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The Relationship Between Import Penetration and Operation of the U.S. Textile and Apparel Industries From 2002 to 2008

Sheng Lu 1

and Kitty Dickerson 2

Abstract The U.S. textile and apparel (T&A) industries have respectively adopted various restructuring strategies in recent years which fundamentally changed the way the two industries operate and the shifting relationship of each sector with imports. This study empirically tests the relationship between import penetration and the operation of the U.S. T&A industries based on data at 4-digit North American Industry Classification System (NAICS) code level from 2002-2008. Results from the panel data model show that overall the U.S. textile industry formed a weak cooperative rela- tionship with import penetration level in the U.S. market and a neutral relationship was suggested for the U.S. apparel industry with imports. These findings contribute to understanding the global nature of today’s U.S. T&A industries and suggest useful perspectives for the U.S. textile trade policies.

Keywords U.S. textile and apparel industries, restructuring, import penetration

Introduction

Since 1960s, the United States has quickly become one of the largest importers of textile and apparel

(T&A) in the world (Dickerson, 1999). In 2009, U.S. T&A imports totaled $17.90 billion and $63.10

billion respectively, which were nearly 4 times as much as the import volume in 1990 (Office of Tex-

tile and Apparel [OTEXA], 2010). Concurrent with the quick increase of imports, the U.S. domestic

T&A industries suffered from steady reduction of output and great loss of employment, especially for

those manufacturing-concentrated functions (Abernathy, Volpe, & Weil, 2006). Understandably,

imports were largely blamed for causing the difficult situation of the U.S. T&A industries (Nordas,

1 University of Rhode Island, Kingston, RI, USA

2 University of Missouri, Columbia, MO, USA

Corresponding Author:

Sheng Lu, University of Rhode Island, 55 Lower College Rd., Quinn Hall, Suite 3, Kingston, RI 02881, USA

Email: [email protected]

Clothing and Textiles Research Journal 30(2) 119-133 ª The Author(s) 2012 Reprints and permission: sagepub.com/journalsPermissions.nav DOI: 10.1177/0887302X12447680 http://ctrj.sagepub.com

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2004). More specifically, the rising import penetration ratio (IPR)—the percentage of domestic appar-

ent consumption supplied by imports (Morgan, 1988, p. 13), was often identified as the threatening and

disruptive factor to the survival of the U.S. domestic T&A firms (Krueger, 1996).

However, one important aspect of the story often overlooked is the dramatic restructuring process

that has occurred in the U.S. T&A industries in response to globalization. For example, after aban-

doning most of the domestic production capacity in favor of outsourcing, U.S. apparel firms have

established solid business relationships with apparel exporting countries, either through cut-and-

sew contracts, opening and owning plants, or full package sourcing (Abernathy et al., 2006).

Regional trade packs such as the North America Free Trade Agreement (NAFTA) as well as the

elimination of the quota system have also enabled the U.S. textile industry to form much closer ties

with business partners outside the U.S. borders and to take greater advantage of resources on a global

basis (Gereffi, 1999).

Capturing the relationship between import penetration and the operation of the U.S. T&A

industries in the globalized era is of value both to academia and government policy making.

For academia, this relationship is important to the understanding of the global nature of today’s

T&A industries, particularly as to how the adoption of various restructuring strategies funda-

mentally transformed the way the industry functions in more developed economies. If a non-

competing relationship different from the traditional view is suggested by the findings, it

may call for rethinking the conclusions of many existing theories built upon old paradigms

when globalization was far less influential in depth and in breadth. On the other hand, for pol-

icy makers, such relationship matters to the appropriateness of trade and industrial policies

intended to create a favored environment for the U.S. domestic T&A industries. In particular,

trade restrictions stemmed from grave concerns about the negative impacts of import penetra-

tion. This perspective dominated U.S. textile trade policy for decades, resulting in the creation

and implementation of various policy tools for the purpose of trade restriction (Dickerson,

1988). However, if imports no longer pose a threat to the survival of the domestic industry,

but rather the two have become ‘‘partners,’’ then a fundamental shift in the direction of policy

might be suggested.

Although some studies have been conducted on related topics, research gaps still exist. For exam-

ple, some studies either focused on the patterns of U.S. T&A imports (such as Nordas, 2004) or

explored the new business models of U.S. T&A firms as a result of adopting various restructuring

strategies such as capitalization, mergers and acquisitions (M&A), and outsourcing (such as Chris-

toffersen & Datta, 2004; Kilduff, 2005; Parrish, Cassill, & Oxenham, 2006). However, little research

has focused on imports as a potentially positive factor in the operation of today’s U.S. T&A

industries.

This article tried to fulfill the current research gaps by linking the level of import penetration with

the operation of the U.S. T&A industries between 2002 and 2008. Specifically, two research ques-

tions were studied:

1. By adopting the various industry restructuring strategies, do the U.S. domestic T&A industries

respectively incorporate imports into their operations?

2. Is the rising import penetration level still positively associated with the decline of the domestic

U.S. T&A industries after various industry restructuring strategies were adopted?

To be noted, the level of import penetration shall not be simply treated as the absolute volume of

imports. This is because import penetration is determined jointly by the import volume and the level

of apparent consumption in the importing country (Morgan, 1988, p. 13). Compared to the volume of

imports, import penetration can more accurately reflect the role of imports in fulfilling the market

demand relative to the domestic supply in the importing nation.

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Literature Review

Import Competition: Theoretical Views

Many studies in this area referred to the difficult time faced by the U.S. T&A industries over the past

decades as the direct result of the intensive competition from rising imports (Christoffersen & Datta,

2004; Hodges & Karpova, 2006). Some classic trade models are helpful in explaining why the U.S.

T&A industry appeared to be negatively affected by rising imports, especially those less costly ones

produced in the low-wage developing countries.

According to the Hecksher–Ohlin model (H-O model), countries usually export products for which

it has abundant factors of production and import products for which it has scarce factors (Batra &

Casas, 1973). As a capital-abundant country, the United States might be expected to specialize in

producing comparatively capital intensive products such as machineries. These products would be

exchanged for comparatively labor-intensive T&A products through trade with less-developed coun-

tries having more abundant, less costly labor. Despite the overall welfare gains in the United States, the

H-O model suggested the ‘‘unfavorable’’ consequences for the import-competing T&A sector in terms

of the lowered relative price in the U.S. market and decreased domestic output.

The factor-price equalization theorem (H-O-S model) developed by Paul Samuelson suggested

that international trade will not only equalize the relative price of trading goods but also will

equalize the factor price in these countries both in relative and absolute terms (Salvatore, 2004). This

conclusion implies that when importing T&A from lower wage less-developed countries, wage lev-

els in the U.S. T&A industries will be ‘‘forced’’ to go downward until reaching the same level with

less-developed countries (Baldwin, 2008).

The Rybczynski theorem further argues that holding the price of trading goods in a country con-

stant, the increase of one production factor will result in disproportionally more production of the

product intensively using that production factor (Krugman, 2005). Based on the Rybezynski theo-

rem, much quicker capital growth in relation to the labor force in the United States will result in

disproportionate reduction of comparatively labor-intensive T&A production.

Import Penetration and Heterogeneity of the U.S. T&A Industries

Historically the U.S. T&A industries, especially the textile sector, unswervingly called for restrict-

ing the flood of imports dominating the U.S. domestic market. However, data suggest that the status

of import penetration in some segments of the U.S. T&A industries may different from public per-

ception. By the end of 2008, IPR in the U.S. textile industry (defined by North America Industry

Classification System NAICS 313 in this study) was still at a relatively modest level of 29.1% measured by gross output and 17.9% measured by shipment (U.S. Census Bureau, 2010; U.S. Inter- national Trade Commission, USITC, 2010). This figure means that the majority of market demand

for fiber, yarn, thread, and fabrics in the United States was still supplied by the U.S.-made textiles

instead of by imports. In comparison, the IPR in the U.S. apparel industry (defined by NAICS 315 in

this study) was at a much higher level of 84.3% by gross output and 79.5% by shipment. On the other hand, although IPR in both T&A industries are on the rise over the past 10 years, the growth rate is

much lower for the textile industry compared to the apparel industry. From 2000 to 2008, IPR in the

U.S. textile industry only gained 8.9% points while imported apparel gained more than 20% points in additional market share (U.S. Census Bureau, 2010; USITC, 2010).

The disparity of the U.S. textile industry and the apparel industry in terms of their IPR level

reflects the heterogeneous nature of the two industries. In general, textile manufacturing is compara-

tively more capital and technology intensive than apparel manufacturing (Nordas, 2004). Because of

the abundance in capital factors, the United States enjoys more comparative advantage in relatively

capital-intensive textile production in relation to imports from labor-abundant less-developed

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countries. Similarly, IPR is higher in the U.S. apparel industry because of the more labor-intensive

nature of apparel production which favors less-developed countries.

Structural Change of the U.S. T&A Industries

The heterogeneity of T&A production further affects the nature of structural change and selection of

restructuring strategies by the two industries. In terms of the U.S. textile industry, first, the industry

boosted production by investing in new machines, equipment, and technology (Christoffersen et al.,

2004). Capital intensity of the industry measured by the capital-labor ratio, increased by nearly 20% from 2002 to 2008 (U.S. Census Bureau, 2010). Capitalization and investment in technology also led

to the higher productivity and lower cost of textile production (Levinsohn & Petropoulos, 2001).

Datta and Christoffersen (2005) suggested that labor-saving technical progress helped the U.S. tex-

tile industry improve its productivity by 2.1% and reduced production cost by 2.4% annually from 1953 to 2001.

Second, many U.S. textile firms enlarged production capacity through M&A with the main pur-

poses of taking advantage of economies of scale and achieving lower production cost (Mock, 2002).

The adoption of the M&A strategy may explain why large firms remain a good proportion in the U.S.

textile industry despite the overall decline of the total number of firms (Christoffersen et al., 2004).

Empirical studies further suggested that plants that survived in the U.S. textile industry emerged

with stronger competitiveness while those that exited were comparatively less productive (Chi,

Kilduff, & Dyer, 2009).

Third, the U.S. textile mills improved supply chain management. As customers’ demands for

apparel products have become more volatile and unpredictable with a shorter life cycle, textile pro-

duction is expected to be more ‘‘sensitive’’ to quick market changes. Two main categories of stra-

tegies have been widely adopted in the U.S. textile industry: one category is lean supply with the

goal of reducing inventories and shortening the delivery time, and the other is agile supply which

intends to deliver the products more ‘‘efficiently’’ by making the high volatility products available

to the customers (Oh & Kim, 2007). Specific supply chain management strategies commonly

applied by the U.S. textile industry include quick response, automatic replenishment, just-in-time

systems, point of sale information, and mass customization (Oh & Kim, 2007).

Fourth, the U.S. textile industry actively engaged in the building of regional production networks

with countries that are geographically close to the United States. This strategy received strong sup-

port from U.S. trade policy makers by intentionally adding special provisions encouraging the use of

United States-made yarns or fabrics in the preferential trade agreements reached with trading part-

ners (Gereffi, Spener, & Bair, 2002). In these agreements, imports from partner countries receive

preferential tariff treatment. By the end of 2009, the United States had reached 11 such free-trade

agreements and 4 preferential trade agreements with less-developed countries mostly located in the

America. Statistics from the Office of T&A (OTEXA) indicated that from 2000 to 2009, more than

50% of U.S. textile mill exports went to partners under the NAFTA and DR-CAFTA. Compared with the U.S. textile industry, the U.S. apparel industry had a more difficult time facing

the flood of imports coming from the low-wage countries. High domestic production cost, especially

labor, is regarded as one of the greatest disadvantages for the U.S. apparel industry to compete on price

(Gereffi et al., 2002). On the other hand, contrary to the case in the textile industry, the nature of appa-

rel manufacturing makes it quite difficult to incorporate automation (Dickerson, 1999).

Over time as retailers bought increasing quantities of low-cost imports, the fierce competition

caused the U.S. apparel industry to abandon most of the domestic production capacity in favor of

outsourcing and offshore subcontracting (Kim & Rucker, 2005). Gereffi et al. (2002) proposed that

two types of apparel firms emerged quickly in the industry: one is ‘‘marketers,’’ which are

engaged in design and marketing activities and characterized as manufacturers without factories

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(such as Liz Claiborne (prior to name change) and Ralph Lauren). The other type is ‘‘branded man-

ufacturers,’’ which still deal with activities ranging from design, cutting, assembly, laundry to

marketing (such as Levi Strauss and VF Corporation). However, the key role of ‘‘branded manu-

facturers’’ is to organize and oversee the whole production process rather than simply manufacture

by themselves (Gereffi et al., 2002). Over time, these distinctions are less clear, however, for both

‘‘marketers’’ and ‘‘branded manufacturers,’’ or other types that emerge, their operations are based

on the close contracting networks with overseas companies, especially manufacturers in the less-

developed countries. These transformed U.S. apparel firms did not regard imports as competitors.

Quite the opposite, a large portion of U.S. apparel imports actually were arranged by ‘‘marketers’’

and ‘‘branded manufacturers.’’

Ironically, U.S. retailers became the emerging competitors for U.S. apparel firms. Although retailers

were the customers of apparel firms, they became ambitious in establishing their own sourcing network

so as to shorten the lead time, reduce the sourcing cost, and enhance their margins (Dickerson, 1999; Ger-

effi et al., 2002). At the same time, some large-scale U.S. apparel firms, including branded manufacturers

have also extended their business realm into the retailing sector by means of forward integration (Kilduff,

2005). The phenomenon of ‘‘scrambled softgoods chain’’ within which some traditional steps in the

supply-chain are skipped may also be found in the U.S. apparel industry (Dickerson, 1999).

On the other hand, although imported apparel through sourcing networks has played a dominant

role in supplying the U.S. apparel market, the U.S. apparel industry still maintains certain local pro-

duction bases, such as in New York and Los Angeles (Bailey-Todd, Eckman, & Tremblay, 2008).

Compared with imports which target the mass market and achieve profits on high volumes, this

locally produced apparel, in most cases, serve a U.S. niche market. They cater to particular needs

from the retail customers on quality and flexibility and compete mostly on nonprice factors, such

as design and service (Parrish et al., 2006).

Research Conceptual Models and Hypotheses

Figures 1 and 2 present the conceptual models illustrating the theoretically suggested relationship

between import penetration and the operation of the U.S. T&A industries when taking their respec-

tive restructuring strategies into consideration.

In terms of the U.S. textile industry (Figure 1), most of its restructuring strategies intend to focus

on building a stronger domestically based production capability rather than offshore production

(Kilduff, 2005). This makes the U.S. domestic apparel manufacturers remain important customers 1

to the U.S. textile industry. However, the rising IPR means the U.S. domestic demand for textiles is

fulfilled by a growing volume of imports rather than U.S.-made textile products. The loss of market

share suggests the U.S. textile industry suffers from rising imports. Therefore, this study proposes:

Hypothesis 1: After restructuring, the U.S. domestic textile industry still directly competes with

imports. Therefore, a higher IPR shall be positively associated with the decline of the U.S. tex-

tile industry and vice versa.

In terms of the U.S. apparel industry (Figure 2), with the adoption of various restructuring strategies,

it has achieved global operations with traditional manufacturing-oriented functions largely replaced

by offshore production and outsourcing (Kilduff, 2005). Under the new business model, on one

hand, a good proportion of imports were brought into the U.S. market by the U.S. apparel firms

themselves, whose commercial success was heavily dependent on the efficient cooperation with

contracted apparel manufacturers overseas. On the other hand, as the transformed U.S. apparel

industry treats imported apparel as an integral part of the supply chain instead of competitors, the

rising import level reflected by a higher IPR may no longer imply the U.S. apparel industry ‘‘lost’’

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in competing with imports. Although certain domestic apparel manufacturing capacity remained in

the United States, in most cases, these operations fulfill the needs of the niche market and are sup-

plementary to the imports which basically serve the mass consumer markets (Gereffi, 2001). As the

nature of the game has largely changed from zero-sum competition into cooperation, operation of

the restructured U.S. apparel industry shall not be negatively affected by rising imports. Therefore,

the study proposes:

Hypothesis 2: After restructuring, the U.S. domestic apparel industry no longer competes with

imports. Therefore, a higher IPR shall be either negatively or neutrally associated with the

decline of the U.S. apparel industry and vice versa.

Methodology

Empirical Model Structure

This study develops a revised model based on the work of Greenway, Hine, and Wright (1999) to

empirically test the hypothesis. First, assume for a 4-digit NAICS industry iin periodt, Qsit represents

the domestic supply of U.S. T&A industries, Qdit represents the total U.S. market demand. Import

supply Mit is defined as the difference of U.S. market demand and domestic supply. Based on the

common definition, such as that used by Morgan (1988), IPR ðIPRitÞ is calculated as the share of imports within the total U.S. demand:

U.S. textile mills

U.S. Domestic apparel

manufacturers U.S. Border

Foreign textile mills

Textile imports: competitor of the U.S. textile industry (H1)

supply

competition

Foreign apparel

manufacturers

supply supply

competition

Production network

supply

Imported apparel using non-U.S. made

textiles

competition

Figure 1. Conceptual model of the relationship between import penetration and the operation of the U.S. textile industry. Note. Two other things need to be noted in Figure 1, although they will not be tested in this article. First, the U.S. domestic textile industry is not only directly competing with textile imports but also competes directly with imported apparel which uses non-U.S.-made textile products, although in an indirect way. With the quick rise of apparel imports since the 1990s, output of the U.S. apparel industry first started to decline and then followed-up by the U.S. textile industry. This pattern suggested that a good proportion of prior U.S. domestic demand for textiles disappeared because of the shrinkage of U.S. domestic apparel pro- duction as the result of rising apparel imports. Second, the U.S. textile industry also competes with foreign-made textiles in third-country markets such as Mexico and Central-South American countries (Gereffi, 2002).

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IPRit ¼ Mit

Qdit ¼

Qdit � Qsit Qdit

¼ 1 � Qsit Qdit

: ð1Þ

Second, to describe the behavior of U.S. domestic supply of T&A, assuming Cobb–Douglas

production function is Qsit ¼ AlitKait � L b it , where A

l it denotes total factor productivity which

changes over time; K and L respectively represents capital and labor input with output elasticity

at a and b. To maximize profit, marginal revenue product of labor (MPL) of industry iin period tshall equal

its wage (Wit) level and marginal revenue product of capital (MPK) shall equal rent (Cit ). As most

concerns for the impacts of import competition are concentrated on the labor side, K is further

expressed as a function of parameter L, W, and C, so that Qsit will be directly dependent on employ-

ment and wage level. By solving equations simultaneously, we get

Kit ¼ PitaQsit

Cit ¼

PitaLitWit PitbCit

¼ aLit Wit bCit

: ð2Þ

Third, in term of the behavior of U.S. total domestic demand for industry iin period t, assume

Qdit ¼ B � P b1 it � Y

b2 t ; where Pit denotes the market price of industry iin period t; Yt is the real

national income of the United States. b1 measures the price elasticity of demand in a ceteris paribus

condition, that is, the percentage change of demand for industry igiven 1% change of market price when other factors hold constant; b2 measures impact of aggregate income elasticity for industry i,

that is, the percentage change of the U.S. demand for industry i given 1% change of U.S. national income. B is constant.

Finally, replacing Qsit and Q d it in Equation 2 and taking logarithm of both sides, we have:

U.S. apparel marketers

U.S. apparel branded manufacturers

U.S. apparel retailers

U.S. domestic apparel

manufacturers

U.S. Border

Foreign apparel manufacturers

Apparel imports: partner with the U.S. apparel industry (H2)

sourcing

sourcing

Supply for U.S. mass market

Supply for U.S. niche market

Supply for U.S. mass market

Potential competition

Production network

Figure 2. Conceptual model of the relationship between import penetration and the operation of the U.S. apparel industry.

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Lnð1 � IPRitÞ¼ j0 þj1LnðAitÞþ j2LnðLitÞþ j3LnðWitÞþj4LnðPitÞþj5LnðYitÞ; ð3Þ

where, j0 ¼ a ln ðaÞ�a ln ðbÞ� LnðBÞ� LnðCÞ; j1 ¼ l; j2 ¼ aþb; j3 ¼ a; j4 ¼�b1; j5 ¼�b2.

In particular, we are interested in the value of the following parameters:

� j1 (elasticity of supply associated with productivity): which measures the impact of productivity change of the U.S. domestic T&A industries on its market share in relation to imports in the U.S.

market. As productivity is positively associated with the supply of U.S.-made T&A, when

imports directly compete with U.S. product, productivity growth will result in the rising market

share of U.S. domestic products. Therefore, we expect H0 : j1 > 0; H1 : j1 � 0; for the U.S. textile industry; and H0 : j1 � 0; H1 : j1 > 0; for the U.S. apparel industry.

� j2(elasticity of labor input): which measures the impact of labor input (employment) of the U.S. T&A industries on their market share in the United States in relation to imports. As in the case of

productivity growth, when imports directly compete with U.S. products, the increase of labor

supply will result in domestic supply increasing market shares. Therefore, we expectH0 : j2 > 0; H1 : j2 � 0; for the U.S. textile industry; and H0 : j2 � 0; H1 : j2 > 0; for the U.S. apparel industry.

� j3 (elasticity of wage level): which measures the impact of relative wage level of the U.S. T&A industries on its market share in the United States in relation to imports. When productivity is

held constant, the rising wage level should be the result of rising product price as

MPL ¼ ML � P ¼ W . If imports directly compete with U.S. products, in this occasion, supply curve of the U.S. domestic T&A industries will decline. Therefore, we expect H0 : j3 < 0; H1 : j3 � 0; for the U.S. textile industry; and H0 : j3 � 0; H1 : j3 < 0; for the U.S. apparel industry.

� j4 (elasticity of price elasticity): which measures the impact of market price on the market share of U.S. domestic made T&A products. When imports directly compete with U.S. products and

both demand and supply are held constant, rising market price will encourage U.S. domestic

T&A industries to increase supply and leave less demand for imports to fulfill. Therefore, we

expect H0 : j4 > 0; H1 : j4 � 0; for the U.S. textile industry; and H0 : j4 � 0; H1 : j4 > 0; for the U.S. apparel industry.

� j5 (elasticity of demand/income elasticity): which measures the impact of aggregate demand of the United States (aggregate income) on the share of its domestic-made T&A products in the market.

Enlarged domestic demand will raise the market price and result in more domestic supply. There-

fore, when imports directly compete with U.S. products, we expect H0 : j5 > 0; H1 : j5 � 0; for the U.S. textile industry; and H0 : j5 � 0; H1 : j5 > 0; for the U.S. apparel industry.

For the empirical test, two additional variables are included in Equation 3.

One is the dummy variable Quota, which is used to capture the potential impacts of the elimina-

tion of the quota system on the import penetration level. As variable Quota ¼ 0 for years 2002–2004 and Quota ¼ 1 for years 2005–2008, parameter j6 can reveal whether IPR has any structural changes in the postquota era due to the significant changes of the ‘‘rules of game.’’

Another variable is t, which is used to capture the potential time trend that existed in the data.

Failing to control the time trend may result in a spurious regression problem (Wooldridge, 2002),

especially when time-series data are not stationary.

Besides, ci refers to the possible unobserved sectoral effect and mit denotes error terms. Because of the interconnection between the textile industry and the apparel industry, simply simulating the

Equation 3 individually for each 4-digit NAICS code is likely to result in biased estimation of para-

meters due to the correlation among mit for different T&A subsectors (Wooldridge, 2002).

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To achieve unbiased and consistent estimation, the panel data modeling technique is adopted in

this study, which is specifically developed to tackle a data set involving both cross-sectional and

time-series data. Compared to the traditional cross-sectional regression, a panel data model can help

solve the potential problem of cross-sectional heteroskedasticity in the data set and reveal the poten-

tial dynamics in the data set, which cannot be detected by the cross-sectional regression (Wool-

dridge, 2002). Moreover, the generalized least square (GLS) method instead of pooled ordinary

least square, is used to ensure consistent and efficient estimation of the parameters. GLS has the

advantages of tolerating a certain degree of correlation among independent variables (Wooldridge,

2002). This is particularly useful in this study given the linkage among productivity, wage level and

employment size in Equation 3.

Data Source

Data used in this study came from various U.S. government agencies, which are the best sources

available for official national-level aggregated industry and trade statistics. Except for otherwise

noted, all data were collected at the four-digit NAICS code level 1 , so as to make industry perfor-

mance and trade activities compatible with each other. More specifically:

For IPR (variable IPR), volumes of imports for each 4-digit NAICS code sectors were measured

in dollar terms (USITC, 2010). Domestic supply of each 4-digit NAICS code U.S. T&A industry was

measured by the total value of shipments (U.S. Census, 2010). In particular, by the U.S. Census’s

definition, value of shipment means the total value of all products shipped by the producers (U.S.

Census, 2010). Therefore, this index is more appropriate than production output to reflect the

U.S. domestic supply of textiles and apparel in the market. Employment level (variable L) was mea-

sured by the total number of employees (U.S. Department of Labor, 2010a). Wage level (variable W)

was measured by the average hourly earnings of all employees either in the U.S. textile industry or in

the apparel industry (U.S. Department of Labor, 2010a). Productivity (variable A) was measured by

the productivity index (year 2002 ¼ 100; U.S. Department of Labor, 2010b). According to the Bureau of Labor Statistics, definition, labor productivity is the ‘‘ratio of output of goods and services

to the labor hours devoted to the production of that output.’’ Producer price index (PPI) was used as

the proxy for market price (variable P; U.S. Department of Labor, 2010b). According to the defini-

tion of BLS, PPI measures the average change over time in the selling prices received by domestic

producers for their output (U.S. Department of Labor, 2010c). Last but not least, aggregate demand

(income) in the United States was measured by gross domestic product (U.S. Department of Com-

merce, 2010).

Data used in this study range from 2002 through 2008. Year 2002 was the first time when statistics

collected based on NAICS were available. Prior to that, industry activities in the United States were

collected based on the Standard Industrial Classification (SIC) system, whose industry classification

method was different and incompatible with NAICS. Further, because of time lag in availability of

government data at the time of the study the latest statistics based on NAICS was through 2008.

Results and Discussions

Relationship Between Imports and the U.S. T&A Industry: Empirical Results

First, the Breusch and Pagan Lagrangian Multiplier (BP) test was conducted to see whether unob-

served sectoral effect ci was present. As w 2

of the BP test is 58.00 (p ¼ .01), therefore at 95% con- fidence level we reject the null hypothesis, that is, unobserved sectoral effect ci was suggested

present in the empirical Model (5).

Second, the Hausman test was conducted to see whether the unobserved sectoral effect ciwas

correlated with other independent variables in Equation 3. For the U.S. textile industry, w2 of the

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Hausman test is 5.0 (p ¼ .08), therefore at 95% confidence level, we fail to reject the null hypoth- esis, that is, sectoral effect ciis suggested uncorrelated with other independent variables. In such

case, both the fixed-effect model (FE) and the random-effect model (RE) can generate consistent

estimation. However, RE estimation usually is more efficient than FE (Wooldridge, 2002), there-

fore RE is chosen for studying the U.S. textile industry. For the U.S. apparel industry, w2 of the Hausman test is 10.57 (p ¼ .01) p value ¼ .01 < .05, therefore at 95% confidence level, we reject the null hypothesis. FE model therefore is chosen for studying the U.S. apparel industry and its

relationship with import penetration level.

Third, RE and FE models were run by STATA 10.0 and the estimation results were shown in

Tables 1 and 2. For both RE and FE model, p value of the F statistics were smaller than .01 at the

95% confidence level. This suggests that overall the dependent variable 1–IPRit, which measures the share of U.S. domestic-made T&A in the U.S. market, has strong correlation with independent vari-

ables describing the operation of the U.S. T&A industries, namely productivity, employment, wage

level, market price, and GDP.

According to Table 1, Hypothesis 1 which suggests a ‘‘competing’’ relationship between imports

and the U.S. domestic textile output was not supported. In most cases, import penetration level

seems independent of the operation of the U.S. textile industry. Changes of the productivity and

wage level of the U.S. textile industry were both suggested having no statistically significant impacts

on the changes of the import penetration level. Neither did the market price nor aggregate U.S.

demand show a significant relationship with the import penetration level. The only exception occurs

in the case of employment. Results in Table 1 imply that expansion of the workforce in the U.S.

textile industry will not help the U.S. textile industry gain more market share in the domestic market,

but rather will end up with more imports. Moreover, the estimated parameter for the dummy variable

Quota is not statistically significant, suggesting that impact of the quota elimination did not lead to

changes of the import penetration level in the U.S. textile industry as a whole.

Hypothesis 2 was supported by the empirical results shown in Table 2. Overall, results suggested

the operation of the U.S. apparel industry and imports were ‘‘immune’’ to each other. Variables

describing operation of the U.S. apparel industry were mostly found having no statistically signif-

icant impacts on the relative market position of imports in relation to U.S. domestic output. This

means a rising import penetration in the U.S. market was not associated with negative development

of the U.S. domestic apparel industry. Moreover, empirical results suggest that holding other vari-

ables constant, 1% change of the U.S. market price would result in 0.5% decline of the market share of the domestic output in the same direction. This means imports will continue increasing when out-

put of the U.S. domestic-made apparel moves toward the higher end of the market. On the other

hand, as the case in the U.S. textile industry, no evidence shows that elimination of the quota system

had resulted in change of the overall level of U.S. apparel imports. 2

Discussion

Despite some inconsistencies with the two hypotheses, results of the empirical tests may still be

explained by certain factors. For the U.S. textile industry, first, with shrinkage of U.S. domestic

demand, operation of the U.S. textile industry relied more heavily on its performance in overseas

markets. With a growing proportion of industry output shipped outside the U.S. border, it may

explain why IPR could still rise when the U.S. domestic fiber, yarn, and thread mills improve

productivity, enlarge employment, and raise wage level. When the U.S. textile industry no longer

specifically targets the domestic market, it seems reasonable that neither the rising market price nor

the expanded aggregate demand (income) in the United States results in more industry supply.

Second, although the U.S. textile industry still largely focuses on domestic production after the

adoption of various restructuring strategies, the industry may still have undergone substantial

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structural changes reflected on the nature of its output. Statistics show that, only 14% of the total U.S. fiber output was used for apparel production by the end of 2008, reduced from 18% in 2004 (Fiber Economics Bureau, 2009). In comparison, technical textiles which was widely used in mil-

itary, health care/medical, construction, engineering, and agriculture industries (Chi, 2010; Dick-

erson, 1999), accounted for 41% of total fiber usage in the United States in 2008, increased from 34% in 2004 (Fiber Economics Bureau, 2009). It is likely that although imported textiles and the U.S. domestic textile output were counted under the same four-digit NAICS code, they were het-

erogeneous in nature with different end-use purposes.

As for the U.S. apparel industry, first, the results may due to the fact that the U.S. domestic

apparel output and imported apparel target different segments of the U.S. market. As proposed in

Figure 2, while imports largely fulfill the demand from mass market, the U.S. domestic-made appa-

rel has narrowed their focus to niche markets in the United States whose preferences give more

weight to added values, services, or speed of product delivery that cannot be easily fulfilled by

imports (Parrish et al., 2006). Some niche markets are created by U.S. legislation, such as the Berry

Amendment. 3

When target markets had little in overlap, it is not too surprising to see that operation

of the U.S. apparel industry had minimum impact on the ebb and flow of imports.

Second, statistical insignificance of the empirical results could also attribute to the fact that mul-

tiple parties in the U.S. softgoods industry are involved in importing apparel. In particular, it has

become a common practice for large apparel retailers in the United States to set up departments

solely responsible for global sourcing of an increasing share of private-label products in their total

sales (Dickerson, 1999). However, under the NAICS system, apparel retailers (NAICS 448) and

apparel firms (NAICS 315) were classified separately, which means their industry activities such

as output, productivity, and employment were independently collected and released. Unfortunately

retailers’ participation in international trade currently is not traced and reported by official statistical

sources. Since apparel imports sourced by retailers have reached a sizable scale but cannot be

Table 1. Results of Random Effect Model on the U.S. Textile Industry

Lnð1 � IPRitÞ Productivity

LnðAitÞ Employment

LnðLitÞ Wage

LnðWitÞ Market price

LnðPitÞ GDP LnðYitÞ Quota Quota Time

Textile industry �0.018 (0.06)

�0.179** (0.04)

0.17 (0.54)

0.50 (0.45)

�0.23 (1.09)

0.08 (3.75)

�2.52 (7.31)

Constant: 6.01 (135.02)*

Note. *denotes p < .05. **denotes p < .01. p Value for F test of overall significance: .00**

Table 2. Results of Fixed Effect Model on the U.S. Apparel Industry

Lnð1 � IPRitÞ Productivity

LnðAitÞ Employment

LnðLitÞ Wage

LnðWitÞ Market price

LnðPitÞ GDP LnðYitÞ Quota Quota Time

Apparel industry 0.04 (0.04)

�0.02 (0.02)

�0.15 (0.52)

�0.50* (0.22)

�0.12 (0.57)

�2.15 (1.92)

0.19 (3.33)

Constant: 82.03 (66.5)

Note. *denotes p < .05. **denotes p < .01. p Value for F test of overall significance: .00**

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separated from total import volumes, it unavoidably weakens the sensitivity of data in reflecting the

actual linkage between imports and the operation of the U.S. apparel industry (NAICS 315).

Third, the diversity of apparel products may further complicate the empirical estimation of the

relationship between imports and the operation of the U.S. domestic firms. In contrast to the highly

standardized textiles, products such as fiber, yarn, and fabric, apparel products are more hetero-

geneous in nature due to consumers’ seeking of uniqueness. Apparel imports from different

sources have demonstrated a wide range of average price measured by dollars per square meters.

Some studies already argue that origin of imports matters for their impact on an importing coun-

try’s domestic industries (Bernard, Jensen, & Schott, 2006). Similarly, the proposed cooperation

between imports and the operation of the U.S. apparel industry could be more remarkable if

empirical tests were narrowed down to a smaller group of apparel firms and imports from certain

geographic regions.

Conclusions and Implications

This study empirically evaluated the relationship between import penetration and the operation of

the U.S. T&A industries using a panel data model based on data at 4-digit NAICS code ranging from

2002 through 2008.

First, the RE model suggests that overall the U.S. textile industry formed a weak cooperative rela-

tionship with imports in the U.S. market. Specifically, employment size of the U.S. textile industry

was found negatively associated with its market share in relation to imports in the U.S. market. How-

ever, no evidence showed that productivity and wage level of the U.S. domestic textile industry or

the aggregate demand in the United States had statistically significant impacts on the import pene-

tration level in the U.S. textile market. Nor was the elimination of the quota system in 2005 shown to

have statistically significant impact on the overall import penetration level in the U.S. textile market.

Second, the FE model suggests that the U.S. apparel industry overall formed a neutral relation-

ship with imports in the U.S. market. No evidence indicated that productivity, employment, and

wage level of the U.S. domestic apparel industry as well as the aggregate demand in the United

States had statistically significant impacts on the import penetration level in the U.S. apparel

market. However, market price was found negatively associated with the share of U.S.

domestic-made apparel in the U.S. market. Similar to the case in the U.S. textile industry,

impact of the quota elimination on the import penetration level in the U.S. apparel market was

found not statistically significant.

Findings of this study have several important implications both regarding the evolution of the

U.S. T&A industries and many broader issues critical to the global economy and its governance

in the 21st century. First, results of this study present a somewhat more encouraging picture of the

current status of the U.S. T&A industries than many previous studies suggested. Although pessimis-

tic and stereotyped public images of a dying U.S. T&A industry are to an extent still popular, this

study argues that the two industries overall have stabilized as a result of their sweeping restructuring.

In particular, indexes often used to measure the size of an industry such as employment and output

may not be solely appropriate for evaluating an industry which is undergoing significant structural

changes. Instead, a more comprehensive and objective assessment of the conditions of the U.S. T&A

industries should also take aspects such as product structure, productivity growth, demand for

occupations at different skill levels, and export dependency rate into consideration. Overall, it is

important to keep in mind that both the U.S. T&A industries today are but a shadow of what they

were even a decade ago. However, the two industries have survived through strategic transformation

and are expected to continue development in the future.

Second, findings of this study raise questions on whether there is a basis to be nervous about ris-

ing imports, especially in the context of an integrated global economy in which global fragmented

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production and trade networks predominate. Actually, the validity of arguments stressing the

adverse impacts of rising imports largely depends on the assumption that imports and output of

importer’s domestic industry necessarily constitute a ‘‘zero-sum’’ game. However, this assump-

tion is questionable when international trade in an integrated global economy today is no longer

arm’s-length transaction in nature (Cattaneo, Gereffi, & Staritz, 2010). Findings of this study also

pose challenges to the ‘‘zero-sum’’ game assumption. The suggested noncompeting relationship

implies that not only has the U.S. apparel industry extensively incorporated imports into its

global-based operation, but also the U.S. textile industry may benefit from imports and offshore

production, although the detailed mechanism needs further exploration.

Perhaps, findings of this research call for shifting the orientation of U.S. T&A trade policy from

focusing on import restriction to greater export promotion. To a large extent, curbing the growth of

imports dominates the history of the U.S. T&A trade policy over the past 40 years. Such single-

focused policy orientation reflects certain policy makers’ strong suspicion, skepticism, and deep

anxiety about rising imports and their presumed negative impacts on the health of the U.S.

domestic industries. However, evidence provided in this study shows that with the adoption

of various restructuring strategies, maintaining today’s U.S. T&A industries largely depend

on the free flow of goods and services across the borders. Even if imports were restricted, those

lost jobs—mostly low-skill types, would not simply go back to the United States as wished.

Instead, with the rising dependency on markets outside the U.S. border, perhaps policy makers

should more wisely spend precious policy resources to strengthen the competiveness of U.S.

textiles and apparel products in the global marketplace which is of growing importance to the

industries’ future prosperity.

Despite the interesting and meaningful results of the findings, several changes might be made to fur-

ther improve the quality of the future similar studies. First, it could be better if longer time-series

data were available. A longer time-series data will help improve the overall reliability of the estima-

tion by increasing the number of data points and degrees of freedom for the model. However, cau-

tions should also be given to the possible new ‘‘noises’’ brought in with data from a longer time span.

For example, if data prior than 2002 were used in the model, questions arise on how to deal with

China’s WTO accession effect as well as the correspondence of NAICS with the SIC system because

categories changed. Second, it could be improved if empirical tests can be conducted at even more

disaggregated data level. Particularly, the heterogeneity of different subsectors within the T&A

industries might also cause the insignificance of the estimation results. Third, the study might be

improved if the interactions between the textile industry and the apparel industry can be taken into

consideration. In this study, the relationship between imports and the operation of the U.S. T&A

industries were evaluated based on products within the same NAICS-code sector, while future study

may take cross-sector connections into consideration. Last but not least, structure of the empirical

model can be further improved by taking the potential existence of stochastic trends in the data set

into consideration. With the presence of stochastic trends, the data set will be nonstationary and may

lead to biased estimation even when time trend variable t is included in the model. As one solution,

the Dickey–Fuller test or related tools may be used in the future to detect the potential existence of

stochastic trends.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publica-

tion of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

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Notes

1. In this study, the U.S. textile industry covers NAICS 3131 (Fiber, yarn, and thread), NAICS 3132 (Fabrics),

and NAICS 3133 (Fabric finishing and coating); the U.S. apparel industry covers NAICs 3151 (Knitted

apparel), NAICs 3152 (Cut and sew apparel), and NAICS3159 (Apparel accessories).

2. The ‘‘insignificant’’ results may be due to two major reasons. First, quota elimination may exert more significant

impact on the country structure of import sources rather than the overall import volume which is more closely

related to macro economic conditions (Nordas, 2004). Second, the largest T&A exporter to the United States—

China, was still subject to quota restriction for many of its most competitive products until the end of 2008.

3. Under the Berry Amendment, clothing, fabrics, fibers, yarns, or other made-up textiles procured by the U.S.

Department of Defense need to be 100% made in the United States (U.S. Department of Defense, 2011).

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Bios

Sheng Lu, PhD, is an assistant professor in the department of textiles, fashion merchandising, and design at the

University of Rhode Island. The areas of his research interests include international trade and trade policy, gov-

ernance of global apparel value chain, and international marketing.

Kitty Dickerson, PhD, was the professor and the department chairman for the department of textile and apparel

management at University of Missouri. Currently, she is the professor emerita, author, and consultant. Her

research includes international trade and trade policy, as well as restructuring of the global and U.S. softgoods

industry.

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