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4 Future Scenarios, Policy Options, and Their implications The purpose of this chapter is to (1) project the structure and international competitiveness of the American textile complex (the basic scenario), (2) identify government policy options in a number of areas that could alter the basic scenario, and (3) assess what impact these options could have on the international competitiveness of the U.S. textile complex. Drastic changes in trade or other government policies were not considered because they would be unrealistic and unfeasible in today's world. The discussion centers on incremental changes, rather than massive, sweeping varieties. Within this framework, the main policy areas examined were trade mechanisms, tech- nology, manpower education and training, taxation, and regulation. As important points of departure, the following points of panel consensus should be kept in mind. First, it is extremely doubtful that employment in the U.S textile complex will increase or even be maintained at its current level even if, by taking various measures, the complex becomes more competitive. However, the rate of decline in employment can be slowed. Second, the prod jected decline in employment and other impacts of competitive changes will not be felt equally in all segments of the complex, nor geographically equally within the United States, nor dem o- graphically equally among various groups of the work force. Third, the rate and extent of possible impacts will depend both on future government policies and on the activities of firms in the complex. Finally, it was the consensus of the panel that govern- m ent policy should be directed toward achieving as orderly a transition/adjustment as feasible and that government policy should be more consistent, proactive, and comprehensive than it has been in the past. 66

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67 THE BASIC SCE N ARI O Assumptions no changes in existing government policies (such as trade restrictions) or the economic, technological, and corporate activity trends described in previous chapters. Expected Results: The combined U.S. trade deficits in fibers, yarns, fabrics, and products made from textile fabrics (apparel, home furnish- ings, and industrial products) will widen further, with an increasing trade deficit in apparel more than offsetting any future trade surpluses in fibers, yarns, and fabrics. Technological and other productivity-related developments will continue to reduce the need for labor in the complex but also will increase the demand for higher-skilled workers and management, permit more sophisticated products to be made, and lower production costs, particularly for apparel. The projected overall slow growth in domestic demand for the output of the complex in the face of increasing imports and productivity will result in employment declining slowly but steadily. The greatest reduction will take place in apparel and in those parts of the fiber and fabric segments that are heavily dependent on the apparel segment. ~ , An, _ _ , In addition, employmen t reductions will be largest in the unskilled categories and among women and minority groups, as has been the case in the past. Finally, employment reductions will particularly impact urban regions of the United States where relative production costs are highest. Increased competition from foreign and large domestic firms and the necessary increased capital outlays required to become more competitive (e.g., newer technology, more productive equipment) will result in continued industrial concentration of the U.S textile complex. Because the man-made fiber segment is already highly concentrated, and there are not major manufac- tur~ng economies of scale in the apparel segment, the greatest consolidation may take place in the yarn and fabric (textile mill products) segment. Increased concentration is expected to continue in the apparel segment due primarily to marketing economies of scale, but it is not expected to be as extensive as in the fabric segment. With a more concentrated and productive complex, the U.S. textile complex will become more competitive. As mentioned previously, however, the expected increase in U.S. international competitiveness will not be great enough to reverse the combined U.S. trade deficit in fibers, fabrics, and apparel, nor prevent an overall reduction in employment in the complex.

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68 GOVERNMENT POLICY AREAS AN D THEIR P OTE NTIAL I MPACT The policy areas examined below pertain to international trad e m echanisms, technology, manpower and education, taxation, antitrust, and other regulations. Major policy changes in these areas could significantly alter the expected results of the basic scenario described above. Trade Mechanisms As a preamble to this discussion of trade mechanisms, several key points are important. First, there is an existing, official, and highly complex framed work governing international trade that comprises a number of specific mechanisms: primarily, the General Agreement on Trade and Tariffs (GATT), the MFA,2 and a host of bilateral trade agreements. The first deals primarily with trade in almost all products, while the latter two deal primarily with regulation Of trade in cotton, wool, and man-made fiber textiles and apparel. Historically, changes in the MFA have had more of an indirect than direct effect on fibers and their greatest direct effect first on apparel, then fabrics, then yarns. However, as pointed out in Chapter 1, unfavorable impacts on just the apparel sector will ripple backward to the fabric, yarn, and fiber sectors. Second, one of the intended purposes of these trade policies a nd mechanisms was to allow developing country producers to increase their exports without unduly disrupting developed countries' markets, firms, and employment levels. Thus, there are inherent political dimensions, domestic and international, that cannot be separated from the existing and future trade framework. Third, the existing framework seeks to regulate trade between exporting and importing countries, including the trade access of developing countries to developed countries' markets. Yet, in terms of the output of the global textile complex, the greatest future growth is projected to occur outside the developed coun- tr ies4 in the developing countries where there are considerable tariff and non-tariff barriers and restrictions on inward foreign i nvestment, which are not likely to be reduced unilaterally. Therefore, modifications of existing trade mechanisms discussed in Chapter 2 are not likely to significantly improve the access of U.S. firms to foreign markets, be it by export or foreign investment.

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69 With these overview considerations in mind, the options for the U.S. government are as follows: 1. To better enforce the existing trade mechanisms system and tighten controls, as well as to respond faster to changes in market conditions and import surges. 2. To seek reduction in tariff and non-tariff barriers in other countries. 3. To change to a system of granting licenses to U.S. mporters instead of foreign exporters. 4. To change policies concerning offshore processing. il Better Enforcement and Control During the Carter administration, an administrative "White Paper" addressed many of the complaints of the U.S. textile complex concerning what it perceived as slack enforcement of the MFA provisions and promised better enforcement.5 While this White Paper was considered by the industry to be a move in the right direction, there remain several areas where improved enforcement is still needed. While the renewed (12/81) MFA is expected to help reduce these problems, faster enforcement and more strict controls would lessen import surges and market disruptions, lessen the risks and improve the planning ability of domestic firms, and make for a more orderly transition and adjustment by the complex. The key to proper enforcement in the United States rests with the [J.S. Customs Service and the amendment of customs legisla- tion, which, for example, imposes no penalties on quota violators when tariff rates are not at issue. The Customs Service has never had sufficient personnel, and recent budget cuts have seriously lessened its effectiveness. Testifying before the Trade Subcommittee of the House Ways and Means Committee, Customs Commissioner William Van Rob b acknowledged that the 1983 budget as submitted by President Reagan may force a layoff of over 1500 employees with a further cut of some 800 jobs through attrition. Layoffs are likely to involve some 240 import specialists, who classify and monitor imports and assess and collect duties; some 1200 inspectors, who staff U.S. border crossings and ports; and 40 special agents, who investigate quota violations and fraud. There are at the present time some 1100 import specialists in all fields, 4350 inspectors, and 635 special agents, although only 400 of them are active in the field, with others assigned to supervisory and foreign liaison duties. Washington recently placed the enforcement staff under the regional directors, thus minimizing the already inadequate effectiveness of the enforcement effort.

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70 There is a need to strengthen the enforcement capabilities by providing improved procedures and by strengthening penalty provisions, to increase the size of the Customs Service personnel (additional manpower in this field pays several fold for itself through increased duty collections), and to bolster its enforce- ment activities and personnel. in creasing Responsiveness It was the consensus of the panel that the existing trade restric- tion mechanisms are not sufficiently responsive to import surges or other significant changes in markets, competitive forces, or company activities. As a result, irreversible damage can be done even before an investigation begins or a response is undertaken. There are currently provisions in both the MFA and most U.S. bilateral agreements concerning flexibility. For example, para- graphs six and nine of the Protocol extending the MFA until 1986 (concluded on December 22, 1981) justify reductions in the posi- tive import growth rate and flexibility provisions for particular products from particular countries in specified circumstances. In addition, there are required consultations with a country whose exports to the United States increase rapidly, either because they were not covered by a bilateral agreement or because the par- ticular agreement did not set a quota for the specific product. If no agreement can be reached, the United States can usually act unilaterally, either in accordance with the provisions of the bilateral under Article 3 of the MFA, or under the provisions of Section 204 of the Agricultural Act as amended, as the case may be. However, delays in action by U.S. authorities often permit the build-up of exports to very high levels, and some bilaterals do not always specify that once consultation is requested, the exporting country will limit its shipments to a specified fraction of the prior year's shipments. Nor do U.S. bilaterals provide that, when under- shipments occur, imports cannot increase in the subsequent year by more than a specified percentage of the applicable quota. In addition, the existing provisions (i.e. swing or shift, carry-over, and carry-forward) often increase the import growth provided for. While recognizing that multilateral trade agreements are inherently complex and that they already contain some responsive provisions, the panel believed it beneficial for the United States to examine ways to improve the speed of U.S. response.6

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71 Reduction of Tariffs and Non-tariff Barriers Abroad While the average tariff levels on fabrics and apparel are gener- ally higher in developing countries than In the United States, the problem is even greater for non-tariff barriers. Non-tariff bar- riers (such as custom clearance delays, time-consuming inspection procedures, local content requirements, labeling procedures, border taxes, and equalization taxes) are often greater trade impediments than tariffs and are far more difficult to identify and assess.7 Obtaining reductions in foreign trade restrictions and impedi- ments would improve U.S. export potential and, in the process, could result in improved U.S. trade balances and increased employ- ment. The potential impact on the U.S. complex of greater exports should not be underestimated. As previously mentioned, in the future both population and per capita consumption (in pounds) of textile products are projected to increase faster outside the United States. Therefore, the more trade restrictions in other countries can be reduced, the more the U.S. complex can participate in and benefit from global growth in consumption. At the same time, it must be acknowledged that U.S. firms must be suitably prepared for and capable of participating in this growth if the benefits are to be realized. This will require greater international commitment and skills, a point addressed separately in a subsequent section of this report. Changing the Export Authorization System Unlike many countries, including European countries, the United States allows exporting countries to decide who shall export within the limits set forth in their bilateral agreements and does not employ a double check system. This permits foreign exporters to buy or sell their licenses to export, thus giving the economic rents (profits) to foreign holders of the licenses, rather than to U.S. citizens. This system makes it much more difficult to control the actual flow of goods to the United States. While the panel was not able to fully assess the impact of the current U.S. policy in this area, it did consider that it would be prudent for the U.S. government to investigate the issue further, that is, to analyze the U.S. system and compare it with systems in other major importing countries to determine if the U.S. system should be retained or revised.

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72 Changing Item 807 (Offshore Processing) The U.S. textile complex has not historically been a major user of offshore processing, but its use in the recent decade has in- creased, particularly by the apparel segment, as shown in Chapter . The consensus of the panel, with one strongly dissenting opinion,8 was that offshore processing (the use of Item 807) preserves jobs9 in the fiber and fabric sectors and even some in apparel and may allow some U.S. firms to be more competitive. The panel also believed-that offshore processing has a positive , ~ ~ . . ~ political impact internationally, as most of the U.S. apparel segment's use of Item 807 is in Latin American and Caribbean countries, areas with whom the United States continues to seek improvements in its political relations. Therefore, the consensus of the panel (although with som e strong dissent) was that the United States should not eliminate Item 807 but rather should consider policies that would increase its use.l] While the panel acknowledged that increased offshore process- ~ng might lead to some reduction in domestic employment, more service jobs might be created, the international competitiveness of firms might increase, and the longer-term prospects for the U.S textile complex might be enhanced. An interim test of any such changes might clarify this view. Summary While changes in almost any of the above areas would help the U.S. textile complex become more competitive, concurrent changes in several of them would have an even greater positive impact. The sooner the changes are implemented, the sooner the benefits would occur. Technology As described in Chapter 2, both the pace and costs of technologi- cal change have increased sharply. While these changes have had greater impact in the fiber and fabric sectors than in the apparel sector, all segments of the textile complex are expected to be i ncreasingly affected by future technological developments. Because adoption of new technology enhances international competitiveness, careful consideration should be given to policies that affect directly and indirectly the development and utilization of new technology.

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73 Examples of government policies that have a direct impact on technology development are (1) support for the scientific com- munity and its RED activities, (2) tax incentives for corporate R&D programs, and (3) support for projects that have high R&D components and spimoff applications. Examples of policies that have an indirect impact on technology development are particle larly those that affect (1 ) future market stability and (2) the amount of capital available to conduct R&D. In the former case, an unstable or pessimistic future can increase the risks and negative perceptions of potential future technology development. In the latter case, if firms or other organizations do not have enough capital to spend on R&D, less R&D will be done. The result can be a kind of "Catch 22" situation. If business prospects and funds availability are low, R&D declines, causing international competitiveness to decline. This causes business conditions, expectations, and future funds to decline further. causing R&D to decline further, and so on. On the bright side, the converse of this scenario is also true. If business prospects and capital availability are high, RED increases, competitiveness increases, business prospects and capital availability improve further, and so on. The obvious trick is to get the cycle moving upward. All of these comments essentially also apply equally to the utilization of technology. Without available funds or a suff i- ciently optimistic future market, firms will be less inclined and less able to purchase (utilize) the new technology. The British economy and textile complex are illustrative examples. Finally, in this technology area, there is the issue of who does it--does it make any major difference (1 ) whether technology development is done by firms in the complex or by the equipment industry, and (2) whether it is done domestically or abroad? The important distinction in the first case is that firms within the complex may be more interested in selling their products than their technology, while independent equipment manufacturers' products are their technology developments. Thus, the distribm tion of technology, domestically and internationally, is faster if it is developed by firms outside the complex that have no incentive to restrict its distribution. The important consideration in the second case hinges on who is doing the technology development abroad. If it is firms in the foreign textile complex, R&D devel- opments will be slower in spreading to the United States, and U.S. competitiveness could be affected adversely. On the other hand, if it is being done by foreign equipment manufacturers, then it will be made available faster to the U.S. complex, and U.S. competitiveness will be affected only by the firm's willingness and ability to purchase it.

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74 Future Technology Scenarios Previous chapters described the increasingly rapid rate of tech- nology development for the textile complex and the forms it had taken. Major developments occurred primarily in new fibers and fiber combinations, yarn and fabric formation, product quality, and automated equipment (generally). Most of them were labor- saving, more energy-efficient, and oriented toward increasing productivity or enhancing product features. Most of them also emanated from equipment manufacturers and increasingly from sources outside the United States. In general terms most of these past trends are expected to continue. Fiber In the man-made fiber segment of the complex, the R&D empha- s~s of the past seven years on energy-cost reduction and EP A equipment-r elated technology will shift to product and process variant technology: taking existing polymers and making new combinations, nigher value products, and better products in terms of quality and aesthetic and processing properties. It is not expected that any major, totally new fibers will be developed. 1 1 It is expected, however, that more, if not most, of the new technology will be developed by the major fiber firms, i.e., in-house rather than by equipment manufacturers. Yarn New developments in yarn spinning are among the most likely to occur and will have a major impact on fabric production, as new methods of spinning make yarns of better quality and more able to be processed on new high-speed equipment. New opening, draw- ing, and spinning processes (particularly air-jet spinning and open- end spinning) are expected to lead the way. Fabric Perhaps more than in any other segment, technology is expected to move farthest and fastest in fabric formation. Fly-shuttle looms may well become obsolete in the United States, replaced by newer missile, rapier, water, and air-jet looms, and later by the wave-shed and bi-phase generation of machines. Technology is also expected to advance in knitting (needle refinements, co m- pound needles, new loop-forming systems, among others), although

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75 not as dramatically as in wovens. As in wovens, however, much, if not most, of the new technology in knitting is expected to emanate from non-U.S. equipment manufacturers. Finally, there remains the non-woven sector--perhaps th e single area where future technological breakthroughs could be dramatic and far-reaching. While currently rather limited, the applicability of non-wovens is hindered only by technology. Non- wovens offer tremendous potential as substitutes for wovens and knits and more importantly as new markets for flat textiles. In addition, the technology is primarily located in the United States and will probably continue to be in the near future. New tech- nology that widens the use of non-wovens in industrial and home furnishings markets represents a major future competitive advan- tage for U.S. firms in these markets. However, it is not likely that major technological breakthroughs will occur in the near future in the use of non-wovens as apparel fabrics. Dyeing, Printing, and Finishing Fabric dyeing, printing, and finishing represent still other areas where technology is expected to advance. The main reason is that these processes add flexibility to firms' strategies and products and help differentiate them from developing country firms, which compete mainly in undifferentiated low-price goods. While the United States has enjoyed technological leadership in most of these processes, the Japanese and Europeans can be expected to increase their efforts in the future. A pparel Unlike most of the other segments of the textile complex, there appears to be little on today's horizon that suggests that applied technology for the apparel industry is going to change very much in the next 10 years. While the Japanese will be spending 550 to $70 million over the next 5 to 10 years on the potential application of robots to apparel manufacturing, few immediate,,short-term applications to apparel . -1 ~ 1 ~ m anufacturing are envisioned.) ~ In the immediate future, new and more extensive use of microprocessors and technology related to body fit and materials handling appear to be the key areas for major developments. In the more distant future, garment molding may eliminate some sewing operations (and sewing operators) but would probably have limited applications because it would not permit alterations or offer the flexibility provided by sewn seams.

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76 It does not appear that most U.S. apparel firms will be increasing their own R&D efforts in the future, but instead will continue to rely on technology developed in other segments of the textile complex. Home Furnishings and Industrial Fabrics Except for carpet, the manufacturing technologies of the home furnishings sector are fairly similar-to those of the fabric sector. Therefore, future technology scenarios for them are similar to those just mentioned for fabrics.l3 However, technologies of the industrial fabric sector are much more varied. They are more technical and it&D-oriented, utilize more specialized equipment, and, for some products such as geotextiles, are significantly different. In addition, an increasing number of home f urnishing and industrial textile products rely on non-woven processes and technologies, and this trend is expected to increase. Therefore, increasing U.S. leadership in non-woven technologies could figure prominently in the future competitiveness of industrial and home furnishing sectors. All in all, the expected technological impact on the industrial product and home furnishing sectors is likely to be similar to that projected for fabrics in general. New technology should make the sectors more capital intensive, more concentrated, and more internationally competitive. Policy Implications There can be a clear benefit to the United States from increased technology development. The most technologically advanced i ndustries in the U.S. economy are the most competitive inter- nationally and are growing the fastest. However, there must be increased funds to continue this development, either from the government sector or the private sector, with the greatest potential benefit probably resulting from government approved cooperative efforts. The most defendable and pressing case for government- sponsored R&D concerns the apparel industry. Of all the segments of the U.S. textile complex, apparel is in the most precarious position. Because historically the apparel industry has not invested heavily in R&D or technological development, that industry is the one with the highest potential marginal returns from new technology. What happens to the U.S. apparel industry in the future will have major repercussions on the rest of the U.S. textile complex.

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77 The more intense levels of international and domestic com- petition in apparel suggest that they will not be capable of developing major technological breakthroughs on their own. However, they would be in a position to provide input into a collaborative R&D effort, particularly with the fiber, fabric, and equipment industries. An examination of the efforts and results of such cooperative, government-sponsored RED projects in the Far East and Europe could prove enlightening and beneficial and should be undertaken. As for the other major segments of the U.S. textile complex, it was the consensus of the panel that increased government emphasis on technology development would be less beneficial than increased emphasis on policies that affect equipment utilization. Examples include more favorable tax incentives tor tne use OI new, experimental equipment (not just for one piece of equip- ment, but for multiple units, e.g., an entire bank of looms) and more funds for education and retraining of both labor and managers in the use and servicing of more modern equipment and processes. These examples suggest that all government policies affecting capital formation within companies are important, as well as policies that mandate certain allocations of corporate capital, if the benefits of new technology are to be maximized. For, even if new technology is developed, the firms must be able to absorb it, financially and managerially. Thus, government-sponsored R3cO, as well as policies increas- ing capital formation in firms to develop their own R&D or to purchase and utilize other firms' R&D will all be essential. Yet, even then, they alone will not provide an automatic increase in U.S. international competitiveness. They are but one critical component in what has to be a multifaceted strategy of cor- porate, economic, and societal development. v' Another key component in this regard is manpower education and training. Manpower Education and Training The combined impact of the two previous scenarios suggests that the future manpower needs of the textile complex will be differ- ent than they have been in the past. In general, fewer people will be employed (particularly in apparel), but more skilled workers and managers and a different orientation of managers will be needed in all segments of the complex. Therefore, the human aspects of the textile complex will also need increased attention if its international competitiveness is to be increased. Government policy options affecting these expected trends are

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78 (1) To slow the projected labor displacement to allow more time for the adjustment process to work (e.g., retraining, reloca- tion, attrition). (2) To develop more effective and efficient federal adjust- ment programs for the textile complex, particularly of the job training and skill-upgrading variety. (3) To enact policies that result in firms' having more funds to develop more productive workers and sophisticated managers, either through creation or expansion of their own programs or by sending more of their personnel to outside programs. (4) To increase funding of research and educational programs at colleges and universities that address the future manpower needs of the textile complex. (5) To provide specific, direct government intervention or assistance in the area ot manpower eaucal~on. While policy option (5) could be considered inconsistent with the historic laissez faire doctrine of the United States, it should be recognized that the underlying assumptions of laissez faire do not exist in reality. Even though, in the long run, market forces may be sufficient in magnitude to force the adjustment process to work, there would be major short-term problems that would need to be addressed. Thus, the panel did not believe that policy option (5) was feasible nor desirable for the United States to pursue. The anticipated impact of the other policy changes would be a more highly skilled labor force for the textile complex and less short-term unemployment for the United States as a whole. The former would clearly enhance the international competitiveness of American industries, while the latter would lower the social costs of the anticipated higher levels of unemployment. The reasons behind the need for increased skill levels of U.S. production workers have already been discussed at length earlier in this report. Comparatively higher U.S. wage rates place U.S. firms at a competitive disadvantage against firms in developing countries unless U.S. productivity is commensurately higher. U.S. productivity, in turn, requires new equipment and a labor force that can properly utilize and service it. Thus, increased effort and funds must be allocated to upgrading the production and service skills of the textile complex's labor force. Not fully elaborated yet in this report are the problems and needs of management--from supervisory levels up through top management levels. Therefore, the rest of this section is devoted to these areas. At the lower levels of management, production supervisory skills are in critically short supply, as are high-grade technicians and especially production and design engineers. What appears to be necessary in order to help solve these shortages is a redirection

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79 o f educational emphasis. But, because financial support for education is being significantly reduced, it is not likely that the educational system will be able on its own to redirect its empha- sis. Therefore, the panel believed policy changes at the federal and state levels could facilitate movement in the needed redirection: more specifically, additional financial support for expansion of technical and supervisory training programs and applied engineering programs. In addition, increased scholarships or other forms of financial assistance would help motivate and make it possible for more people to enroll in such programs. The panel also believed that more middle management development programs will be needed because the nature of the textile business and its work force will be continually changing. Unfortunately, current curricula of many business schools place emphasis on large organizations, growth industries, and on preparing people for top management. They do not suitably interest nor prepare people for working in middle management, in smaller scale enterprises, or industries with slow growth-- characteristic of several segments of the textile complex. As a result, business school graduates do not readily seek employment in the complex and, when they do take jobs in the complex, may find themselves ill-equipped and frustrated. Thus, what is needed are more emphases and programs in business schools oriented toward developing needed skills of middle management and small business. But while government assistance in the development and funding of such programs would be beneficial, the firms themselves must be educated and motivated and resolve to spend additional time and money of their own in these areas. At the top management level, many problems also exist an oversupply of people with inappropiate skills and orientation and, at the same time, a shortage of people with the needed skills and orientation. There is probably no single area where this problem is more acute than in the existing domestic and production (supply) orientation of top management in the fabric and apparel segments. What is needed now and particularly in the future are international and marketing (demand) orientations. If the U.S. textile complex is to become internationally competitive, it must not restrict its orientation to just becoming more competitive in the U.S. market--it must grow and become more committed and more competitive outside as well. In addition to this fundamental change in perception, there is a great need for increased business knowledge and skills in the areas of international trade and investment (mechanisms, structure, dynamics, and other foreign ways of doing business) if the future global opportunities are to be achieved successfully. While most business schools are moving the curricula in this direction, the pace and extent of the movement need to be accelerated if future managers are to be suitably prepared.

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80 Better marketing at home and abroad will be equally necessary and critical. Better anticipation of changing markets and the appropriate matching of technology changes and the firm's capabilities to these markets will be essential for future success. In a broad sense, this process and related procedures concern strategic management, the most critical aspect of which is strategic marketing; identifying what market niches will best protect the firm from competition while placing it in a position to take best advantage of opportunities. The strategic planning process and its outwardly focused orientation are particularly critical for mature, slow growth industries. More research, education, and training in the areas of strategic management and the management of mature industries would clearly benefit the textile complex. However, given the recent reduction in federal and state support for education, additional support and commit- ment will be necessary from industry associations and the firms themselves. Taxation Most of the preceding discussions point to an increased need for money--money to develop and acquire new technology and skills, to undertake new activities, and to weather any financial storms that may occur in the interim. Where will the money come from? If the government is to play a major financial role in these areas, a reallocation of existing government revenues is one optior' increasing the revenue base through higher taxes is another. Neither option appears politically feasible in the near future. A third option, and one that many argue is both wiser and more feasible, is for the government to enact policies that will result in greater capital formation and after-tax income for companies--income that can then be used by the companies themselves to become more competitive. While recent changes in the U.S. tax laws are a movement in this direction, the panel questioned whether they will be suffi- cient. The panel did agree that (a) tax policies that improve profitability will increase both capital formation and U.S. competitiveness at home and abroad, and (b) existing tax and depreciation rules are not a unique problem to the textile complex but are in fact a national economic problem that should be approached at that level. Specific tax policy options suggested by the panel for government consideration were the following: ( 1 ) To revitalize U.S. industry, the government should consider providing greater tax incentives to assure more

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81 investment in new plant and equipment and R&D. It should specifically consider faster depreciation of fixed assets, greater tax incentives for scrapping obsolete equipment and plants, and more favorable tax treatment for R&D (development and experi- m entation) and expenditures related to meeting government regulations (e.g., EPA, OSHA). (2) To stimulate capital formation, the government should consider eliminating double taxation of dividends, further Increasing or removing ceilings on interest rates for personal savings, and decreasing further the capital gains tax and taxes on interest (or increasing further the tax exempt ceilings). (3) To promote the expansion of the U.S. exports, th e government should consider: (a) simplifying or revising the rules for Domestic Inter- national Sales Corporations (DISCs),l4 (b) increasing the amount (percentage) of deferrable DISC _ Income, (c) providing tax incentives for export market develop ment and establishing foreign sales offices and possibly for developing cooperative (multifirm) export organizations. Options (3a) and (3b) would permit more aggressive marketing, and in particular pricing, of U.S. exports as well as encourage more firms and smaller firms to begin exporting or expanding their exports. Option (3c) is related to the need for greater U.S. expertise about, and presence in, foreign countries. Both would provide greater knowledge of foreign market conditions, better contact with foreign buyers and government officials, better after-sale service capability, and show foreign buyers a greater commitment of U.S. firms to their particular market--all of which should translate into increased U.S. exports and improved international business skills of U.S. personnel. In sum, a larger pool of investable funds would facilitate American firms in becoming more competitive in many ways. While it would probably benefit larger firms more than smaller ones, all firms could benefit, and, the more they do, the greater their competitiveness. One final note. As far as the panel could determine, there has been no truly comprehensive study of the comparative impact of U.S. and foreign taxation on the respective textile complexes. It has been alleged that taxation systems and procedures in foreign countries give competitive advantages to their complexes, even in countries where official corporate income tax rates are higher than their U.S. counterpart. A future study examining this issue might prove enlightening and beneficial for the United States. . .

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82 Other Government Regulations Like its foreign counterparts, the U.S. textile complex is affected by a wide variety of government regulations other than taxation. In general, such regulations are designed to safeguard various aspects or members of society, and they have proliferated rather than decreased in number. It was well beyond the charge to this panel to assess the desirability or adequacy of such regulations. However, many existing regulations do impact the competitive ness of American industries, including the textile complex--a subject within the scope of this panel's charge. It was the consensus of the panel that government regulations have had a mixed impact on the textile complex some favorable, some unfavorable. In addition, it was felt that too often their i mpact on American competitiveness was insufficiently con- sidered before and even after some regulations were enacted. In general, the panel believed that a more thorough study of the impact of regulations is needed. Such a study should assess how existing regulations are affecting U.S. international com- petitiveness, and how existing regulations could be altered to increase U.S. competitiveness. A few specific examples where such a study would be helpful are antitrust and the impact of regulatory compliance on capital formation and allocation. In the antitrust area, it is difficult, if not illegal, for U.S. firms to cooperate on R&D projects, even if such projects are designed to result in new processes or equipment to meet government regulations in such areas as EPA or OSHA. The same conclusion is basically true for cooperative export market development, despite the fact that expanding exports are a government priority and that cooperative export associations are legally excluded f ram antitrust regulation under the Webb Pomerene Act.~5 Antitrust regulations may also become increasingly important as the fabric and apparel sectors continue to consolidate, and if further integration (horizontal or vertical) takes place. The lack of comparable antitrust enforcement in major economic competitor nations does provide an international competitive advantage for their firms and industries--often at the expense of their U.S. counterparts. While the intent of U.S. antitrust is to insure fair competition in the United States, the government should consider the impact of antitrust on American competitiveness internationally. In the area of regulatory impacts on capital formation, previous sections of this report have discussed several areas of impact. Mandated expenditures for compliance with EPA, OSHA, and many of the 37 other U.S. regulatory agencies use up scarce corporate capital. While a few of these expenditures result in increased productivity, others do not and, hence, take capital

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83 a way from potentially productive use. Of course, there is no guarantee that greater capital availability will result in increased competitiveness. . . . ~ I I ~ I ~ ~ However, reduced capital avallaolllly IS cer- tainly not conducive to increased international competitiveness. GENERAL POLICY CONSIDERATIONS Almost regardless of which future policy directions the U.S. government takes, it was the consensus of the panel that there is a great need for more consistency in U.S. policy. The uncertainty in the economic environment is already enough to make corporate planning difficult and long-term capital commitments risky. As has been pointed out already, increased planning and investment are key components of future American industrial success at home and abroad. If uncertainty about future government policy is added to the uncertainty in the market, necessary and appr o- priate corporate adjustment will be harder to achieve. The American textile complex is capable of adjusting to a number of different government policies, but greater government policy consistency would be both beneficial and welcomed. In addition to greater consistency, the panel believed that future U.S. policy should also be more proactive rather than reactive. That is, the future impact on the textile complex of changing economic conditions and government policies at home and abroad should be estimated, and then policies should be enacted to facilitate the adjustment process (lessen the expected adverse impacts and increase the desirable impacts) before the proverbial horse is out of the barn. For example, many govern- m ent assistance programs for firms have been so difficult to qualify for and the assistance so long in coming that some firms went bankrupt before the assistance was received (or the cost of assistance was much higher than it would have been had it been given earlier, because the necessary changes had become so massive).! 6 SUMMARY AND CONCLUSIONS While the future for many firms and segments of the American textile complex is far from rosy, the complex as a whole is in a position to increase its international competitiveness. It can do so by becoming more capital and R&D intensive utilizing higher skilled manpower Resulting in higher oroductivitY), by becoming , more concentrated!', by changing its historical product mix, and by becoming more internationally oriented and active. While most of the larger and financially stronger firms will be able to

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84 meet these goals largely by their own efforts, most of the rest of the firms need some additional government assistance (directly or indirectly) to improve their competitiveness. Al most no matter what government policy may be in the future, not all firms will survive, nor will all jobs be maintained. Such is the nature of competition. The expected employment reduction in the textile complex and the rising levels of immigra- tion into the United States have the potential for substantially increasing U.S. unemployment levels, particularly among minor- ities, women, and lesser skilled and educated people. Given the U.S. government's historic policy of full employment, the govern- ment will need to address this future problem in addition to what future policies, if any, it undertakes concerning the textile complex or any other American industry. NOTES 1. The panel believed that U.S. apparel employment could decline to a level as low as 800,000 people by the end of the 1980s. 2. the MFA in Article 1 (2) states that its objectives "shall be to achieve the expansion of trade, the reduction of barriers to such trade, and the progressive liberalization of world trade in textile products...while at the same time ensuring the orderly and equitable development of this trade and avoidance of disruptive effects in individual markets and on individual lines of production in both importing and exporting countries." 3. However, the MFA does contain a provision for man-made f ibers, specifically, Article 12~2), which reads: "Artificial and synthetic staple tube, tow, waste, simple mono- and mult i- filaments are not covered by paragraph 1 above. However, should conditions of market disruption (as defined in Annex A) be found to exist for such products, the provisions of Article 3 of this Arrangement (and other provisions of this Arrangement directly relevant thereto)...shall apply." 4. Th is conclusion is based on several estimates that per capita consumption of fiber (and hence fiber products) will increase faster in developing countries because their current consumption levels are so low relative to those in developed countries. This point, combined with faster population growth in developing countries, results in the projections of greater demand growth outside developed countries in the future. 5. It referred to the need for better and improved adminis- trative measures to enforce the textile agreements "including the use of penalties available under law where aDDroDriate. with respect to improper meets, and violations of quantitative limits." . ~ . . . . . . , ~ ~ , . transshiDments. country of origin require

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85 6. Several panel members recommend that the United States seek improved ways to speed up the period of consultations with exporting countries, set up specific limits in the event of import advances sufficiently in advance of the high build-up of shim meets, and provide a formula for rapid resolution of disputes. 7. For a comprehensive description of the thousands o f non-tariff barriers that exist in the world, see U.S. Department of Commerce report, Foreign Regulations Affecting U.S. Textile/ Apparel Exports, August 1981. 8. Details of the position of the dissenting view can be found in the testimony of Sol C. Chaikin before the House Subcom- mittee on Trade of the Committee on Ways and Means, Special Duty Treatment or Repeal of Articles Assembled or Fabricated Abroad, March 24-25, 1976. 9. The domestic employment effect of offshore processing remains a controversial subject in virtually all countries. There is no question that some firms have closed domestic plants as a result of establishing offshore production or have reduced employ- ment in their domestic plants (without closing plants) by moving offshore. Yet offshore processing is also said to have lessened even more drastic reductions in employment that would have occurred if the moves offshore had not been made. That is, by increasing the firms' competitiveness, domestic employment shrinkage was lessened. Studies showing both results have been conducted and, therefore, no unassailable conclusion can be reached about offshore processing's precise impact on employ- ment within the industry directly involved. 10. Three changes suggested by some panel members but not supported by all included (1) remove Item 807 imports from the quota allocation given each country., (2) permit cutting, button- holeing, and other jobs that presently disqualify the product from the benefits of Item 807 to be done offshore; and (3) provide more information and training for the industry on the effective use of offshore processing. 11. While not likely, some new fiber breakthroughs could emanate from the paper or plastics industries, both of which already produce laminar flexible products. 12. The main reasons are that the robotic equipment co m- panies will continue to concentrate their efforts on industries where the use possibilities and potential gains are highest, and apparel is not one of them. Constantly changing fashions, styles, and fabric weights pose great difficulties for automation. To date, roughly $2 million has been appropriated by the Japanese government for its project on robot application for apparel m anufacturing, and so far no reports have been issued on the success or failure of its robotics project.

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86 13. As for carpet, no ma jor technology breakthroughs are expected in the basic manufacturing process (tufting). New developments are more likely in new fiber combinations (emanating from the fiber industry) and in printing and dyeing (emanating from the equipment industry). 14. DISC came into existence in 1971 as a measure to help offset the tax advantages and subsidies that foreign governments were extending to their own exporting companies. In 197 6 Congress weakened a number of DISC provisions with a tax reform act, largely in response to the feelir~g that these provisions might be inconsistent with GATT. 15. Less than two dozen Webb Pomerene associations have been established in the more than 60 years the Act has been in force. 16. See Jose de la Torre, et al., Corporated Responses to Import Competition in the U.S. Apparel Industry, Business Publishing Division, College of Business Administration, Georgia State University, Atlanta, GA, 1978. 17. For the apparel sector, however, concentration may not result in increased competitiveness. The main reason would be that greater flexibility, particularly in terms of market antic i- pation and response, may exist in small firms. 18. One can argue whether such government assistance i s advisable or desirable compared to letting market forces determine which firms survive. Ultimately, this is a societal recision.