The longstanding Multi-fiber Arrangement (MFA) on Textiles -- next to agricultural subsidies and trade barriers the most objectionable trade-restricting affliction of the world trading system -- will finally become history on Jan. 1, 2005. The textile lobbies in many rich, and in some poor, countries are scrambling already to resurrect its protective effects in alternative ways: for the removal of the MFA means that the rich countries will face more competition; as will those poor countries, with no inherent ability to compete, that had developed production simply because they had a guaranteed MFA quota.
The focus of the huge media attention, therefore, has been the rich drama within the textiles sphere itself: Who will win, who will lose? Yet the real story lies in the lessons that this episode offers more generally for trade policy. What are these lessons, as seen from the "textiles lens"?
Lobbyists as Termites
When the MFA's demise was negotiated at the conclusion of the Uruguay Round, a 10-year "gradual" removal of restrictions was agreed to, so as to ease the pain of adjustment. With the trajectory of the reductions having been agreed only with loopholes, some feared that the textile lobbies would end up "backloading" the reductions to the end of the period. That would, in turn, enable the American textile lobbies to scream successfully for help in the form of renewed quotas or a blizzard of antidumping and safeguard actions (as happened with steel in 2001).
That is exactly what has transpired. The U.S. has surrendered to protectionism. For those of us who thought that the Bush administration, in contrast with a Kerry administration, would avoid protectionism, this latest throwback to the steel and farm protectionism of George W. Bush's first term is a sad reality check. President Bush may be talking to God -- who, we hope, likes free trade, since he cares for the poor; but Karl Rove talks to the textile lobbyists, who have other ideas. Indeed, the textile lobbyists had already managed during the election to impose special one-year quotas on bra imports from China -- a wit has remarked that the lobbyist behind this must have been Club Med -- as well as on Chinese dressing gowns and knitted fabrics.
But lobbyists are only one side of an ugly picture. Another major problem is non-transparency in trade dealings, which is practiced just as surely by the Bush administration as it was in Bill Clinton's time. It was the Clinton administration's U.S. trade representative, Charlene Barshefsky, who struck the astonishing deal in November 1999 with China (whose exports are feared most), under which the Chinese accession to the WTO was accompanied by a proviso that the U.S. could impose restrictions on the mere threat, not the actuality, of a market-disrupting import surge -- until 2008!
As it happens, few among the public knew of this provision. It represents a dramatic, and undesirable, shift in WTO jurisprudence on permissible interruption of imports. It was smuggled into the agreement much like the way in which lawyers who negotiated Chapter 11 in the Nafta agreement smuggled in a much more expansive view of "takings" than the U.S. Supreme Court has ever allowed in the domestic sphere: a matter that came into view, and created a storm, only when a Canadian firm filed a case for compensation against the U.S. because its profits had been affected by U.S. environmental legislation. And now a cynical Washington has wheeled out the reprehensible Barshefsky provision: the Bush Department of Commerce has slapped these so-called "special safeguard" quotas on imports of Chinese socks.
The non-transparency of this administration makes the Clinton era look like a model of free information. As the investigative reporter Greg Rushford has discovered, the Commerce Department now runs a secretive federal interagency Committee for the Implementation of Textile Agreements. It has accepted the request of the Domestic Manufacturing Coalition, a secret splinter group of the Hosiery Association, which is lobbying for new restrictions against China, to keep the names of the member companies secret. Evidently, this pushes the administration further down the slippery road to protectionism.
The Return of 'Voluntary' Export Restrictions
But the damage being done to the cause of freer trade is yet greater. At the end of the Uruguay Round, it was agreed to terminate "voluntary" export restraints. Instead of imposing import restraints, the rich countries had used pressure to force exporting countries into restraining exports: a phenomenon hilariously called "voluntary" the way a kidnapper, who forced you into his car, might say you were getting a "free ride." These arrangements were arbitrary and, being non-transparent, impossible to monitor effectively. And they restrained trade, no doubt, as much as import restrictions do: they were export protectionism, as contrasted with conventional import protectionism.
Now they have returned. Manifestly, pressure was steadily brought to bear on the Chinese to show restraint. The European Commission, whose zeal for protectionism of all varieties is unabashed, began firing off its ammunition by beginning a dialogue on Sino-EU Textiles Trade on May 6 of this year. The Commission "welcomed" the announcement by China at the EU-China Summit of Dec. 8, when China revealed that she would undertake several measures to moderate the expansion of Chinese exports. And now China has announced that she will impose an export tax on textiles, which is of course a "voluntary export restraint" (VER), courtesy of pressure from the EU and the U.S., and the threat that the alternative was the use of the special safeguards. So much for the commitment to abolish VERs.
Poor Countries and Trade: Knaves and Pawns
Textiles also demonstrate how the EU and the U.S. use preferential trading arrangements to seduce poor countries into making enduring and substantial concessions in exchange for evanescent, and wasting, assets.
Poor countries with no comparative advantage that were given textile quotas -- such as Fiji, Brunei, Turkmenistan and Macedonia -- encounter themselves in a losing situation, and find that whatever concessions they once gave to the EU and the U.S. for higher quotas now have no quid pro quo, since the reciprocal concession in the form of quotas has vanished. The point is quite general: The EU, and more so the U.S., extract concessions on labor standards, the environment, intellectual property protection, and an ability to use capital controls in a crisis. These "non-trade" concessions are swapped for preferential access to EU and U.S. markets, an asset which steadily reduces in value with successive multilateral trade liberalizing negotiations such as the Uruguay Round and the ongoing Doha Round. These two powers have played this game cynically, using the poor countries as patsies in bilateral trade agreements where small countries are forced into one-on-one face-offs with an economic superpower bent on the extraction of trade-unrelated concessions.
The textiles case also illustrates the occasional hypocrisy of the rich-country lobbies and the policy makers who are in thrall to them. Thus, while the protectionist measures being adopted are evidently prompted by the need to protect their own producers, the European Commission seeks to delude others into thinking that anti-China measures are really in the interest of poor countries. Witness its statement: "We hope that these Chinese [export restraint] policies enable other developing country exporters of textiles and garments to share the benefits from the expansion of trade."
As it happens, the fear of China has begun to moderate in the major poor nations, even as the rich countries are seized by it. India and Bangladesh, which feared China, are confident that they can compete with it. Caught between decelerating growth in the number of young workers -- a result of the one-child policy -- and the massive demand for labor generated by double-digit economic growth over 25 years, wages in China are finally rising. At the same time, both Bangladesh and India plan investments in big mills where scale economies obtain and modernization is possible: this induced innovation is indeed what competition often does, and protectionists fail to appreciate.
The problem countries among the poor are going to be those with no comparative advantage. The answer to their problems has to be, not renewed protectionism, but for the rich countries finally to acknowledge that they must take the blame for this MFA-caused situation. Their aid funds, and those of the World Bank, need to be addressed to assist these countries as they struggle with the enormity of the losses now facing them.
Mr. Bhagwati, University Professor at Columbia University and senior fellow at the Council on Foreign Relations , is the author of "In Defense of Globalization" (Oxford, 2004). Mr. Panagariya is Professor of Economics, and the Bhagwati Professor of Indian Political Economy, at Columbia.