What Would Happen if the New T-shirt Market Operated as a Free Market? The producers in the new T-shirt value chain do not operate in a free market system. Government protectionist measures such as subsidies, quotas, and tariffs have limited economic success to a fortunate few. According to the author Pietra Rivoli, “the winners at various stages of my T-shirt’s life are adept not so much at competing in markets but at avoiding them. ” These winners include the U. S. otton farmer and the China apparel industry. Their market dominance and profitability have benefitted significantly from the political prowess of their government to limit competition. If government intervention was removed from all segments of the new T-shirt value chain, the current leading producers would gradually lose their dominance as global competition intensifies. The race to the bottom would occur more quickly as more poor countries compete to become the producer of the cheapest cotton and T-shirts.
As garment manufacturing develops in their country, industrialization would occur which would cause their standard of living to increase. Although competition would intensify in the free market system, it is doubtful that the current top producers (U. S. cotton farmer, China apparel manufacturer) will lose their position in the near future. If the U. S. government removes the direct subsidies to the American cotton farmer, the world market price for cotton would increase by 3% to 15% and weaken U. S. cotton exports.
American farmers would not be able to compete on price with farmers outside the U. S. such as those in China, India, Pakistan, or Africa because of their low priced or free family labor. T-shirt manufactures seeking to lower their cost and improve their margins will buy cotton from the cheapest providers. As a result, U. S. farmers will see a decline in their cotton production profits while farmers in emerging and developed nations will see an increase in their income. Over time, the U. S cotton farmer’s dominance will decline as countries gain market share from being lower cost providers.
However, this transition will be gradual given the U. S farmers’ advantage in producing more yields per acre and higher grade cotton. With the elimination of U. S. government subsidies, cotton textile manufacturers will pay more for cotton. As the leading buyer of cotton, the Chinese apparel industry’s profitability will be reduced due to their inability to pass on increased cotton prices to their buyers. China’s manufacturing costs had already increased by as much as 40% due to higher market wages and costs with complying with worker and environmental protections.
Although China has substantial labor and is accused of utilizing sweat shops to keep their costs extremely low, their increasing manufacturing costs have opened the door to other countries with cheap labor such as Vietnam and Pakistan. Although the Chinese apparel manufacturers would lose profitability due to rising cotton prices and competition from emerging countries, they stand to gain the most from the removal of U. S. quotas and tariffs. According to the author, in 2007, 95% of the 20 billion garments Americans made were purchased overseas. Due to U. S. rade barriers, China’s share of the U. S. apparel import was only 30%. Once these barriers were removed, Chinese apparel would flood the American market due to their low cost and dominance in garment manufacturing. Experts predict that China could eventually supply 85% of U. S. apparel. As they increase their market share in the U. S, their profitability will rise. The primary loser in the apparel manufacturer’s industry is the U. S. apparel industry. According to the author, the textile and apparel trade is the most managed and protected manufacturing trade in U. S. istory. Once trade barriers are removed, the American apparel manufacturer has no hope of competing with China or other low cost producers. In time, the remaining mills will be forced to shut their doors. Other losers include apparel manufacturers in countries who have duty free access to the U. S. market and poor countries who benefitted from the quota on Chinese apparel. Certain countries such as Japan, Germany, Costa Rica, and Honduras receive duty free access to the U. S. market. The removal of these tariffs forces them to compete with China and other low cost producers.
Regarding the impact on poor countries, the loss of quotas would allow unrestrained sourcing from China. With the quotas, retailers and other garment sources were forced to work with as many as 50 countries to fill their orders. Once the MFA laws are removed, retailers are expected to consolidate the number of countries who produce their apparel. The financial impact on these developing countries will be significant given apparel and textile exports make up more than 50% of their exports. Worst case predictions suggest the end of the MFA law could mean the loss of 30 million jobs in the developed world.
In conclusion, the removal of government interventions in the new T-shirt free trade system would hurt the profitability of the most heavily protected industries (U. S. cotton farmer, U. S. apparel manufacturer). No longer able to rely on artificial support, these industries would be forced to compete on cost to their disadvantage. The clear winner in the free market system includes China’s apparel manufacturers. Their ability to support the developed world’s apparel demands at a competitive price allows them to obtain more profitability in the T-shirt value chain.