Commentary

The Emperor’s Same Old Clothes

This article originally appeared in the Asian Wall Street Journal on December 23, 2004.

On the Web site of the U.S. Association of Importers of Textile and Apparel is a countdown clock marking the years, months, days, hours, minutes and even seconds until the expiration of quotas that have governed most international trade in textiles and clothing for 30 years. The clock ticks down, second-by-second, agonizingly slowly, like time for a prisoner scribing chalk marks on the wall. What began in the 1950’s as a small-scale effort by the U.S. and Britain to impose restrictions on imports from Japan, Hong Kong, India and Pakistan, ballooned into a mammoth web of restrictions known as the Multifiber Arrangement in 1974. The MFA instituted rich country quotas on imports from virtually all developing countries, an injustice that has distorted production, forced importers and retailers into sub optimal supply arrangements, and taxed unwitting consumers.

Then, during the Uruguay Round of multilateral trade talks (1986-94), the developing countries scored a negotiating victory and prevailed upon the United States, Europe, and Canada to scrap the unfair quota system. Thus, come January 1, the final stage of a four-step quota phase-out, agreed to in 1994 and adopted the following year as the World Trade Organization Agreement on Textiles and Clothing, will be complete.

But the U.S. textile industry wants to put time back on the clock. It is working relentlessly to undermine this historic liberalization of trade. Having failed to convince WTO members to defer final implementation of the ATC by extending quotas generally, the industry has turned to the so-called China Textile Safeguard provision. Under a bilateral agreement that paved the way for China’s accession into the World Trade Organization, America can re-impose quotas on Chinese textile and apparel products if a surge in imports causes disruption to the U.S. market. If those conditions are met, import growth can be capped at 7.5% of the previous year’s volume.

Last year the industry was successful in obtaining limits on dressing gowns, brassieres, and knit fabric, all products which saw a surge in imports from China after their quotas were abolished in 2002, under the third stage of the quota phase-out.

Then, responding to pressure from the textile lobby in the run up to November’s U.S. presidential election, Grant Aldonas, a U.S. undersecretary of commerce, moved the goalposts even closer. In a meeting with U.S. reporters on Sept. 16, Mr. Aldonas made clear that quotas could be re-imposed even without a surge in imports — simply the threat of market disruption would be enough. The industry responded by filing nine “threat-based” petitions calling for quotas on products like trousers, shirts, and underwear. All these are still subject to quotas, at least until Jan. 1, thus imports cannot possible have surged.

Now, the U.S. Government faces a huge dilemma. How it proceeds will have far-reaching implications for broader U.S.-China trade relations, and will affect on-going trade negotiations, most notably the limping Doha Round of multilateral trade talks.

Having won the election by significant margins in textile states, will U.S. President George W. Bush feel obliged to grant the industry’s wishes and impose restraints? Such a course could inspire a WTO challenge from China, on the grounds that the accession agreement does not permit threat-based sanctions. It would also undermine the Bush administration’s capacity to compel China to better honor its own WTO commitments, particularly if the United States is found to have violated the terms of the agreement by a WTO dispute settlement panel.

Thus far, the administration has managed the U.S.-China trade relationship with skill, recognizing the bigger stakes and seeking to avoid unnecessary provocation. It has refrained from pursuing every whimsical protectionist wish to thwart Chinese imports, so it could save its capital for legitimate issues, like compelling China to improve its enforcement of intellectual-property rights and to open its services markets more effectively to U.S. providers.

Going forward with textile sanctions would undermine the accumulated moral and political capital of the administration to push these issues, which matter to a large cross-section of U.S. economic interests. It would also embolden other American opponents of trade liberalization, like steel manufacturers, sugar producers and other agricultural interests, whom the administration must overcome to win passage of new agreements.

Of course, other countries are quietly hoping the administration drops the hammer on China, since restricting Chinese exports could translate into greater U.S. sales for their own exporters. But that, too, is shortsighted. These countries will need the administration’s help to ensure the textile industry does not launch a slew of frivolous antidumping and antisubsidy cases against their exporters. Signs that the administration is accommodating any kind of new textile protection should be unwelcome to them.

Certainly, China will be an important supplier — likely the largest — after the primary quota system is dismantled. China is aware of the fear of its dominance, and just recently announced plans to tax its own exports. It is handicapping itself in hopes that the gesture may deter further restraints from the United States and others.

Yet, rejecting the petitions carries its own set of risks for the administration. Feeling betrayed, textile producers could intensify lobbying efforts to defeat the U.S.-Central American Free Trade Agreement, an important agreement which is expected to come before the U.S. Congress for a vote by the middle of next year. The last close trade vote in the U.S. Congress came in 2001, when a one-vote margin of difference gave President Bush “trade promotion authority,” granting the president power to negotiate trade deals with foreign governments.

The decisive eleventh hour votes came from textile-state representatives, who withheld support until the president promised to change certain textile trade rules, which benefited the U.S. industry. Given this recent precedent, it is entirely plausible that the administration’s acceptance of the threat-based petitions was a quid pro quo for textile district votes on the CAFTA.

But the administration has to find the wherewithal to put its foot down. At some point, the tactic of buying off opposition to trade agreements with trade restrictions — particularly those that violate previous agreements — makes a mockery of the objective of freer trade. Since the administration will have similar challenges from trade opponents in other and prospective trade negotiations, it should be equal and firm with all by clearly stating no exceptions.

Just a couple of weeks ago, a new variable entered the equation, which could make it easier for the administration to do the right thing. The USA-ITA — the association with the countdown clock — filed a lawsuit with the U.S. Court of International Trade, which has jurisdiction over U.S. trade decisions should a private party contest them. Among other things, the suit seeks an injunction to prevent the government going forward with the petitions. The essence of the suit is that the government violated the rules by accepting threat-based petitions.

The suit gives the Bush administration occasion to rethink its options and consider the broader economic stakes. It also offers President Bush political cover to make the right choice and reject new quotas. For reasons of principle, economic fairness, and the longer-term viability of trade liberalization, the administration must reject these threat-based quotas. The U.S. economic interest is severely undermined by catering to the parochial interests of an industry that has been feeding from the trough for too long.

One of the first acts of the first congress of the United States was to impose tariffs on imported gloves, hats and clothing. That was in 1789, when the United States was an agrarian economy and textile and clothing production represented the future. That 18th century precedent has proven a difficult habit to break. Today, the average U.S. tariff on clothing and shoes is 11%, almost six times higher than the average tariff on everything else. America’s status as an economic superpower does not hinge on its ability to produce socks. Its 21st century trade policy should reflect that fact.