Sharp increases in U.S. imports of clothes from China this year have caused domestic manufacturers to demand that limits be placed on imports. While the ending of the worldwide Multifiber Arrangement (MFA) is blamed for the current increase in imports, the textiles and clothing industries have been restructuring for decades based on economic efficiencies. U.S. cotton producers are part of an international industry that has continuously evolved over the last 70 years and will continue to evolve without the MFA.
The economic forces behind the current market changes are explored in a recent analysis “The Forces Shaping World Cotton Consumption After the Multifiber Arrangement” by Stephen MacDonald and Thomas Vollrath of the Economic Research Service of USDA.
Coordinated government restrictions on textile and clothing trade began 70 years ago when Japan became the world’s largest exporter, and the United States and much of Europe responded with import restrictions to protect domestic industries. By the early 1960s, the clothing industries in Hong Kong, Pakistan and India became major producers and their access to U.S. and European markets was restricted. By the time the MFA was completed in 1974 restrictions were in place on 30 countries. That number grew to 40 countries by 1994 when the Uruguay Round Agreement under the General Agreement on Tariffs and Trade (GATT) included the Agreement on Textiles and Clothing that provided a ten-year transition away from import quotas.
According to MacDonald and Vollrath, a range of studies show that the quotas added 5-10 percent to clothing prices paid by U.S. consumers. The quotas were a “right” to export to the U.S. and EU and had economic value that economists measured as an “export tax equivalent” or ETE. Some estimates of ETEs for clothing were as high as 40 percent in 1992, but were in the 10-20 percent range in 2002.
The quotas caused production to shift to other countries, which then had quotas applied and caused still other countries to become producers. The authors note that the MFA led to increased clothing exports for some countries. They cite Bangladesh where the ETE was 22 percent in 2002, but still has a larger industry than expected without the MFA.
Tariff and non-tariff barriers also restrict trade flows in textiles and clothing. Applied tariffs range from 10-20 percent for textiles and 20-40 percent for clothing compared to tariffs on manufactured products that average about 4 percent globally. Non-tariff barriers include customs procedures, labeling requirements and outright bans on imports. Tariffs were lowed as part of the Uruguay Round Agreement, but tariff and non-tariff barriers were not affected by the ending of the MFA on December 31 of last year.
MacDonald and Vollrath note that worldwide consumption of cotton has accelerated in recent years with favorable trends in income, fiber prices and trade. They explained, “After growing 0.3 percent in the 1990s, cotton consumption grew at an estimated 3 percent annually during the first five years of the 21st century.” Clothing consumption is very responsive to short- run changes in income, particularly in developing countries. In the long run, clothing consumption grows more slowly than income.
Declining prices have helped to drive increased consumption. The authors note that inflation-adjusted clothing prices during 1999-2003 fell by 7 percent on average for a group of ten developed and developing countries. Bilateral trade agreements have allowed the U.S. and the EU to increase imports from countries with lower production costs. Per unit sea freight rates had declined almost 70 percent from the mid-1980s to the end of the 1990s.
These economic forces have resulted in increased trade. For the U.S. and Japan, imports of cotton clothing have increased from 30 percent of the domestic market in 1992, to 45 percent in 1996 and over 60 percent in 2000. The respective share numbers for the EU were 71 percent, 75 percent and 84 percent. Unleashing market forces at a time of rising consumer incomes has accelerated changes that have been in the market for decades.
MacDonald and Vollrath expect economic forces to continue to realign textile and clothing production and trade. Textile production is highly mechanized with high capital costs and will go to where capital is most available. Clothing production continues to be labor intensive. The authors explain, “For this reason, clothing is a classic growth sector especially suitable for low-income countries having a relative abundance of low-cost labor.” What was true in the 1930s remains true in 2005.
Low labor costs are not the only factor in choosing a supplier of clothing. Shipping times continue to be important. Products from Mexico and Central America can get to the U.S. in 1-6 days compared to 11-15 days from southern China and 25 days from India. Total lead time from placing the order to receiving the product is also important. Chinese suppliers take 60 days, Indian suppliers 90 to 120 days and Bangladeshi suppliers 120 to 150 days. The authors noted that the Spanish retailer Zara is integrated within Europe and can go from design to retail delivery in as little as three weeks.
MacDonald and Vollrath do not expect U.S. domestic cotton use to decline precipitously in 2005 because the U.S. industry has made major changes over the last five years. Domestic use of cotton has declined from 10.2 million bales in 1999 to an expected 6.3 million bales for 2005, while exports have increased from 6.8 million bales to an expected 13.2 million bales. With production of cotton textiles and clothing increasing outside the U.S. and future consumer demand likely to grow more rapidly in developing countries, U.S. cotton production and income will be increasing driven by market forces that have been made freer by the ending of the MFA.