Latin America’s textile industries are in trouble. They cannot compete with cheaper imports from China.
Textile industries are labor-intensive. They do much to create the infrastructure and work ethic needed for other manufacturing industries to develop. For this reason they are usually the crucial first stage in a nation’s industrialization. The demise of Latin America’s textile industries is especially tragic since it will not only cripple further industrial progress; it could also trigger social crises, given the serious unemployment and resultant crime problems in the area — problems I have been made only too aware of on recent visits to Peru and Ecuador.
In short, these nations should be allowed to impose whatever trade barriers are needed to keep those Chinese textiles out. But the free-trade experts, in the International Monetary Fund, World Bank and elsewhere, say no. No free trade, no loans to help cope with economic crises. But if the crises are the result of free trade preventing industrial progress? For the Latin Americans it is an ugly Catch 22 situation.
True, there are times and places where free trade can be useful in forcing non-competitive producers out of business. But a textile industry in a developing economy? It deserves all the help it can get.
Even stranger is the way the free-trade people until quite recently largely ignored the fact that the Chinese yuan currency was undervalued by at least 20 percent (some say 40 percent). That this represented an unfair 20 percent subsidy for all Chinese exports to Latin America, giving importing nations a perfect right, even by free-trade textbook standards, to impose a 20-percent tariff, never seemed to register.
As the free traders saw it, currency valuations were the result of free-market forces. So the exchange rates were fair, by definition. If China’s cheap yuan meant the destruction of some Latin American industries, so be it. The Latin Americans should go off and develop other industries.
Only now is the yuan undervaluation problem beginning to get attention. But it could be too late. For a developing nation, a lost industry usually remains lost; it is very hard to revive the infrastructure needed to support it. As this column predicted several years ago, trying to compete with China’s low wage and rapidly improving infrastructure advantage will be almost impossible unless its currency is forced to appreciate quickly and greatly.
If the Latin America situation is bad, it is much worse in Africa. The 50th anniversary of Ghana’s independence saw much recrimination over Africa’s inability to progress industrially. The answer, as ever, was more aid from the West. But as an excellent BBC documentary recently pointed out, this aid is destroying even local agriculture. The West will only provide that aid if the Africans allow free import of EU and U.S. surplus agricultural goods. Local politicians go along with these suicidal policies so they can get their kickbacks from the aid funds. Meanwhile cheap and imported consumer goods, from China especially, rule out any chance of developing manufacturing industries.
There is a simple answer to this problem of industrial development in a backward economy and it can be found in Thailand. Forty years ago Thailand was almost as retarded as most African nations today. But today it has a serious industrial economy exporting to the world. How did that happen? Since I was there at the time let me tell you something that the free-trade textbooks won’t tell you.
At the time Thailand had to rely almost entirely on exports of rice to buy manufactured goods. Even shirts had to be imported, mainly from Japan. Then one day its government decreed that while fabric could continue to be imported freely, shirts and other garments would have to be made in Thailand. The Japanese garment exporters were not happy. But since Thailand was a big market and the extra cost of processing imported fabric was not high, they bit their lips and set up processing factories knowing they would be protected from cheaper imports of finished goods.
Next move, a few years later, was to ban the import of fabric, but not the yarn needed to make fabric. Rather than lose their garment factories, the Japanese bit their lips again and established fabric weaving factories. And so it went on, all the way down the production line till Thailand eventually had a full-scale, competitive textile industry able even to export, sometimes to Japan.
Next move was to block car imports but encourage a car-assembly industry by allowing free import of car-making materials and parts. Then imports of some materials and parts were also blocked. Then more materials and parts were blocked, and so on. The foreign exporters, mainly Japanese, were in effect “blackmailed” into local production in order to protect their earlier investments. But they also knew that enough Thais would continue to buy cars to sustain a car industry, even if production costs were higher than abroad.
Today Thailand has a respectable car industry, also able to export. And because it has textile and car industries, it now also has the skills, work ethic and infrastructure needed for a range of other advanced industries.
There are two morals to this story. One is that all nations, and not just the East Asian miracle economies with their initial work ethic advantages, can create industrial societies. But they need to do it gradually, Thai style, forcing foreign firms to replace exports with local production.
The other moral is the need to get rid of our Western free-trade dogmatists. The World Bank with its current scandals and mistakes would be a good start.