Making the Case for Trade
By Edward Welsch October 23, 2015
WHEN PILLOWTEX CORPORATION shut down its Kannapolis, North Carolina, textile manufacturing plants in 2003, it was the largest layoff in the state’s history and a personal loss for 7,600 workers.
“It was like everybody in Kannapolis got a punch in the stomach … it was like your favorite uncle died,” a laid-off worker told the local newspaper. For newly unemployed workers there was an easy target to blame: free trade.
North Carolina’s textile industry had been among the largest in the world for decades after the U.S. Civil War, and employed nearly 20 percent of the state’s population at the peak of its prosperity in the 1970s. But industrialization in the developing world rapidly eroded its competitive position since then. By 2012, four-fifths of the state’s textile jobs were gone, and Asian countries including China, India and Bangladesh established their dominance over the industry.
Examples like the Pillowtex case are being cited by opponents of international trade as the U.S. concludes negotiations of the Trans Pacific Partnership, or TPP. TPP is a 12-country trade agreement between the U.S. and Pacific Rim countries in Asia and Latin America that make up 40 percent of the world economy. It’s one of the most significant world trade deals in decades and promises major economic benefits to the countries involved. TPP’s opponents say the deal will harm local workers, and they can make a powerful emotional argument by pointing to individuals who lost their jobs to international competition.
But were trade agreements really responsible for the closure of North Carolina textile factories like Pillowtex? The reality is that the rapid growth of Asian economies including China and India drove the change, and it was by being open to trade that North Carolina was able to replace those lost jobs with higher paying ones.
Making the case for trade requires looking at the big picture. The benefits of free trade are numerous, but sometimes harder to see because they are spread across society. From higher wages for workers and lower prices for consumers to less strain on natural resources, free trade agreements set standards for workers’ rights and the environment that wouldn’t otherwise exist. In the case of food, international trade is vital to deliver safe, affordable and nutritious food to a growing global population.
“If we don’t have free trade, we won’t have enough food for 9 billion people by 2050, or we’ll have to plant all over the face of the globe,” Paul Conway, Cargill vice chairman, said in a recent interview. “Free trade is the best way to grow the most food on the least land, in the most affordable and least environmentally destructive way possible.”
The modern case for free trade goes back to the founding of economics in the 18th century, when British economist David Ricardo outlined the theory of comparative advantage. He hypothesized that countries benefit when they specialize in industries where they are most efficient and have the highest returns. By resisting the temptation to bolster uncompetitive domestic companies by charging taxes on foreign imports, citizens everywhere pay less for goods and are more productive and wealthy as a result.
Ricardo’s theory has been born out repeatedly through history. For example, it’s always been enormously costly for Japan to grow its own food because of its small land mass, only 12 percent of which is available for farming. As it industrialized, Japan focused on developing its technical expertise in manufacturing electronics and automobiles for export, while importing much of its food. Today, Japan produces only 39 percent of the food it needs, down from 73 percent in 1965. By effectively outsourcing its food production to the U.S. and other countries and focusing on manufacturing, Japan has become the third-largest economy in the world.
Japan is one of the countries involved in the TPP deal, which would lower agricultural tariffs if adopted, and make it easier for Japanese consumers to access food grown overseas.
“If you look at where the surplus land, water and sunshine are to make food, it’s essentially in Canada, the U.S., Brazil and sub-Saharan Africa,” Conway said. “The argument I’ve made from a food security angle is that the biggest proponents of free trade should be Asians because they’re in food deficit.”
The self-sufficiency trap
However, Conway and other executives note that worries about food security tend to drive countries away from free trade agreements, in part because of decisions made by producing countries in the past to restrict the movement of food.
On January 4, 1980, the U.S. put in place a grain embargo to try to punish the Soviet Union for invading Afghanistan. Never before had U.S. food exports to the U.S.S.R. been suspended in pursuit of a noncommercial foreign policy objective. The “food weapon” had been taken from the shelf. Countries that relied on the U.S. for their food supply suffered as a result. In more recent years, Russia and South American countries have also put in place bans or high export taxes for political reasons, and to make the price of goods cheaper for their citizens.
“We’ve broken the trust barrier, historically, which encouraged many countries to turn toward self-sufficiency,” said Cargill Vice Chairman and Chief Risk Officer Emery Koenig. “Self-sufficiency is not the answer.”
Distrust is one of the reasons tariffs on agricultural goods remain higher than on other goods in most countries. The average global tariff rate on agricultural goods is about 15 percent, compared to single digits rates for other products, according to World Trade Organization data.
Cargill sees formal trade agreements as the way to reinforce trust in a market-based food system and to encourage countries to abandon attempts to become self-sufficient. Signing formal agreements sets the rules for trade, and establishes a process where disagreements can be settled through arbitration at international bodies like the World Trade Organization.
That makes it far less likely that food-producing countries will leave buying countries in the lurch as in years past.
“By encouraging trade in a fair, rules-based, rigorously enforced system, free trade agreements can help ensure that food surpluses reach areas of deficit,” said Koenig.
Realities of the global economy
All of the benefits of trade are still cold comfort to the Pillowtex workers who lost their jobs to foreign competition. However the evidence shows that trade agreements weren’t responsible for their job losses, and even helped to provide a solution to the decline of the textile industry.
The greatest competitive pressure for Pillowtex came from China and India, which don’t have free trade agreements with the U.S. With or without free trade, the growth of China as a manufacturing powerhouse in recent decades made it nearly impossible for the North Carolina textile industry to survive. In fact, if the TPP agreement had been signed decades ago, the U.S. textile industry may have fared better, as signers have agreed to lower tariffs on U.S. textiles.
Despite the loss suffered by the Pillowtex workers, the North Carolina economy recovered strongly in the years after the Pillowtex closure, as it was already shifting its focus from textiles to areas where it had a better comparative advantage. The state became a regional hub for biotechnology and information technology, and agricultural production for export also surged, reaching $3.9 billion in 2012, a 189 percent increase from 2005, according the state’s Department of Agriculture and Consumer Services.
The industries that replaced the textile jobs tended to be higher paying jobs, and the state focused more on growth of its export industries. North Carolina’s trade-related jobs have grown nearly four times faster than total employment since 2004, and trade jobs pay on average 18 percent more than non-trade jobs, according to the Business Roundtable. Those results could have been predicted by the law of comparative advantage: as the state’s industries adapted to realities of the global economy, they became more efficient and were able to pay workers more.
A hard case, but worth making
The U.S. Congress will soon debate the merits of the TPP deal, and Cargill has been a prominent voice on Capitol Hill making the case for trade. Despite all the demonstrable benefits, it’s often politically hard to counter the more poignant stories of individuals who feel they have been negatively affected by trade.
Cargill Vice President of Corporate Affairs Devry Boughner Vorwerk has been at the forefront of the company’s efforts to promote trade in Washington, D.C., and she acknowledges the difficulty of the task.
“It’s a hard argument to make—it doesn’t have the same emotional resonance as a person who’s lost their job,” she said. “But it’s a debate we must be willing to have, because the consequences of turning away from trade—the impact on food security and economic prosperity—are so great.”