EconSouth (Second Quarter 2005)

Challenges Loom Large for
Southeastern Textile Producers
and Cotton Growers

Textiles and cotton have been mainstays of the Southeastern economy for over a century, but that dominance is fading. Textiles manufacturers, especially apparel producers, have downsized and specialized to remain competitive, and cotton producers are searching for new markets as domestic cotton consumption declines. The future of these traditional Southern flagship industries will depend largely on whether they can continue to adapt to the global marketplace.

The textile industry, which began in Great Britain and was transported to New England in the late 18th century, became the United States’ first large-scale automated industry. Beginning after the Civil War and continuing over the next century, much of the industry moved to the Southeast in search of lower labor costs and less union activity. The industry remained one of the region’s largest employers through World War II.

But technological advancements and international competition have changed the face of the U.S. textile and apparel industry in the post-war years. Today this U.S. industry struggles to survive advances in global transportation, more open international trading agreements, and the scaling back of U.S. textile quotas. In addition, domestic producers have been hard pressed to compete with low-wage producers overseas. As a result, operations—especially labor-intensive apparel cut-and-sew operations—have begun moving abroad to take advantage of low-cost labor.

Adding to domestic producers’ woes, several factors have adversely affected many firms’ bottom lines. The textile industry consumes large amounts of water and chemicals, and mills must shoulder the costs of complying with significant environmental and regulatory standards. And in the Southeast, where textile producers are one of the most intensive industrial energy users, recent surges in energy costs have become an added burden.

Production and employment sag
For the textile industry, the effects of both long-standing and more recent problems are mirrored in declines in production and employment. Although technological advances have improved the efficiency of larger textile manufacturers, these same advances have eliminated many of the jobs performed by older production processes used in many mills.

Industrial production for U.S. textile and textile product mills fell more than 25 percent from the first quarter of 2000 to the first quarter of 2005. For apparel producers, a subsector of the textile industry (see the sidebar), industrial production declined at nearly twice that rate (47 percent) during the same period (see chart 1).

Chart 1
U.S. Industrial Production and Textile Production
Source: Federal Reserve Board of Governors
Chart 2
U.S. Textile-Related Employment
Source: U. S. Bureau of Labor Statistics

During the past 15 years, employment has plummeted more than 60 percent in the nation’s textile industry overall and nearly 72 percent in the apparel sector. In fact, during the past year alone, employment has dropped more than 5 percent for textiles and more than 10 percent for apparel (see chart 2). The ongoing downsizing of both industries has been crippling for the typically rural Southeastern communities where the plants and mills are located. Three states—North Carolina, South Carolina, and Georgia, which account for nearly 57 percent of the total U.S. textile workforce—have been hit hardest. Since 1990, when nearly 170,000 people worked in North Carolina’s textile mill sector, the state has lost 106,000 jobs, more than 50,000 of those losses occurring since 2000. Likewise, since 2000 textile employment in Georgia has fallen from 52,000 jobs to 32,000, and, in South Carolina, from 61,000 jobs to 34,000.

Employment declines at apparel firms have been even more dramatic than in the textile industry overall. North Carolina, Alabama, Tennessee, and Mississippi in particular have suffered significant apparel job losses, leaving the industry a fraction of what it was only a few years ago (see the table).

Carpet makers go against the grain
One textile sector going against this declining trend is carpet and rug manufacturing. Nationally, total textile employment has declined nearly 60 percent since 1992. But during that period, employment in carpet and rug factories, which account for 8 percent of total textile employment, has dropped only 3 percent and, since May 2004, has risen more than 4 percent.

In the Southeast, one spot in particular has benefited from the presence of carpet and rug production. In the area around Dalton and Calhoun, Ga., textile product mill employment has risen from a low of 15,000 in early 1991 to nearly 25,000 by early 2005.

The Dalton-Calhoun area, which has been dubbed the “Carpet Capital of the World,” produces more than 70 percent of the $9 billion worldwide carpet and rug output, according to the Carpet and Rug Institute. The boom in residential housing developments continues to stimulate demand, and several carpet producers have expanded product lines to include other floorings, such as hardwood and tile.

King Cotton faces challenges
No discussion of textiles is complete without mentioning the industry’s most important raw material—cotton. The decline of textile operations has not led to the demise of cotton production. According to the National Cotton Council of America, approximately 30,000 farms covering more than 13.5 million acres in the United States are devoted to cotton production. The 2004 U.S. crop of 23 million bales is the largest yet on record.

Apparel Manufacturing Employment
(in thousands)
  1990 2000 2005
Alabama 60.4 28.9 15.2
Mississippi 34.3 31.1 4.9
North Carolina 98.4 48.1 25.9
South Carolina 37.6 10.5 3.6
Tennessee 64.0 20.4 8.5
 
Source: U. S. Bureau of Labor Statistics

Although cotton production is thriving, cotton farmers and other domestic industries that depend on cotton face a number of challenges. In recent years, the demand base for U.S. cotton fiber has shifted from the domestic market to the export market as domestic mill use has declined. For the current marketing year, the U.S. textile industry will spin 6.3 million bales of cotton fiber into yarn—a significant decline from 11.4 million bales in 1998. Exports of raw fiber are estimated at 13 million bales, or two-thirds of total use. With the removal of textile import quotas and China’s continued emergence as the largest spinner of raw cotton, the reliance on exports is expected to continue for the foreseeable future.

In a recent edition of Cotton Marketing News, University of Georgia economist Don Shurley writes that about 14 million bales will need to find a home overseas if U.S. cotton farmers continue producing 20 million bale crops. Currently, that volume of U.S. cotton exports is not possible without major purchases from China. Fortunately, China’s mill industry is growing in relation to its cotton production and is therefore expected to continue to need U.S. cotton.

As a major buyer of U.S. cotton, China is a “rose” to U.S. cotton producers, Shurley notes. But that rose has thorns: China is also a source of large textile exports to the United States and thus hampers the U.S. mill industry. “The recently announced import sanction against China has some observers worried that China may retaliate against the U.S. by purchasing less U.S. cotton,” he writes. “Some say any sanctions will have no impact. The fact is nobody knows.”

Putting a new spin on cotton
Basic cotton products like yarn are also searching for markets. Woods Eastland, president of Staplcotn, a cotton marketing cooperative based in Greenwood, Miss., and with offices throughout the Southeast, said mill operators have told him that “they can produce yarn in the United States as cheaply as anywhere. The problem is that yarn production is only the first step in manufacturing textiles. The yarn must be knitted or woven into cloth, which must be dyed and finished and cut and sewn into apparel, bed and bath, etc. Because of current U.S. labor costs, as you move past yarn spinning, we become increasingly noncompetitive.”

Beginning in the 1980s, U.S. textile mills converted their spinning predominantly to open-end spinning technology, as opposed to ring spinning, which is the predominant method used in Asia. Open-end spinning can be used only for coarse and medium yarns (defined by the yarn’s thickness). It requires little labor, and the biggest cost other than for the raw fiber is for electrical power. The textile goods made from these yarns are primarily denim, sheets, towels, fleece wear, men’s knitted underwear and t-shirts, and knitted top wear such as golf shirts.

The most cost-efficient cotton fiber to use in open-end spinning is medium-grade cotton, the type grown in the Southeast and sometimes referred to as Memphis/Eastern cotton. About 80 percent of the cotton used by U.S. mills is Memphis/Eastern. In the mid-to-late 1990s, U.S. mills consumed roughly 11 million bales of cotton. But today, because of mill closures, U.S. mills consume only about 6 million bales, and only about 5 million of those are from the Memphis/Eastern region. Yet production from Memphis/Eastern has increased to about 10 million bales a year.

To make their product competitive in the world market, Southeastern growers need to improve the quality of cotton they produce, according to V. Larkin Martin, managing partner of Martin Farm in Courtland, Ala., and deputy chairman of the Federal Reserve Bank of Atlanta’s board of directors. Southern cotton, Martin notes, was traditionally grown for domestic use and sold to mills in the region. “As that customer base has shrunk, we’ve had to look elsewhere for sales. More and more, that’s meant China.”

Eastland agrees with Martin about the future of cotton production in the region. “In order to stay in business, Memphis/ Eastern cotton producers must find export outlets for their product. Since NAFTA [the North American Free Trade Agreement] was enacted in 1995, Mexican mill consumption has increased and is taking in roughly an additional 1 million bales of Memphis/ Eastern production,” he said. “Turkey has developed a substantial textile industry, with growing Memphis/Eastern exports there as well.”

Martin and Eastland believe that the biggest challenge for U.S. cotton growers is to Memphis/Eastern producers. Varieties of cotton grown in Texas and in the western United States have almost all been exported for 20 years, mainly to Asia. About 60 percent of Memphis/Eastern cotton production is suitable for North American markets, which use open-end spinning.

But to be able to export cotton to Asia, where the ring spinning method is used, Memphis/Eastern growers must develop a product that ring spinners want, with longer, stronger, and finer fibers. “We are researching and experimenting with different types of seeds so we can grow what the overseas market demands,” Martin said. Eastland notes that Memphis/Eastern seed breeders have developed cotton varieties with longer and stronger fibers, but they’re still working on decreasing the fiber size. He believes they are about two years away from producing a suitable product.

The next step is to develop markets for this higher-quality cotton, and all eyes seem fixed on China.

Chart 3
U.S. Monthly Imports of Textile from China
Source: U. S. Census Bureau

The China question
China is emerging as an economic power (see China’s Economic Emergence), and much of that country’s expansion is linked to exports. China has become the world’s largest textile exporter, nearly doubling its textile exports from just over $50 billion in 2001 to $95 billion in 2004. In the first quarter of 2005, total Chinese textile exports rose to an annualized pace of $108 billion, according to Chinese customs data. Chinese textile imports into the United States surged in early 2005, up 62 percent in January and February from year-earlier levels, according to U.S. Commerce Department reports (see chart 3).

A key reason behind the import surge is the World Trade Organization’s Multi-Fiber Agreement (MFA), which took effect on Jan. 1, 2005, and eliminated international quotas on textiles. But according to MFA rules, quotas may be reimposed if resulting increases in imports are deemed to be market disrupting. U.S. officials concluded exactly that in April 2005, and imports of three types of Chinese textiles are limited at this time. According to Commerce Department data, overall textile imports surged 54 percent in the first quarter of 2005 compared to the first quarter of 2004. Three textile products in particular saw large jumps: cotton trousers, up 664 percent; cotton knit shirts and blouses, up 520 percent; and underwear, up 132 percent. The reimposed U.S. limits on these three Chinese exports should limit the growth in these products to 7.5 percent per year through 2008.

While import limits may save some textile jobs in the very short term, the longer-term trend of the decline of U.S. textile and apparel employment will likely hold. In addition, because of restrictions on Chinese imports, U.S. consumers will be paying more for clothing, and the cotton industry may see demand from China decline.

The 21st century challenge
Regardless of how the U.S.-China trade equation balances out, the U.S. textile and apparel industry will continue to change. The reduced quota restrictions will likely result in additional pressure on domestic producers. While U.S. apparel manufacturers will probably continue to lose ground to foreign producers, domestic nonapparel textile firms such as carpet and rug makers are likely to continue to hold onto market share unless there is a significant downturn in housing markets. Improvement in commercial construction should help to stimulate demand for commercial office-grade carpet, and automakers’ and furniture makers’ use of domestic textile fabrics could increase with an expanding economy.

Cotton producers and yarn spinners will continue to develop higher-quality fibers and products to market abroad, and Eastland is optimistic. “The U.S. farm sector will compete well with the world in the future as long as we don’t have to compete with farmers more subsidized than we are,” he concludes.

Textile Industry Classifications
The diverse nature of the textile and apparel industry is reflected in its industrial classifications. The descriptions below are based on definitions from the North American Industry Classification System (NAICS).

Textile mills
Industries in the textile mills subsector transform a natural or synthetic fiber into a product, such as yarn or fabric, that can be further manufactured into items such as apparel, sheets, towels, and textile bags for individual or industrial consumption.

Textile product mills
Industries in the textile product mills subsector make textile products (except apparel). With a few exceptions, processes used in these industries are typically cut and sew (that is, purchasing fabric and cutting and sewing it to make nonapparel products such as sheets and towels).

Included in this subgroup are carpet and rug mills, which either (1) manufacture carpets and rugs from textile or natural materials or rags or (2) finish carpets and rugs.

Apparel manufacturing
Industries in the apparel manufacturing subsector include establishments that either cut and sew purchased fabric to make a garment or first knit the fabric and then cut and sew it into a garment. (Knitting is classified in the textile mills subsector when done alone but as apparel manufacturing when it is combined with the production of complete garments).

The apparel manufacturing subsector includes a diverse range of establishments manufacturing ready-to-wear apparel and custom apparel, including contractors, jobbers, and tailors.

This article was written by Michael Chriszt, director of international and regional analysis, and Dave Avery, senior economic analyst, in the regional group of the Atlanta Fed’s research department..

 

 

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