MINI CASE: NAFTA and the U.S. Textile Industry

When the North American Free Trade Agreement (NAFTA) went into effect in 1994, many expressed fears that large job losses in the US textile industry would occur as companies moved production from the US to Mexico. NAFTA opponents argued passionately, but unsuccessfully, that the treaty should not be adopted because of the negative impact it would have on US 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 apparel fell by 40 percent and production of textile by 20 percentand this during a period when overall US demand for apparel grew by almost 60 percent. During the same timeframe, employment in textile mills in the US dropped from 478,000 to 239,000 and employment in apparel plummeted from 858,000 to 296,000, while exports of apparel from Mexico to the US surged from $1.6 billion to $3.8 billion.

However, job losses in the US textile industry to not mean that the overall effects of NAFTA have been negative. Clothing prices int eh US have also fallen since 1994 as textile production shifted from high-cost US 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 from $24 a dozen. Now they sell for $14 a dozen.

In additional to lower prices, the shift in textile production to Mexico also benefited the US economy in other ways. Despite the move of fabric and apparel production to Mexico, exports have surged for US yarn makers, many of which are in the chemical industry. Before the passage of NAFTA, US yarn producers, such as E.I. du Pont, supplied only small amounts of product to Mexico. However, as apparel production moved to Mexico, exports of fabric and yarn to that country have surged. US producers supply 70 percent of the raw material going to Mexican sewing shops. Between 1994 and 2004, US cotton and yarn exports to Mexico grew from $293 million to $1.2 billion. As always, the establishment of a free trade area creates winners and losers and the losers have been employees in the textile industry but advocates of free trade argue that the gains outweigh the losses.

a. Why did many textile jobs apparently migrate out of the United States in the years after the establishment of NAFTA?

b. Who gained from the process of readjustment in the textile industry after NAFTA? Who lost?

c. With hindsight, do you think it is better to protect vulnerable industries such as textiles, or let them adjust to the painful winds of change that follow entering into free trade agreements? What would the benefits of protection be? What would the costs be?