Global industrial systems — a case study of the clothing industry

0016-7185/78/0101-0035

Geoforum, Vol. 9, pp. 35-47, 1978. 0 Pergamon Press Limited. Printed in Great Britain.

#02.00/O

Global Industrial Systems a Case Study of the Clothing Industry GUY P. F. STEED,*

Ottawa,

Canada

Recent rapid changes in comparative advantage have led to serious stresses through market disruption of the industries of many developed countries. The paper views the global industrial geography of the clothing industries as a form of adaptive, purposeful system in which governments respond to stress through the negotiation of “voluntary” export restraints, reversion to “escape clauses” or safeguards offering protection, or the application of adjustment assistance. It contrasts the stresses and mechanisms of adjustment of the Netherlands, West Germany, Sweden, the United States and Japan. Abstract:

Serious stresses have arisen in response to the striking shifts which have occurred in the global location and apparent comparative advantage of many industries during the past two decades. Both the mechanisms of adjustment and processes of international specialization have changed significantly. Global production, however, has not advanced as rapidly as trade, whose vast expansion has been stimulated by transport and communication advances, promoted through a proliferating variety of governmental policies and programmes, and facilitated by progressive trade liberalization through tariff reductions. The rapidly growing integration of the global economy has raised a number of major tensions between and within nations, arising especially from problems inherent in existing mechanisms of adjustment to the quickening pace of change. Most governments have reacted to particular pressures as they have arisen, providing assistance to individual industries in a fragmented or uncoordinated manner, often with the apparent impact of significant private and social costs to their community. Moreover, in some cases, assistance aimed to ease the phasing-out of an industry has appeared instead to have been used in perverse attempts to increase productivity and restore competitiveness (OHIAN, 1975). The growing accumulation of short* Department of Geography and Regional Planning, University of Ottawa, Ottawa, KlN 6N.5 Canada.

term ad hoc responses may seem increasingly inconsistent with any longer-term national objectives to improve efficiency in resource use. This has led to deepening interest both in the provision of a more acceptable degree of coherence in national policies towards industry and the development by governments of more conscious and systematic efforts to influence the evolution of their industrial structures. The capacity to achieve a variety of domestic goals through the use of industrial policies has become increasingly affected, and some times heavily constrained, by the obvious vigour of international competition. The prevailing conditions have generated intense pressures to improve adjustment mechanisms designed to enable countries to adapt smoothly at the industry level to international competition, especially in situations where industrial environments have become intolerably turbulent. My concern in this paper is with an extreme situation, the particular conditions of the clothing industries. Their fast-changing international specialization and competitiveness have probably created more anguish and led to greater contention between, as well as controversy within nations, than almost any other manufacturing industries over recent years. There are reasons to believe that the coping strategies developed for these industries might provide precedents for other industries subsequently confronted by similar stresses. The clothing industries of Developed

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Market Economy Countries (DMECs) have proved particularly susceptible to competition from producers in the State-Trading Countries (STCs) of Eastern Europe and the Less Developed Countries (LDCs) in recent decades. The provision of protection and supposedly temporary adjustment assistance by the governments of many DMECs has been strongly opposed by the proponents of liberal trade, leading to lively debate. The arguments of free traders and the spokesmen for various consumer interest groups in DMECs suggest that the clothing industries in DMECs are, to use a term WO LPERT (1970) borrowed from geomorphology, “economic erratics,” -- that is artifacts of maladaptive behaviour under extreme situations, the end products of policy compromise leading to solutions that are neither the most efficient nor perhaps even satisfactory. However, the traditional liberal trade model does not correspond to the reality of current trade relations. Among other things, it assumes only slow changes in comparative advantages, and thus ignores the major problems of firm and labour adjustment. Without the measures implemented by most DMECs there would almost certainly have been a higher degree of social disruption in many of those countries and an even more rapid redistribution of production from DMECs than has already occurred. The redeployment of productive resources, part of the international adjustment mechanism, has proved especially difficult in these industries, partly because of the limited machinery for trade adjustment embodied in the General Agreement on Trade and Tariffs (GATT). The interventions of DMEC governments are thus significant elements in the fight to influence the international distribution of these industries. The purpose of this paper is to provide some insight into the global geography, particularly the extent of market orientation among DMECs, of the clothing industries: first by outlining and indicating the relevance of some systems’ models recently introduced in the policy sciences; and second by contrasting the situations, stresses and responses of several DMECs. Some indication will be provided concerning the processes of international production transfer and mechanisms of industrial adjustment, and an attempt will be made with the scanty evidence available to evaluate

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the trade approaches according to their emphasis on such economic criteria as efficiency in resource allocation, income distribution and full employment, or political criteria such as security and domestic political effects. The Clothing Industry It will be useful to start by viewing the clothing industry of each country as an adaptive purposeful system. As an open system, the clothing system functions within, and interacts with, its environment, which comprises “the set of all objects, a change in whose attributes affects the system and also those objects whose attributes are changed by the behaviour of the system” (HALL and FAGEN, 1956). The system is adaptive in the sense that it responds to change to attain goals. It is also actively adaptive in that it aspires actively to influence its environment to help determine the kinds of responses that will subsequently be adaptive - as for example through lobbying and pressure groups(EM E RY and TRIST, 1973). Thus both changes and responses may be internal or external, that is within the system or in its environment. From a policy-making viewpoint at the national level, the adaptive system is also purposeful in that the government, within various constraints, can choose the system’s goals. LEWIN and SHAKUN (1976) have described such systems as containing both feedback and feedforward controls. The feedback controls involve three features: (1) the prediction of decision outcomes in terms of performance measures related to goals; (2) gathering of information on actual performance; and (3) comparison of actual with predicted performance, leading to corrective action where the gap between outcome and intent is unacceptably large. A model of such a system (Figure l), thus contains five main elements: the external stresses or disturbances, a set of outcomes, a group of goal variables, a controller (government policy makers) and a regulator (administrators). The regulator operates through error with error being the difference control, between specified and actual performance. Such feedback control contrasts with feedforward control which links knowledge or expectations of disturbance directly to the

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Controller ante Actual

I

Figure 1. An Adaptive and SH AKUN , 1976).

performance

Purposeful

Systern(L~~~~

regulator, rather than awaiting response until after the disturbance has worked its way through outcomes and goal variables back to the regulator. In the context of global industrial geography, such adaptive, purposeful systems may be coupled to form a collective suprasystem. The couplings may run perhaps via the information channels between the regulator of one system and the set of outcomes in another, as in the imposition by Canada of high tariffs on imported clothing from other DMECs, or even directly between the regulators, as in Canada’s negotiation of Voluntary Export Restraints (VERs) on shirts produced in Hong Kong. The goals may be collective ones, as agreed for instance through GATT, or the 1962 Long Term Arrangement on Cotton Textiles (LTA), or they may reflect the overriding goals of one partner or group of countries, as in the unilateral imposition of global quotas by Canada in 1976 on clothing imports, with the intent of rolling imports back to 1975 levels. Within a given country, the contrast between actual and specified performance may reflect many factors, not the least of them probably being the gap between legislation and execution. In Canada’s case, for instance, there has been a major distinction between the controller’s ambitions, as established in the Textile and Clothing Policy of 1970, and the regulator’s achievements over successive years. The policy aimed “to provide a sense of direction, a framework and conditions within which the textile and ~~oth~ng ind~str~es cayl plan, invest and develop with a greater degree of confidence” and “to create conditions

in which the Canadian textile and clothing industries con time to move progressively towards viable lines of production on an increasingly competitive basis internationally.” In 1977, it is apparent that the aims are nowhere near to achievement, in large measure because the regulator lacked suitable tools to implement the policy, and also because other elements of policy tended to work at cross-purposes with the Textile and Clothing Policy (PESTIEAU, 1976). By the end of 1976, when the Canadian clothing industries managed to supply only 55 per cent of their domestic market, a decline from 73 per cent in 1971, the gove~ment finally appreciated its feedback control mechanisms were not suitable to the task established. One procedure it has recently instigated is a feedforward mechanism or surveillance procedure which requires importers to register their orders. By such a monitoring device the government hopes to be able to regulate imports before the damage or injury has occurred to domestic firms, rather than attempt to undertake patchwork repairs afterwards. One of the morals of this Canadian example is that if we are to understand the global geography of the clothing, or for that matter any other, industries, we must give due emphasis to the implementation process as a significant intermediary between outcomes and policies. Similar outcomes may result from contrasting policies with similar implementation processes, just as different outcomes may reflect similar policies but contrasting implementation processes. Thus the contrast between the Canadian clothing firms holding 55 per cent of their domestic market and the American ones with over 80 per cent of theirs, lies less in policy distinctions than in the manner of implementation. Both countries have sought to protect their producers, but Canada has relied upon product by product, short-term safeguard mechanisms, drawing on article 3 of the Multifibre Agreement (MFA), the successor to the LTA, whereas the United States has used article 4 to negotiate longer term, comprehensive restraint agreements with its major low cost suppliers. The outcome has been that the American clothing firms have greater protection and a lower degree of market uncertainty with respect to foreign competition, and have managed to retain control over a much higher proportion of their market.

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The extent to which the clothing industries are oriented to markets on a geographic basis thus reflects distinctions between countries in the policies established by their governments and also their choice of approach to ~m~~ern~nt~ng those poticies. fn the rest of this paper I shall focus primarily on the nature of policies and responses to the stresses of rising global competition.

ignoring thereby the bilateral pacts signed with Hong Kong and South Korea. In order to get around these sorts of difficulties, most DMECs seeking to safeguard their clothing industries have reverted either to what some argue are illegal VERs, or to disc~minatory quotas established under escape clauses of bilateral trade agreements and under articles 3 and 4 of the LTA or the subsequent MFA.

The recent thrust of external clothing competition, whether from LDCs or DMECs has varied in intensity and duration among DMECs. A wide range of reactions to the sudden external stresses of the past two decades are discernible. Some countries have largely eschewed intervention and opted for freer trade, others have made concerted efforts to provide continuing or even additional protection, and yet others have removed trade barriers with one group of countries while protecting themselves from the competition of third parties, Where competition has led to complaints by domestic clothing firms of injury or market disruption, whether through a sharp and substantial increase or potential increase af imports, the use of one or more of three possible options has usually been open to policy-makers to resolve the problem: the negotiation of VERs, reversion to “escape of adjustment clauses”, or the application assistance. The VER approach, deriving from the LTA, offers temporary protection. “Escape clauses” have a longer history, they are safeguards or provisions in international trade agreements which allow a participating country the right in particular circumstances to derogate from the strict obfigations they incur under the agreement (ROBERTSON, 1972). There are, for instance, at least nine safeguard clauses in the GATT. Article 19 in particular allows countries to impose quantitative restrictions where imports of a particular commodity cause or threaten to cause serious injury to domestic firms. Use of the article generally, however, has been shunned by governments because it is

Adjustment assistance, by contrast, tends to be designed to facilitate the adaptation of the domestic industry to the new international providing support for those competition, firms which show a capacity to become viable, while assisting the transfer of resources from marginal or non-viabie firms to other activities. The case for adjustment assistance has been argued, as O’CLEIREACAIN (1972) has succinctly noted, on the grounds of efficiency, equity and practicality. “On e,f+L+3zcy grounds, it would lead to greater ~e.~~bii~ty in the a~~ocat~~F~of resources. On equity gro~inds, the ~~~~fare gain to society as a whole resulting from the further trade would not be obtained at the expense of injury to the purticular OFZ producers. group of (inefficient) practical grotmds, it is argued that adjustmen ~s~i~~~~~~~tvorltd weaken the protect~o~l~sttrend ~~~~~i~~ has begun to appear as increases in imports have threatened domestic producers. The temporary nature of assistance programmes is stressed bq* those who see them as an improvement on protective r~~easi~res, such as quotas, which daterprove d~~~~~~~~t to remove. ”

“too exacting in that the ctxcntry invoking it risks retardation (or risks paying too match) for tak~~~gemergency action, and at the same time, it is too lenient in allowing emergency protection to become permanent” (TUMLIR, 1972). Canada actually invoked Article 19 in 1976,

Consider now the main directions and forms of structural and trade adjustment, certain features of adjustment processes, and varying approaches to adjustment assistance in West Germany, the Netherlands, Sweden, the United States and Japan. Note also the distinct contrasts in the conflicting interests at stake within the countries. During the 1950s the West German economy was heavily preoccupied with the creation of employment opportunities for several milhon refugees. The clothing industries, as many operated behind high protective others, tariffs By 1960, however, full employment had been achieved and in the subsequent decade, with a very buoyant economy sup-

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ported by undervaluation of the German currency, the clothing industries were confronted with rapidly rising wages and increasing difficulty in finding workers. Demand for clothing grew at about the same rate as the growth of demand for all manufactured products while employment initially grew even more rapidly, though it decreased a little towards the end of the sixties. A key shift was the sudden drop in the later sixties in the propensity to invest in the clothing industries within West Germany (NEU, 1973). Tariffs on imported clothing from other members of the EEC were removed but the nominal and by the mid-sixties, effective tariffs against non-EEC members increased slightly. Nevertheless, actually there was a quickening pace of clothing imports, particularly from non-EEC members, which led to the negotiation of bilateral quotas based on self-restraining agreements under the LTA with several Asian countries, as well as restrictive agreements with most of the East European state-trading countries. The need for adjustment by West German clothing producers was initially reduced by their capacity to obtain foreign workers, who came to constitute nearly one fifth of domestic clothing operatives by 1972. Several producers chose, however, to direct their investment abroad. In the early years of the Common Market they had invested heavily in Italy. Subsequently they turned to Eastern Europe, Hong Kong, Spain, Portugal, Ireland, Austria and South Korea. It has been estimated that as much as40 per cent of West German clothing imports by the early seventies constituted intra-firm transactions. Consider for a moment the role of the Eastern European countries, including Yugolsavia, which have ventured significantly into the world trade in clothing in recent years, with major markets in West Germany and the U.S.S.R. Whether these countries really have a comparative advantage in the production of clothing is not readily assessed because in such socialisttype economies prices bear no necessary relationship to production costs and exports are largely dete~ined by import “needs” (RANSOM, 1973). As prices do not reflect resource use, it is impossible to determine where comparative advantage lies and hence the extent to which trade patterns are in some sense “fair” or deviate from some optimum.

The key element in the East European exports to Western Europe has been the direct investment by West German manufacturers in clothing production in Eastern Europe, supported as part of their government’s “Ostpolitik” policy, aimed to reduce political tensions in the area. The exports are often made with the use of West German supervisory staffs and to West German design and technical specifications. They are estimated to have involved employment of 6,500-m 8,700 people by 1972 {CLOTTING ECONOMIC DEVELOPMENT COMMITTEE, 1974a). It is not surprising that in such circumstances during the sixties not all West German producers were ardent advocates of protection. The manufacturers had, moreover, managed to make an a~angement with the government whereby one third of other low-priced clothing imports are channelled through themselves, so they may benefit from such trade (CLOTHING COMMITTEE,

ECONOMIC

DEVELOPMENT

197413). Furthermore, the seeming demise of the domestic manufacturers is not well reflected by import penetration figures when a significant proportion of West Germany’s imports, particularly from Eastern Europe, are thought to be re-exported to the Netherlands, some with a small amount of additional manufacturing. This inflates the value of German gross output and helps to account, at least in part, for the fact that one third of Dutch clothing imports by 1972/73, surprisingly a higher proportion than five years earlier, came from West Germany. The major retailers and mail order houses in West Germany have also contributed to transferring production abroad, seeking out foreign producers and playing a role similar to their American counterparts in providing the key marketing links for foreign subcontractors. One Hamburg retail group, for example, has developed close ties with about 20 Singapore manufacturers. Import competition in West Germany during the sixties and early seventies did not, therefore, create a crisis for the internal structural adjustment of the clothing industries. A combination of import safeguards, full employment and the relatively widespread geographic distribution of the West German clothing industries led to few problems of labour adjustment. On the contrary, inability to produce because of labour shortage left the

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way open for imports. Many firms also revealed the ability to benefit rapidly from foreign investment opportunities. Yet clothing import penetration, although it had proceeded much further in West Germany than in France or Italy, was still not as great as in several other leading DMECs (NEU, 1973). While German public opinion as well as public authorities largely maintained ideological objections to any interference with market forces, nevertheless trade protection was widely considered to be a policy instrument consistent with the principles of the market economy (FELS and GLISMANN, 1975). However, in 1971 the government expressed agreement with the need for increased integration of the developing countries into the international division of labour, and suggested the resulting structural changes must, where necessary, be supported by adequate measures of structural policy. Two years later it attempted to liberalize its clothing imports from Asia and Eastern Europe, but subsequently bowed to the opposition of manufacturer’s associations and trade unions when economic conditions deteriorated in 1974. The situation in the Netherlands was somewhat similar to that in West Germany during the early sixties, with growing home demand and increased employment in the clothing industries, accompanied by rising wage pressures, increasing scarcity of labour and growing imports. Between 1966 and 197 1, however, employment and the total number of firms in the Dutch clothing industries declined very rapidly, with a loss of more than one third in only five years. Dutch firms proved less successful than their German counterparts in attracting foreign workers and, confronted by deteriorating input conditions, greater foreign competition and increased buyer concentration, many simply sought liquidation while others merged to form larger ventures. Many surviving Dutch producers turned increasingly towards investing abroad, large numbers of them focussing initially on Belgium. More recently, Dutch producers have settled in the countries of North Africa, especially Tunisia. Some have operated by commissioning work by foreign producers, in similar fashion to the large Dutch chainstores and central buying organizations, which sub-contracted much

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work in Eastern Europe; others transferred their more staple production activities through direct foreign investment (EVERS, 1975). Firms making such investments in Tunisia have even received preferential treatment from the Dutch foreign aid programme, through contributions to the costs of training seamstresses. Dutch-owned factories operating in the low-cost countries are estimated to have produced in 1973 the equivalent of about 15 per cent of the value of Dutch clothing output (CLOTHING ECONOMIC DEVELOPMENT COMMITTEE, 1974b), while sub-contracting reportedly accounted for nearly half the growth in Dutch clothing imports during 1965-70 (EVERS et al., 1975). At least until the early seventies the Dutch government had in effect made no effort to halt this phasing out of its clothing industries. Indeed, EVERS (1975)argues that, “2s a result consistency adjustment in practice to transfer activities

of a relative lack of conceptual in Dutch policy in matters of assistance, this policy amounts to encouraging Dutch industry its labour-intensive productive to cheap-labour countries”. Several employers largely supported such an approach, abandoning production in Holland and transferring it abroad, while retaining the more creative and higher skilled commercial, marketing and administrative functions in Holland. Until 1971, when the internal adjustment problems of several industries became serious and a new industrial policy was introduced, Dutch policy had been largely non-interventionist. In the depressed conditions of 1974, the government became rather more concerned about the rapidly deteriorating state of its clothing industries and proved sympathetic to the pleas from employers and workers for measures of relief and adjustment assistance as well as temporary protection from East Asian, North Africa and East European imports. The new approach appears to be one of using protective measures to provide the necessary time to secure a more orderly retreat than occurred in the late sixties and actively assist the phasing out of companies that are no longer viable. A much greater degree of market intervention, with emphasis on active adjustment assistance programmes has characterized the

Swedish scene. The Swedish clothing industries have been confronted with somewhat similar stresses to those faced by their West German and Dutch counterparts, b.ut their instituti~~al ~n~iro~r~~~~t has been rather different, as has their form of response” A major limitstion to the competitiveness of Swedish clothing firms has been their need to pay the highest wages among European clothing firms to obtain labour. Nevertheless in Sweden, uniike the Netherla~ds~ the number of clothing firms increased by one fifth from 1960 to 1970. Imports, however, generated intense pressure on the Swedish clothing industries in the sixties and early seventies, and in &ombi~ation with improved productivity led to a one third decline in clothing ~mployrn~nt~ The main competition came from their European Free Trade Area partner Finland, who, with free access to the Swedish market, increased their clothing exports to Sweden by about one third each year on average. At the same time, the Swedish clothing market, on B per capita basis, was more heavily penetrated by imports from LDCs than the markets of all other DMECs. The emphasis of Swedish trade policy during the sixties was strongly upon reaping the advantages of efficient resource allocation through almost free access for imports. The protectionism followed by several other DMECs suggest, however, that the Swedish market was subjected to undue pressure from the new LDC suppliers. This argument was accepted by the government in 1967 when it negot.iated some bilateral agreements, including VERs, with the main Asian suppliers as well as Yugoslavia and Portugal, though not, notably, with its key competitor Finland. Retails of the restraining agreements have not been made public. It seems, however, the major approach to structural and trade adjustment in that decade was not specific to the clothing industries nor oriented to trade measures, but rather focussed upon a very active labour market policy (OHLIN, 19?f>. The major areas of government intervention involved substantial financial altocations to support maIlpower and regional programmes designed to facilitate occupational, industrial and regiotlal mobility of the population. The combination of these prog~~mmes did not, however, manage to avert the crisis situations building in several industries and communities by the late sixties.

In 1969 a report by a joint government, employer and trade union group argued the survival of the Swedish clothing industries would depend on their capacity to switch to more fashion sensitive lines or other very high quality products. It would also require production for export markets, given the small scale of domestic demand. Supporting this argument, the government launched various programmes to upgrade the necessary design, marketing, managerial and production skills, ease the accessibility to risk capital, promote exports and aid the restructuring of enterprises and rationalisation of the industries, Dominated as usual by small firms with limited management skills and financial resources, the industries lacked the capacity for such adaptation without government intervention. Same VERs were also negotiated as transitional measures to facilitate the rest~~tu~ng programme. The government expected to offer additional protection only should the programme falter and it felt the need to m~i~tain a minimal clothing sector, to avoid a situation where political crises could significantly affect external supplies. The Swedish trade unions strongly supported this programme of trade fiberalization and structural change, with the knowledge that those displaced from the clothing industries would receive immediate assistance, substantial adjustment and following

Yet the programme did falter and in 1974 Sweden became much more protectionist towards its clothing sector. It had found it was not readily able through its own producers even to clothe its armed forces, a situation somewhat undermining its neutral foreign policy (SENATE OF CANADA, February 2.5, 1976). In effect, therefore, Swedish policy regarding the clothing industries had led to an outcome not so very different from that in the Netherlands. Until very recently it had largely promoted the demise of those sections unable to compete with low wage competition, assisted firm and employee adjustment, and provided some apparently temporary

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protection to ease the pains arising from the process of adjustment. At the same time it had attempted to salvage those portions considered potentially viable, an approach which might restrict the capacity of other DMECs to compete in the Swedish market or even enable the high cost Swedish clothing firms to generate exports by emphasizing good design and high quality. The outcome of the Swedish policy proved to be a largely successful redistribution of resources, but the governments’ reappraisal of the situation indicated the need for the economic criteria of efficiency to be outweighed by the political one of security. By comparison with the initially liberal approaches of West Germany, the Netherlands and Sweden, the response of the United States to the thrust of recent global clothing competition may be characterized as one of protection and no adjustment assistance. The large United States’ market was the major focus of the LDC clothing challenge in the sixties. Much of that challenge was spurred by the competition of its own retail or wholesale institutions, and supported by some direct foreign investment by U.S. manufacturers. The initial government response was largely a selective and short term approach to protection, through VERs in the form of absolute physical quotas administered geographically. When this approach proved unsuccessful in stemming the flow, the government adopted a more comprehensive and longer term approach, covering broad ranges of clothing, and enabling American producers to retain about 80 per cent of their domestic market. In this manner the United States managed to restrict the full penetration of its clothing markets by more competitive low-cost producers. By 1971 the share of imported clothing from Asian and East European countries in the total of American private expenditure for clothing was about half the equivalent for Sweden and much less than for Canada, the United Kingdom and West Germany (NEU, 1973). Although the U.S.A. ranked as the leading clothing importer by total value, its actual clothing imports per capita were among the lowest of all DMECs, at one sixth the level for Switzerland and the Netherlands, one third that for West Germany. The

basis

for

the

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response and some of its effects warrant brief consideration. Following the Second World War, the United States was one of the most ardent advocates of more liberalized trade through tariff reductions, but by 1968 it had turned more protectionist in sentiment, as its productivity lead in many industries had steadily become eroded. Prior to 1968, its textile and clothing sectors had stood out as special cases of protected industries. In seeking to protect jobs in such less competitive sectors, the United States had avoided raising tariffs, not surprisingly perhaps, for there was little indication in these sorts of sectors that even much higher tariffs would have effectively halted or significantly slowed low cost imports. The relative costs of the two types of protection provided are of some pertinence. The existing high tariffs on clothing, aimed primarily to protect the industries from other DMEC competitors, were not particularly expensive per capita. Estimates, using various approaches, suggest the cost of tariff protection for the American apparel industry in 1972 amounted to somewhere between $90 million and $203 million, or between about 50 cents to a dollar per person (TRUG LIA, 1974). By contrast, the quotas, aimed at low cost producers mainly in Asia, actually cost the economy only about one-tenth as much, from $7 million to $9 million. The brunt of those costs have been borne, however, by lowincome consumers, for whom the low-cost imports would be of greater relative interest, so in this sense the quotas have acted as a regressive tax. Moreover, because the American quotas were administered by the exporting countries and the limitations were set on the quantity rather than value of items, those exporters have had incentive to shift into more expensive lines than ones with which they would otherwise compete. So the actual low-cost imports within the quota system probably have been somewhat more expensive than would have been the case if imports were free (MINTZ, 1973). The use of such a quota system, therefore, affected both the composition and size of the American imports. It reduced the rate of increase of the quantity of clothing imports from the six main Asian suppliers from about 30 per cent annually prior to the accords to between 5 and 7% per cent, depending on the country, in the years immediately following.

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The American argument in support of the negotiation of VERs has been based on the notion of market disruption, existing or potential, involving significant employment problems. Yet various studies have concluded that employment problems resulting from a faster increase in LDC exports, not just of clothing but of all manufactures, to DMECs are unlikely to be severe in aggregate. The annual rate of total displacements of employees arising from imports from LDCs have been estimated as less than 1 per cent of the manufacturing labour force, a figure far smaller than the displacement simply arising from annual inter-industry shifts in labour productivity. An O.E.C.D. study (LITTLE, SCITOVSKY and SCOTT, 1970) attempted to provide an indication of the order of magnitude involved in clothing adaptation. They estimated a $75 million increase in the value of clothing exports to the U.S. would result in a 0.8 per cent fall in U.S. clothing employment. Their estimate was based on 196 1 data for domestic output and employment, but with output valued at 1965 prices. The estimate assumed the reduction in employment would be directly proportionate to the reduction in output, which was taken, in turn, to be equal to the increase in LDC exports valued at c.i.f. prices inclusive of import duty. Extending this to 1965 levels, imports therefcre displaced much less than 10 per cent of U.S. clothing employment. In another approach the U.S. BUREAU of LABOUR STATISTICS (1971) noted that 1965 U.S. apparel imports were valued at $670.8 million (in 1958 dollars) at domestic ports, and that the percentage increase in 1965 imports whose employment effects could be absorbed simply by voluntary quits of the clothing labour force was 79 per cent. The economic impact of a major increase in imports of clothing would not seem substantial, therefore, providing there was ample adjustment assistance and reasonably buoyant economic conditions. However there lies the catch, for American unemployment, high for more than two decades, has differed almost in quantity and kind from most other DMECs, and its adjustment assistance has hardly been significant in comparison with West European standards (MUKHERJEE, 1974). In the sixties, the criteria for eligibility for assistance were so highly restrictive that few firms obtained relief and unions dis-

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paragingly referred to the programme as (BALDWIN and MUTTI, “burial assistance” 1973). Prior to 1962 there was no policy to assist adjustment to increased import comcontained Existing legislation petition. “escape clause” provisions, and some clothing cases were approved. However, that mechanism simply restored trade barriers rather than assisted adjustment (KRAUSE, 1973). The popular basis for the market disruption argument in the United States has been the pace of increase in imports and their social and geographic impact. The American clothing industries have played a special role as catalysts of social integration. Many of the are Jewish, and managers entrepreneurs while a large proportion of the employees are Negroes, Puerto Ricans, Mexican Americans or Cubans. Moreover, most employees are relatively immobile, older women with low skill and educational levels. These are the groups who have by far the greatest difficulty in finding alternative jobs. The problems of structural adjustment are much greater for such groups and are exacerbated in the clothing industries by their particular geographic concentration and relative role in both the largest cities of the arid-Atlantic states, especially New York, and the smaller towns of the poorer south-east. In such circumstances, much more severe social costs might be anticipated from a particular increase in clothing imports compared with imports of other goods, particularly given the high levels of unemployment and the relative lack of an appropriate mix of labour, industry, regional and adjustment assistance programmes to promote internal structural change (MILES, 1974). There has been, in addition, a lingering fear within some American political groups that discrimination against particular ethnic groups might significantly complicate the adjustment process. The relatively small benefits, spread widely among the consuming public, of reducing clothing protection, have not, in the dominant American political estimate, sufficiently outweighed the costs expected to bear most heavily on particular ethnic groups in a few geographic areas. Thus the apparent aim of American response has been “income protection”, to redistribute incomes towards those groups that would otherwise suffer absolute falls in

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real

income

(CORDEN,

as a result 1975).

of market

forces

This market disruption argument has been strongly promoted by special interest groups, the various unions, employers and politicians in the affected areas, where imports are seen as a scapegoat for U.S. unemployment and social disruption. The validity of their argument has received a spirited challenge. Although American adjustment problems have been more acute than those of most other DMECs, and resort to escape clauses for temporary protection appears legitimate to some, the key question is - has the U.S. made positive use of the breathing space offered to adapt and restructure its clothing industries to enable them to function without further resort to protection? The evidence suggests not. The protection arguably legitimized by the LTA and subsequent agreements was visualized as temporary, to allow orderly adjustment. Temporary assistance was not supposed to have the perverse effect of preventing movement of resources out of an industry. MUKHERJEE (1974) has argued that American protective measures have really proved a trivial and counterproductive response to a major problem, where the need is to place much greater programmes, to emphasis on manpower the employability of the disadimprove vantaged groups affected, and on speeding up structural change by shifting capital and manpower into more productive uses. In his view, “a policy issue of ten tral importance for the U.S. is whether disadvantaged Americans are to be equipped to rise up the ladder of occupational opportunity. To argue that the low skill intensive industries should be kept going with protection against imports is to hold that the disadvantaged are incapable of anything better. ” Others opposing the government’s response included several thousand American economists, who in 1971 endorsed “An Appeal for Freer World Trade” which, among other things, urged the rejection of import controls, and the fostering instead of “a realistic foreign and domestic policy aimed at getting all countries to cooperate

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in furthering the expansion instead of the con traction of international trade, and at finding durable answers to the adjustment problems of U.S. industries, workers and communities” (quoted in MEIER,

1974).

They expressed alarm at what they considered a massive mistake of moving back again to government-controlled trade, reflecting a perversion of the national interest by the shortsighted pressures of special interests. The need was for a more enlightened adjustment assistance programme to enable the country to support a more open trade policy and move away from escape-clause relief. A major step towards such a programme occurred in December 1974 with the passage of the Trade Reform Act, which considerably liberalized the criteria for eligibility of workers and firms for trade adjustment assistance, and raised the benefits for workers. Consider, finally, the changing situation and policies of Japan, another major participant in the global clothing trade. The Japanese clothing industries, geographically dispersed and dominated by large numbers of very small firms, over two-thirds of them subcontractors in 1966 (WATANABE, 1971), more than doubled their employment in the sixties, in response to rapidly growing home demand and the creation, mainly through assistance from the large trading houses, of significant export markets. In relation to North American and more developed West European countries, Japan was a competitive low-cost producer. Its competitive position through wage costs was reinforced by the existence of an excessively competitive home textile industry, producing a wide range of qualities and types of textiles, the support of diverse government export programmes, the expertise in world wide markets of the large trading houses, and the undervaluation, until 197 1, of its currency. Its competitiveness in cotton textiles and garments soon gave rise to VER pressures, particularly from the United States, and led to the initial series of LTA agreements. When the Japanese then switched to synthetic and woollen clothing exports during the sixties they were again subjected to the heaviest pressures for self-restraint. The government withstood these pressures for several years, whether unable or unwilling

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to force restraint, before giving in late in 197 1. Japanese acquiescence quite possibly was assisted by a growing appreciation of the extent to which their own competitive position in the markets of other DMECs was becoming undermined, through rapidly rising home labour costs, labour shortages, pressure to revalue the Yen in 1971, and growth of other lower cost Asian competitors. Thus quotas allocated by the United States through VER agreements with the main Asian suppliers could help the Japanese retain their portion of the major American import market, and secure higher prices than would otherwise prevail, given the method of quota administration (BERGSTEN, 1975). Indeed, in more recent years, the Japanese have considerably upgraded their clothing exports, including some high fashion women’s clothing, developing their own leaders of design and establishing significant tie-ups or licenses with foreign producers, in support of the sudden switch in Japanese tastes towards Western clothing styles (URABE, 1972; KRAAR, 1976). In relation to the other major East Asian exporters, Japan has rapidly become a higher cost producer. In the earlier sixties it placed high tariff barriers to protect its clothing industries, although most of its market was until then largely shielded by consumer preferences for traditional Japanese styling. However, with the buoyancy of the economy during the sixties, the ability of small firms in the labour intensive sectors to compete was threatened as labour became harder to find and wage rates increased more rapidly than in other sectors (HELLER, 1976). By the early seventies, the Japanese government had decided on a strategy of encouraging the development of its more sophisticated, knowledge-intensive industries, and effectively allowing the contraction or expulsion of those sectors, such as clothing, in which other Asian countries revealed a comparative advantage (KO JIMA, 1973). Between 1960 and 1972 Japan had slipped from first to eighth in rank of clothing exports and, although still a net exporter, had rapidly increased its imports of clothing, ranking eleventh largest importer by 1972. This change in Japanese conditions and strategy provided a major impetus to the growth of clothing production in several Asian coun-

tries, particularly South Korea and Taiwan where many people could speak Japanese, through both the provision of a substantial neighbouring market and the generation of Japanese sub-contracting and direct investment. A significant number of Japanese clothing firms reportedly made direct investments or even transferred to South Korea. Others sought opportunities in Taiwan. By 1973 the world’s tenth largest clothing flow was from South Korea to Japan, the eighteenth from Taiwan to Japan. Compared with only six years earlier those flows had multiplied in value by 177 and 152 times respectively, an extraordinarily rapid shift in location and trade focus, and some indication of the inherent degree of geographic instability in these industries. The big Japanese trading companies played a major role in helping to redistribute resources and undermine their domestic sources of production. The success with which they had managed to assist their own clothing producers in penetrating DMEC markets in the previous decade was soon matched by their success in assisting Japanese producers to invest abroad or find suitable foreign producers prepared to operate on a sub-contract or commission basis. For many Japanese wholesalers and clothing firms, used to widespread sub-contracting within Japan, the process was a relatively easy one of substituting foreign for domestic sub-contractors. The timing of the move depended heavily on the balance of payments situation. It was not until well into the 196$,. as the fear of balance of payments deficits receded, that controls over outward direct investment by Japanese firms were relaxed. By the early investment seven ties such was strongly encouraged as the government sought to correct for the balance of payments surplus which had rapidly accumulated (KRAUSE and SEKIGUCHI, 1976). Conclusions

The extent to which the clothing industries are market oriented in the DMECs apparently reflects a combination of variations in policies towards the industries and differences in the implementation of policies. Most governments considered here eventually proved interventionist when major problems of adaptation

46

arose or conflicts arose with policy goals other than the efficient allocation of resources. The pace of adaptation seemed to vary largely according to the degree of unemployment and the particular geographic distribution and ethnic composition of the industries. Without the provision of significant protection, using various devices, from low cost competitors, a much larger portion of the clothing industries would certainly have been redistributed from DMECs to LDCs, mainly through the processes of international subcontracting and operation on a commission basis. The astonishing pace at which the global redistribution may occur is clearly indicated by the recent experiences of Canada, Holland, Sweden and Japan. It is in this sense, therefore, that those supporting free trade as an efficient way in which to allocate resources, no matter what the adjustment costs, may certainly classify a large portion of the clothing industries of the DMECs as “economic erratics.” Paper presented at the Krakow (Poland) Conference of the Commission on Industrial Systems of the International Geographical Union, 28th August, 1977.

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