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Positive Feedback: The Impact of Trade Liberalization on Industry Demands for

Protection

Oona A. Hathaway

International Organization, Vol. 52, No. 3. (Summer, 1998), pp. 575-612.

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Positive Feedback: The Impactof Trade Liberalization on IndustryDemands for ProtectionOona A . Hathaway

Th e continued openness of the U.S. economy du ring the 1970s and 1980s poses apuzzle for many theories of political economy. Despite the world economic reces-sions of this period, the influx of cheap g ood s from Asia , and the increased c om peti-tiveness of European firms, dem and for protection was m uch low er than many schol-ars, particularly interest-gro up theorists, had pred icted. In fact, many U.S . industriesthat were hurt by these trends actually bec am e less protectionist. Although the use ofnontariff barriers increased du ring the 197 0s and 198 0s, these trade barriers prove dto be less effective in reducing trade than the taiiffs they replac ed.' Unilateral reduc-tions in U.S. tariffs c ontinued unabated, regiona l trade agreeme nts blossome d, an dthe global movement toward multilateral trade liberalization marched steadily for-ward.

The puzzle raised by the vitality of free trade during this period has promptedconsiderable debate. To resolve this puzzle, most theorists have focused on supply-side factors that may have offset rising protectionist demand, such as internationalregimes and well-insulated state actor^.^ In contrast, very little attention has beenpaid to changes in societal demand for protection. The central assumption has beenthat econo mic actors have largely static preferences for free trade o r protection. As aresult, the evolution of the preferences and strategies of producers in the face ofchange s in trade policy h as been largely ignored.

To fill this ga p I prop ose a theory of dynam ic industry preferences and strategies toexplain variation in industries' demand for protection over time. This theory shows

For their helpful comm ents on the manuscript. I am grateful to Lawrence Broz, Alvin K levorick, MichaelHiscox, Robert Keohane, Jonathan Crystal, James Alt. Edward Schwartz, Mohan Penubarti, Sara SuJones. three anonymous I 0 referees, and the editors of 10. I owe the greatest debt to my husband, Jacob S .Hacke r, for his intellectual and personal su pport at every stage of this project.1. Althoug h there is some disagreem ent am ong scholars about the effect of nontariff barriers (NTBs) onworld trade, most have concluded that the growth of NTBs h as had, "at worst, a moderately adverse effecton the growth of trade." Bhagwati 1988, 56. See, for exam ple, Morici and Megna 1983. 11; Milner 1988.11-12; and Hansen and Prusa 1995,311-12.2. See, for example, Destler 1986: Keohane 1984; Lake 1983: and Krasner 1982. A notable exceptionto this trend is Milner 1988.

hzternntional Orgnlzizntion 52, 3, Sum mer 1998, pp. 575-6120 1998 by The I 0 Foundation and the Massachusetts Institute of Technology


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576 International Organization

how the characteristics of industries affect their demand for protection and how, inturn, trade policy transforms industry characteristics. An imp ortant and cou nterintui-tive implication of this theory is that trade liberalization tends to reduce, rather thanincrease, industry d emand for protection.

Th e theory I dev elop in this article focuses on the determinants of political de ma ndfor protection. Although a theory of demand only represents half of the politicalequation that produces trade policy outcomes, a focus on demand is, nonetheless,critical because the source of industry preferences and strategies is poorly under-stood. Moreover, to the extent that policymakers respond to industry demands forprotection, a dynamic theory of demand can provide important insight into tradepolicy outcomes.

I begin this article by developing a static model of industry decision making thatillustrates how p roducers fa ced w ith a reduction in trade barriers weigh the costs andbenefits of political action and eco nom ic adjustme nt. I then explain how the strategicchoices of an industry are determined by key industry characteristics that evo lve overtime in response to changes in trade policy and market conditions. In particular, Idemon strate that reductions in trade barriers m ay h ave a positive fee dba ck effect thatdampe ns rather than am plifies domestic protectionist sentiment. To test this mo del, Iexamine the dramatic postwar transformation of three industries that have histori-cally demanded and received extensive import protection: the footwear, textile, andapparel industries. I con clude with an assessment of the model and a discussion of itspossible implications for our understanding of the politics of trade policy.

A Model of Preference and Strategy FormationThe model of industry decision making that I develop focuses on the aftermath of atrade barrier reduction (regardless of how it has co me abo ut) and explains the imp actof that reduction on the future demand for protection by affected i n d ~ s t r i e s . ~l-though the m odel d oes not explain w hy the initial reductions in trade barriers occur-and, indee d, treats the supply of protection as completely exogenous-it show s thatthey may have the counterintuitive effect of decreasing protectionist sentiment byaltering the characteristics of affected industries in ways that redu ce their dem and fo rprotection.

In the model, the industry is the basic unit of analysis, and the producer is thecentral actor within the indu stry. I focus on industries because they provide a com-mon framework that shapes the preferences and strategies of producers. Althoughproducers within an industry act independently, many of the factors that determinehow a producer will react to a reduction in trade barriers are com mo n to all mem bersof an industry. Th e industry context a lso shapes how a producer articulates its prefer-

3. The dynamic model of industry behavior is informed by numerous works that analyze internationaltrade policies in political-economic and game -theoretic terms, especially Krue ger 1 992, 109-14: Bhag-wati 1988; Baldwin 1985; Mayer 1984,9 70-85 ; Baldwin 1982 ,153-84 ; Brock and Magee 1980, 1-9; andBrock and Magee 1978,246-50.


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Impa ct of Trade Liberalization 577

Administrative routeMarket

Congress Congressver,dev e r i ~ o v e r i f i override

F I GURE 1. A nzodel of industry decision nzaking

ences in the political arena because m ost producers voice their policy dema nds throughindustry associations that aggregate and pursue member preference^.^ As a popula-tion of firms in an industry ch ang es in resp ons e to a reduction in trade bai~ie rs-w itheach individual firm either adjusting to the m ore com petitive environm ent or exitingthe industry-the aggregate of those firms' preferences and the political activity ofthe industry's representatives change as well. In this article, therefore, the term "in-dustry preferences" refers to the aggre gate preferences of the firms in an industry forfree trade or protection, as interpreted and articulated by the indus try's primary advo-cates in the political aren a. Th ese preferences, in turn, shape the strategies that theindustry will use in response to the increasing import competition that follows areduction in trade barriers.

Figure 1 shows the dec ision-ma king process of an industry in the w ake of a reduc-tion in the level of protection. T he figure illustrates a simp lified version of the optionsavailable to industries and the outco me s that result from choosing each alternative.The domestic industry must choose between two possible modes of action: adjust-

4. See, for example, Y ofi e and Badaracco 1984


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ment and voice. T he first path-adjustment-involves a chan ge in the level and typeof resources devoted to production. Producers adjust to changing market conditionsby downsizing and revitalizing their production processes, specializing in specificsectors of the market in w hich they e xpect to be most com petitive, or exiting from theindustry altogether. T he alternative ch ann el of action is voice, "the act of com plain-ing or of organizing to com plain or to protest, with the intent of achieving d irectly arecuperation of the quali ty that has been i m ~ a i r e d . " ~

Tw o "voice" alternatives-administrative and legislative-are availab le to an in-dustry. If an industry takes the administrative route, the Internatio nal Trad e Com mis-sion (ITC) must decide whether to grant protection. If the ITC chooses to grantprotection, it must decide how much is required and what form it should take. Fi-nally, the president has to de cide whether to grant protection. If the president choo sesto grant protection, h e must decide whether to accept the ITC's recomm endation orset his ow n policy. If the president d eclines to grant protection, Co ngre ss can over-rule the decision with a two-thirds majority vo te.

When an industry decides to take the legislative route, Congress must decidewhether to pass legislation to grant trade protection to it. If C ong ress cho oses to passa bill, it must dec ide how m uch protection is neede d and the form it should take. Th epresident ca n then sign or veto the bill. If the president vetoes th e bill, Co ngre ss canove rrule the veto with a two-thirds majority vote.If the industry ch oose s to forgo en tering the political arena and simply ad justs tothe new m arket co ndition s, the only mediating factors will be m arket characteristicsand conditions, which together determine the ease with which the industry will beable to adjust to the more com petitive environm ent.

An industry faced with increasing import competition in the wake of a trade bar-rier reduction will choose between adjustment and voice, and between the adminis-trative and legislative routes of voice, by comparing the utility each alternative isexpected to produce. Industries "base their lobb ying on rational present-value ca lcu-lat ions of their self- intere~t ."~hey look to the impact a mod e of action is expectedto have on the present discounted v alue of their income stream s. Although industriesdo not know the exact preferences of the othe r actors, they can predict the likelihoodthat the other actors will choose one option over another. Similarly, industries esti-mate the expected utility of each possible outc om e. Based on these predictions, theycalculate the expected utility of voic e and adjustm ent and choo se the path that prom-ises the highest total expected utility.

The factors that determine which response an industry will choose when facedwith increasing imp ort competition a fter a trade barrier reduction fall into two broadcategories: ( I ) the potential benefit of voice and (2) the perceived chance of success.The potential benefit of voice is the total additional benefit an industry expects toreceive by obtaining protection rathe r than sim ply adjusting to the more com petitive

5. Hirschlnan 1970. 76. The term "voice" was first coined by Hirschman , who used it to describe oneof three channels of action available to econom ic orga nizations in decline.6. Magee 1980, 138-53.


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Impact of Trade Liberalization 579

market less the costs of exercising voice (for example, the costs of lobbying). Theperce ived c han ce of suc cess is the probability that an industry w ill succeed in obtain-ing the protection it seeks.

T he ind ustry's c hoice of strategy is not necessarily e xclusiv e. An indu stry maypetition the ITC or attempt to push a bill through Congress while at the same timeadjusting to ch anging market c onditions. Investment in adjustme nt, howe ver, neces-sarily we aken s an industry 's chan ce of obtaining adm inistrative or legislative protec-tion becau se it und eimin es its claim that it is suffering from severe eco nom ic distressand because it often involves a reduction in the size of the industry. Although anindustry can (and typically does) pursu e both voice and adjustment simultaneously, Itreat them as discrete alternative strategies to highlight the process by which anindustry chooses o ne or the other as its primary strategy. Th e case studies, howe ver,exp lore the possibility of mixed strategies. In addition, despite impo rtant distinctionsbetween legislative and administrative voice, for the most part I treat voice as asingle option. This simplifies the model without significantly reducing its explana-tory capacity.

Variables Influencing Indu stry StrategyTh e potential benefit of v oice and the perceived chance of success are the two keydeterminants of the trade policy strategies of producer gro ups. An explanation ofthese two categories an d of the factors influencing them is therefore necessary fo r afull understanding of the strategic decisions of producer group^.^

Potential Bene$t of VoiceTh e potential benefit of voice is the total benefit an industry receives fro m securingprotection. As such , it is a function of the cost of ad justm ent, beca use an industry thatsecures protection will avoid having to adjust fully to a more competitive market.Th e level and means of protection will determine how muc h the industry will have toadjust. The potential benefits of administrative and legislative voice differ only inmagn itude. They bo th depe nd on the cost of adjustme nt and are therefore affected bythe same factors. Because administrative protection tends to be more porous, thepotential benefit to the industry of the adm inistrative route is generally not as great asthe potential benefit of the legislative rou te. On th e other ha nd, the cost to the ind us-try of pursuing the administrative ro ute tends to be significantly lower than the costof pursuing th e legislative route, particularly if the industry can credibly cla im that itis suffering from severe econo mic d istress.

7. The variables that determine the potential benefit of voice and perceived chance of success arelargely drawn from numerous theoretical works that address the demand for and supply of protection,especially Conybeare 1991. 57-81: Hansen 1990. 2 1 4 6 : Rogowski 1987b, 203-23: Rogowski 1987 a,1121-37; L avergne 1 983; Anderson and Baldwin 1981; Ray 1981, 105-21: Baldwin, Mutti, and Rich-ardson 1980,405-23; and Baldwin 1979.


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Sev eral factors d eterm ine the potential benefit to an industry of obtaining protec-tion. T he most important are capital intensity, trade dep endenc e, and factor specific-ity. Given relative facto r endow me nts in the United State s, capital intensity an d tradedependence are inversely related to the potential benefit of obtaining protection.Factor specificity, on th e oth er han d, is positively related to the potential benefit ofobtaining protection.Capital intensity. The impact of capital intensity on industry preferences is thesubject of ongoing debate. The Stolper-Samuelson theorem suggests that trade pro-tection tends to favor a nation's scasce factors of production and industries that usethose factors relatively intensively. On the other hand, trade protection can harmabu nda nt factors of production and industries that use those factors relatively in ten-sively by increasing the probability that other countries will engage in retaliatoryprotection, thereby im ped ing the industries' access to foreign maskets. This sug geststhat labor-intensive industries in the U nited States w ould tend to be m ore protection-ist than capital-intensive industries (since the United S tates is considered to be rela-tively abu nda nt in capital and relatively scasce in labor), at least in the long run.8

Ca pital intensity is also a primary determ inant of the level of entry barriers. Anindustry w ith low capital intensity usually ha s low barriers to entry, since the cost ofstarting a business in that industry is relatively low. For such industries, nontariffbarriers are highly porous and supply highly elastic, because countries not coveredby the trade restriction can begin production relatively quickly and e a ~ i l y . ~n con-trast, industries with relatively high capital intensity and thus high entry b a i~ ie rs illfind trade barriers m ore effective at stem min g the tide of foreign impo rts.Trade dependence. Industries that depend on trade for a significant portion oftheir incom e are unlikely to favor trade protection and may even actively op pose it.loIndustries that expo rt a large percentag e of their total production are mo re likely to behurt by the threat of foreig n retaliation against their expo rts than they are to benefitfrom g reater protection of their imp ort-com peting products. Similarly, if an industrydepends on income generated by importing goods into the U.S. market or on theimport of intermediate goods for its production process, a rise in import duties orimposition of quotas will lower profits. Indeed, Helen Milner has convincingly ar-gued that the proliferation a nd deep enin g of international ec ono mie s that took placeafter World War I1 helped create a pro-trade business commu nity that served to counterprotectionist sentimen t in the 197 0s and 1980s."Factor specificity. Factor specificity measures the extent to which a factor ofproduction has an available alternate use in which it can ea rn a similar rate of return.It is positively correlated w ith the potential benefit of voice (the return to lobb ying

8. Rogowski 1989,93-96.9. Bhagwati 1988,54-59.10. See Anderson and Baldwin 1981 ,24-25: Rogowski 1989: and Helleiner 199111. Milner 1988.


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for specific gov ernm ent policies)." If a factor can be transferred without co st fro mone activity to another, the owner of that factor has no reason to lobby for sector-specific protection. If an asset is highly specific to a sector, however, its owner isdepend ent on the sec tor's fortunes. The harder it is for an industry to m ove its assetsto another use, the harder it is for the industry to adjust and the m ore an industry hasto lose from a reduction in the level of protection.Perceived Chance of SuccessT he perceived chance of success is the expected probability that an industry will besucc essfu l in its efforts to obtain protection. T he model refers to the perceived chanceof success because the industry's decision about how to proceed is based on incom -plete information. It does not know the payoff structures of the other actors andcannot know for certain w hich outco me w ill result from its choice. Th e industry canonly predict the probability that the other actors will choose to act for or against it,and it bases its cho ice of strategy on su ch predictions.

Although it is impo ssible to model exactly the process by which an industry deter-mines its chance of success in the political arena, it is possible to specify some keyfactors that it is likely to consider. Th es e facto rs are basically those that public cho icetheorists associate with "the s upp ly of protection." Th ey includ e the receptiveness ofthe administration to protectionist argum ents, the receptiveness of C ongress to pro-tectionist arguments, the size of the industry, the level of industry distress, and, per-haps most im portant, the past success of similar efforts.13 Th us, although the theoryof dynamic preferences and strategies is a theory only of demand for protection, itmust take account of the apparent likelihood of supply (from the point of view of theindustry) to the extent that it affects an industry's choice between voice and ad justment.Receptiveness of the administration to protectionist arguments. Administra-tion receptiveness affects the industry's prediction of the probability of a favorabledecision by the president or the IT C. The term "receptiveness" describes the admin-istration's receptiveness to protectionist arguments as revealed in past actions andpublic statements. Th e administration's receptiveness to the protectionist argumentsof a particular industry is also influenced by the pressure the a dministration is receiv-ing from other societal groups for free trade or protection. S ince the ITC is a part ofthe executive branch and its top officials are appointed by the White House, thewillingness of the ITC to administer protection is a function (though not necessarily aperfect reflection) of administration receptiveness to protectionist arguments.

Receptiveness of Congress to protectionist arguments. When considering theprobability that Co ngress will pass a favo rable bill, the industry takes into accoun tthe receptiveness of the m em bers of the Hou se of Representatives and the Senate to

12. On the influence of asset specificity on incentive s to lobby, see Frieden 1991, 19-22.13. For more on the factors influencing the supply of p rotection, see, for exam ple, Conybeare 1991:Frey 1984. 199-224: and Anderson and Baldwin 198 1, 20-36.


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protectionist argume nts. Th e more favorab le Cong ress appears to be toward the in-dustry considering political action, or toward protection in general, the higher thepredicted probability that Co ngre ss will pass a bill in its favor. Here, too, I use theterm "receptiveness" to describe Congress's receptiveness to protectionist argu-ments as revealed in past actions and public statements and as influenced by thedem and s of other gro ups fo r free trade or protection.14Size. T he size of an industry, as measured by level of outp ut and level of em ploy -me nt, increase s its political c lout and thus its predicted chan ce of success.15 Forobvious reasons, politicians tend to be more responsive to industries that employ alarge number of people and possess large financial resources. A related variable,industry con cen tration, may also be an imp ortant determ inant of an industry's ab ilityto obtain protection, although its relationship to levels of protection is the focus ofdebate.16Because of this uncertainty, the model d oes not incorporate industry concen-tration.17 How ever, I examine the effect of industry concentration on the politicalactivities of the industry in the ca se studie s.Industry distress. Not surprisingly, the level of industry distress is one of thestronger indicators of the likelihood an indu stry will obtain protection. Indeed, accord-ing to a study by Wendy Hansen, this is the only consistent predictive factor offavora ble ITC decisions.18 An indu stry's likelihood of obtaining protection from im -ports is strengthened if it can point to clear evidence of distress, such as slow ornegative growth, high industry-related job loss and unemployment, low capacityutilization, an d high imp ort penetration."Past success. Probably the strongest influence on an industry's perceived chanceof success is the recent decisions of the pre siden t, ITC , and Co ngress . If an industryhas m ade succ essful petitions in the recen t past or if similar petitions by other indu s-tries have been successful, an industry's estimation of its probability of succ ess willbe relatively high.20Industry Ideal l jpesTh e potential benefit of voice and perceived cha nce of success are the primary deter-min ants of an industry's action s in the fac e of higher imp ort competition after a trade

14 . Lutz 1991, 301-28.15. Cassin g, McK eown . and O chs 1986, 853.16. Mancur Olsoli has argued that Inore concentrated industries are more likely to obtain protectionsince the costs o f organization are lower. Olson 1971. See also Finger. Hall, and Nelson 1982. 452-66;Anderson and Baldwin 1981,23; Ray 1981, 108; and Pincus 1975, 757-78.17 . See. for example. Aggarwal. Keohane. and Y o f i e 1987,345-66: Cassing and H illtnan 1986,516-23;and Finger, Ha ll, and N elson 1982.

18. Hansen 1990,30. See also Staiger and Wolak 1994.19. See Hansel1 1990, 30; and Lavergne 1983, 87-88.20 . W en dy Tacaks, for example , argues that " i f many groups seeking protection have been successfulin the recent past, other groups would be elicouraged v ia a 'dem ons trat ion ef fe ct ' to present their case aswell." Tacaks 1981, 698. See also Staiger and Wolak 1994. 61-63.78-81.91-93.


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- - - - -


TABLE 1 . The our inrlustry typesPerceived chance of success

Low High

Type I Type I1Low Acl jus tme~~t Voice orPotential mo st likely acljus tm entbenefit oflaice Type I11 Type I VHigh \'oice or Voice m os t

adjustment likely

TABLE 2 . Clznrncteristics of the four industry Q pes

Txpe I T ~ p e1 Tvpe 111 Txpe IV

Potential benefitCapital intensityTradedependenceFac tor specificityChance of successReceptiveness of administrationReceptiveness of CongressSize of industryIndustry distressPast success

+I= relatively high . bL = relatively low.

barrier reduction. They define four ideal-typical categories of industries withdifferent preferences and strategies. These four ideal types are outlined in Tables 1and 2 .

Type I industries are those for which the costs of pursuing protection outw eigh thebenefits. They will choo se to adjust rather than pursue protection in either the adm in-istrative or legislative arenas. For these industries, both the benefit of obtaining pro-tection and the perceived chance of success are low. Type I1 and type I11 industriesmay choose voice or adjustment or som e combination thereof. Finally, type IV indu s-tries are those for which the costs of pursuing protection are outweighed by thebenefits. These industries are the most protectionist and will consistently choosevoice over adjustment.


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A Theory of Dynamic Preferences and StrategiesHaving examined the factors that influence the choice of strategies by industries, Inow develop a theory of dynamic producer group preferences and strategies to ac-count fo r the imp act of a reduction of trade bal-siers on the preferences and strategiesof industries. Adding an intertemporal perspective shows how trade liberalizationcan inc rease the global co mp etitiveness of firms, lower the potential costs of futuretrade liberalization, and thereby make producer groups less likely to demand tradeprotection.

Indu stries that exp erien ce a reduction in the level of protection-whether resultingfrom a trade agreement, unilateral trade liberalization, or decreasing effectiveness ofexisting protection-will either exer cise voic e or adjust to the mo re com petitiv eenvironment. Industries that exercise voice may win full, partial, or no protectionfrom foreign competition. The amount that they will then be forced to adjust willvary with the level and type of protection awa rded. Industries that ch oose to adjustwill become mo re com petitive by focu sing production in areas where they are rela-tively more efficient, reducing capacity, undertaking technological improvements,changing m anagem ent strategies, and reducing c osts. This process of adjustment ha san impo rtant, and often ov erloo ked , effect on the factors that influence both potentialbenefit of voice and perceived chance of success. By forcing industries to adjust to amo re com petitive market, a reduction in protection levels cha nges their preferencesand strategies and thus their level of future political activity. Effects in one periodbecom e causes in the next (see Figure 2 ) .

W hen an industry adjusts to an increase in import competition after a trade barrierreduction, the adjustm ent usually affects the factors that determ ine the potential ben-efit of obta ining prote ction . Capital intensity and trade dependence-which are in-versely related to the potential benefit of obtaining protection-often increase. Fac -tor specificity-which is pos itively related to the pote ntial benefit of obta iningprotection-generally rem ains unc han ged . A s a result of these cha nge s, the potentialbenefit of v oice falls.

An industry in the United States can adjust to the more com petitive ma rket condi-tions that follow a trade barrier reduction by increasing its capital intensity. Thisusually involves investing in machinery that can complete tasks more quickly andefficiently than huma n labor, while reducing the num ber of em ployees. (A strategy ofsimply "downsizing" by laying off workers may also result in a limited increase incap ital intensity.) Since capital is relatively ab und ant in the United States, firms thatincrease the relative amo unt of capital invo lved in the production process are likelyto become m ore competitive at hom e and abroad. Thus, w hen firms choo se to adjustby increasing their cap ital intensity, the potential benefit of obtain ing protection falls.

Firms can also adjust to more competitive market conditions by becoming moreactive in international trade. First, when import barriers fall, firms that earn lowreturns on their domestic manufacturing activities may import finished goods for salein the domestic market to improve their profits. Second , firms may opt to "farm out"the more labor-intensive activities involved in their production processes to low-


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Level ofprotection seduced

Less deinalld for Industry adjusts(in long run)

1 1 ~ d u s t s ~s lesslikely to choose I oice fa lls, perceivedvoice (more likely chanc e of successto adjust) also Ilkel) to fall

F I G U R E 2 . Th e positive feedback effect

wag e countries (such as M exico and the nations of the Caribbean) or impo rt interme-diate products to reduce their production costs. Third, firms may begin to exploreexport opportunities, pasticularly if the trade baisier reduction is reciprocal. As aresult of these change s, trade dependence-which is inversely related to the potentialbenefit of obtaining protection-generally increases when an industry adjusts to amo re competitive mark et in the wa ke of a trade baisier reduction.

Becau se econom ic adjustment can be exp ensive and difficult to imp leme nt, it of-ten occurs in jump s. For instance, a single com puter-aided design (CA D) machine-which can cost well over a million dollass-can cut a firm's labor costs to a fractionof its previous levels and multiply a firm's efficiency, speed, and accuracy several-fold. Similasly, shifting labor-intensive processes abro ad, impo rting intermediate andfinished goods, and exporting products all caisy high start-up costs (primarily thecosts of information gathering and establishing contacts with buyers and sellers) butcan yield large benefits. Moreover, once a firm begins these activities, additionalincremental adjustments are easier and less exp ensive to m ake. Thu s, firms that sur-vive in the wake of a trade barrier reduction may not only continue to operate butmay actually becom e formida ble comp etitors in the international m arket.

Th e cumulative effect of these changes is to reduc e the severity of future adjust-ment an d thus the potential cos ts of future trade liberalization. W he n an industry thathas been forced to adjust is subsequently f aced with the prospect of anoth er reductionin the level of protection, it again has two options: voice or adjustm ent. Yet, becauseof the previous reduction in protection, adjustment is relatively less costly and thusmore attractive than it would otherwise have been. Moreover, those less-efficientfirms in the industry that were unab le to adjust and went out of business are no long erpart of the population of firms in the industry. The industry as a whole is thus more


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likely to favor-or at lea st less likely to oppose through use of voice-a furthe rreduction of trade barriers. Reduc tions in the level of protection thereby d ecrease thenum ber of active and vocal oppone nts of trade liberalization.

Th e reduction in the potential benefit of vo ice in the wa ke of a trade barrier red uc-tion is contingent on industry adjustment to m ore com petitive market conditions. Th epredicted chang e in trade policy preferences and strategies will not co me about untilthe industry adjusts. How long that takes will depend primarily on the level of barri-ers to exit in the industry, which is highly correlated with asset ~pecificity.~'hus,industries with high asset specificity may remain stridently protectionist for a longerperiod of time after a reduction in the level of protection than industries with lowasset specificity and henc e low barriers to exit.

Th e factors that determine the perceived ch ance of success are also affected by theadjustment process that follows a reduction in the level of protection. Most notably,the size of the industry and the past success rate are both likely to fall. In addition , theindustry is likely to perceive the administration and Congress as less receptive toprotectionist argum ents. T he level of industry distress, howeve r, is likely to incre ase ,at least for a short time .

Th e size of an industry, which positively influences the perceived chanc e of suc-cess, is expected to fall in the wake of a trade banier reduction. A reduction inemployment generally accompanies an effort to increase efficiency and meet thechallenge of growing foreig n competition. Th e number of firms in the industry alsotends to fall when foreign competition increases, since the least efficient firms areforced out of business.

A final factor that is also positively related to the perceived chance of su ccess, thepast success rate, is expected to fall by a marginal a mou nt after a reduction in tradebarriers. Because the industry will have lost its most recent effort to preven t a reduc-tion in the level of protection, it is likely to feel less confident of its future chance ofsuccess in the political arena.

In summary, only one factor that is positively related to the perceived c hance ofsuccess, the level of industry distress, should increas e as a conseq uence of a reduc-tion in the level of protection. In the short te r n , rising industry distress may m ake anindustry that is subject to a reduction in trade barriers more willing to enter thepolitical arena and more likely to gain a sympathetic hearing from public officials.Over the long term, however, the effects of this shift are outweighed by the otherchang es that take place in the industry as a result of heightened import com petition.

The process just outlined has implications for the evolution of the industry typesintroduced earlier. As Table 3 illustrates, the four industry types are affected differ-ently by an increase in imp ort competition following a reduction in trade protection.Eventually, however, the adjustment process pu shes the m all in the sam e direction-toward the characteristics of a type I industry.

After a trade barrier reduction, type I industries cho ose to adjust to more co mpe ti-tive market conditions and a re likely to co ntinu e to do so. Type I1 and type 111 indu s-

21. Caves an d Porter 1976.39-69


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TABLE 3 . Ch ang es in indust?-?,Qy es after a reduction in trade barriersPerceived chance of success

Low HighTj7peI Type I1Low A d i u s t m e ~ ~ t, Voice or

Potential inost likely L adjustmentbenefit of uvoice I Type 111 Type IVHigh \'oice or Voice inost

acljjus tm en t likely

tries that are not successful in obtaining protection are forced to adjust to the morecompetitive mark et conditions. As they ad just, they becom e m ore like type I indus-tries. How much they are forced to adjust depends on how much trade protectionremains. Type IV industries undergo a process similar to that experienced by type I1and type IU industries. Th e amount they are forced to adjust is deteimined by the level ofprotection gsanted by legislative and administrative officials. If the industry does not re-ceive protection or receives only partial protection, it will become more like a type I, 11 orIU industly, depending on the extent and type of adjustment it is forced to undergo.

As a result of the adjustment process, the industry changes the way it employsscarce resources. Capital and labor that once went into the less efficient productionprocesses are transferred to more efficient production processes within the industryor reallocated to more efficient industries. Owners of capital in a noncompetitiveindustry "will expend resources to influence governm ent policy towa rd their indus-try up to the point where it would m ake more sense for them to find another use fortheir resource^."^^ Since the process of adjustment increases the likelihood that ow n-ers of capital will shift their resources to other activities, the effect is to reduce theam ount of scarce resources industries devote to dem anding trade protection.

This model does not predict that reductions in trade barriers will lead to the elimi-nation of protectionist demands, but rather that the societal actors who vocally op-pose free trade will be fewer in number. Not all actively protectionist industries willbe less vociferous after a trade barrier reduction, only those forced to undergo sub-stantial adjustments. Moreover, the model does not predict that protectionist activitywill fall immediately after a reduction in trade barriers. Indeed, in the short run, anindustry that is subject to a reduction in trade barriers will probably become morewilling to enter the political aren a because it w ill be suffering greater distress. But, asan industry affected by the reduction in trade barriers adjusts-that is, as its size

22. Frieden 1991.21


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shrinks, its capital intensity rises, and its trade dep end ence increases-it will bec om eless willing to undertake the costs associated with pursuing protection and morewilling to ad just. Thu s, the com m on prediction that an increa se in impo rt competitionwill lead to greater demand for protection may be accurate in the short run, but itbecomes less so over time as industries adjust. Th is is precisely why an intertemporalapproach to industry de ma nd for protection is essential.The Dynam ics of Dem and for Protection: The Case StudiesTo test the accuracy of the model, I examine three industries that appear to presentthe hardest cases for the argument. Because a well-established and widely acceptedhypothesis of the trade policy literature is that high and rising levels of import pen-etration lead industries to pu rsue protection, I trace the e volu tion of three industriesthat faced strong foreig n competition after an initial reduction in the level of protec-tion: footwear, textiles, and apparel. Ac cordin g to traditional m ode ls, these industriesshould be among the most protectionist, with a strong and rising interest in importrestraints. In contrast, my model predicts that these industries should become lessprotectionist as they adjust to more c om petitive mark ets. As w ill bec om e clear, this isindeed w hat happ ened in all three industries during the last quarter-century, suggest-ing that the model is ac curate and that other industries faced w ith similar conditionswill also reduc e their dem and s for protection.The Footwear IndustryFrom W orld War I1 to the 197 0s, the U.S. foo twea r industry exemp lified the protec-tionist type IV industries. Its primary political advocate, the F ootw ear Indu stries ofAm eiica (F1A)-then called the Am erican Footwe ar Industries Association (AF1A)-did little else during this period but lobby for import relief.23The members of theAFIA, which included all major U.S . shoe manufacturers, unanimously favo red pur-suing trade protection, a unity d irectly related to the characteristics of the fo otwe arindustry.24 First, the industry was relatively large and unc onc entrated , comp osedprimar ily of small privately owned firms located in remote c ~ m m u n i t i e s . ~ ~lthoughproduction was dispersed among many producers, the industry was geographically~ o n c e n t r a t e d . ~ ~econd, footwear production during this period was highly laborintensive, with labor costs accounting for approximately one-third of the price of apair of shoes.27The semiskilled laborers employed by the industry tended to havefew attractive employment alternatives, which made adjustment to changing marketconditions especially difficult for t he m .2 T ap ita l investment in the footw ear industry

23. Autho r's interv iew with Faw n Evenson. president of Footw ear Industries of Am erica. Washington.D.C., August 1993; see also Milner 1988. 110; Yofie 1983a. 323-24: and Yof ie 1983b, 174.24. Author's interview with Fawn Evenson.25. See USITC 1976a; OECD 1976; and Szenberg, Lombardi, and Lee 1977,7 -15.26. See Yoffie 1 983b. 1 74; and Yoffie 1983a, 323-24.27. Yoffie 1983b, 173.28. Workers in the footwear industry tended to be younger than twenty and older than sixty. andtwo-thirds of the workforce were female. Unemployment in the industry was persistently high for several


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Imp act of Trade Liberalization 589

was low. Most fo otwe ar firms were too small to afford significant investments in newma~hinery.~'ven for those firms with the necessary funds, little technology wasavailable to reduce the labo r intensiveness of the production process.30Th e low capi-tal requirements for entry into the mark et, low skill level of the workplace, and lowcapital intensity mad e the industry highly vulnerable to competition from low-wag edeveloping countries.31Finally, the footwear industry had a very low level of traded e p e n d e n ~ e . ~ ~xports never grew beyond a paltry 0 .05 percent of domestic consum p-t i ~ n . ~ ~he ratio of foreign asse ts to total assets rem ained less than 5 percent through-out the 1960s and 1 9 7 0 ~ . ~ ~hese characteristics suggest that the footwear industryhad a high perceived chance of success and a high potential benefit of voice-aclassic typ e IV industry.

In the years following World W ar 11, the U.S. shoe industry do minated the Am eri-can m arket, capturing 99.6 percent of the marke t in 194 7, 98 .8 percent in 195 0, and98.7 percent in 1955.35During the 1960s, however, Europe and Jap an emerged fullyrecovered from the destruction of World War 11, and the Pacific Rim countries em-barked on the path of industrialization. Many traditional U.S. manufacturing indus-tries began to feel the pressure of increasing foreign competition. One of the moreprofoundly affected wa s the footw ear industry.36

Th e footwear industry began to face high and rising import competition during the1960s, especially after the 1968 Kennedy T rade Rou nd, which lowered tariffs onshoes by close to 50 percent. The resulting surge in imports impelled the industry,which then had a high potential benefit of voice and high perceived chance of suc-cess, to seek protection. It m et with only limited success. An escape clause c aseinitiated in 196 8 by presidential can didate Richard N ixon end ed in a hun g jury, andafter he was elected, President Nixon declined to impose trade barriers, choosinginstead to authorize adjustment assistance for eleven shoe plants.37 Th e industry'snear-perfect record of past success was marred by these failures, but its efforts hadnot been com pletely unsu ccessfu l. T he Tariff Com missio n's tied vote and the presi-dent's decision to grant adjustment assistance indicated that they were open to theindustry's pleas.

decades. s om eti ~n es s much as twice the national average. M oreover, footwear firms were often located insma ller comm unities where they employed a large percentage of the local popu lation. As a result. work ersin the industry had difficulty finding new jobs. See Washington Post, 29 August 1985, C1; and Pearson1 9 8 3 , 6 .29. Burton and Yoffie 1986,s.30. Ibid.31. See USITC 197 6a,A 71, A75; OECD 1976; and Yofie 1983a, 324-27.32. Author's interview w ith Fawn Evenson: see also U.S. Departm ent of Com merce 1977; and U.S.Department of Com merce 1979a, 1981, and 1982a.33. See U.S. Departme nt of Com merce 1979a and 19 82a.34. See U.S. Departm ent of Com merce 1977 and 1981.35. Foohi~eaiArew.s, October 1985. 2.36. This case study focuses primarily on the nonntbber footwear industry. which is classified underU.S. Department of Comm erce Stand ard Industrial Classification code 3 14.37. Author's interview with Fawn Evenson; see also Bzlsirless Week, 4 July 1977. 17; and Hufbauer,Berliner, and Elliott 19 86, 206-17.


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During the early 197 0s, the footw ear industry repeatedly sought protection fro mimports and repeatedly met with failure. The most significant failure was the defeatof the Trade Bill of 197 1, which enjoy ed strong support by the industry and w ouldhav e imposed quantitative im port restrictions o n footwear.38Between 1973 and 1979,the industry brought seven countervailing duty (CVD) cases and won duties againstBrazil, Spain, and Argentina. But the CVDs failed to stem the rising tide of foreigncom petition. Import penetration-the ratio of imports to total dom estic consumption-surged 111 percent between 1968 and 1976,39 he highest rate of increase in imp ortpenetration of any U.S. manu facturer." Foo twea r producers won some trade assis-tance in the 19 74 Tra de Ac t, but th e legislati011 did not bind the ad min istration toact." In 1 975 , the AFIA initiated an esca pe clause case with the ITC . Although theITC found that the industry had been injured by impoi-ts and recommended relief,President Gerald Ford refused to imp leme nt the recomm endations." A month afterthe decision, imports of nonrubber footwear reached a record high of 49 percent ofthe domestic market.43

In the fall of 197 6, under pressure fro m the industry an d Co ngres s, the ITC re-opened the nonrubber footwear escape clause case. The ITC recommended that acombination of tariffs and qu otas be im pose d on a country-by-country basis for fiveyears.44 In Api-il 197 7, howev er, P resident Jim my Carter rejected the recom me nda -tions in favor of two Orderly Ma rketing Agreem ents (OM As) with Taiwan and Ko-rea, an expanded program of adjustment assistance, and the formation of a footwearindustry advisory committee for the Tokyo Round of the General Agreement onTariffs an d Trad e (GATT) negotiation^.^^ Although the OMAs and increased adjust-ment assistance provided a limited deg ree of relief," imp orts from the rest of theworld continued to surge, and domestic production of nonrubber footwear droppe dsteadily, from 4 30 .9 million pairs in 197 7 to 377 .2 million pairs in 1981 47

In 19 79, the industry-which, as Figu res 3, 4, and 5 indica te, was suffering fromextrem e econ om ic distress-won cha nge s in U.S. trade laws that reduced the cost ofpursuing import relief, succeeded in getting a footw ear industry advisory comm itteeincluded in the gro up of industry advisors for the Tokyo R oun d of the GATT negotia-tions (the com mittee kept GA TT tariff cuts on footw ear products m inima l and recip-

38. See Milner 1988. 109; and Yoffie 1983a. 355.39. American Footwear Industry Association 1983.40. See U.S. Department of Commerce 1979b and 1982b.41. See Milner 1988, 109: andY ofiie 1983a, 337.42. USITC 1976b.43. Fooh~ ,eczrA~e%~, .s ,October 1985, 2.44. USITC 1977.45. For more on the events of 1976. see Yofiie 1983a. For more o n the 197 7 decision and the circum-stances sul~ou ndin gt, see W ~ ~ s l ~ i r ~ g r o n P o s ~ ,30 June 1977, D l: andost, 23 July 1977, A4: Wclsi~ii~gtorlA r e ~ ~ , s , ~ , e e k ,1 April 1977. 80.46. There is some disagreement over how much relief the OMAs provided to the footwear industry.Compare Fo orl ~,e or re\r.s, 6 October 1985, 2 (arguing that OMAs provided much needed relief to thefootwear in dus try) , with Yoffie 19 83a. 313-39 (arguing that the quantitative limits actually strengthenedforeign importers vis-8-vis domestic produ cers).47. Footrveczr-A%n,.s,6 October 1985, 2.


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Impact of Trade Liberalization 591- Footwear..,,,.... Leather footwear- - - - - Rubber footwear------

_I - .. -1 * - a .*,-.----c___-.*'

Source: U N Dep artmen t of International Ec onom ic and Social Affairs Statis tical Office,1950-9 1 .F I G U R E 3. Inzpor-ts of footwear into the U nited States, 1960-91 (adju sted using a nirzdustr~-basedroclzlcer price irzclex)

S o ~ ~ r c e s :.S . Bureau of the Censuq 1971, 1976 b, 1990, 1996b.Note: Data before and after 1977- are not com pletely com parable du e to a minor ch ang e in theS t a nda r d I ndu t ~ i a lClassification (SIC:) c o ~ l e s .

F I G U R E 4 . Estciblish~?zentsn tlze~footw>earrzclzlstry, 1947-92


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Sou~ces.LS Bureau of the Census 1971, l 976b , 1990 , 1996bNote. Data before and aftel 19 72 are not completely comparable due to a mlnor ch a~ lg en SICcocles Comparable data not av a~ labl e or 1968-71

F I G U R E 5 . Employinent in the U.S. footwear industry, 1950-92

rocal), and developed a formal footwear caucus in the House and Se nate to press itsviews." Th ese minor political successes again failed, howev er, to stem the increasein sho e imports. During the 197 0s and 198 0s, the size of the industry fell as smaller,less com petitive firms either wen t out of business or were purchased by larger firms.As F igure 4 shows, between 1967 and 1987 the numbe r of firms manufacturing shoesin the United States declined by more than 50 percent, from 951 to 446, and thenumber of plants dropped from 1,100 in 1 970 to 594 in 1981." Em ployme nt in theindustry also fell dramatically, from 216,340 in 1960 to 125,700 in 1980 to 57 ,800 in1990 (Figure 5). As a result, output becam e eve n m ore concentrated in a few largefirms (Figure 6). Many of the firms that survived the onslaught of foreign competi-tion did so by moving plants to low-wage states, investing in advanced machinery,diversifying into the import and retail sectors, importing the components that re-quired the most labor to produce, an d farming out the m ost labor-intensive portionsof the production p rocesses to nearby low-w age countries in the Caribbe an and LatinAm erica. As F igure 7 dem onstrates, new capital ex penditures rose dramatically. Do-mestic firms sought to capitalize on their on e inhere nt advantage-location-by fo-cusing on in-stock sizes and quick delivery. As the footwear industry adjusted, itspotential benefit of voice and perceived chan ce of suc cess began to fall, shifting theindustry from a type IV indu stry tow ard a type 111 industry.As some firms began adjusting to the more competitive market more rapidly thanothers, a split began to dev elop within the industry. Larger firms that w ere in a betterposition to compete with foreign producers became less interested in obtaining im-

48. Milner 1988.49. Hufbauer, Berliner, an d Elliott 1986.


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Impact of Trad e Liberalization 593

S o r ~ ~ e s :1.S.Bureau of the Census 1971, 1970b, 1990, 1996b.Note: Data before and after 1972are not completely comparable clue to a minor change inSIC codes.

F I G U R E 6 . Corzcentratiorz o j th e footwear industry, 1954-92 (measured as thevcilue o jo u pu fper establishment, adjusted using a n in dustry-based producer priceindex)

port restrictions. Th ese firms began withdrawing from the FIA and joining its opp o-nent, the Volume Footwear Retailers Association (VFRA), which primarily repre-sented shoe importers and retailers in the U nited States.50 In the m id-19 80s, newtechnological innovations deepened the industry split . CAD and computer-aidedmanufacturing (CAM) significantly reduced the time and labor required for the de-sign, manufacturing, and marketing of footwear. Th ese innovations also led to amore consistent product and made quicker delivery possible. The new technologieswere extremely expensive, however, and were therefore purchased only by largerfirms with the necessary resource^.^'

As larger shoe firms adjusted to the mo re com petitive mark et and as smaller firmswent out of business, the FIA's efforts to obtain protection were countered withincreasing strength by the VFR A and its mem bership. In 1981, for instance, the

50. Autho r's interview with Fawn Ev enson ; see also Milner 1988, 11 1.51. See U.S. Depa~ tme nt f Colnmerce 1994; Foo hi,e i~r 'eti,s. 14 December 1987. 6: Foohivtrr New s.29 October 1984. 4; Foorrvetir. Neti,s, 23 May 1983, 2: Tec17nologp Review, April 1984, 79: Foorii,erir.Neii,s, 12 March 1984. 2; and Foohi,ec~r.News, 27 Februaty 1984. 50 .


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in,

Sozirces: L'.S . Bureau of the Census 1971, 1976b, 1990, 1996b. Note: Data before and after 1972 are not co~npletely omparable due to a minor change in SIC codes.

F I G U R E 7 . New an n~ ia l apital expenditures per establishment in the foo t~v earindustry, 1954-92 (measu red as the new capital expenditures per establishment(production plant), adjusted u.ring an industry-base d producer price inde x)

strongest opposition to the F I R S efforts to extend the O M As with Taiwan and So uthKorea cam e from dom estic manufacturers that had joined the VF RA when they be-gan importing shoes from the Far East and Europe to supplement their product lines.5 2Th e VFR A and its members won: President Reagan rejected the ITC 's recom menda-tion to renew the agreement with Taiwan and allowed both agreements to expire.53As a result, import penetration of the U .S. footwear industry rose from 5 0. 6 percentin 1981 to 58 .7 percent in 198 2, 64.3 percent in 198 3, and over 75 percent in 1985.54

Although the FIA succeeded in 1985 in obtaining an ITC recomm endation of afive-year global quota of 55 percent on the U. S. nonrubber footwear market, Presi-dent Reagan refused to imp ose the trade restraints. Instead, he authorized an adjust-ment and retraining program for w orkers in the industry.55 This decision convinced

52. See New York Fines. 27 Jun e 1981. 2-29: and \W~.rlz i~~gtoi~ost. 24 May 1981. F1.53. USITC 1981.54. See Yoftie 1983a. 2: and Cllristiar~ cierlce iM oi~it or, July 1 981. 24.55. See Fooh reiir. iVeki,s, 2 September 1985, 19; Foohvear. Neii's, 12 August 1985: and IVc~shiizgroilPost , 17 April 1985, F2.


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the footwear industry that it was unlikely to obtain any administrative protectionf rom the Reagan adm i n i ~ t r a t i o n . ~~n 1985, the FIA lobbied Co ngre ss in an effort toget a footwe ar quota pack age incorporated into a pending trade bill. Although the billprovoked strong opposition from Am erican retailers, importers, and con sum er groups,it was o verwhelm ingly approved by both the Senate and House, not least because themembers of Congress were certain the president would veto the bill . As expected,neither chamber managed to raise the two-thirds majority required to override theveto.57

This defeat led the FIA to conclude that it was unlikely to succeed in obtainingsubstantial imp ort protection as long as President Reagan wa s in office.58Th e indus-try's ch ance of succ ess thus fell to the lowest it had ev er been. Th e potential benefitof voice also co ntinue d to fall as firms were forced to adjust to the m ore com petitivema rket or go out of bu siness. Th e shift in the industry 's attitude d uring this period isdem onstrate d perhaps most clearly by the FIA's decision in 198 6 to focu s less onpursuing import restrictions and m ore on promoting exports and helping firms ad aptto new t e c h n o l ~ g i e s . ~ ~he FIA began holding seminars aimed at helping its mem -bers incorporate new technologies into their production processes, sponsored an in-dustry show intended to inform shoe producers about new cost-cutting m odu le units,purchased four shoe-designing com puter systems and invited its memb ers to train onthem to determine which system best suited their compan ies' needs, and sponsored ashoe sum mit to bring the industry together to discuss technological adv anc es60

Bu t the FIA was not yet willing to give up entirely on obtaining protection. In 1987and a gain in 199 0, the FIA entered the political a rena in joint efforts with the textileindustry to obtain qua ntitative impo rt restrictions. In bo th c ases, a protectionist billwas approved by large margins in Congress but failed to gain enough votes to over-ride the expected presidential veto. After experiencing its third major failure in thelegislative a rena in five years, the FIA finally dec ided, in the words of FIA presidentFawn Evenso n, to "stop spending one more penny or one mo re minute of our time onimport restriction^."^^ In a remarkable shift in strategy, the FIA began to admit im-porters into its ranks and stop ped pursuing trade

As illustrated in Table 4, the reduction in trade barriers, failure of the industry toobtain additional protection, and economic adjustment within the industry had re-duc ed the perceived chan ce of success an d the potential benefit of v oice. As a result,voice had becom e a less attractive op tion than eco nom ic adjustment. Indeed, whenthe 1991 Ca ribbea n Basin Initiative threatened to lower tariffs on shoes com ing fromthe Caribbean area, the FIA chose not to o ppose the m easure. Instead, it acted as an

56. Author's interview with Fawn Evenson.57. See Washington Post, 24 November 1985, G I: \Vashington Post, 14 November 1985, E l ; and\Va,rhirzgtoiz Post. 4 October 1985. B 1.58. Author's interview w ith Fawn Evenson.59. Ibid.60. See Footwear lVews, 3 July 1989, 21; IW~shingtonPost , 24 August 1987, F11; Foohi,eiir lVe~vs , 1April 1986 . 1: and FoohvearNews . 14Ap ril 1986. 1.61. Author's interview with Fawn Evenson.62 . Fo oh ve ar 1Verv.r.19 November 1990.


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TABLE 4 . Chara cteristics of the footwear ind~ istry rior toand following adju stme nt

Pre-adjustment Transition Po.rt-adjustlnerzr( 1950-79) ( I980-89) ( 1989-94)

Potential benefitCapital intensityTradedependenceFactor specificityChance of successReceptiveness of administrationReceptiveness of CongressSize of i ndus t ~ yIndustry distressPast successApproximate type

,'L= relatively low.bM = average.CH= relatively high.

information b roker betwee n m emb ers interested in doing business in the Caribbeanand U.S. trade officials. Similarly, the FIA oppo sed NAFT A "in principle," but spentlittle time and no money opp osing the measure.

The history of the footwear industry supports the theory of dynamic preferencesand strategies. During the two decades that followed World War 11, the footwearindustry was a classic type IV industry. W he n faced with increasing imp ort com peti-tion in the wake of the Kennedy Rou nd tariff reduc tions, the industry chose voice-asexpe cted of a type IV industry-but met with only limited success in the politicalarena. T he theory predicts that an imp ort-affected industry not receiving full protec-tion will be forced to adjust and that, as a result of this adjustment, the industry'spotential benefit of voice and perceived chan ce of success will fall. Th is is exactlywhat happened to the footwear industry, although the process of adjustment tookmo re than a dec ade . T he process was slow ed by the partial success of the industry inthe political arena. The industry did eventually adjust, however, and its perceivedcha nce of success and potential benefit of voice fell as predicted by the theory. W hathad been one of the most protectionist industries in America eventually stoppedseeking import restrictions. Today, the U.S. footwear industry's characteristics andpolitical activities are closest, though not yet iden tical, to those of a type I industry.

The Textile and Apparel IndustriesThe textile and apparel industries have long been among the most protectionist andmost protected industries in p ostwar America. From the 1950s to the 1970s, the


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industries were among the largest manufacturing employers in the United States-eve n larger than the footw ear industry-and both were geographically dispersed butconcentrated in politically pivotal states. Together the industries employed over 2.5million w orkers, far m ore than any o ther man ufacturing sector.63 Bo th industrieswere traditionally dominated by small- and medium-sized companies, many of themfamily-owned businesses. The apparel industry was particularly unconcentrated anddiffuse, with the average firm employing fewer than fifty-nine workers, operating asingle plant, and prod ucing ap parel worth less than $3 million.64Apparel productionwas a lso extremely labor inten sive. Textile firms were slightly larger on avera ge andemp loyed m ore cap ital, but they w ere still small and labor intensive compared w ithU.S . manufacturing as a w hole. The industries operated primarily in rural com mun i-ties in the Southeast and in small urban communities in the Northeast where theywere the only major employer in the area. The workers in the industries, most ofwhom were women and minorities with few skills and little education, had fewem ploym ent alternatives and were therefore highly resistant to change s that reducedem ploym ent in the Finally, beca use textile and apparel production re-quires little capital or technology, the textile and apparel industries were acutelyvulnerable to competition from producers in low-wage countries. Although the tex-tile industry was more automated and had greater infrastructure requirements thanthe apparel indu stry, it was still highly labor intensiv e. Moreover, both industries ha dlittle involvement in international trade, buying most of their inputs from domesticsupp liers. The se characteristics indicate that duling the immediate postwar period thetextile and apparel industries had a high potential benefit of voice and high perce ived chanceof succ ess, placing them bo th squarely in the type IV industry category.

During the 1950s, the textile and apparel industries beg an to face increa sing com-petition from foreign producers. As one of the largest manufacturing employers inthe United S tates, these type IV industries wielded almo st unpa ralleled political power.Thus, when import competition began to cause distress, they turned to the politicalarena in search of protection. In 195 7, the industries won a voluntary restraint a gree-ment on imports from Jap an. But even as imports of textiles from Japan leveled off,new entrants into the industry-including Ho ng Kong , Portu gal, India, and Egypt-increased their exports to the United Sta tes.

In response to increasing import competition, the textile and apparel industriesdemanded more comprehensive controls on imports. In 1961, at a conference heldunder the auspices of GATT, they won a comprehensive Short-Term ArrangementRegarding International Trade in Cotton Textiles, which restricted trade in cottontextiles for one year. This ag reement laid the groundwo rk for the mo re comp rehen-sive Long-Term Arrangement Regarding International Trade in C otton Textiles (LTA),which w as inaugurated a year later. Th e agreem ent permitted im porting countries to

63. Bennett and DiLorenzo 1982.64. See Toyne et al. 1984, 70-84; and Arpan, de la Torre. and Toyne 1982, 3-5.65 . Author's interview with Herman Starobin. research director. International Ladies Gatment WorkersUnion, W ashington, D.C .. 16 August 1993: see also IVotnen's We ar Dn ilj ~, October 1991, 18; and Yofi eand Au stin 1983, 2-3.


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limit imports on one or a few suppliers, contrary to the most-favored-nation rule ofGATT. Although it was initially m eant to go vern wo rld trade in cotton textiles foronly five years, the LTA was exten ded twice, in 1967 and 197 0. Until it finallyexp ired in 197 3, the LTA limited the ann ual growth in the vo lum e of cotton textileexports from developing cou ntries to 5 percent.66

Th ese political successes kept the industries ' perceived chance of success high. Asimp ort competition in synthe tic fiber products increased rapidly, how eve r, the poten-tial benefit of voice slowly beg an to fall. Be twee n 196 3 and 196 8, imp orts of cottonapparel grew by only 30 percent, whe reas impo rts of apparel mad e of synthetic fibersincreased 1,70 0 percent.67

W he n the textile and apparel industries realized that the LTA had not stem me d thetide of textile and apparel im ports, they returned to the political arena. Althou gh theyfailed to win protection from the Tariff Com missio n in 196 9, the textile a nd appa relindustries succeed ed in winning another rare exception to the GA TT rule of nondis-crimination: the 197 3 Multifiber Ag reem ent on Tex tiles (MFA ). Lik e the LTA, theMFA permitted importing countries to limit imp orts through bilateral agre em ents andto impos e impo rt limits without com pen sation in cases of significant market disrup-tion. T he MFA-which covered trade in cotton textiles as well as textile productsma nufa ctured from cotton , wool, and synth etic fibers-allowed 6 percent ann ualgrowth in imports. Successive renewals of the MFA in 1977, 1981, 1986, and 1993further tightened the regim e of quotas, gradually redu cing the flexibility of the quotasand the growth rates allowed therein in an effort to reduce the porousness of theagreement.

As a result of their success in obtaining these rare trade concessions, both indus-tries continued to have a relatively high potential benefit of voice and perceivedchance of success. When the GATT talks approached in 1978, therefore, the U.S.textile and apparel industries lobbied Congress for exemption from considerationund er the GATT fram ew ork. Congre ss responded by passing legislation preventing areduction in tariffs on textiles and ap parel, but the bill was ve toed by President C arter.Du ring the round, tariffs on textiles w ere reduced from 17 percent to 11.4 percent,and tariffs on apparel were reduced from 25.9 percent to 21.1 percent.68To m ollifyCongress and the industries, President Carter promised better enforcement of exist-ing protection, a reversal of tariff reductions ma de du ring the round if the MFA wasnot renew ed, and a program of Trade Adjustment A ssistance.

During the decade after the Tokyo Round tariff cuts were approved, textile andapparel imports rose betw een two- and threefold (Figure 8). Under severe econom icduress, the industries repeatedly sought protection from Congress, but they experi-enced a series of political defeats at the hands of the Reagan administration. Al-though the industry succeeded in gaining an exemption from the first CaribbeanBasin Initiative (CBI) trade agreem ent, the sec ond a greemen t, the Caribbean B asin

66. Yof ie and Austin 19 83,367. Loewinger 1982.6-7.68. Wolf et al. 1983. 99.


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Source: U N Department of International Economic and Social Affairs Statistical Office,1950-91. T he figures for apparel are classified under Standard International Trade C lassification(SITC) 841 ("clothing, not of fur") for 1956-63 and under SITC 8 4 ("clothing") for 1964-91.The figures for textiles are classified under SITC 65 ("textile yam, fabric, etc.").F I G U R E 8 . Imports of textile and apparel products into the United States,1952-91 (adjusted ~isi ilg n industry-based producer price index)

Textiles Access P rogra m, extended special privileges to textile and apparel producersin the Caribbean, thus leading to a surge of imports into the United S tates from C BImember countries. In S eptembe r 1985, the United S tates and Israel signed a freetrade agreement, and in the following year, apparel imp orts from Israel doub led.

The se repeated political failures dealt a blow to the textile an d apparel industries.Although their potential benefit of voice remained high, their perceived chance ofsuccess began to fall dramatically. As a result, they gradually transformed from highlyprotectionist type IV industries into type I1 industries.

The industries' political losses soon translated into economic losses. The importsof textiles and apparel continued to rise dramatically. The MFAs became increas-ingly ineffective during the 197 0s and 198 0s beca use of the soaring value of thedollar, the entry of new Asian producers into the U.S. apparel ma rket, transshipmentsof semifinished textile products with filled quota s to countries w hose q uotas we re notyet filled, the growing production of apparel made of materials not covered by theagreement, and the efforts of foreign competitors to produce at the cusp of theirgrowing quota limits. Indeed, the nontariff ba rriers w ere unab le to even slow the risein apparel imports. With higher capital and technology requirements, the textile in-dustry found the MFA less porous than did the apparel industry. But even it was not


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g - Teltile iiidusti~ - - - Apparel ii~dustig

Sources: U.S. Bureau of the Census 1976a, 1991, 1996a. Note: Data before and after 1972 are slot completely co~nparablelue to a minor change i n SIC codes.

F I G U R E 9 . Em ploym ent in the textile and apparel industries, 1950-92

imm une to the problems facing the apparel Job growth and growth ofoutput in both industries were negative or declining ove r much of this period.70Th e high and i-ising competition fro m o verseas forced the U.S. textile and apparel

industries to adjust. The industries responded by downsizing and revitalizing theirproduction processes. T he least efficient firms exited the m arket altogether. Produc-tion and exports grew steadily while employment shrank dramatically. Between 197 3and 1992, employm ent in the apparel industry fell from 1,400 ,200 to a new low of985,3 00 (Figure 9). Th e drop in the number of textile industry employees was of asimilar magnitude (Figure 9). The number of compan ies in both industries also felldramatically, especially during the late 1970s and early 1980s (Figure 10). As themost inefficient companies closed, the concentration of the textile and apparel indus-tries increased dram atically, more so in the textile industry than in the apparel indu s-try (Figure 11).

Those firms that remained in the industries sought to improve their ability to com -pete with foreign producers by investing in new capital and specializing in areas inwhich they were relatively more com petitive. As Figure 12 indicates, the move towardgreater capital intensity proceeded at the same rate in the textile and apparel indus-tries. But the magnitud e of capital investm ent in textiles was alm ost exactly ten timesthat in appare l, where mechanization proved mo re difficult. In less than a decade, thetextile industry doubled its level of investment in capital. With its high level of

69. Ibid.70. Hufbauer, Berliner. and Elliott 1986, 140.


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8,500 - -31,000- - _ - Textile industry -29,000,000 - - - - - --.--.... - - - Apparel industry.+-. . - 27,000. ..7,000 - ..

6,500 -6,000 -5,500 - - 19,0005,000 - - 17,0004,500 I I I I I I 15,000

cc m r- N r- N r- NV; 13 13 r- r- oo oo 30' 2 2 0' 0' s s 2Sources; U.S. Bureau of the Census 1976a, 1991. 1996a.Note: Data before and after 1972 are not coillpletely comparable due to a illinor change inSIC codes.

F I G U R E 10. Establishments in the textile and apparel industries, 1958-92- - Textile industry- - - - Apparel industry----

. - - - - - - _ ____- _.--- _ _ _ _ _ _ _ _ _ _ _ _ _ _- - - , - - - - - - -_.-* _ - _ _ _ - - - - -- * . - - -

So~rrces:U.S. Bureau of the Census 1976a, 1991, 1996a.Note: Data before and after 1972 are not completely comparable due to a minor change InSIC codes.

F I G U R E 11. Concentration of the textile and apparel industries, 1958-92(me asur ed as the valiie of output per establishment, adjusted using anindustry-based prodiicer price index)


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Sources: U.S. Bureau of the Census 1976a , 1991, 1996a.vote: Data before and after 1972 are not completely co ~n pa ra ble ue to a minor change inSIC codes.F I GURE 1 2 . New annual ca pital investrnerzt per establishment in the textile andapparel industries, 1954-92 (mea sured as tlze new capital expenditures perestablishment, adjiisted iising an indu stry-ba sed prod licerprice ind ex)

family ownership, large num ber of small comp anies, and limited product lines, theapparel industry found it more difficult to adjust. The production process was notinitially am enab le to me chan ization , and it was not until the mid -198 0s that signifi-cant improvem ents in appare l production technology b ecam e available to the bulk ofthe industry. Until the mid -198 0s, therefore, new capital inves tme nt in apparel laggedfar behind tha t in textiles.

As im port competition intensified during the 1970 s and 1980 s, appa rel firms ex-plored the possibility of offshore sourc ing to cut costs and maintain com petitive ness.The y began to take ad vanta ge of Sectio n 807 of the Tai-iff Classification Act of 1962 ,which allowed U .S. firms to send cut parts overseas for assembly and pay duty onlyon the value added by the assembly process on reentry of the finished goods. Theapparel industry thus moved the most labor-intensive stages of its production pro-cesses abroad , and-as Fig ure 13 demonstrates-both the textile and apparel indus-tries exported more of their products (especially after the value of the dollar began tofa ll in th e l at e 1 9 8 0 ~ ) . ~ 'any apparel firms also began importing finished productsfrom foreign producers to supplement their own product lines and increase theirprofitability.

In 1985 , with imp ort compe tition growin g and the size of their industries shrink-ing, the textile and appa rel industries suffered their greatest political failure to date.

71. See Ghadar, Dav idson, and Feigenoff 1987 .74-79; and U.S. Depaltment of Commerce 1993.32.6.


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So~rrce:UN Department of International Economic and Social Affairs Stat~sticalOffice,1950-91. The figures before and after 1964 are not completely comparable due to a minorchange in SITC codes.F I G U R E 13. Exports of textile and a pparel products froin the U nited States1952-91 (adjusted using an indus tp-b ase d pmd ucer price index)Th e Congressional Textile Caucu s proposed a bill to pare back textile imports fromthe three leading suppliers-Taiwan, South Korea, and Hong Kong-and to placelimits on shipm ents from other major suppliers. For the first time in history, however,the textile and apparel industries faced significant opposition from within their ow nranks. Although the bill enjoyed broad support among members of the industries'primary political advocates, the American Apparel Manufacturers Association(AAMA) and the American Textile Manufacturers Institute (ATMI), it faced vocalopposition from members of several newly formed groups representing the retail,impost, and export sectors of the industries, most prominently the Retail IndustryTrade Action Coalition, the National Retail Merchants Association, the AmericanRetail Federation, and the American Association of Exporters' and Importers' Tex-tiles and Apparel Group. Congress passed the bill, but it was vetoed by PresidentReagan, and proponents of the bill were not able to muster the votes needed tooverride the veto.72

72. See Wornen's Wear Daily, 24 April 1987, 1; Washington Post, 13 October 1985. D l ; I.Vn.~/ringtotzPo.rt,4 October 1985. B1; Clricngo Tribune, 24 September 1985; Daily News Record, 20 August 1985. 11;and Daily News Record, 25 January 1985. 2.


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This series of political defeats caused the industries' perceived chance of successto fall dramatically. Both the textile and appasel industries gradually realized thatsignificant new trade barriers were unlikely and that they could only survive bydow nsizing , specializing, diversifying, an d investing in new cap ital and technology.Consequently, the process of adjustment and restructuring that had begun in thetextile and apparel industries in the 197 0s accelerated during the 198 0s. T he Dep art-ment of Commerce provided financial support for the apparel industry's efforts tocreate computerized systems that could take over many of the most labor intensivetasks. In the mid-1980s, computerized inventory and ordering networks and CADand CAM systems created powerful information networks and led to the creation ofthe "Quick Response" program, which helped domestic apparel firms capitalize ontheir close proximity to U.S. retailer^.^^ Quick Response soon gained acceptance,and companies began implementing it on an industry-wide scale, with large andmid-sized firms placing greater emphasis on high technology machinery. Smallerfirms were reluctant or unable to make the capital investments necessary to becomefully involved in Quick R esponse, however, and many exited the market. This in turncontributed to the increasing concentration of the industry.74

As a result of the Quick Response program and increasing trade dep endence , thepotential benefit of voice for the appare l industry fell dramatically d uring the 198 0s.In the mid-1980s, the AAMA significantly reduced its lobbying activities, and in198 8, it abolished its PAC. In 198 9, the AA MA stunned trade policy ex perts byann oun cing that it would not supp ort any new legislation to limit textile and appa relimports.75

T he textile industry d id not mak e such a rapid transition. It had adjusted , but not asdrastically as the apparel industry; its potential benefit of voice therefore remainedfairly high. During the 198 0s, the ATMI reduced its political activities, began todevote more of its resources to export promotion, and stopped filing escape clausepetitions. But the organization was not yet willing to give up on the possibility ofobtaining trade protection. In 198 7, the textile industry joined forces with the foot-wear industry in an attempt to pass the Textile and Apparel Trade Bill of 198 7. Forthe first time in decades, the ATMI was not joined by the AAMA in its lobbyingefforts (the AA M A adopted a neutral position on the bill). T he ATM I's efforts werefurther hindered by the opposition of organizations that represented the interests ofimporters, exporters, and retailers of textiles and ap parel. Cong ress approved the billby a wide margin, but it fell shy of the votes needed in the Hou se to override Presi-dent Reagan 's veto.76 On the sam e day that President Reagan vetoed the bill, h esigned legislation implementing the C anada F ree Trade Agreemen t, which included

73. Author's interview with L an y M artin, legislative director, American Apparel Manufacturer's Asso-ciation, Wash ington, D.C.. 12A ugu st 1993; see also Fortune, 27 April 1987, 217.74. Ham mon d and Kelly 1990, 3-9.75. Author's interv iew with Larry Martin.76. Daily News Record. 9 May 1989, 3.


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within a dec ade, and the long-standing protectionist trade regim e of these manu fac-turing giants will fade into memory.Again, the history of the textile and apparel industries provides strong support forthe theory of dynamic preferences and strategies. During the immediate postwarperiod, these industries were type IV industries, and, as import competition in-creased, they chose voice, as the model predicts. The industries had several majorsuccesses in the 1960s and early 1970s, winning a voluntary export restraint agree-men t and two prog rams of quantitative impo rt restrictions that were exe mp ted fromthe GATT nondiscrimination rule. Yet the effectiveness of these trade barriers de-clined over time as foreign producers fou nd new w ays to ev ade the restrictions and asthe effectiveness of the quota program fell. Th e textile and app arel industries failed toobtain additional protection, and tariffs on textile and apparel imports fell in 1979after the Tokyo Roun d of GATT. This set off a new wav e of imports and forced theindustries to adjust to the mo re com petitive market. Again, the process of adjustmentproceeded slowly as a result of the limited availability of technology, labo r immobil-ity, and the persistence of significant trade barriers. Th e textile industry adjusted lessthan the apparel industry becau se the nontariff b arriers were m ore effective in prevent-ing imp orts of textiles than of appare l. Ev en so , both industries did even tually adj ust,and their perceived chance of success and potential benefit of voice fell in response(although it fell less in the textile industry than in the apparel industry). As Table 5summarizes, the characteristics and political activities of the apparel industry arenow closest to those of a type I industry, and the characteristics of the textile industryare closest to those of a type I11 industry.

ConclusionIn this article I have developed a theory of dynamic preferences and strategies toexplain changes in dem and for trade protection by industries over time. I have arguedthat industry characteristics shape the preferences of industries for free trade or pro-tection in meaningful and predictable ways. M y argu men t suggests that trade liberal-ization has a positive feed back effect on policy preferences and political strategies ofdomestic producer groups. As industries adjust to more competitive market condi-tions, their characteristics change in ways that reduce the likelihood that they willdem and protection in the future.

T he three case studies provide strong support for the theory. During the im me diatepostwar period, the footwear, apparel, and textile industries were all highly protec-tionist. Thus, when import competition increased, the industries demanded protec-tion. Although the industries enjoyed partial s uccess in the political arena du ring the1960s and 1970s, they gradually lost trade protection over tim e as the level an deffectiveness of trade barriers fell. This set off a new wa ve of im ports and forced t heindustries to adjust to their more competitive markets. The process of adjustmentproceeded slowly in all three industries bec ause of the limited av ailability of technol-ogy, labor immobility, and the persistence of significant trade barriers. Yet all three


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Impa ct of Trade Liberalization 607

T ABL E 5 . Ch arac teristic s of the textile and apparel industries prior to, dur ing,and after adjustment

Textiles Apparel

Pre- Pre- Post-adju.rtment Transition adju.rtment Tran.rition adjustment(1950-78) (1979-94) (1950-77) (1978-86) (1987-94)

Potential benefitCap ital intensityTrade dependenceFacto r specificityChance of successReceptiveliess of administrati~Receptiveness of CongressSize of industryIndustry distressPast successApproximate type

"L = relatively low. bM= average. CH= relatively high.

industries did eventually adjust, and their perceived chance of success and potentialbenefit of voice fell in response. As a result, all three industries have significantlyreduced their demand fo r protection, just as the theory predicts.

Th e case studies not only establish the plausibility of the theory of dynam ic strate-gies and preferences; they also have broader implications for the study of interna-tional political economy and the trade policy process. First, the case studies suggestthat, contrary to widely accepted argum ents, smaller industries and industries in whichoutput is highly concentrated m ay not be mo re likely to organize to dem and protec-t i ~ n . ~ ~he footw ear, textile, and apparel industries actually becam e less w illing toorganize to press for trade protection as the num ber of firms fell and the averag e sizeof firms inc rease d. This is beca use the larger firms w ere better ab le than their sm allercounterparts to invest resources in new capital and m ore likely to possess the infor-mation and resources necessary to operate offshore production and to export goodsabroad. Thus, as production became more concentrated in large firms, the willing-ness of the industry to pursue protection fell. This suggests that as industries growmo re concentrated, they may not becom e m ore protectionist, be cause an increase inconcentration goes hand in hand with changes in industry characteristics-namely,increased capital intensity and trade dependence-that tend to redu ce industry de-mand for protection.


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The case studies also reveal the central importance of industry organizations inmediating the preferences, strategies, and political activities of an industry. This isimporta nt in pai-t because w hen industry preferences chan ge, forma l industry organi-zations tend to lag behind the industry as a whole. As a result, an industry organiza-tion can som etimes continu e to dem and protection for a short period of time after theindustry it represents has adjusted. Th e lag seem s to occur for three primary reasons.First, firms often maintain their membership in industry organizations that no longeraccurately represent their preferences because of ingrained ideology, force of habit,or because they want to maintain access to other services offered by the organiza-t i ~ n . ~ ~econd, when firms do leave a protectionist industry organization, they oftenbecome politically neutral, rather than joining an organization that presses for freetrade.82Third, industry

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