, the proceeds of which go in part to domestic producers and workers, to the U.S. government (in the case of a tariff), or to the foreign suppliers (in the case of most quotas). A part of the consumer cost goes to no one. So-called deadweight loss, it occurs simply because resources are wasted an the production of a good in the U.S. that could be more efficiently produced abroad.

The U.S. currently protects its textile and apparel industries with both quotas and tariffs. Quota limits an the imports of most major suppliers have been in effect since 1961, in one form or another, thanks to the Long-Term Arrangement Regarding International Trade in Cotton Textiles and its successor, the Multilateral Fiber Agreement (MFA). The MFA is the main international agreement governing textile and apparel trade.

MFA quotas are established by bilateral agreements negotiated every three to five years with major suppliers. These agreements set annual limits for specific textile and apparel products. Each agreement typically provides for annual growth in these limits.

Washington may allow the supplying country to carry forward into the next year a portion of unused quota from the previous year, and to "borrow" a part of next year's quota for the current year. Countries may also switch (or "swing") a certain share of one product category's quota amount to another category. In 1984' two-thirds of U.S. textile and apparel @mports' were covered.by some t@pe of quantitative restriction.

in addition to the MPA quotas, the U.S. textile and apparel industries are protected by tariffs levied on all imports from all suppliers except Israel, whether or not they are also restrained by a quota. The discussion of protectionism in the textile and apparel industries often ignores these substantial tariffs, which are five times higher than average tariffs on all other manufactured goods.

A number of studies quantify the costs of textile and apparel tariff and quota protection; Table 1 summarizes some of the results. Estimates of the total cost (at wholesale prices) of tariffs and quotas on textile and apparel imports run as high as $27 billion a year (in 1984 dollars). The cost to the consumer at retail could be as high as $54 billion a year. Although they use a variety of methodologies, assumptions, and data bases, these studies all arrive at the same general conclusion: the costs of3textile and apparel protection far exceed the supposed benefits.

THE'COSTS OF THE PROPOSED PROTECTIONISM

Despite existing protection, Congress-enacted more in passing the Textile and Apparel Trade Enforcement Act of 1985 (H.R. 1562 and S. 680). And if each House of Congress can mount the two-thirds majority needed to override the Reagan veto, the new legislation will have serious repercussions. For one thing, it will impose quotas unilaterally, which will violate U.S. international obligations under the General Agreement on Tariffs and Trade (GATT) and the MFA. For another, the legislation will invite foreign retaliation against U.S.

TABLE 1 SUMMARY OF ANNUAL CONSUMER COST ESTIMATES OF' EXISTING TEXTILE AND APPAREL IMPORT PROTECTION 4- (in 1984 dollars)

Total Cost to Source Instrument Product the Consumer Hufbauer, et al. (1986)' MFA Quotas Textiles $9.00 billion Apparel $18.00 billion Munger (1983)6 Tariffs Textiles $3.55 billion Tariffs Apparel $13.23 billion Wolf (1982)7 MFA Quotas Apparel $3.57 billion Textiles Morkre Tarr (1980)8 Tariffs Apparel $1.82 billion Xeesing Wolf (1980) 9 Tariffs Apparel $11.29 billion COWPS (1978) to Tariffs Apparel $3.78 billion Mintz (1973)" Quotas Textiles $4.09 billion exports, jeopardizing thousands of American export jobs. And by limiting the access of developing countries to the U.S. market, the legislation will hold back their growth and foreign exchange earnings, both of'which they need to purchase U.S. goods and to pay their debts to U.S. banks.

Proponents of protectionism blame increases in imports for job losses as a justification for increasing protectionist barriers to textile and apparel imports. It is argued, for example, that doubling textile and apparel imports between 1980 and 1984 was responsible for the loss of some 300,000'American textile industry jobs during that period. This argument, however, is refuted by the facts. As Table 2 shows, virtually all of the job losses experienced by the industry occurred prior to 1982. Most of the import growth occurred after 1982--when domestic employment actually increased.

TABLE 2

Annual Rate Percent Change of Import Growth in Industry Employment

1980-1982 10.2% - 200.7% 1982-1984 30.9% + 32.1%

Source: U.S. Department of Commerce and Department of Labor.

H.R. 1562 has been portrayed as a means to save thousands of American jobs. The bill's chief sponsor, Congressman Ed Jenkins, maintains that, "the failure to pass our legislation would result In unemployment for not only 947,000 Americans in the textile and apparel industries, but 943,0000 others, in other industries.... 11 The bill's negative job impact has been ignored. Yet the International Business and Economic Research Corporation estimates that, while the final version of H.R. 1562, as amended by the Senate, would retain 20,627 jobs in the textile and apparel manufacturing industries, it would cost 20,373 retail jobs related to textile and apparel 12 consumption. The net gain thus would be just under 254 jobs (see Table 3).

12. Jobs would be lost in the retail sector because the combination of higher prices and reduced availability of textiles and apparel would reduce consumer purchases, and retailers would require fewer sales personnel.

TABLE 3 SUMMARY OF IBERC ESTIMATES OF THE COSTS AND BENEFITS OF THE LEGISLATION

Textiles and Apparel

Total Annual Cost (at Wholesale) $1 billion Manufacturing Jobs Supported +20,627 Retail Jobs Lost -20,373 Net Jobs Supported 254 Apparel Import Cutback 7% Textile Import Cutback at

Footwear (for First 4 Years)

Total Cost (at Wholesale) $5 billion Manufacturing Jobs Supported +34,728 Retail Jobs Lost not calculated. Import Cutback 36%

Source: International Business and Economic Research Corporation.

The cost per net textile or apparel-related job saved amounts to $4,145,669. In effect, consumers would have been assessed a hidden "tax" of $4,145,669 for every textile and apparel manufacturing job allegedly saved by the legislation. Since the average annual salary of a textile worker in 1984 was about $13,000, and that of an apparel worker about $10,000, it would be far cheaper for consumers to be taxed outright to pay each of those 10,000 workers' salaries (and benefits) directly for as long as consumers wished to keep :them employed. Calculations based on the original House version of H.R. 1562" indicate that the job gains and losses would not be distributed evenly across the U.S. IBERC's state-by-state analysis of the distribution of employment benefits and losses reveals that at leas4%-. 35 states would suffer net job losses if the legislation were eventually enacted. While major textile-producing states of North Carolina, South Carolina, and Georgia would be the major,beneficiaries of additional quotas, numerous midwestern and southwestern states, as well as California, would be heavy net losers (see Table 4).

TABLE 4

ESrD%TED DISTRIBUI!ICN OF MANUACrEPMG JCBS SEJPPCRI!ED AND RE7!AM JOBS L40ST BY H.R. 1562 BY REGION AND STATE

(Number of Jobs)

Manuf . Retail Manuf . Retail Jobs Jobs Jobs jobs Supported Lost Supported Lost South 40,067 14v126 Midwest 4,043 15,555 XrWaina -4 r 1-15 816 12 784 -To, 0-3 9 Delaware 62 195 Indiana 321 1,,449 Dist. o f (bl. a 200 Iowa 143 743 Florida 171 3F321 Kansas 147 647 Georgia .7,020 1F576 Michigan 526 2,160 Kentucky 987 818 Minnesota 259 11292 Maryland 245 1j,316 Missouri 783 11'315 Mississippi lv350 509 Nebraska 88 429 North Carolina 12,,982 1,,576 North Dakota 0 177 South Carolina 7F214 786 Ohio 656 2v790 Tennessee 3r002 1#138 South Dakota 0 181 Virginia 2j,775 10,495 Asconsin 336 1..333 Imbst, Virginia 144 380 Northeast -19,140 12,126 Mountains 433 3,454 Connecticut 751 N.A. Arizona 0 859 Maine 615 308 Colorado 112 983 Massachusetts 2F250 10,909 Idaho 0 228 New Sampshire 76 325 Montana 0 222 New Jersey 2,403 2FO78 Nevada 0 268 New York. 7F132 4f153 New Mexico 76 360 Pennsylvania 5,146 2,949 Utah 245 400 Rhode Island 681 261 Wyoming 0 134 Vermont 86 143 Southwest 3,622 6,861 West 4,133 9,356 Arkansas 545 499 7Mka 0 136 Louisiana 345 lo,078 California 3,972 7,033 Ok1ahcma 294 827 Hawaii 0 345 Tlexas 2,438 4,457 Oregon 161 709 Wishington 0 11133 Source: International Business & Econamic Research Corporation, revised,.derived from unpublished BES data.

A more detailed IBERC analysis of the impact of the House legislation on Texas shows that the small number of textile jobs supported would be outweighed vastly by job losses in manufacturing and agricultural export industries, including cotton farming, export and import related services, and retailing. Because of its strong export orientation, Texas would be hard hit by the loss of foreign exchange of overseas buyers. It would also bear heavy costs if protectionism led to retaliation. Some 91,300 jobs in Texas in 1981 depended on exports of chemicals, primary and fabricated metal products, and machinery. 14 In addition, Texas is one of the country's top five exporters of agricultural products and a major exporter of raw cotton, making it particularly susceptible to retaliation.

The final version of the legislation is not a significant improvement. The distribution of the job gains and losses would be similar to that shown in Table 4 for the original House bill. while incorporating changeg intended to reduce some foreign objections, the final legislation still would violate U.S. obligations under the GATT and the MFA; pose a serious threat to American exports because of foreign retaliation; and create a multibillion dollar burden for the American consumer. Because the overall rollback provisions of the final bill were slightly less restrictive than the original, the total annual cost to the textile and apparel consumer would be somewhat reduced.

The final bill, however, also includes quotas to restrict imports of footwear to 60 percent of the U.S. market. The cost of this to the t.S. economy is estimated by IBERC at over $5 billion (at wholesale) over the first four years of the'quotas. Over this same period, 34,728 jobs would be supported, at an average annual cost of $36,088 per job.

Table 5 summarizes the costs associated with existing textile and apparel protection as well as the additional protection provided in the House and Senate legislation. Every American would be "taxed" annually the equivalent of $20 to protect 254 textile and apparel jobs. For large families, therefore, the hidden costs of protection could be very high. These "per American" costs, moreover, are averages, and do not reflect the fact that low-income families spend a larger proportion of their income than others on clothing and footwear. For these consumers, the annual "tax" would be much higher than that shown.

TABLE 5 TOTAL ANNUAL RETAIL COST TO CONSUMER OF EXISTING AND PROPOSED TEXTILE AND APPAREL PROTECTION

Existing Additional Tariff and Cost Based on Quota Senate Product Protection Bill

Textiles & 16 Apparel ($billions) $87.6" $2.2 Footwear ($billions) 0 2.5 17

Cost of protection per American (1984 dollars) $370 $20

CONCLUSION

The American consumer already pays a significant amount to protect the U.S. textile and apparel industry from imports, and it hardly seems fair to increase that burden. To make matters worse, estimates of the costs and benefits show that such protection is not an effective way to save American jobs overall. To be sure, some U.S. textile and apparel manufacturing jobs would be saved. But as many, and probably more, jobs would be lost in retailing, agriculture, and other export-related industries. In effect, the bill says that a ..textile or apparel worker's job is more "valuable" than-that of a retail or farm worker and is, therefore, more "worth" saving.

Jobs for Americans can be saved. But it takes improved productivity and industry adjustment to the changing conditions of international competition in the textile and apparel industries, not quotas and tariffs. Lower taxes and policies creating a climate conducive to investment and risk taking help create jobs. But increasing protection merely forestalls necessary adjustment to market changes. And protection hinders the restructuring al U.-S. textile and apparel industries into an internationally competitive sector of the U.S. economy.

Prepared for The Heritage Foundation by Laura Megna Baughman Senior Associate International Business and Economic Research Corp., Washington, D.C.