The Impact of NAFTA on the U.S. Textile Industry
When the North American Free Trade Agreement went into effect in 1994, many expressed fears that one consequence would be large job losses in the US textile industry as companies moved production from the United States to Mexico. Opponents of NAFTA argued passionately, but unsuccessfully, that the treaty should not be adopted because of the negative impact it would have on employment in the United States, particularly in industries such as textiles. A glance at the data four years after the passage of NAFTA suggests the critics had a point. Between 1994 and mid-1997, about 149,000 US apparel workers lost their jobs, over 15 percent of all employment in the industry. Much of this job loss has occurred because producers have moved production to Mexico. Between 1994 and 1997, Mexico's apparel exports to the United States trebled to $3.3 billion. In 1993, the US jeans maker, Guess?, sourced 95 percent of its product domestically. Now it gets about 60 percent of its clothing from outside the United States, with Mexico as one of the biggest suppliers. Similarly, 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 US work force.
The company announced 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. However, the issue becomes more complicated when one takes a closer look at the data. To be sure, there have been job losses in the US textile industry, but clothing prices in the United States have also fallen since 1994 as textile production shifted from high-cost US producers to lower-cost Mexican producers. This obviously benefits US 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 $48 in 1997. Nor is the fall in prices simply a result of the movement of production from the United States to Mexico.
NAFTA has also resulted in textile production being moved from Asia to Mexico. In 1980, 83 percent of all US textile imports came from Asia. By 1997, Asia accounted for 41 percent of US textile imports as companies switched their source of textiles from Asia to Mexico. An example of this trend is the US clothing retailer The Limited Inc., which in 1997 switched its source for textile products from Sri Lanka to Mexico. According to a spokesman for The Limited, although wages in Mexico are three time the $60 per month that apparel workers make in Sri Lanka, it's cheaper and faster to move goods from Mexico to the United States than from Sri Lanka. Under NAFTA there are no tariffs on imports from Mexico, but there is a 19 percent tariff levied on textile imports from Sri Lanka. When all these factors are considered, it becomes cheaper to produce textiles in Mexico than Sri Lanka. Thus, as a result of NAFTA, production has been shifted to a lower external cost source. The Limited plans to pass on its cost savings to US consumers in the form o lower prices.
In addition to lower prices, the shift in textile production to Mexico has also benefited the US economy in other ways. First, it has helped produce a surge in exports from the US fabric and yarn makers, many of whom are in the chemical industry. Before the passage of NAFTA, US yarn producers, such as Burlington Industries and E.I. du Pont, supplied only small amounts of fabric and yarn to Asian producers. However, as apparel production has moved from Asia to Mexico, exports of fabric and yarn to that country have surged. US producers supply 70 percent of the raw material going to Mexican sewing shops. Between 1994 and 1997, fabric and yarn exports to Mexico, mostly in the form of cut pieces ready for sewing, nearly doubled to around $2.5 billion per year. In addition, US manufacturers of textile equipment have also seen an increase in their sales as apparel factories in Mexico order textile equipment. Exports of textile equipment to Mexico nearly doubled in 1995 over the 1994 level to $35.5 million.
Although there have been job losses in the US textile industry, advocates of NAFTA argue that there have been net benefits to the US economy in the form of lower clothing prices and an increase in exports from fabric and yarn producers and from producers of textile machinery. Trade has been created as a result of NAFTA. The gains from trade are being captured by US consumers and by producers in certain sectors. As always, the establishment of a free trade area creates winners and losers, but advocates argue that the gains easily outweigh the losses.