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Business & Financial
Robert S. Reichard, Economics Editor

Mill Earnings Hold Up

Robert S. Reichard, Economics Editor

E arly 2007 profit performance hasn’t been all that bad — and clearly a lot better than some of the gloomy forecasts making the rounds earlier this year. New first-quarter figures released by the Department of Commerce provide the details. Domestic textile firms’ after-tax earnings during this three-month period hit $339 million. Project this number through the entire year, and you end up with a 2007 estimate of $1.36 billion — just fractionally under last year’s overall $1.41 billion total. Margins also are tolerably good — 3 percent for the first quarter 2007 versus 3.8 percent for all of last year.

The picture is much the same for domestic apparel makers, where first-quarter after-tax profits and margins actually ran slightly above the overall 2006 average.

These trends seem likely to continue — at least that’s how analysts at Global Insight see it. Specifically, this economic forecasting firm’s measure of textile mills’ gross profits — sales less wage and material costs — is expected to hold virtually unchanged over the next few years. Zero in on the apparel sector, and this gross profit measure actually rises a bit for 2007 and 2008. If anywhere near accurate, this projection suggests US textiles and apparel could continue to hold their own in the global marketplace.


More Question Marks
Major trade uncertainties remain. The biggest unanswered question is what happens after the disappointing results of the recently concluded economic summit between the United States and China. Dialogue and negotiations are continuing, but there’s now the increasing likelihood of new punitive US legislation against China — including the imposition of tariffs on incoming Beijing shipments or perhaps selective levying of countervailing duties to offset the impact of China’s subsidies to its manufacturers.

Even if President George W. Bush should veto such legislation, these kinds of actions could well provide some political cover for Washington to take a tougher line. In any event, one point seems clear: The huge overall trade deficit with China can’t continue. At just over $230 billion in 2007 — one-third the total deficit with all trading partners — the red-ink figure is on track to move up a lot further this year. This circumstance has enabled the Chinese to capture a huge 30 percent of the overall US apparel market — a figure that could take another significant jump once the remaining quotas on many textile/apparel categories are removed. The National Council of Textile Organizations (NCTO) is asking that Chinese exports in key categories continue to be kept under some sort of restraint once these so-called “safeguard” quotas are removed. NCTO President Cass Johnson further emphasized the problem, noting ongoing negotiations are supposed to increase trade, not hand it over to countries that don’t play by the rules.

Beijing Has Options
The easiest way out of this trade problem would be more give on the part of the Chinese. Clearly, a speed-up in the revaluation of its currency would be welcome. Analysts at the Peter G. Paterson Institute of International Economics feel Beijing could tolerate yuan appreciation between 6 and 10 percent in any one-year period. If so, this could bring the still badly undervalued yuan back into equilibrium with the US dollar by the end of the current decade. The Chinese could help stem the still huge textile/apparel import tide by also taking action in other areas — including subsidy reductions, the curtailment of illegal transshipments and the end of copyright piracy.

The next few months will bear close monitoring, but Textile World feels some sort of compromise is likely. Reason: The US and Chinese economies are already too interconnected for a trade war to be anything but a lose-lose situation. But aside from all this, there are economic pressures — in the form of rising Chinese wage rates — that could also play a role in how the China card plays out. Specifically, Chinese wage costs are up 10 percent or more in many of that nation’s cities, something that could eventually erode the country’s reputation as the world’s lowest-cost producer — especially in such cheap labor-intensive products as textiles, apparel and shoes.
July/August 2007

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