U.S. Textile Investment: More On The Way?

BornemanBy James M. Borneman

One can’t throw a rock in the next several months without hitting a textile meeting or event. The industry is approaching that part of the event cycle when annual, biannual and triennial events collide.

It’s not a bad thing, particularly with the U.S. economy performing well and continuing to grow. As mentioned in the investment feature (See “Textile Investments In The Headlines,” TW, this issue), according to the latest Manufacturing ISM® Report On Business® published by the Tempe, Ariz.-based Institute for Supply Management® (ISM®):  “Economic activity in the manufacturing sector expanded in February, and the overall economy grew for the 118th consecutive month, said the nation’s supply executives.”

Not only that, but the textile mill sector is performing well, coming in third out of 16 growing manufacturing sectors.

On the world stage, the U.S. economy is a stand-out. But lack of growth in export markets are a challenge.

China is a double-edged sword. Its slowing economy can cause a global swoon. But if fair and free trade can be achieved, or if trade policy can move in that direction, positive global economic effects could result. If China’s growth is based on a strengthened internal economy rather than a sharp focus on export driven growth, a hallmark of mercantilism, the net effects globally could be tremendous.

If trade went back to the general tenets of free trade based on countries specializing in trade based on their comparative advantage rather than competitive advantage, a win-win would occur. China/U.S. trade hasn’t been based on free trade, and neither are long term tariff barriers or restrictive trade barriers.

Comparative advantage can be a challenge to understand, but it is fundamental to real free trade.

If you have two trading partners that produce goods for domestic and trade consumption, each partner needs to look at what they can produce most efficiently. If these goods are then traded, in economic terms goods and services were traded at their lowest opportunity cost, and that is why free trade is a win-win.

You can build a motorcycle for $5,000 and sell it $7,500 in the open market. A potential trading partner has higher opportunity cost, but insists on making motorcycles at $10,000 and selling at $12,500 rather than trading something with lower opportunity cost. He insists on protecting his industry, and applies a 100-percent tariff on imported motorcycles.

The end result is your $7,500 motorcycles sells for $15,000 in your partner’s country — more expensive than his $12,500 bike. The partner’s consumer is paying a high price for whichever bike they buy, the partner’s government is pocketing $7,500 for each bike of yours that sell in that country and your business volume isn’t maximized. Everybody loses.

But this unfair trade can be fixed. It turns out your partner makes roller skates much more efficiently than he makes motorcycles. Just maybe, if he lets in motorcycles tariff free and you accept roller skates tariff free, both partners can maximize efficiencies and consumers and companies are all winners.

At least that’s what supposed to happen, keep your fingers crossed on China trade — it is important on a global scale.

March/April 2019