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NAME: BIBI SHAFIQAH AKBAR SHAH (MBA-UUMKL)

MATRIC: 819380
COURSE CODE: GFMA 6043

FTA and the United States Textile Industry


When the North American Free Trade Agreement (NAFTA) went into effect in 1994,
many expressed fears that large job losses in the U.S. textile industry would occur as
companies moved production from the United States to Mexico. NAFTA opponents
argued passionately, but unsuccessfully, that the treaty should not be adopted because of
the negative impact it would have on U.S. employment.
A quick glance at the data available 10 years after the passage of NAFTA suggests the
critics had a point. Between 1994 and 2004, production of apparel fell by 40 percent and
production of textiles by 20 percent and this during a period when overall U.S. demand
for apparel grew by almost 60 percent. During the same timeframe, employment in textile
mills in the United Stated dropped from 478,000 to 239,000, employment in apparel
plummeted from 858,000 to 296,000, while exports of apparel from Mexico to the United
States surged from $1.26 billion to $3.84 billion. Such data seem to indicate that the job
losses have been due to apparel production migrating from the United States to Mexico.
There is anecdotal evidence to support this assertion. For example, in 1995, Fruit of the
Loom Inc., the largest manufacturer of underwear in the United States, said it would close
six of its domestic plants and cut back operations at two others, laying off about 3,200
workers, or 12 percent of its U.S. workforce. The company announced that the closures
were part of its drive to move its operations to cheaper plants abroad, particularly in
Mexico. Before the closures, less than 30 percent of its sewing was done outside the
United States, but Fruit of the Loom planned to move the majority of that work to
Mexico. For textile manufacturers, the, advantages of locating in Mexico include cheap
labor and inputs. Labor rates in Mexico average between $10 and $20 a day, compared to
$10 to $12 an hour for U.S. textile workers.
However, job losses in the U.S. textile industry do not mean that the overall effects of
NAFTA have been negative. Clothing prices in the United States have also fallen since

1994 as textile production shifted from high cost U.S. producers to lower-cost Mexican
producers. This benefits consumers, who now have more money to spend on other items.
The cost of a typical pair of designer jeans, for example, fell from $55 in 1994 to about
$48 today. In 1994, blank T-shirts wholesaled for -$24 a dozen. Now they sell for $14 a
dozen. In addition to lower prices, the shift in textile production to Mexico also benefited
the U.S. economy in other ways. Despite the move of fabric and apparel production to
Mexico, exports have surged for U.S. yarn makers, many of which are in the chemical
industry. Before the passage of NAFTA, U.S. yam producers, such as E. I. du Pont,
supplied only small amounts of product to Mexico. However, as apparel production
moved to Mexico, exports of fabric and yarn to that country have surged. U.S. producers
supply 70 percent of the raw material going to Mexican sewing shops. Between 1994 and
2004, U.S. cotton and yarn exports to Mexico grew from $293 million to $1.21 billion.
Moreover, although the U.S. textile industry has lost jobs, advocates of NAFTA argue
that the U.S. economy has benefited in the form of lower clothing prices and an increase
in exports from fabric and yarn producers. NAFTA supporters argue that trade has been
created because of NAFTA. U.S. consumers and producers in certain sectors are
capturing the gains from trade. As always, the establishment of a free trade area creates
winners and losers - and the losers have been employees in the textile industry - but
advocates of free trade argue that the gains outweigh the losses.

Case Discussion Questions


1. Why did many textile jobs apparently migrate out of the United States in the
years after the establishment of NAFTA?
There are many reasons why many textile jobs migrated out of the United States after the
establishment of NAFTA. One of it is because manufacturers now getting their garments
production more cheaply outside of the country. Besides that, between 1994 and 2004,
despite strong and growing demand by American consumers, U.S. apparel production fell
by 40 percent and textile production fell by 20 percent. The cuts in production led to
significantly unemployment, with employment in textile mills falling from 478,000 to
239,000, and apparel employment dropping from 858,000 to just 296,000. The U.S.
producers could take advantage of Mexicos low cost labour and inputs through NAFTA
agreement, export of apparel from Mexico to the United State surged from $1.26 billion

to $3. 84 billion.
Besides, the jobs migrated out of the United States because where the average labour for
US was $10 to $12 an hour compared to rates in Mexico at $10 to $12 a day. For
example, the company Fruit of the Loom Inc. would benefit more and increase their
revenue by paying their employees less to perform the job. It is also stated that NAFTA
was credited with helping crease increase political stability in Mexico. So this could be
another reason for the Jobs migrating out of the United State.

2. Who gained from the process of readjustment in the textile industry after
NAFTA? Who lost?
From the process of readjustment, American consumers have watched prices on
clothing fall. Designer jeans, for example, fell from about $55 in 1994 to about $48
today. For consumers, this means more money to spend on other items. It is because
the NAFTA and the cheaper labor available in Mexico. Nevertheless, while consumer
are the one who are satisfied about the swing in apparel production from the United
States to Mexico, some consumers may have been one of the unfortunate individuals
who also saw their job move to Mexico. However, those individuals were able to find
a new job as a yarn maker, and are now benefiting from the increase in U.S. yarn
exports. Companies that were able to take advantage of larger markets and cheaper
labor were also beneficiaries of this agreement. But, some companies probably saw
their profits drop as competition from companies producing in Mexico increased.
Certainly, gains were made by the newly employed Mexican textile workers and the
companies they worked for.

3. With hindsight, do you think it is better to protect vulnerable industries such


as textiles, or to let them adjust to the painful winds of change that follow
entering into free trade agreements? What would the benefits of costs of
protection be? What would the costs be?

I strongly believe that pursuing the free trade agreement without looking into vulnerable
industry like textiles, is much better applying. United States in particular are not the only
losers to consider. Nevertheless, the theory does not consider the painful adjustment that
may need to occur before the benefits of free trade can be fully realized. For displaced
workers, NAFTA is probably viewed quite negatively. The workers who were able to
increase their skill base may not actually be better off than they were prior to NAFTA.
Certainly, it would seem that consumers are better off with free trade. Many people may
come to the conclusion that for countries to remain competitive today, economic
integration is a necessary, though sometimes painful, process. Nevertheless, continuing
to enforce textile quotas to protect U.S. firms and workers will also drive up the cost of
clothing and other textiles for the American consumer. In contrast, the U.S textile
industry has benefited from NAFTA by expanding exports to both Mexico and Canada,
especially of high and good quality textiles.
In conclusion, the initial years of a free trade implementation have created a clear and
concise trend revealing increased trade in the next phase of time. The act of protecting
vulnerable sector, textile sector will clearly show a loss of revenue in time to come for a
free trade.