Question

When the North American Free Trade Agreement (NAFTA) started in 1994, many were worried 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 clothes fell by 40 percent and production of textiles by 20 percent –
and this during a period when overall U.S. demand for clothes grew by almost 60 percent. During the same
time frame, employment in textile mills in the United Stated dropped from 478,000 to 239,000 and
employment in clothes dropped from 858,000 to 296,000, while exports of clothes from Mexico to the United
States increased from $1.26 billion to $3.84 billion. Such data seem to indicate that the job losses have been
due to clothes production migrating from the United States to Mexico.
There is anecdotal evidence to support this conclusion. 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 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 clothes production to Mexico, exports have increased for U.S. thread
makers, many of which are in the chemical industry. Before the passage of NAFTA, U.S. thread producers,
such as E. I. du Pont, supplied only small amounts of product to Mexico. However, as clothes production
moved to Mexico, exports of fabric and thread to that country have increased. U.S. producers supply 70
percent of the raw material going to Mexican sewing shops. Between 1994 and 2004, U.S. cotton and thread
exports to Mexico grew from $293 million to $1.21 billion. Moreover, although the U.S. textile industry has
lost jobs, supporters 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 thread producers. NAFTA supporters argue that it has
created trade, and U.S. consumers and producers in certain sectors are capturing these 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 supporters of free trade argue that the gains outweigh the losses.

1) 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?

Answer 1

1) Free Trade results in increasing consumer surplus. It also leads to exit of inefficient firms of the economy, thus increasing overall efficiency. However, employees who lost jobs should be upskilled and accomodated to other more fruitful industries, so that this labor can be used efficiently. Protectionism leads to inefficiencies within economy and it results in just loss in the long run, in form of lost social surplus and inefficiency in economy. Recent example is US-China trade war

Benefits of protection: Jobs saved in textiles; they can have enough space to grow without competition from outside; government can have revenue from import tariff; producer surplus and government revenue increases in short run

Cost of production: Higher price of textiles due to high cost of production; inefficient allocation of resources in the economy; welfare loss in long run(as many countries may impose counter tariff on protectionist country); global slowdown in case countries involved are big(US-China trade war)