in Your Wardrobe
By Jagdish Bhagwati and Arvind Panagariya
(WSJ December 27, 2004)
longstanding Multi-fiber Arrangement (MFA) on Textiles-next to
agricultural subsidies and trade barriers the most objectionable
trade-restricting affliction of the world trading system-will finally
become history on Jan. 1, 2005. The textile lobbies in many rich, and in
some poor, countries are scrambling already to resurrect its
protective effects in alternative ways: for the removal of the MFA means
that the rich countries will face more competition; as will those poor
countries, with no inherent ability to compete, that had developed
production simply because they had a guaranteed MFA quota.
The focus of the huge media attention, therefore, has been the rich drama
within the textiles sphere itself: Who will win, who will lose? Yet the
real story lies in the lessons that this episode offers more generally for
trade policy. What are these lessons, as seen from the "textiles
Lobbyists as Termites
the MFA's demise was negotiated at the conclusion of the Uruguay Round, a
10-year "gradual" removal of restrictions was agreed to, so as
to ease the pain of adjustment. With the trajectory of the reductions
having been agreed only with loopholes, some feared that the textile
lobbies would end up "backloading" the reductions to the end of
the period. That would, in turn, enable the American textile lobbies to
scream successfully for help in the form of renewed quotas or a blizzard
of antidumping and safeguard actions (as happened with steel in 2001).
That is exactly what has transpired. The U.S. has surrendered to
protectionism. For those of us who thought that the Bush administration,
in contrast with a Kerry administration, would avoid protectionism, this
latest throwback to the steel and farm protectionism of George W. Bush's
first term is a sad reality check. President Bush may be talking to
God-who, we hope, likes free trade, since he cares for the poor; but Karl
Rove talks to the textile lobbyists, who have other ideas. Indeed, the
textile lobbyists had already managed during the election to impose
special one-year quotas on bra imports from China-a wit has remarked that
the lobbyist behind this must have been Club Med-as well as on Chinese
dressing gowns and knitted fabrics.
But lobbyists are only one side of an ugly picture. Another major problem
is non-transparency in trade dealings, which is practised just as surely
by the Bush administration as it was in Bill Clinton's time. It was the
Clinton administration's U.S. trade representative, Charlene Barshefsky,
who struck the astonishing deal in November 1999 with China (whose exports
are feared most), under which the Chinese accession to the WTO was
accompanied by a proviso that the U.S. could impose restrictions on the
mere threat, not the actuality, of a market-disrupting import surge-until
As it happens, few among the public knew of this provision. It
represents a dramatic, and undesirable, shift in WTO jurisprudence on
permissible interruption of imports. It was smuggled into the agreement
much like the way in which lawyers who negotiated Chapter 11 in the NAFTA
agreement smuggled in a much more expansive view of "takings"
than the U.S. Supreme Court has ever allowed in the domestic sphere: a
matter that came into view, and created a storm, only when a Canadian firm
filed a case for compensation against the U.S. because its profits had
been affected by U.S. environmental legislation. And now a cynical
Washington has wheeled out the reprehensible Barshefsky provision: the
Bush Department of Commerce has slapped these so-called "special
safeguard" quotas on imports of Chinese socks.
The non-transparency of this administration makes the Clinton era look
like a model of free information. As the investigative reporter Greg
Rushford has discovered, the Commerce Department now runs a secretive
federal interagency Committee for the Implementation of Textile
Agreements. It has accepted the request of the Domestic Manufacturing
Coalition, a secret splinter group of the Hosiery Association, which is
lobbying for new restrictions against China, to keep the names of the
member companies secret. Evidently, this pushes the administration further
down the slippery road to protectionism.
The Return of "Voluntary" Export Restrictions.
the damage being done to the cause of freer trade is yet greater. At the
end of the Uruguay Round, it was agreed to terminate "voluntary"
export restraints. Instead of imposing import restraints, the rich
countries had used pressure to force exporting countries into restraining
exports: a phenomenon hilariously called "voluntary" the way a
kidnapper, who forced you into his car, might say you were getting a
"free ride." These arrangements were arbitrary and, being
non-transparent, impossible to monitor effectively. And they restrained
trade, no doubt, as much as import restrictions do: they were export
protectionism, as contrasted with conventional import protectionism.
Now they have returned. Manifestly, pressure was steadily brought to bear
on the Chinese to show restraint. The European Commission, whose zeal for
protectionism of all varieties is unabashed, began firing off its
ammunition by beginning a dialogue on Sino-EU Textiles Trade on May 6 of
this year. The Commission "welcomed" the announcement by China
at the EU-China Summit of Dec. 8, when China revealed that she would
undertake several measures to moderate the expansion of Chinese exports.
And now China has announced that she will impose an export tax on
textiles, which is of course a "voluntary export restraint" (VER),
courtesy of pressure from EU and the U.S., and the threat that the
alternative was the use of the special safeguards. So much for the
commitment to abolish VERs.
Poor Countries and Trade: Knaves and Pawns
also demonstrate how the EU and the U.S. use preferential trading
arrangements to seduce poor countries into making enduring and substantial
concessions in exchange for evanescent, and wasting, assets.
Poor countries with no comparative advantage that were given textile
quotas-such as Fiji, Brunei, Turkmenistan and Macedonia-encounter
themselves in a losing situation, and find that whatever concessions they
once gave to the EU and the U.S. for higher quotas now have no quid pro
quo, since the reciprocal concession in the form of quotas has vanished.
The point is quite general: the EU, and more so the U.S., extract
concessions on labor standards, the environment, intellectual property
protection, and an ability to use capital controls in a crisis. These
"non-trade" concessions are swapped for preferential access to
EU and U.S. markets, an asset which steadily reduces in value
with successive multilateral trade liberalizing negotiations such as the
Uruguay Round and the ongoing Doha Round. These two powers have played
this game cynically, using the poor countries as patsies in bilateral
trade agreements where small countries are forced into one-on-one
face-offs with an economic superpower bent on the extraction of
The textiles case also illustrates the occasional hypocrisy of the
rich-country lobbies and the policymakers who are in thrall to them.
Thus, while the protectionist measures being adopted are evidently
prompted by the need to protect their own producers, the European
Commission seeks to delude others into thinking that anti-China measures
are really in the interest of poor countries. Witness its statement:
"We hope that these Chinese \[export restraint\] policies enable
other developing country exporters of textiles and garments to share the
benefits from the expansion of trade."
As it happens, the fear of China has begun to moderate in the major poor
nations, even as the rich countries are seized by it. India and
Bangladesh, which feared China, are confident that they can compete with
it. Caught between decelerating growth in the number of young workers-a
result of the one-child policy-and the massive demand for labor generated
by double-digit economic growth over 25 years, wages in China are finally
rising. At the same time, both Bangladesh and India plan investments in
big mills where scale economies obtain and modernization is possible: this
induced innovation is indeed what competition often does, and
protectionists fail to appreciate.
The problem countries among the poor are going to be those with no
comparative advantage. The answer to their problems has to be, not renewed
protectionism, but for the rich countries finally to acknowledge that they
must take the blame for this MFA-caused situation. Their aid funds, and
those of the World Bank, need to be addressed to assist these countries as
they struggle with the enormity of the losses now facing them.
Mr. Bhagwati, University Professor at Columbia University and senior
fellow at the Council on Foreign Relations, is the author of "In
Defense of Globalization" (Oxford, 2004). Mr. Panagariya is Professor
of Economics, and Bhagwati Professor of Indian Political Economy, at