The textile industry hasn’t taken seriously enough the need to really, really cut a lot of costs out…Part of the psychological problem is too many of the textile people simply complaining about imports, rather than trying to figure out a way how to design around them or operate around them.”
Those were the strong words of financier Wilbur L. Ross, who over the last nine months has injected a much-needed spark of energy — as well as capital — into the struggling U.S. textile industry by acquiring the apparel-fabrics operations of Burlington Industries, seeking to acquire the bankrupt Cone Mills Corp. and launching the Free Trade for America Coalition, a pan-industrial group including representatives of the metals and agriculture industries. (Ross is also active in the steel business, serving as chairman of International Steel Group, a conglomerate he assembled out of three bankrupt steel makers.)
Ross delivered a keynote address in which he sketched out his argument as to why Washington should make a greater effort to preserve the domestic manufacturing base and what the surviving elements of the domestic textile industry need to do to ensure their survival.
He contended that the U.S.’s rising foreign trade deficit threatens the stability of the U.S. economy. According to preliminary Commerce Department data, the U.S. had a $138.67 billion current-accounts deficit in the second quarter, with a $528.69 billion deficit for the 12-month period ended in June.
“Some economists think we can overcome this huge trade deficit by developing service businesses,” Ross said. “This is not true because, unfortunately, it’s easier to export service jobs than it is to export the services themselves. Therefore many good service jobs, like software, call centers and engineering are also moving to India and elsewhere at a fraction of U.S. wages.”
He offered a vivid analogy of why he does not believe the trade deficit is sustainable.
“In terms of purely domestic economics, a pure service economy also doesn’t work,” he said. “It doesn’t work any better than an individual household of unemployed people, where the husband hires the wife to cook and clean and the wife hires the husband to drive and mow the lawn. You can guess how long that would last. It’s the same with the economy. The fact is, unemployed people don’t buy a lot of services or goods.”
He further argued that because of the “multiplier effect” associated with manufacturing — which takes into account economic activity generated when a factory needs to bring in an outside service provider to fix a piece of machinery, or when a foreman stops off for a drink on the way home from his shift — the loss of manufacturing jobs has a negative effect on the rest of the economy.
With the current trade deficit exceeding $500 billion a year, he said, “That means that every hour, 24 hours a day, 365 days of the year, $50 million is leaking out of this country in trade deficit. That’s a pretty big number. When the Department of Commerce, Bureau of Economic Analysis says for every $1 in final manufacturing sales that are lost, there’s a multiplier effect so that’s about $2.40 from the whole economy. That means that $500 billion trade deficit is really a $1.2 trillion drain on our country. That’s 12 percent [of the U.S.’s gross domestic product]. If we could cut the trade deficit just in half, back to where it was a couple years ago, we wouldn’t have unemployment. And that’s what’s really at issue, and I don’t think the free-trade people realize the speed with which this change would occur. And I’m sure they would have no idea they were really risking the whole standard of living.”
Ross argued that the U.S. is perhaps the only country in the world that does not make trade policy its key concern in diplomatic conversations.
“In the U.S., and only in the U.S., trade policy is largely dictated by diplomatic policy,” he said. “In other countries, trade policy tends to dictate diplomatic policy. The problem with our system is that the State Department always wants some favor from every imaginable country. So we make lopsided trade deals.”
Ross contended that the World Trade Organization, which was set up to handle international trade disputes, is inherently flawed.
“The WTO was set up to enforce trade rules, trade agreements, but it fails to do so because it operates by consensus,” he said. Ross argued that the vast majority of WTO nations have focused their trade policies on improving exports to the U.S. That belief has led him to dub the entity the “Wealth Transfer Organization.”
“It’s not possible for U.S. textile workers who are earning $12 to $13 an hour in wages to compete against people earning less than a dollar,” he said. “It’s not possible for American companies to pay health care costs when their foreign competition slubs them off on their government. It’s not possible for U.S. exporters to pay 35 percent income tax when their foreign competition recoups all of the value-added tax on exports. It’s not possible for American companies to spend billions of dollars a year to protect the environment when the foreign competition pollutes with impunity. It is not possible for our companies to compete with foreign companies whose government-owned banks subsidize them by making expansion loans that everybody knows will never be repaid. It is not possible for American companies to live up to the worker safeguards of OSHA when the competition does not. It is also not possible to have truly free trade without freely floating foreign exchange values that can accurately reflect economic relationships among countries. The reason I’m harping on all of these broad truisms is that unless we’re able to change the frame of the trade dialogue, we will not prevail on any individual issues.”
Still, Ross emphasized that he is no opponent of free trade, so long as it is conducted fairly.
“We recognize that globalization is inevitable and we are for free trade, if everybody plays by the same rules,” he said. “But we oppose — and all free traders should oppose — the foul trade of government subsidies, illegal transshipments to avoid quotas and currency manipulation.”
Ross said his lobbying coalition, the Free Trade for America Coalition, is growing: It now has 70 members from the textile, steel, sugar, cattle, citrus, copper and brass industries as well as state manufacturing associations and state AFL-CIOs. “Our purpose is to make it politically unacceptable for foul trade to continue under the pretense of being free trade.”
On the apparel and textile front, he said that one of FREETAC’s key goals is to extend the deadline for the U.S. to lift quotas on Chinese imports. WTO nations are set to drop their quotas on garments and fabric in 2005.
“I believe that the quotas should not just go away on Jan. 1, 2005 as scheduled, because that would really be rewarding China for having failed to live up to its WTO obligations,” Ross said. “Instead, I believe the President should use the threat of the powerful safeguards that were built into China’s WTO entry…to negotiate a voluntary, more gradual phaseout over a bit longer time period.”
He further argued that the $69 billion domestic apparel and textile industries are not doing enough to make their voices heard in Washington.
“If all the domestic producers were to allocate one-tenth of 1 percent of revenues to lobbying, advertising and a p.r. campaign, we’d have a $69 million fund, a powerful weapon even by Washington standards. The actual amount being spent is a tiny fraction of this,” he said.
While Ross has been very politically active on the industry’s behalf in recent months, he acknowledged that lobbying alone will not save domestic textile manufacturers. He said domestic textile makers need to do three things to survive: consolidate, strengthen their brands and develop new technologies to set them apart from foreign competition.
“Historically, the industry has been very fragmented, both horizontally and vertically. There’s too many of everything. Therefore there needs to be horizontal integration so that a few larger operators, by using the most efficient equipment are using close to 100 percent of capacity,” he said. “There also needs to be vertical integration. In the future, there will probably be room only for one set of SG&A and one profit margin all the way through. I believe that the industry will go through unprecedented consolidation in the next few years, partly because of the onslaught of bankruptcies.”
As might be expected from an executive who has spent his career dealing with troubled companies, Ross spoke highly of bankruptcy, calling it “the corporate form of Darwinism.” Ross said from the beginning of 2002 through the end of September, textile and apparel companies carrying a debt load of $4.7 billion have filed bankruptcy. He predicted that metric would hit $10 billion by the end of 2005.
Overall, Ross argued that after a period of aggressive lobbying and consolidation, that the U.S. textile industry could continue to thrive.
“My ultimate vision of the industry therefore is one that is much more politically active, highly concentrated and integrated and focused on value added, from technology and design,” he said. “It will be a real challenge, but $69 billion of our economy and a couple of million jobs depend on it.”