The New Wave of Protectionism Among Western Nations Hurts Third World Producers, Not Multinationals

This summer, developed and underdeveloped countries are arguing over protectionism and free trade in the world textile and apparel industry. The subject of the debate is the Multi-Fiber Arrangement pact, an agreement regulating textile trade which was initially ratified in 1973, then renewed in 1977. This year it again expires, and the 51 countries representing 85016 of world textile trade who.have signed the pact in the past are attempting to fashion another extension;

Multinational textile firms and retailers are keeping a low profile at the Multi-Fiber Arrangement (MFA) talks. Such corporate silence - is understandable: the MFA poses no threat to their dominant position, and in some ways the Arrangement actually helps them.

While governments are engaging in global trade wars, multinational corporations are carrying forward a worldwide reorganization of production which largely insulates them from adverse effects of the mounting protectionism. Multinationals are fragmenting output and trade into a chain of partial operations, spaced along a planetary assembly line according to cost considerations and marketing stratagems. The existing MFA does not effectively guard against the difficulties this trend has brought to First and Third World countries.

History of the MFA

The first four-year Multi-Fiber Arrangement was drawn up in response to calls from the developed countries in the West. Like the subsequent MFA pact ratified in 1978, the original MFA discriminated against Third World countries exporting textiles. Despite the fact that underdeveloped countries represented well under a third of global textile and apparel exports, they were designated "exporters" and assigned quotas on textile items to the West.

The first MFA included as an eventual goal "the reduction of trade barriers and the liberalization of world trade," but this was largely rhetoric and the 1977 negotiations for a second MFA resulted in a further drift away from that ideal. In addition to limiting trade growth in most items to a maximum of 6% per annum, the U.S. and EEC institutionalized new forms of protectionism in the 1978 MFA renewal. Most important of these were the "global ceilings" (only applying to underdeveloped country exports) imposed on trade in low-cost textile and apparel items, with large quotas allocated to smaller underdeveloped countries that were newcomers to the market, at the expense of the big three Asian exporters: Hong Kong, south Korea, and Taiwan.

As intended by the MFA's architects, the Arrangement had a differential impact on underdeveloped countries. While textiles and apparel make up almost a third of underdeveloped countries' manufactured exports, over two-fifths of their textile exports and three-quarters of their apparel exports come from south Korea, Taiwan and Hong Kong. All three suffered reduced EEC market, shares in both textiles and apparel under MFA II.

Other underdeveloped countries, the supposed gainers from the "global ceilings," did achieve export gains, particularly in apparel. But, except for China (1980 textile and apparel exports of $3.2 billion), these gains were modest.

The State Actors in the Current Talks

Of the industrialized nations, Britain, France and Italy have been hardest hit by job losses in the textile industry, as multinational firms transfer production to the Third World or automate the process of manufacturing. These European countries, as a result, have been arguing at MFA III talks for more restrictive measures-including an extension of bilateral deals on sensitive textile and apparel items; a continuation of the divide and conquer strategy of "global. ceilings" (cutting back the Asian big three in favor of the other underdeveloped countries); and a new trade slow-down provision that would tie developed-country textile imports to growth of internal textile consumption. (Without batting an eyelash, U.S. trade representatives argued for these protective measures, on the very days President Reagan was condemning all restrictive trade practices at the July summit meeting of developed-nation heads of state in Ottawa.)

Underdeveloped countries, however, serve as a massive market for developed country manufacturers-providing room for underdeveloped country protectionist retaliation should the new MFA be too restrictive. Over $140 billion in manufactures flowed from developed to underdeveloped countries in 1977, versus only $33 billion in the other direction. With such figures in mind, West Germany, Holland, and Denmark, whose textile and apparel industries have adjusted best to changes in the industry, have argued for a liberalization of the new MFA. Up until now, however, their pleas have been less strident than those of their protectionist neighbors and it appears that they will yield to a common "importers" position to strengthen the MFA. '

But for the first time in years, underdeveloped countries have entered this international forum with an aggressive, unified stance. In stark opposition to the EEC/U.S. position, underdeveloped countries emerged from a June meeting in Hong Kong demanding three major changes: that restrictions on exporters be extended beyond underdeveloped countries to the U.S. and all other exporters; that "global ceilings" be eliminated so that small underdeveloped countries face unrestricted markets that do not diminish the Asian "big three's" quotas; and that "clear-cut" criteria be set to decide when specific items that injure importers merit bilateral restrictions.

Given underdeveloped countries' desperate economic situation, their unity may hold and produce some small negotiating benefits. As on other global negotiating fronts, however, the underdeveloped nations bargain with little international clout (see MM, July 1980), and by this year's end they will probably be signing the package offered them by the Western countries.

The Corporate Actors

Multinational corporations in the textile/apparel industry (including Levi Strauss, Blue Bell, Gulf and Western, General Mills and Consolidated Foods) are bypassing MFA restrictions-largely through "outward processing," sometimes referred to as international subcontracting. Typically, multinationals will have the fabric design and cutting done in the "home" country, then ship the material to a less-developed nation for sewing. The partially processed items are then re-imported for finishing and packaging. Since the MFA restrictions apply only to sales of finished products from Third World countries, multinationals which complete production in the West elude the tariffs.

In the U.S., such operations have been encouraged by special tariff Item 807 whereby "outward processing" corporations pay duty only on the value added to the garment abroad. By 1978, over $400 million worth of U.S. textiles were flowing annually to Puerto Rico, Costa Rica, Honduras, Mexico, and other Latin American and Caribbean countries for sewing, to be reimported under, Item 807. Even medium-sized companies such as the St. Louis-based Kellwood Co. have used Item 807 to build plants in Mexico and Somoza's Nicaragua for the manufacture of brassieres and boys' jackets. Kellwood's Chairman Fred Wenzel explained the simplicity of the operation: "In Mexico we have several operations where the cutting room and the warehouse are on the U.S. side and all we're doing is crossing a river and sewing it, returning it immediately."

Multinational corporations have not only circumvented the MFA-they have actually profited from it. Since the MFA imposes lower tariff barriers on the less developed of the Third World nations than on the more-developed of them, it gives companies an impetus to penetrate these labor markets and take advantage of the cheap work force there. In 1979, textile and apparel wages in Pakistan, for example, were 4:% of U.S. levels, compared with those in south Korea and Taiwan at 16% and those in Hong Kong at about 24%.

Moreover, multinational textile firms are strategically positioned vis-a-vis smaller national textile producers to take advantage of local markets for textiles. The superior resources of a J.P. Stevens will allow such a company to outpace virtually any local competitors.

The companies have been quick to capitalize on the opportunities. In the Philippines, apparel "outward processing" generated over $400 million out of a total of $4.6 billion in 1979 export earnings. In addition to free trade zones, the Philippine government, on the urging of the World Bank, has established dozens of "bonded villages,", where corporations bring in all kinds of equipment and raw materials duty-free and process the goods entirely for re-export.

The multinational company determines not only the price paid for the articles produced, but also the subsistence wages of the value-adder, according to the Philippine research group, IBON. From 1970 to 1977, two-thirds of the Philippines' apparel exports fell into this "outward processing" category. Each worker, earning eight pesos a day, was generating 65 pesos per day in profits for the domestic sub-contractor (the majority of which were partially or wholly foreign-owned) and the multinational contracting firm, IBON has estimated.

In Sri Lanka, most of the 23 foreign-financed industries set up since 1977 in the country's free trade zone have been' textile/apparel plants. Multinationals are able to take advantage of Sri Lanka's export quotas as well as a female labor force which the government trumpets as "the cheapest labor in Asia." As in most Asian free trade zones, the, foreign companies obtain highly advantageous land prices, tax holidays and exemptions from duty payments.

The Losers

The globalization of the textile and apparel industry has brought with it hardships for many groups in the world economy.

The trend threatens small competitors both in the West and the Third World. Some European textile and apparel companies depend on protectionism for their very survival. They cannot compete with multinational or Third World textile firms that have access to cheap labor. Nor can they afford the high costs of new technology. For these reasons, this group has been pressuring the hardest for a more restrictive MFA. And in the Third World, particularly the least developed areas, multinationals are swamping domestic textile industries, ruining a section of the economy which traditionally has served the local market.

Workers in both underdeveloped and developed countries also pay a high price for the policies of multina tional textile and apparel firms. These firms depend upon and enforce appalling working conditions, long hours, and brutal suppression of what are usually considered trade union rights (such as the right to strike). In developed-country textile and apparel industries, workers face a bleak and uncertain future as their employers liquidate jobs in favor of machines and the lucrative offerings of Third World free trade zones.

Even the Western consumer, who might be thought to gain from globalized production based on the cheapest inputs, is no better off. Giant retailers mark=up low-cost underdeveloped country apparel to domestic levels.

And those aspirants within Third World countries who strive for more indigenous, self-sustaining forms of industrialization find the scarce resources of their countries being poured into free trade zones and multinational joint ventures. Production becomes foreign-controlled; consumption is destined for the world market.

John Cavanagh is a political economist with the United Nations Conference on Trade and Development. The views expressed are his own and do not necessarily reflect those of the UNCTAD Secretariat. He is co-author, with Frederick Clairmonte, of the forthcoming Zed Press book, The World in Their Web: the Dynamics of Transnational Fiber and Allied Textile Oligopolies.