Economics and the politics of protection : some case studies of industries

SWP-569 Economics and the Politics of Protection Some Case Studies of Industries Vincent Cable WORLD BANK STAFF WORKING PAPERS Number 569 PUB HG 388i.5 .W57 W67 no.569   A Set of Related WORLD BANK STAFF WORKING PAPERS Public Subsidies to Industry The Case of Sweden and Its Shipbuilding Industry Number 566 The Political Economy of Protection in Italy Some Empirical Evidence Number 567 Bureaucracies and the Political Economy of Protection Reflections of a Continental European Number 568 Economics and the Politics of Protection Some Case Studies of Industries Number 569 Public Assistance to Industries and Trade Policy in France Number 570 The Structure of International Competitiveness in the Federal Republic of Germany An Appraisal Number 571  j i I I  WORLD BANK STAFF WORKING PAPERS Number 569 Economics and the Politics of Protection Some Case Studies of Industries Vincent Cable The World Bank Washington, D.C., U.S.A.  Copyright i 1983 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. First printing July 1983 All rights reserved Manufactured in the United States of America This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The views and interpretations in this document are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. Any maps used have been prepared solely for the convenience of the readers; the denominations used and the boundaries shown do not imply, on the part of the World Bank and its affiliates, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. The full range of World Bank publications is described in the Catalog of World Bank Publications; the continuing research program of the Bank is outlined in World Bank Research Program: Abstracts of Current Studies. Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Distribution Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'ISna, 75116 Paris, France. Vincent Cable is deputy director of the Overseas Development Institute in London and a consultant to the Economic Analysis and Projections Department of the World Bank. Library of Congress Cataloging in Publication Data Cable, Vincent. Economics and the politics of protection. (World Bank staff working papers ; no. 569) Bibliography: p. 1. Great Britain--eomercial policy. 2. Free trade and protection--Protection. 3. Great Britain--Industries --Case studies. I. World Bank. II. Title. III. Series. HF1533.C33 1983 382.7'3'0941 83-10268 ISBN 0-8213-0199-3  ABSTRACT This report is part of an inquiry undertaken by the World Bank in conjunction with scholars from 12 industrial countries into the penetration of the markets of industrial countries by exports of manufactures from developing countries. The project sought to establish the shares of industrial country markets held by the developing countries, changes in such shares in the 1970s, and why they vary among industry groups and countries. The aim is to assist developing and industrial countries to improve their policies through a better understanding of trade patterns and protectionist pressures. To a great extent, protectionist behavior is industry-specific, with several factors relevant in determining an industry's attitude toward protection. Among them are the intensity and nature of the competition it faces, its adjustment options and capacity to adjust, and its success in lobbying the government for protection. This paper analyzes these factors for four quite different industries in Great Britain: footwear, knitwear, cutlery and consumer electronics. Each has faced substantial import competition from developing countries and has received varying degrees of protection that in all cases have been higher than the U.K. average for manufacturing. The paper also looks at the factors that may determine whether the government adopts a protectionist policy, with specific attention to the four industries. The study showed that the effect of the import competition across industries and within each industry varied substantially. Some branches and/or firms did well, others did not. It also showed that  many of the common assumptions about the nature of the competition were ill-founded. For example, the competition derived from a few, not the majority, of developing countries. Differentials in labor availability and costs were only two, and not necessarily the key, factors affecting Great Britain's competitiveness. Others were that plants in the developing countries were often larger and more modern, enhancing efficiency and providing scale economies; input costs were lower and there was less waste; and labor overhead was lower. As a result, production costs were substantially lower. Equally important, government policies in Britain and industry responses to competition have all too often been inappropriate and unsuccessful. This is particularly true in terms of the use of protectionism to counter competition. All four industries in fact have had a number of adjustment options to choose from. Broadly, they fall into two categories: product (or horizontal) diversification, and product (or vertical) specialization. In general, the industries have not pursued these options (with some notable exceptions) and have resorted, instead, to requests for protection. As noted, the four industries studied here have received substantial protection. Two explanations are generally forwarded for the government's policy: the pluralist model and the corporatist model. In the case of the four industries studied here, the latter model is more relevant. However, other important factors must also be taken into account, such as the external pressures on government (the EC and other trade partners) and its ideology (free trade vs. protectionism).  Where protection is provided, two rationales are often given. The first -- the modified infant industry rationale -- is rarely justified. The second -- the need to minimize the costs of rapid adjustment -- is more understandable. However, government assistance should not result, as it has in Britain, in the addition of resources or capacity to a non-competitive industry. Rather, it should further the industry's diversification or help it close down more slowly. Government should also remove those trade restrictions that reduce an industry's adjustment options and make change more difficult to implement. Finally, the role that Britain's overvalued exchange rate has played in discouraging major structural adjustments must be noted.   TABLE OF CONTENTS Page I INTRODUCTION ...... . .................... 1 The Case Studies .............. ............ . 2 II IMPORT COMPETITION AND THE PRESSURE TO ADJUST ...... 6 Import Penetration .... .. .............. . 6 Competitiveness and Comparative Advantage .12 III REVERSING COMPARATIVE ADVANTAGE .............. 18 Current Efforts by Industry .18 IV ADJUSTMENT OPTIONS: THE DEGREES OF FREEDOM. . 24 Project (or Horizontal) Diversification .24 Locational (or Vertical) Specialization .31 V SEEKING PROTECTION: THE LOBBIES . . 40 Protectionist Behavior: The Explanations ....... 40 The Politics of Decision-Making ..............I... 50 VI POLICY CONCLUSIONS . ... ....... 57 REFERENCES . ........................................ 61  LIST OF TABLES Page 1. Imports from Developing Economies and Import Penetration . . .................. . 7 2. Salient Characteristics of the Case Study Industries ......................... 13 3. Distribution of Foreign Capital Assets and U.K. Capital Assets Abroad, 1974 ................... 39  Chapter I INTRODUCTION Some industries have proven more vulnerable to shifts in international competitiveness and more adaptive or more prone to protectionist pressures than others. To some extent, the reasons can be related to general principles. Nevertheless, a substantial part of the dynamics of adjustment or protectionist behavior is industry-specific and can be properly understood only through the detailed study of individual industries and the firms within them. For specific industries, the intensity of the pressures resulting from competitive imports will depend not only on underlying factors such as comparative advantage, but also on other determinants of competitiveness. These include different productivity levels stemming from different vintages of machinery and levels of managerial competence; the degree to which technical knowledge is internationally diffuse; differences in the prices of inputs, especially those that are non-traded; the movement of exchange rates; and the structure of distribution at the wholesale and retail levels. Whether firms in an industry will try to resist competition by seeking protection or will adjust to market forces will also depend on the options available: for new or specialized products, for multinational investment or for new technology with different production methods. In addition, for a given array of options, industries will differ in their capacity to adjust. In some cases their capacity will be low: the firms may be small and have limited financial resources;  -2- the work force may be concentrated in a high unemployment area and resist change; or management may be highly specialized and conservative. Where there is resistance to market-related solutions, there will be differences in the ability of industries to mobilize this resistance and to influence decision-makers. In this paper, these questions are pursued through a comparative case study approach involving four British industries: footwear, cutlery, consumer electronics and knitwear. The Case Studies The main criterion in the choice of the cfse studies was to identify industries with a common experience of competing imports from developing -- or "newly industrializing" -- countries (NICs),I/ but with different characteristics and different histories of government policy. Textiles and clothing was an obvious starting point. However, a decision was made to look at only one component part, knitwear. It is a branch of manufacturing with a distinct identity -- in terms of technology, geography, unioniziation and manufacturers' association -- yet, in other respects, it is an integral part of the larger textiles family. The knitwear industry extends vertically from "upstream" textile activities which mainly use manmade fibers to "downstream" 1/ The newly industrializing countries are variously defined in different contexts. For example, they may be countries which are increasing their industrial capacity or which are increasing their exports of manufactures. A number of international institutions have specific definitions for this group or only include some countries. In this volume, any of the various definitions may be relevant.  - 3- garment assembly, the latter being the one of the greatest areas of competition from the developing countries. The footwear industry has also been in the forefront of current arguments about trade protection in Britain and elsewhere. It was worth an individual look to establish whether the consequences of its being a relatively small industry (63,000 workers in Great Britain at the end of 1980, in relation to 710,000 in textiles and clothing) have been significant. It is also an industry (unlike textiles and clothing) in which the "downstream" assembly operations predominate in economic and political importance over the "upstream" intermediatelprocesses (in this case, leather tanning). The third choice was of a quite different industry -- consumer electronics. Developing countries have made substantial inroads in the world trade of these products. This phenomenon is less explicable in terms of traditional trade theory and rmore explicable in terms of the "product cycle" concept and asWociated ideas.l/ The industry has been characterized by the rapid pace and extent of product innovation, and also by its strongly transitional character, with many important firms having overseas interests or ownership. The fourth choice was cutlery, a tiny industry employing a few thousand people, but one with a lively and complex history of lobbying for protection. It is also interesting as the first of what may prove to be a succession of metal-working industries (others being hand tools, 1/ The theory is set out in R. Vernon, "International Investment and International Trade in the Product Cycle," Quarterly Journal of Economics 80(May 1966):190-207.  -4- metal fasteners and metal hollow-ware) in which developing countries, especially those able to produce or acquire cheap steel, are becoming competitive. Each of the four industries has enjoyed some protection, though in varying degrees. Except for leather shoes, tariffs have been well above the EC's average Common External Tariff, and in each case, the industries have been shielded from the tariff cuts of the Tokyo Round. Although the effective rate of tariff protectioi is difficult to compute, it has varied from approximately 10 percent on leather footwear to just over 30 percent on cutlery and knitwear (there are various additional imposts as well, such as an 8 percent anti-dumping duty on Brazilian leather shoes, the main developing country source for that product). Most products have also been "sensitive" under the EC's Generalised System of Preferences, which permits only a little duty-free market access. Of the four industries, cutlery has been less "sensitive," and there has been some flexibility in the treatment of consumer electronics. Quantitative restrictions have provided additional protection. Industry-to-industry voluntary export restrictions (VERs) are normally the weakest form of restraint, and the cutlery industry has operated within this framework, with Japan and the Republic of Korea (South Korea) having been refused formal import controls. The consumer electronics industry also relies upon voluntary restraints for monochrome TVs and music centers from South Korea, Taiwan, China, Japan and Singapore, as well as for Japanese color TVs. In this case, the agreements had been precipitated -- indeed forced -- by the prior  - 5 - unilateral import quotas. The industry has also been protected by a licensing system which has prevented Asian non-licensees from exporting larger TVs -- above 20 inches -- to Britain and Europe. Trade in the main radio items and small TVs has, however, been unrestricted. A similar patchwork quilt of voluntary restraints on some items and limited use of import quotas and free trade on others also describes the footwear industry. From the point of view of the industry being protected, one of the major weaknesses of the kind of regime that has been operating in footwear and consumer electronics (and more weakly in cutlery) is that it has not been comprehensive. The Multi-Fibre Arrangement (MFA) for textiles which covers the knitting industry represents a much more comprehensive approach to prottction. It has evolved to cover all the major product categories and all the major (and most minor) "low cost" suppliers in a network of bilaterally negotiated quotas which are normally "voluntary" but which are strictly enforced by the governments of the importing countries.  -6- Chapter II IMPORT COMPETITION AND THE PRESSURE TO ADJUST The popularization of the idea of "comparative advantage" has often led to the impression that whole industri s are doomed to disappear (or have actually disappeared) because of "low cost" imports. In each of the cases considered here, reality has been a great deal more complex. Import competition from developing countries has been much stronger in some branches of the industries than others and non-existent elsewhere (see Table 1). Moreover, there have been other factors besides low-cost imports creating pressures for adjustment: technological change, competition from other products, declining demand and competition from countries besides the developing ones. Import Penetration Overall, the level of import penetration in British footwear almost doubled in terms of value between 1972 and 1979, reaching a level of 36 percent. In terms of volume, the level was 46 percent. This competition has exerted pressures on the industries to adjust: while the imports were rising in volume throughout the 1970s, production was falling (there was no growth in domestic demand, and exports were static). In 1979, production (149.6 million pairs) was well below that of a decade earlier (194.1 million pairs), a phenomenon observed in most other OECD countries. At first sight, the developing countries would appear to have been a major source of the problem. The demand for textile footwear has been met almost entirely by imports from developing countries (the volume has been over 80 percent), while rubber and plastic footwear has  Table 1: IMPORTS FROM DEVELOPING ECONOMIES AND IMPORT PENETRATION Import value % of dev. economy 1 of dev. economy E millions IPt%) imports Import volume IP(%) imports Footwear (1979) (millions of pairs) Leather uppers 256 42 14 48 36 17 Men's 96 41 10 17 50 8 Women's 110 41 15 22 50 16 Children's 24 20 14 4 18 19 Safety 1 2 - - 2 - Sports 26 59 26 5 60 41 Rubber uppers 4 )33 45 2 )49 59 Plastic uppers 52 ) 27 27 ) 42 Textile uppers 30 93 60 22 89 89 Slippers 9 16 59 9 23 80 All products 331 36 24 110 46 44 Knitwear and hosiery (1978)a/ Knitted fabrics 33 7 - n.a. n.a. Gloves 13 99 82 n.a. n.a. 85 Tights 17 21 39 n.a. n.a. )51 Socks & stockings 4 8 n.a. n.a. Shirts 35 70 )21 n.a. n.a. )22 Underwear 27 27 ) n.a. n.a. Jerseys/pullovers 134 37 42 n.a. n.a. 51 All products 338 30 38 n.a. n.a. 44 Cutlery (1976)b/ (million dozen pieces) Stainless steel tableware 7.7 77 68 7.2 68 73 Silverplate 0.4 7.1 n.a. n.a. n.a. n.a. All cutlery 54 48 24 n.a. n.a. n.a. Consumer electronics (1979)c/ ('000 units) Color TV 540 20 12 Mono TV (small screen) 709 45 42 Music centers and hi-fi 1,432 n.a. 19 Tape recorders 3,878 ca. 100 66 Car radios (and CB) 3,130 ca. 95 40 Other radios 7,992 ca. 100 92 Videos 179 100 1 Games 1,401 100 92 a/ Taiwan, China, Hong Kong and South Korea only. '/ Hong Kong and South Korea; million dozen pieces. c/ Taiwan, China, Hong Kong, South Korea and Singapore only; thousands of units. n.a. = Not available. - = Not applicable. Sources: The footwear statistics are from the British Footwear Manufacturers Federation (BFMF); the knitwear statistics from "Knitstats" and other sources of the Knitting Industries Federation (KIF); the consumer electronics statistics from the British Radio and Electrical Manufacturers Association (BREMA) and MacIhtosh European Yearbook; and the cutlery statistics from Business Monitor on the cutlery industry.  - 8 - also faced relatively high import penetration. On the other hand, in leather footwear production, which has been the mainstay of British footwear manufacturers, the developing countries have taken over only 6 percent of the British market in terms of volume and value. As competitors, the developing countries have been overshadowed by Italy, Spain and the COMECON countries. In fact, when looking at footwear imports as a whole, a striking feature is the decline in the share of developing countries in terms of both volume and value. In volume terms, developing countries have recently been running at a lower level than in the early 1970s. Part of the explanation lies in the more favorable conditions of market access for European suppliers. Still, it is significant that two developing countries have been able to capture some of the leather footwear market. While low unit value and non-leather footwear imports from Hong Kong, India and Malaysia have declined, imports of high unit value leather footwear from South Korea and Brazil have grown. In fact, the latter two have succeeded in providing goods competitive in quality and price in the main leather footwear market. This picture of the nature of competition from developing countries -- of concentration in only some product lines and originating in a small number of middle-income countries -- has been duplicated exactly in the knitwear industry (although here the extent of the quota regulations has made interpretation of the trade, trends difficult). Import competition from developing countries has been negligible in one category -- fabrics. In fact, British knitting firms export fabrics to Brazil and South Korea. The other branches in which import competition  - 9 - from developing countries has been of modest importance are socks, ladies' stockings, tights and underwear. The industry has had fears, however, that the main developing country suppliers, which already export acrylic socks, will soon perfect the technique of incorporating satisfactory heels. Further, while developing countries have not yet had any sizable impact on the market for tights, competition from Italy has been severe. So far, the competition has been concentrated in three areas: gloves, knitted shirts and outerwear. In the 1960s, Britain lost its glove market almost in entirety to suppliers from Hong Kong. The glove industry has virtually disappeared (though there is still some limited production of high quality leather gloves for export). The other two major product areas in which import penetration increased markedly in the 1970s are knitted shirts and outerwear (jerseys, pullovers and dresses). The outerwear sector alone accounted for over 40 percent of Britain's market for knitted goods, and here the developing countries have accounted for approximately 75 percent of the value of imports and 28 percent of the British market. Among the developing countries, three Far Eastern newly industrializing economies have predominated: Hong Kong, South Korea and Taiwan, China. In cutlery, the adjustment pressures from developing countries have been specific to one part of the industry -- domestic stainless steel cutlery (knives, forks, spoons) -- and to virtually one supplier, South Korea. Included in the stainless steel cutlery imports from developing countries have been blanks for silverplating in England. These imports have been taking place for at least 20 years, originally  - 10 - coming from Europe and Japan, then in the sixties from Hong Kong, and lately from South Korea, which has been accounting for over 50 percent of the volume of imports. This category of goods is but a small part of a complex of industrial activities which includes cutlery for industrial use, razor blades, metal hollow-ware and domestic cutlery of precious metals, silver gilt or chromium plate, as well as stainless steel. Thus imports from developing countries have been a negligible issue so far. The import competition in consumer electronics, much of it from the Far Eastern NICs and Japan, has gone farther and faster than in the other three industries taken as a whole. Except for color television, which to now has been protected by outstanding patents, import penetration has exceeded 50 percent in all of the other branches of the industry. Several have virtually disappeared. The transformation is perhaps illustrated most dramatically by the radio industry. In 1979, over 14 million radios and units of audio were sold in Britain, of which 96 percent were imported. In 1969, 1.7 million were sold, of which only 3 percent were imported. The importance of developing countries has varied considerably among the product categories. In the more standardized items in the "mature" phase of the product cycle (portable radios, black and white TVs, the more simple music centers, car radios and cassette and tape recorders) and in products that involve slight modifications of these (clock radios), competition has come largely from the Asian NICs and increasingly from the poorer developing countries such as Malaysia (radios) and Thailand (black and white TVs). A second category of goods  is comprised of items closer to the "growth" or innovative phase of development -- color TVs, hi-fi equipment, video recorders, car radios/cassette combinations and sophisticated music centers. The main competition has been Japan. However, such is the speed of the diffusion of technical knowledge that the NICs are also competing in "new" products and already dominate some markets, such as that for electronic games. To summarize, several general tendencies are clear. First, reflecting the complex and diverse nature of the industries themselves, the experience with import competition has varied greatly. Some rather small industrial branches have almost been wiped out by competition from developing countries: gloves, portable radios, shoes with textile uppers and stainless steel tableware. Yet, even here, some firms have flourished, while the competition has scarcely touched other branches of the industries. Second, in all four industries, it has been a small group of NIC competitors rather than the developing countries generally which have predominated. Among these, the traditional major supplier has been Hong Kong, which, however, has lost ground to South Korea in particular. Among the poorer countries, India and Pakistan have maintained a small but diminishing niche at the bottom of the footwear and knitwear markets, while Malaysia (non-leather shoes and radios) and Thailand (TV and knitwear) have accounted for a modest market share. Thus, the full extent of a comparative advantage based on low wage costs has yet to reveal itself except on a very narrow front in terms of countries and products. Third, there is some evidence that the shares of developing countries' imports overall, as well as in the British  - 12 - I market, for some important product categories have actually declined: for footwear generally, for monochrome TVs and for major knitwear items. Protection has played a part, combined with the unrestricted access that EC exporters have to the British market. However, another factor is probably that wage costs are merely one of a variety of price and non-price considerations that determine competitiveness. It is these other considerations that are the subject of the next section. Competitiveness and Comparative Advantage There is good empirical evidence that the pattern of manufacturing trade between developed and developing countries can be broadly explained in terms of factor endowments, at least when the factors are defined to include "human capital" (skill and innovative capacity).!/ Beyond that, however, are other substantial and unexplained elements. At first sight, each of the four industries fits the characteristics of the "labor-intensive," low "human capital" industries in which developing countries could have a comparative advantage. From Table 2, it can be seen that the four industries have a gross output per employee, value-added per person and fixed capital per person well below the manufacturing average. Also striking is the high share of women in the labor force, reaching 84 percent in garments. Only in footwear (and leather) is the share of women (29 percent) close to the average for the manufacturing industry as a whole (29 percent). Three factors are both 1/ S. Hirsch, Ric1 Man's, Poor Man's and Every Man's Goods -- Aspects of Industriali2ation, T{lbingen: J. C. B. Mohr, 1977.  Table 2: SALIENT CHARACTERISTICS OF THE CASE STUDY INDUSTRIES All Hosiery & Made-up garments Consumer manufactures knitwear inel. knitwear Footwear electronics Cutlery Industry category (U.K. Census) 417 441 450 365(2) 392 -449 (includes (only some are records) of knitted fabric) (1) Employees ('000), Dec. 1980 6,264.0 96.0 249.5 63.1 39.1 9.2 (2) Share of women in labor force (X) 29 67 84 29 52 41 (3) Share of manual workers (%) 71 82 86 83 69 77 (4) Value added - gross output (Z) 0.39 0.43 0.46 0.42 0.25 0.41 (5) Gross output per person (index) 100 53 46 53 88 63 (6) Value added per person (index) 100 58 57 55 72 86 (7) Capital employed per person (index) 100 46 20 17 49 53 (8) Wage and salary per quarter (index) 100 71 57 79 81 77 (9) Professional staff employed (%) 3.5 0.8 0.4 0.8 5.7 1.6 (10) Region with largest share of employment S.E. E. Midlands S.E. E. Mtdlands S.E. Yorkshire as % of total in industry (26) (63) (23) (40) (57) (49) % of total in industry - (14) (17) (13) (9) & (6) (18) (11) % employment in firms -- 1,500-plus employees 56 46 14 37 65 n.a. 2 employment in firms - below 200 employees 23 25 4 20 11 53 (12) Share of output from - 34 20 33 66 - 43 5 largest firms in industry (X) (13) Import penetration -- all imports 25 22 27 30 55 38 (Z by value) (14) Export sales ratio -- all exports 25 20 18 15 27 47 (2 by value) n.a. - Not available. - Not applicable. Sources: (The numbers in parentheses in this note refer to the line of the table.) The employment data (1) and (2) are from Department of Employment Gazette, 1980 data; the main ratios (3), <4), (5) and (6) from the Business Monitor PA 1000, "Report on the Census of Production," Provisional Results, 1977; capital employed per man (7) was calculated from the gross investment per man employed over the 1973-77 period (Census of Production); the regional statistics (10) from the Department of Employment, Gazette, March 1981 for 1978 data; the firm size statistics (11) and (12) from the Business Monitor PA 1002, "Report on the Census of Production," establishment analysis.  - 14 - I the causes and effects of these relatively large numbers of women workers: the lower wages generally paid to women (about 70 percent of the rate for men); the lack of technical skills associated with employees who turn over rapidly, especially married women; and the willingness of women to work part-time when market conditions require it. The large share of women workers, and the relatively low wages paid to men as well, have depressed average earnings in all the industries studied to well below those in manufacturing as a whole. The same conclusion can also be drawn from other proxies that can be used to measure "human capital": the share of manual workers in the labor force; the share of professionally qualified staff; and expenditures on R&D (though, in this case, consumer electronics is exceptional). This picture is, however, not the whole st?ry. Absolute price differences between British goods and the landed costs of competing -- and what seem to be identical -- imports from developing countries have often been substantially greater than can be explained satisfactorily in terms of the differences in the wage rates for the unskilled. The share of manual wages in the total ex-factory sales price in Britain has been close to 20 percent for each of the industries and around 30 percent for all labor costs (though the labor cost percentage may be higher for particular categories of subproducts, and inputs also have a labor content). By contrast, material inputs accounted for 50 percent or more. Price differentials may also have arisen from material inputs not being charged at international prices. It has, for example, been a contention of British cutlers that their South Korean competitors have  - 15 - had access to exceptionally cheap steel. They claim that l ton of finished (cutlery) pieces from South Korea fetches the same price as 1 ton of unprocessed European steel and that the prices paid by South Korean and Japanese makers for stainless steel sheet and coil are approximately one-half that of European prices.l/ Allegedly, hot band and some flatwear steel is provided by Japanese companies to their subsidiaries -- or to South Korean firms -- at below cost. Closer inspection shows that this claim has questionable validity. Japanese -- and the new South Korean steel plants are genuinely among the world's most efficient. The European price, moreover, is sustained by cartelization. The South Koreans also economize on steel by using their relatively low-cost labor to gather up waste steel after the blanks are cut from the steel sheet, whereas a British cutlery plant can "lose" over a third of its steel by not saving waste. South Korean and Japanese firms also salvage scrap more generally, unlike British firms. Finally, South Korean cutlery steel is somewhat lower in quality -- the chromium and nickel content is a little less, and the product is more inclined to rust. Hence, it is cheaper. A similar set of factors helps explain the Far East's competitiveness in knitwear: there are cost savings in the garment- making process not only in terms of direct labor, but also through the use of cheaper acrylic yarns; the availability in the Far East of manmade fibers at a discount, relative to European fiber prices; and material savings in the knitting mills. 1/ Federation of British Cutlery Manufacturers, "The Table Cutlery Industry in the UK," Sheffield, 1981, p. 14.  - 16 - Perhaps the most important case in which material input costs may be decisive involves leather footwear. Brazil has been criticized not only for imposing "a ban on hide exports which normally allows their tanners material at prices well below world market levels," but there is also "a tax on the export of leather which means that Brazil keeps for herself the leather price advantage arising from cheap hides."I/ By the end of 1978, according to one group, British tanners were paying three times the price that tanners in the main exporting developing countries were paying for their hides 2/ On the other hand, the other major developing country leather footwear exporter, South Korea, has not been using domestic hides, although it does enjoy relatively cheap leather, a product of modern, highl productivity (and low wage) tanneries. I In the final case study, consumer electronics, the question of material input costs arises again but in a different way. The costs for TV assembly derived for the National Economic Development Office (NEDO) showed that European costs were 30 to 35 percent greater than in Japan or South Korea.!/ By far the most important reason -- especially in the case of Japan, but also of South Korea -- lay in the relative cheapness 1/ Evidence presented to the Select Committee on Industry and Trade of the House of Commons, Parliament, Imports and Exports, first report, vol. II, London, p. 341. 2/ National Economic Development Office (NEDO), Footwear Industry Working Party, "Annual Progress Report," London, 1979, p. 7. 3/ An unpublished report by a Boston consulting group, carried out for the National Economic Development Office, London, 1978.  - 17 - and better quality of Asian components. Cost advantages were being obtained through the large size of the factory units producing the components, through sophisticated managerial control systems, through substantial investments of a labor-saving character and through the use of the most advanced integrated circuit technology. These factors suggest that a simple version of "comparative advantage" is inadequate by it$elf to explain the relative competitiveness of industries and countries. Nevertheless, differentials in labor availability -- and labor costs -- are still important not just directly, but also indirectly in ancillary functions such as waste collection or in supplying industries such as tanning. The "comparative advantage" of producers with low labor costs is also expressed through lower overheads, including for labor conditions, rather than just through wages. Far Eastern (and Italian) manufacturers often do not have to obey rigid regulations on working conditions or to pay social security taxes. Employees tend not to benefit from holiday and sick benefits, and floor space productivity is raised by reducing the safety margins for operating and by cutting back on rest rooms. In many instances, office workers' are family and are therefore probably unpaid except to cover subsistence needs. More important, overhead is reduced by long working hours, especially by working shifts, so that machines are kept operating continuously. The average working week in South Korea is 55 hours for clothing workers, a schedule which reduces the incidence of overhead considerably -- by an estimated 30-40 percent -- with a net impact on the ex-factor cost of around 12 percent.  - 18 - Chapter III REVERSING COMPARATIVE ADVANTAGE Critical to the issue of how industries respond to competition and how governments respond to requests for protection is the extent to which the lack of competitiveness can be reversed or is imagined to be reversible. In large part, that reversal will require changing the techniques of production so that the comparative advantage is changed. The possibility of using automated, capital-intensive methods is central to the discussions about the future of the consumer electronics and cutlery industries and, to a lesser degree, of the others, just as it has been in two other industries -- jute and cotton textiles -- threatened by "low cost" import competition. Current Efforts by Industry Consumer Electronics British consumer electronics manufacturers concede that, to a degree, the "product cycle" should be allowed to run its course and that standardized labor-intensive assembly operations "are more suitable to the low cost labor industries."L/ However, they have resisted extending that principle to color TVs, their last remaining major product. The main TV firms and trade unions have instead agreed on a strategy for the industry: to make it internationally competitive by achieving economies 1/ British Radio and Electrical Manufacturers Association (BREMA), "Memorandum to the Industry and Trade Select Committee," Imports and Exports, op. cit., p. 172.  - 19 - of scale through consolidation into larger plants owned by fewer companies and by increasing the use of advanced Japanese technology and mass production methods. The mechanism is investment by the Japanese or the installation of sophisticated, automatic insertion machinery by nonr- Japanese companies. It is hoped that subsequently the plants can be used for new products such as video tape recorders. Trade protection has not been an explicit government commitment, though it has been accepted that the process wilt require "the maintenance of the present network of import restraints through the reconstruction phase.'-'Y This phase is usually defined as four to five years, or to 1985. The program of investment is already well-advanced. Thorn-EMI, the largest firm, has closed one of its three main factories and has invested heavily in an automated production line for a new range of sets based on a versatile single-board (TV) chassis. As a result, and with union cooperation, it has halved its labor force in three years, cut the labor time to make one set from six to three hours and reduced the number of components by a third. Philips, the other major non-Japanese maker, has consolidated its production into one plant and has noted that "it now takes over two man hours to make a TV set against ten man hours six years ago. At the same time the number of components has been halved.42/ 1/ National Economic Development Office (NEDO), Electronic Consumer Goods Sector Working Party, "Annual Progress Report," London, 1980, p. 3. 2/ Reports in Observer, October 19, 1980 and Financial Times, November 18, 1980.  - 20 - Finally, another five (and shortly to be six) Japanese companies have built plants using automated methods, as has one from Taiwan, China; all invested in Britain to "Jump" the barriers to the British (and EC) markets created by the patent restrictions, quotas and tariffs on imports. At first sight, the egercise has been a success. The industry is no longer relatively labor-intensive. It has been exporting, as well as reclaiming the home market (the Sony plant was recently awarded the Queen's Award for Export, while its Japanese manager received the Order of the British Empire, or OBE). At the same time, however, generally the plants are still small by world standards (almost a dozen produce just over 2 million sets a year, although the optimum size of a single plant is 1 million per year). It is likely that, without protection, the British plants will continue to be uncompetitive with those of South Korea and Taiwan, China and with Japanese subsidiaries in the ASEAN countries, as these will be combining low labor costs with the latest equipment and a very large plant size. Further, so far Britain is developing new products only on a small scale. Cutlery In the cutlery industry, automation is certainly technically feasible. Ironically, however, the British industry has been unable to compete with the factories in one developing country (South Korea), whose plants are larger and newer than almost any in Britain and are geared mainly to automated mass production. It is even more ironic that Britain's industry has retained a comparative advantage in some of the most labor-intensive activities: designing, polishing and inspecting a  - 21 - wide range of specialized items, especially in high quality, low volume lines in which the South Koreans have not tried to compete. Some firms, including the largest, Viners, have tried to retain the main market. In the early 1970s, Viners invested heavily in new equipment, expanding capacity, simplifying its product range and remodelling its factories to a production line basis rather than leaving them as independent workshops.- Even before 1970 it had a computer- controlled warehouse and electroplating plant, as well as other advanced equipment. After an initial period of high market and profit growth, the company was unable to generate the profits needed to pay for the higher interest charges and, under a threat of liquidation, was recently taken over. Footwear and Knitwear Both the footwear and knitwear industries (the latter at least in its garment-making aspects) have much more limited options. The footwear industry has always been characterized by short production runs and "batch" rather than mass production methods. While there is some hope of, for example, computer-controlled patterning, automatic stitching and more efficient transfers from one process to another, the manufacturers have frankly acknowledged the limitations: "we do not anticipate any significant change in the labor-intensive nature of the production process," "there are few economies of scale in production beyond an employment level of some 250"4' and 1/ "Cutlers Last Stand?" Financial Times, September 8, 1981. 2/ Op. cit., NEDO, Footwear Industry Working Party.  - 22 - there is absolutely no scope for competing with low cost imports on productivity....It is conspicuous that the most capital intensive parts lof the industry -- things like plastt7 tennis shoes -- were the very first part to move out. Increasingly, the emphasis has been on quality leather footwear, which, however, has the least scope for mechanization and is labor-intensive because (skilled) labor is needed to select carefully the pieces for assembly. In the knitwear industry, more advanced techniques are also being employed -- in fabric-making, with faster knitting machines; in tights-making; and in the garment design and fabric-cutting processes. On the other hand, this has not been true in the crucial stage of making up the clothes (mainly sewing). Manufacturers have acknowledged that comparative costs are such that...it is not possible for the UK or other advanced countries to compete effectively in the supply of knitted goods, particularly as they have no technological aqyantages over industries in ldcs [developing countries] - In both these industries, but especially in knitwear, the effort to counteract the comparative advantage of developing countries has also involved not so much a changing of factor intensities as a changing of factor prices, that is, by trying to find and use low-cost labor in the highly imperfect British labor market. One technique has been to employ outworkers. The knitwear industry, especially in Leicester, has benefitted from access to disorganized Immigrant, including family, labor. In a similar way, Lancashire textiles and 1/ British Footwear Manufacturers Federation, "Evidence to the Industry and Trade Select Committee," Imports and Exports, op. cit., p. 343. 2/ NEDO, Knitting Industry Sector Working Party, "Progress Report," 1980, p. 1.  - 23 - Yorkshire woolens have recruited immigrant labor not only to hold down the increases in real wages, but to counter the advantages that Far Eastern producers have with respect to overhead, including more flexible shift working. To summarize, the possibility of reversing the comparative disadvantage looks remote in three of the four industries and is doubtful, though certainly not impossible, in the case of consumer electronics. In several instances, the industries have been pinning their hopes on automation. However, this shows not only dubious business sense, but also questionable economic theory. The theory indicates that developing countries may have a comparative advantage not only (and not necessarily) in labor-intensive items, but also in "*mature" and "standardized" products -- like TVs, knives and forks and non-leather shoes that use capital-intensive methods. Automation may, therefore, represent a cul-de-sac rather than an adjustment option.  - 24 - Chapter IV ADJUSTMENT OPTIONS: THE DEGREES OF FREEDOM Are there other options? At the level of the firm, it is of the greatest importance not only whether adjustment is to take place but whether it is to be accomplished by means of growth and adaptation, rather than by liquidation and the forced redeployment of labor and physical assets. The extent to which adjustment is "successful" -- that is, smooth, relatively costless and not impeded by protectionist demands -- will depend in part on the options available and the availability (or willingness) of firms to use them. The options can be broadly categorized into two: product diversification and locational diversification. Product (or Horizontal) Diversification Faced with the need to change their product mix, firms have various possible strategies - diversification into other industries; switching to "up market" items; or making "new" rather than established products. For firms in an industry facing limited growth prospects and growing import competition across a broad range of products, an obvious question is why not produce something else, or why not diversify into other industries? The chairman of Courtaulds, the company with the largest stake in both the knitting industry and in textiles more generally, has noted, "it is reasonable to ask why we have persisted so  - 25 - long in the textiles industry."L/ In fact, Courtaulds has carried out a good deal of successful diversification. In 1960, its non-textile activities accounted for less than 20 percent of its profits. By 1979/80, the figure had expanded to 40 percent, although these activities accounted for less than a quarter of the group's sales and capital employed. These non-textile activities have included paints, plastics, packaging, miscellaneous chemicals, engineering and, more recently, medical equipment, frozen chickens and an eel farm. Courtaulds illustrates both the possibilities and limitations of diversification as a strategy. A large company (in fact, the world's largest textile company) it has had the resources to acquire other firms as growing concerns. It has also been able to diversify while remaining within one broad industrial category: chemicals. In this way, it has been able to adapt while at the same time maintaining faith with its dictum that "businesses make money over the long term by concentrating on what they are best at doing."'/ Finally, it has pursued a strategy of seeking protection, acknowledging that it "has benefitted much from...protection and it could not otherwise have developed the strength it has."3/ Other cases of diversification have been less successful. With the help of the government's National Enterprises Board, Tootal has tried to diversify into paper-making, but its fine paper subsidiary, 1/ Courtaulds, "Annual Report," London, 1979/80, p. 3. 2/ Ibid. 3/ Ibid.  - 26 - Yates-Duxbury, recently went into liquidation, having suffered even more from import competition than the textiles division had. Successful "inter-industry" shifts have been more common with firms in consumer electronics, since they have been an integral part of the most rapidly expanding of all the industrial "families" -- electronics. Decca, for example, merged with Racal; that joint company then dropped Decca's former interests in consumer goods and concentrated instead on electronic capital goods, data communications and electronic defense equipment. Philips, a European company with major interests in Britain, is much more heavily enmeshed in consumer electronics, but is trying to move into communications and capital goods. Rank has withdrawn from radio and TV manufacturing altogether to concentrate on entertainment. Even the most heavily committed of Britain's consumer electronics companies, Thorn, has diversified into records, cinemas and other entertainment through a merger with EMI and a half share of Thames Television. It has also been trying to build up a medical electronics business. Most of its profits have been coming from TV rentals rather than from manufacturers. Generalizing, it is clear that diversification into new industries is possible but not always successful and that usually companies will seek activities which are related. Firms may be better equipped to diversify horizontally if they are large and if they have access either to a "core" industrial technology or to a marketing system which they can develop. It has been easier for chemicals and electronics firms to identify horizontal alternatives than for those companies making only garments, table cutlery or footwear.  - 27 - For the latter, specialization within the industry -- in "up- market" products -- may be more feasible. In the footwear industry, for example, a recognized objective of the industry as a whole is that there should be "a marked movement towards upgrading.''L/ Several firms have consciously opted for an "up-market" strategy with the objective of selling higher-priced leather shoes, while running down and eventually abandoning their low-priced footwear output: There has been a steady move upwards in quality as it was found that those group companies operating in the higher quality footwear market were ppving to be not quite so vulnerable to low-cost imports - In practice, this textbook solution is fraught with problems. First, the belief that British manufacturers can move en masse to the better quality end of the domestic market is a fallacy. A condition for survival of the few may be bankruptcy of the many. The many, however, may use their weight in the industry associations to press for more protection, as they already have. Exporting could provide an escape valve, but this merely elevates the fallacy to a higher level -- all industrial countries could do the same. Second, to the extent that the move "up-market" depends on a relatively high income elasticity of demand for these products, it also depends on a continued rise in income. In times of recession, "up-market" firms may be very vulnerable. In 1981, for example, the demand for footwear was shifting to lower priced, lower quality shoes, the reverse of previous 1/ Op. cit., NEDO, Footwear Industry Working Party, p. 3. 2/ Shoe and Leather News, September 29, 1977, p. 70.  - 28 - trends.-L Clarks, a leading firm, reported that the recession was forcing parents to switch from leather to less expensive canvas shoes for their children and said: ...the company cannot compete in the children's canvas shoes market on an equal basis with imports because they have to make them on existing high quality lasts which forces up the pricel2/ Third, there is evidence that developing countries as well as the Southern European ones are advancing in terms of quality. Brazil is now seen as a major threat, precisely because it has developed a capability to make footwear as sophisticated as any in the world. Finally, a particular problem with footwear is the prevalence of small, one plant firms with limited managerial and financial resources. The companies producing high quality leather goods need more working capital to stock (more valuable) products and leather. Evidently, many companies have found these problems to be extremely difficult: ...clearly, the balance sheet ratios demonstrate that, on average, all leather made-to-order shoe companies have the weakest financial structure. Their bank borrowings and trade creditors are the 3 ghest, resulting in their very poor liquidity position._ In an industry with many small and vulnerable firms, there is a familiar dilemma: exposed to competition, many companies will die 1/ Shoe and Leather News, June 6, 1981, p. 3. 2/ "Why UK Shoe Makers Are Down at the Heel," Observer, November 22, 1981. 3/ Economists Advisory Group, Footwear Industry Steering Group, "Report," unpublished, London, 1977, p. 11.  - 29 - rather than adjust; protected from it, they will have no incentive to adjust. In the other industries studied, there has also been a general commitment to "up-market" diversification, for example, toward silverplate cutlery and quality knitwear: The inability of the [knitwear] industry to compete with low cost producers in sectors of the market where demand is highly price sensitive must be more widely recognised. A greater proportion of the industry 17eeds to concentrate on the less price sensitive sectors Yet they face the same dilemmas: a reluctance to cede the "mass" market; competition from developing countries in some quality products (e.g., "Shetland" wool jerseys from Mauritius); and the "squeeze" the recession has created on the luxury goods market. Another way forward can be product innovation. "New" products have been a central preoccupation in consumer electronics, whose history is actually one of new product development -- from radios to monochrome TVs, from monochrome TVs to color TVs, and now to video. The key argument is whether protection of existing products is necessary -- or inimical -- to the development of new ones. The industry has argued a need to preserve the existing nucleus of labor skills and plant infrastructure out of which new products can grow organically": 1/ Op. cit., NEDO, Knitting Industry Sector Working Party, p. 4.  - 30 - .any production depends on the continued existence in the short and medium term of the plants and experti E7 which are currently vulnerable to overseas competition_ The few remaining audio producers believe that the British industry "over adjusted" by moving out of radios almost entirely, thereby passing up opportunities for many new products: ... the UK is facing difficulties in the consumer goods area by our inability to produce, competitively, clock radios and other ra do combination products after losing our radio industry The head of Philips has claimed that, despite evidence of falling demand, television is not yet a "mature" product: I really believe that the market for television sets is in its infancy...there is a widely shared belief that the next few years will see an explosion of demand for new types of entertainment and information systems which will create a huge new market for more sophisticated televi ton sets and for video equipment to be attached to them The other element in the argument is that major new product development requires companies that are able to generate sufficient profits on existing products to finance the R&D and to underwrite future investment plans. Imports cause, it is argued, a reduction in factory loading, which reduces the profits per unit on color TVs, the main source of resources for reinvestment in R&D for new products. 1/ Memorandum on behalf of the NEDO, Consumer Electronics Sector Working Party, to the Secretary of State for Trade, London, 1980, p. 7. 2/ Ibid. 3/ C. J. van der Klugt, as quoted in Financial Times, November 18, 1980.  - 31 - It is by no means certain that these arguments are correct. Despite protection for color TVs and, to a lesser extent, other items, there are only a few signs that British-based manufacturers are launching a new generation of products. Nor is it clear that the main opportunities will lie in manufacturing as opposed to the related services; that new products should be developed rather than produced under license; that manufacture should be linked to existing production facilities; or even that radio and TV manufacturers are the companies best placed to exploit the new opportunities. Locational (or Vertical) Specialization Another approach to adjustment is for firms to abandon those stages of production in which they have lost any competitive advantage. A response of this kind may be attractive when there is a product mix which does not lend itself to horizontal diversification: for example, homogeneous products not subject to differentiation or product innovation. One classic technique widely employed in textiles and in consumer electronics in the EC and the United States has been offshore processing (OP). Textiles, including knitting, firms could ensure that British fabrics are incorporated in any imports of clothing by contracting out (or relocating) the labor-intensive sewing operations to low-wage developing countries, perhaps using pre-set designs and with the fabrics already cut. The garment is then re-imported for finishing and packaging.  - 32 - British firms have been slow to see the possibilities and have never sought the kind of tax inducements offered in West Germany, the United States and Holland. At present they are opposed to any extension of OP. For example, ...an escalation of the technique known as OP [is] seen by the Knitting Industries Federation as a further major thorn in our side, [and] will reduce the Industry's competitive ability at home and in other Community markets. The UK is not well placed geographically to take advantage of a technique which is J3 any event tantamount to exporting UK capital and jobs-' The reason for this conservatism is that the big British textile companies had already committed themselves heavily to a policy the opposite of vertical specialization -- to vertical integration, or from fibers to garments -- within Britain itself. Further, the British government has backed the restructuring of the textile industry undertaken by the fiber companies and has helped develop the concept of an integrated textiles "pipeline," with protection accorded the most vulnerable parts. While some "offshore processing" of British components has taken place in consumer electronics, the most striking feature there has been a different phenomenon: finishing touch assembly. Japanese firms and the Taiwanese company, Tatung, have invested in assembly operations in the United Kingdom. They have, however, been accused by critics of using their plants to assemble kits of TV parts. (In fact, the 1/ Knitting Industries Federation, "Evidence to the House of Lords Select Committee on the European Communities," Parliament, Select Committee on European Communities, 16th report, Session 1978/79, London, 1979.  - 33 - accusations do not seem too well-founded, since most of the plants have been using substantial amounts of local components.) A similar concept is involved in the practice widely employed in the cutlery industry of importing "blanks" and then carrying out the final stage of manufacture -- silverplating and other finishing work -- in Britain. Other firms in the chain whose position has thereby been weakened have strongly resisted this approach, as has been true with other forms of vertical specialization. Vertical specialization can be taken one step further by eliminating the British manufacturing component entirely through manufacturer importing. Manufacturer importing arises in different ways: some English manufacturers buy abroad on an "arms length" basis; some invest in exporting plants in developing countries; and some subcontract some operations or license their brand to overseas suppliers. In two of the four industries, cutlery and consumer electronics, importing has become a major source of profit and an important technique for adjustment out of unprofitable activities. Many cutlery manufacturers have been importing a portion of their sales. They have processed some goods in Britain (in the form of silverplating) or have simply repackaged them; sometimes the products have not even been unwrapped. Importing manufacturers, of whom Viners is the biggest, argue that their practice is good business sense, that an industrialist's first objective is survival: ...there is no way that we can beat the Far Eastern countries at their own game, but what we can do is to use  - 34 - their cheaper products to open up a wider sec t,r of the market and to generate profits for investment_ There has been a snag in this strategy. Manufacturer importing, as with other forms of specialized importing, is itself under competitive pressure. Mail-order companies and supermarkets can cut out the importers' margin. South Korean exporters in particular have learnt how to bypass the manufacturer-importers and to sell directly to the retail outlet. In fact, since the mid-1960s, the share of manufacturers in the importing business has slumped from 80 percent to 25 percent. Viners' financial problems have been in part the result of this trend. A further consequence of manufacturer importing has been serious conflict between the two rival manufacturers' federations, one favoring prompt and tight protection, the other a looser set of VERs to harmonize with its importing facilities. The leader of the former noted that: ...[the relevant Minister] made it clear that the industry had to decide whether it wanted to be an importer or manufacturer. I replied that the activities of a few should not be seen to be ty cal of an industry which, generally, deplored importing - Manufacturer importing is much further advanced in consumer electronics, where it has been taking place under what is known as OEM (Original Equipment Manufacturer) contracts. The appeal of OEM contracting is obvious: to exporters, it offers market access (although some Japanese companies like Sony have opposed it, preferring to build 1/ B. Viner, as quoted in Sheffield Morning Telegraph, May 4, 1977. 2/ J. Price, as quoted in Hardware Trade Journal, February 2, 1978.  - 35 - up their own brand names); to importing manufacturers, it offers the opportunity to profit from Imports while concentrating their own efforts. OEM imports have been accounting for a substantial share of the current imports of "new" products such as video-recorders. Thorn, among other manufacturing companies, has been importing video-recorders from Japan and selling them through its video rental network. OEMs have also been important with other "mature" products, such as radios and combinations, in which developing country exporters have predominated. It should be added that manufacturer importing has also served as a major device for facilitating adjustment to import competition in other sectors where the import penetration by developing countries, has, however, been relatively uncontroversial: toys, sporting goods, leather goods such as saddlery, and rubber shoes. It has generally been less prevalent in clothing and footwear because of the dominance of retailers as importers. Nevertheless, manufacturer importing is recognized as a irowing trend: Britain's major textile companies pin their hope for survival on overseas production and direct importing using 1yheir already well established British trade marks - They recognize, to quote John Shelton of Coats Paton, that "in this country we let importing get-into the wrong hands."2/ 1/ "Textiles in Tatters," Observer, 1980. 2/ European Commission, Europe's Problems in the Textile Market, Brussels, October 1981.  - 36 - Overall, manufacturer importing could be seen as part of a more general tendency for manufacturers affected by import competition to move from the production of trade goods to non-traded services. Here, distribution represents the most obvious point of entry for a specialized firm. In consumer electronics, the British retail, rental and sales operations of Thorn-EMI have provided the company with substantially more profits than manufacturing. In footwear and knitwear, the leading companies -- Clarks and Jaeger (of Coats Paton) -- have had their own retail outlets become independent and growing sources of profits. Research has shown that, in recent years in general, distribution has been significantly more profitable in the United Kingdom than manufacturing has 1/ That individual companies should wish to diversify in this way can be regarded as a form of market adjustment. However, in terms of the economy as a whole, it is perhaps a symptom of a deeper structural maladjustment in which internationally traded activities have generally been uncompetitive because the effective rate of exchange has, over a period of years, not been favorable to them. A final option is foreign investment, which can be seen in part as an extension of the mechanism already described -- vertical specialization (through offshore processing) and horizontal specialization (developing new products on a multinational basis). On the other hand, foreign investment can have quite different features -- 1/ N. P. Williams, "Influences on the Profitability of Twenty-Two Industrial Sectors," Bank of England Discussion Paper No. 15, London, 1979.  - 37 - it can involve building up an international business in an industry which is contracting in Britain or simply the acquisition of a miscellany of financial assets overseas. As can be seen from Table 3, there has been a general tendency for capital in low technology industries to migrate overseas and for these industries to attract relatively less foreign capital to the United Kingdom than other industries. International capital flows have, therefore, reinforced comparative advantages. Foreign investment has become the main line of retreat for the major textile companies to the extent that in 1981 it accounted for a majority of the overseas earnings of several. Furthest along this road has been Coats Paton, with 75 percent of its sales overseas. Most sales have been by overseas subsidiaries, and almost all the new investment has been overseas. Courtaulds has been moving in the same direction, with 30 percent of its sales coming from overseas subsidiaries, which accounted for almost 50 percent of its profits in 1980. Its current managing director argues, ...on the whole the UK is not a good base from which to manufacture and compete internationally. There is no barrief, in my' mind [as] to where we manufacture our goods - Even spokesmen for the textile industry as a whole have argued that ...textile companies should consider going overseas to less developed countries and setting up plan Y/ where there may be a considerable commercial advantage.-. 1/ "The Cut of Courtaulds," The Guardian, 1981. 2/ Alan Clough, president of the Textile Council, Financial Times, June 3, 1980.  - 38 - Of the smaller knitwear companies, ...it is being confidently predicted in many quarters that more and more UK knitted garments manuf cturers will seek their future fortunes on foreign Soil1I At the same time, however, there is plenty of evidence of pitfalls. Foreign investment is risky and difficult to control, especially for small companies. The only cutlery company to have ventured overseas on a significant scale -- Viners -- has found, as have other smallish companies, that problems of managerial control are severe. Its overseas French subsidiary proved unprofitable and required constant attention. What has been surprising is the disinclination of most British consumer electronics companies to follow this route. It is an industry which, more generally, has a strongly international character. There are exceptions, though. BSR, one of the largest companies and a producer of record changers, has, from 1980 to 1982, changed from being a British-based company employing 18,000 workers in England to an international electronics company heavily involved in the Far East, with 5,000 workers there and only 8,000 left in Britain 2/ 1/ "Overseas Ventures Can Be Tricky," Knitting International (March 1981.) 2/ "A Switch in Time " Financial Times, September 21, 1981.  - 39 - Table 3: DISTRIBUTION OF FOREIGN CAPITAL ASSETS AND U.K. CAPITAL ASSETS ABROAD, 1974 % of total manufacturing U.K. assets abroad Foreign assets in the U.K. Less "technology-intensive" Food, drink, tobacco 25.8 11.9 Other manufacturing (including ships) 12.0 9.1 Paper printing, etc. 7.3 6.2 Textiles, leather clothing and footwear 7.2 1.7 Metal manufacture 4.5 6.7 Total 56.8 35.7 More "technology-intensive" Chemicals and allied industries 19.2 19.5 Electrical engineering 11.1 13.6 Mechanical and instrument engineering 8.1 20.6 Rubber 2.5 6.1 Motor vehicles 2.4 8.5 Total 43.2 64.3 Source: "Biennial Census of Overseas Assets," Business Monitor M4, 1974, Supplement. The classification was devised by Dunning and used subsequently by Panic.  - 40 - Chapter V SEEKING PROTECTION: THE LOBBIES In general, it can be said that the more adjustment options there are, and the more success companies have in availing themselves of the options, the less they will seek protection. It has been seen that the consumer electronics industry has had possibilities for diversifica- tion into related fields and new product development and for interna- tional specialization within large companies. Company brand names have also been strong. It therefore has had considerable freedom to maneuver and has not had to open the many small firms that have populated the traditional craft industries such as footwear and cutlery. In practice, however, life has not been so simple. The large British consumer electronics and the integrated textile companies, even while exploring the full range of adjustment options, nonetheless have remained strongly protectionist when it permitted the extraction of profits from relatively declining activities for use elsewhere. On the other hand, some firms within even the most unpromising industries have found a market niche secure from international competition, thus weakening their drive for protection. The balance of these different interests and of other interested parties, notably the workforce, will determine the direction and effectiveness of lobbying. Protectionist Behavior: The Explanations Explanations of why some British industry lobbies have been relatively more successful in obtaining protection are not easy to  - 41 - find. The final determination of trade policy takes place at the EC -- not the national -- level. Further, in England, the decision-making process is shrouded in an official secrecy that is often ludicrous. As one of the main consumer electronics unions has noted, "the union has been active in the corridors of power. Often these meetings were confidential, private, even secret.''/ Broadly, pro-protectionist behavior can be analyzed using one of two alternative "models," or ways of characterizing society. The first can be described as "pluralist": it looks at the ways in which democratic politics reflects different interests through the voting and legislative processes. The other, described here as "corporatist," concentrates on the ways in which significant economic interests are assimilated into the decision-making of the state. In the first, the emphasis lies on the political importance of different industries -- their size and geographical concentration -- and on their motivation to pursue the issue politically. In the second, the emphasis lies more on the effectiveness with which the various elements in the industry -- workers, manufacturers, producers, distributors and large and small companies -- can be brought together into an effective "national" grouping which can penetrate, and be accepted by, government. No doubt there are elements of both, although it seems that the second has been more important. 1/ Consumer Electronics Union, "EEPTU in Action," internal union circular, London, November 1977.  - 42 - The Pluralist Explanation At first sight, the "pluralist" explanation seems to fit best. The large and regionally concentrated knitting industry, which has over 100,000 workers located mainly in a few East Midlands towns and over 700,000 in the wider family of textiles, has achieved its protectionist lobbying objectives for the most part. The tiny cutlery industry -- down to 4,000 workers in table cutlery from 25,000 at the end of the war -- has been largely ineffectual, despite its concentration in Sheffield. Footwear and consumer electronics have been roughly intermediate in standing, and this has been reflected in the degree of protection achieved. At the same time, there is much that is not explained by this theory. There is no evidence that the trade policy pertaining to these industries has had any impact on electoral politics. There has been every reason to doubt, until the current recession, that a fear of redundancy was a potent force. In 1980, the footwear industry noted, "studies have shown shortages of labour, particularly of skilled machinists, in most parts of the industry. Problems have been especially acute in Northamptonshire."Y/ In knitwear, too, until very recently there have been difficulties of recruitment, and much labor (in Leicester, for example) has been drawn from Indian and East African immigrants. The cutlery industry has also encountered shortages of certain types of labor, as well as a large turnover and an inability to 1/ Op. cit., NEDO, Footwear Industry Working Party, 1980, para. 15.2.  - 43 - recruit younger workers. Tracer studies conducted by the Overseas Development Institute in 1978 indicated that, at a time when demands for import controls for footwear and cutlery were strong, displaced workers in general were finding new jobs very quickly. The Corporatist Explanation The real influence of the knitting industry has lain mainly in its being part of a wider and extremely powerful textiles lobby. At first sight, the main manufacturers' association, the Knitting Industries Federation (KIF), is an awkward bedfellow for other textiles interests. Alone among the many textile associations (including the Scottish Knitwear Council), it has stood aloof from the umbrella group, the British Textiles Confederation. It has stressed its own identity and regional roots. In practice, however, the differences were never pushed to divisive lengths. On such a potentially difficult issue as the Tokyo Round tariff cuts, where the EC obtained tariff cuts for knitwear and woolens in the United States in return for very small reductions in the tariff on manmade fibers, the KIF went along with the negative opinion of the industry, as enunciated by the fiber companies. The process of reaching consensus within the textiles "family" has been facilitated by the existence of informal contacts through committees like the "Derby Group," which has been meeting regularly to ensure that any disagreements are not aired in public or in front of officials and ministers. What has made cooperation easier has been the expansion of the manmade fiber companies, especially Courtaulds, into knitting as well as into Lancashire textiles. The fiber companies have been as conscious as the clothing and knitwear companies themselves of  - 44 - competition from imports of "low-cost" clothing that incorporate manmade fibers (usually Japanese). They have been a major unifying force in the lobby for protection of "downstream" products. There has been a similar collaboration at the EC level, where the knitters' federation (MAIEUROP) has acted as a link between the textile manufacturers (COMITEXTIL) and the garment makers (AEIH) associations. The trade unions have done their bit, too. The main industry union is the National Union of Hosiery and Knitwear (NUHKW), with about two-thirds of the workforce. It has a strong sense of industry identity, since it embraces all the different craft skills within the industry and does compete outside it for members. The weight of tradition has also been heavy (going back over 200 years)..! Unlike many British unions, the NUHKW has been largely non- political and has not been at all militant industrially. If there has been a guiding ideology, it has been patriotism rather than socialism. Some of the NUHKW's ethos was captured during a recent, anti-import demonstration (to the tune of "Jesus Loves Little Children"): We don't need no foreign imports Unemployment makes us poor. We've got workers by the score Please don't shut our factory doors Freeze the imports; that's the tonic our firms need British is Best: British is Best.2- 1/ R. Curham, "The Hosiery Unions 1776-1977," National Union of Hosiery and Knitwear Workers (NUHKW), Nottingham, 1976. 2/ The Hosiery and Knitwear Workers, journal of the National Union of Hosiery and Knitwear Workers (NUHKW), Nottingham, 1980. i  - 45 - The union has collaborated actively with employers on trade matters. In 1981, it worked with the KIF (and the dyers' employers) in a tripartite campaign under the banner, "The British Knitting Industry -- To Live or Let Die." It organized, with the KIF, a "Buy British" demonstration in Leicester (which was addressed by a Conservative M.P.). The manufacturers have, in turn, supported union demands for a "social clause" in trade agreements, ostensibly designed to secure the rights of trade unions in textile-exporting countries. The union has also helped to mobilize the resources of the wider union movement behind the industry and has worked with the Trades Union Congress (TUC) and with European unions to organize a campaign of token textile strikes across Europe to demand tougher trade restrictions (the last was on December 2, 1980). Another crucial, if surprising, ally has been the largest retailer, M & S (Marks and Spencer). M & S accounts for about 15 percent of all British clothing sales, with much higher shares in the hosiery and knitwear market. M & S prides itself on retailing almost exclusively British goods. No doubt commercial ad well as patriotic reasoning originally inspired this policy. In the late 1970s, it led to M & S being undercut by chain stores and mail-order companies which were importing from developing countries. Given its policy to refrain from importing, the company was led to a position very close to that of the manufacturers, and it has publicly endorsed demands for stricter import controls. Not only is M & S highly prestigious in its own right, but its association with the producers has considerably weakened Ithe argument other  - 46 - retailers have put forward that protection is "bad for the consumer" or merely a "sectional interest." This powerful coalition of manufacturers, unions and retailers, united in what has been presented as a common "patriotic" cause, must have been extremely intimidating to most ministers and officials. A similar coalition to protect TV producers has emerged in the consumer electronics industry, though from much less solidly rooted -- and certainly more cosmopolitan - constituents. The manufacturers' interests are represented by BREMA (the British Radio and Electrical Manufacturers Association), which incorporates not only British companies, but also foreign transnationals -- led by Philips -- and the main Japanese firms which produce in the United Kingdom. They seem an improbable lobby, but there are several major strengths. The main members can be easily assembled around one table to make decisions. There is little parochial or regional jealousy. Lobbying costs are a negligible concern. These groups can attract and afford to pay top names: in 1980, BREMA's president was Lord Thorneycroft, who was also the chairman of the Conservative Party. Thorn-EMI, the biggest British consumer electronics manufacturer, and Philips, the two companies which effectively dominate BREMA, have developed a strong common interest in protecting British large-screen TV production and some other items. It might seem odd that Philips, in particular, should have been a strident defender of British Import controls, given that it is a multinational company with many importing interestF (components; small screen TVs; and car radios from Philips, Singapore, in competition with Britain's last remaining producer). The company *has, however,  - 47 - sufficiently strong involvement in British production of tubes and TVs and in product development that it has campaigned forcefully: I believe intervention is absolutely necessary...I make the case to the Administration that they got us ir4o this bloody mess; they should try to get us out of it -' Even odder are the Japanese TV companies. However, they have had to prove themselves as "good British citizens," and, perhaps more to the point, they now have an interest in preventing other Japanese companies (like Sharp) or the South Koreans from exporting direct to the United Kingdom (and the EC). Another potential source of dissension -- the retailers -- has been largely neutralized by the heavy involvement of manufacturers in distribution, particularly in "rental sales." The manufacturers have also received a good deal of help from the unions, especially the electricians' union (EEPTU). Its relations with BREMA have been good: the relevant national officer, Roy Sanderson, has traveled abroad with the association and has sat in on VER negotiations regularly. The union, in turn, has accepted the legitimacy of some manufacturers' importing and the need for substantial reductions in employment as a result of automation and rationalization. There has been little industrial conflict. Further, a history of conflict with the Communists in the union has led its current leadership to be forcefully "moderate," and it has eschewed anti-business campaigns. It has been a useful ally for BREMA, especially in mobilizing Labor ministers and M.P.s. 1/ Op. cit., BREMA, p. 135.  - 48 - I The footwear industry lobby has been led by the main manufacturers' association, the British Footwear Manufacturers Association (BFMA), and another cooperative industry union, the National Union of Footwear, Leather and Allied Trades (NUFLAT). This lobby has been trying, with growing success, to emulate the more successful textiles lobby, but it too has had some weaknesses. One has been a lack of backing from the producers of the major "upstream" products, for example, the fiber companies, although the tanners have started to work more closely on lobbying with the footwear companies. Second, the manufacturers (and unions) have been split, with a separate association and union representing the 10 percent or so of t4e workforce in the Rosserdale area of Northeast Lancashire, and, more divisively, by the Rubber and Plastics Footwear Group, which represents companies such as Dunlop that have become predominantly importers of items such as plimsols (a type of shoe). (Ironically, it was these companies which had first beat a protectionist path to the government's door in the 1960s. Having been turned away, they largely abandoned production for importing under British brand names.) Finally, the dominant force in the industry has not been a manufacturer -- almost all companies, bar a handful, are one-plant enterprises - but a big distributor, the British Shoe Corporation (BSC), which has had 20 percent of the retail mariet. BSC, unlike M & S, the corresponding clothing distributor, has had no compunction about buying from the cheapest source and is a major importer. Still, the producers have been successful in enlisting support for import controls from the Independent Footwear, Retailers Association (whose  - 49 - 1,000 members have feared, above all, competition from BSC). With government help, they have skillfully maneuvered the "multiple" stores, including BSC, into a "Buy British" policy which has effectively neutralized their previous opposition to import controls. The cutlery industry, by contrast with these, has provided an object lesson in how not to lobby for protection. Ironically, the compact, geographically concentrated nature of this tiny industry has contributed not to unity, but to division, which has been expressed openly and often highly vituperatively. There are four manufacturers' associations: the Cutlery and Silverware Association (CSA); the Federation of Cutlery Manufacturers (FBCM); the Sheffield Spoon and Fork Blank Makers Association; the Manufacturing Silversmiths Association. The two most important have been the CSA and the FBCM. The core of their disagreement has been manufacturer- importing. The FBCM was formed solely to combat imports and excludes from membership any firm with substantial importing interests (over 20 percent of turnover). The CSA, which has been dominated by Viners, has been more equivocal about its objectives, but, as its president has explained: I contend there is nothing wrong with a cutlery manufacturer, finding his market eroded by imports, attempting to preserve his market share by coyeting directly against the importers who have eroded it._ The unions have been little better organized. Although only about half of the workforce of 4,000 has been unionized, three unions 1/ Company spokesman in a statement to the Sheffield Morning Telegraph, August 18, 1978L  - 50 - I have been involved. One, the National Union of Goldsmiths, Silversmiths and Allied Trades (NUGSAT), is a highly specialized, small craft union based in Sheffield; the others are the country's biggest general unions: the Transport and General Workers (T&GWU) and the General and Municipal Workers (GMWU). These unions have lobbied for the industry, but on occasion their efforts have been compromised by conflicts with the companies over wages. For an industry so tiny and divided, it is surprising that so much vigorous lobbying has been carried out. In large part the reason has been the unifying efforts of the Sheffield City Council and the city's M.P.s. Even at this late stage, with the industry virtually at death's door, the FBCM is trying to form a coalition of manufacturers from some other small and vulnerable industries: the hollow-ware industry, represented by the silverware section of the British Jewellers Association; the silverware and leather goods sections of the British Giftware Federation; and the Brush Makers Association. As the FBCM noted, ...many industries are facing reduction; in future potential and perhaps extinction as the flood of Far Eastern imports accelerates. A bond between various trade bodies...can only be good for all the industries concerned f/ The Politics of Decision-Making It is one thing to have a united industry lobby. It is another to get decision-makers to act, and British ministers and officials have i 1/ Federation of British Cutlery Manufacturers, "First Survival; Then Growth," Sheffield, April 1981.  - 51 - been constrained in what they can do: externally by the limitations the EC has imposed on national trade policy and by the potential threat of retaliatory action, and internally by the need to balance the different constituents of the "national interest." Two key influences on the government's behavior have been, first, the balance of these internal and external pressures as expressed through the governmental machinery, and, second, ideology. Trade policy decisions are the immediate responsibility of the Department of Trade. It is to take into account foreign reactions (as determined by its own export promotion and GATT divisions and by the Foreign Office) and domestic pressure (represented mainly by the Department of Industry and employment-sensitive departments such as those representing the regions, as well as by the Department of Employment). It is possible that a more detached view of the national economic interest -- represented by the Treasury -- would be given equal weight, but this is unlikely unless subsidies (rather than quotas) are Involved. The crux of the matter has been well-summarized by BREMA: The Department of Industry provides invaluable help, being fully conscious of the needs of manufacturers. The Department of Trade, on the other hand, is inclined to find itself in a dichotomy because of its need, on one hand, to promote exports and two way trade and, on the other, t protect home industry against excessive imports.- The influence of ideology is of several kinds. The traditional belief in "free trade" is still to be found in parts of the Department of Trade and has been well-represented by recent prime ministers -- 1/ Op. cit., BREMA, p. 173.  - 52 - Heath, Wilson, Callaghan and Thatcher. All of them appear to have had free trade instincts (the first two built their ministerial reputations on trade liberalization programs at the Board of Trade, while the last has identified strongly with free market ideas of all kinds). At the same time, there has been another belief -- perhaps more deeply held at the official level -- which is mercantilist in origin. It has been summed up in the phrase, "Great Britain Ltd." and expresses the "corporatist" idea that the state, businessmen and unions should be as one, working through trade policy for a common national (producerst) interest. In Britain, as in some other European countries, this "'corporatism" has had an institutional expression -- the network of bipartisan sector working parties (SWPs) set up under the National Economic Development Council. Although the SWPs were to have been more influential under Labour than under the Conservatives, they have continued to produce their reports, which have recommended the need for government action against Imports of shoes, textiles and consumer electronics, among other things. Further, the developing tradition of liaison between officials, manufacturers and unions has continued to ensure that an influential "industryl view" will be fed into the Departments of Industry and TrAde. One side of this "corporatist" approach to trade policy has been a belief in the need for a "tough" trade policy in defense of "national" trading interests, especially when foreign competition has been defined as "unfair." One industry spokesman acknowledged disarmingly, "the term 'unfair competition' has been used and misused so  - 53 - often that it hardly has any meaning left" (however, he subsequently noted "twenty six unfair advantages that Korea has over its European counterparts") 1/ i The significance of these "fairness" arguments, which have been widely used and accepted, is that they have removed from producers the stigma of seeking favors. Instead, by having as their starting point conventional assumptions about the "rules of the game" in International trade negotiations, they have demanded that trade decision-makers act as defenders of "the national interest." In this way, competing claims on the "national interest" -- of exporters or of those concerned with anti- inflation policy -- can be bypassed. There are several good examples of this "corporatist" approach to trade policy decision-making among the four indust.ry studies. Within its SWP, the consumer electronics industry developed a clearly defined strategy for the future of the industry. In effect, a bargain was struck. The industry -- and Thorn and Philips in particular -- would invest heavily in the automation of TV assembly and in new products. The unions would not obstruct the changes. The government would shore up the home market from Far nastern competition, at least for several years. This it did through unilateral quotas leading to "voluntary" industry-to-industry agreements. There is no evidence that the main elements of this mutual understanding lost their force with the change in government. 1/ Op. cit., "First Survival; Then Growth."  - 54 - In textiles, the "corporatist" process of decisionr-making arose in the early 1960s, when the MacMillan government introduced limited trade protection and an adjustment assistance program for the Lancashire cotton industry. Subsequently, Courtaulds acquired a substantial share of the industry, which it intended to integrate vertically with its fiber operations. Through a "mass market" strategy, it would achieve economies of scale from the bulk production of fibres and large-scale sophisticated mills. This strategy in turn led it into knitwear and hosiery as a "downstream" outlet for manmade fibers. Courtaulds ...embarked on its strategy with some confidence that the government would listen to it and indeed it clearly influenced the government with its positive approach y restructuring under a temporary protectionisy umbrella-i_ Gradually, official and ministerial opinion came to believe that more permanent quota protection would be necessary, in an EC context. This view hardened in the late 1970s, as the crisis in the textiles industry grew and the habits of cooperation between the textiles and the clothing industry and the government developed. The incorporation of the main economic interest groups in the footwear industry into the process of government decisionr-making has been less advanced, although there has been one significant example of a new spirit at work. In 1977, a Footwear Industry Steering Group of officials and industry representatives noted that the "overseas trade problem is a symptom rather than a cause of the industry's 1/ G. Shepherd, "UK Economic Politics and Their Implications for Third World Countries: The Case of Textiles and Clothing," Catholic Institute for International Relations Seminar Paper, London, 1980.  - 55 - difficulty,'"1 although it nonetheless saw a role for import controls and drew attention to the "maldistribution in the balance between manufacturing and distribution."2/ At about the same time, the Price Commission found that, while the British Shoe Corporation (BSC), the dominant retailer-manufacturer, was the most efficient firm in the industry, it was also making "excessive" profits. The Commission sought price cuts. The recommendations did not unduly concern the BSC, which saw that it could cut its prices by selling more cheap imports and, at the same time, expand its market share; The Price Commission in fact anticipated this move and, witth the Office of Fair Trading (responsible for legislation on monopolies), established that any expansion by the BSC, which had been frozen since 1972 under a threat of a reference to the Monopolies Commission, would not be curbed. However, such a market-oriented solution to the problem was totally at odds with what the industry lobby wanted. The Minister of Prices responded by turning the Commission's recommendations on their head: price cuts would not be imposed on the BSC if it would agree to make a greater effort to "buy British." The Economist acidly observed at the time, "if it had happened in Japan it would be condemned as a new non-tariff barrier to trade." Despite the abolition of the Price Commission, the general understanding subsequently reached -- and dignified with the name of the Retail Commitment -- has remained effective to this day. 1/ Op. cit., Economists Advisory Group, London, 1977. 2/ Ibid.  - 56 - It might have been thought that with a new government so committed to free market ideas and explicitly rejecttng 'corporatism" in other contexts (such as incomes policy), these trends in decision-making would have been reversed. However, in the trade field the belief seems to have persisted that if a policy is good for Courtaulds and Marks and Spencer -- and the trades unions, also -- it must be good for Britain.  - 57 - Chapter VI POLICY CONCLUSIONS A great deal has been written, based on general principles and the experiences of different countries, about the "positive" adjustment policies that governments could instit te to facilitate the adaptation of the industrial structure in response to international competition, while minimizing the costs of adjustment.!' It is worth making a few specific points here. First, all four industries have enjoyed somewhat greater protection against overseas competition than the manufacturing average. Only rarely have the reasons been stated explicitly. However, they boil down to two: first, a modified version of the "infant industry" argument for protection, and, second, the argument that the costs of rapid adjustment exceed the community benefits from trade, necessitating a slowidown in trade-induced changes. The former has some plausibility only in the case of consumer electronics, though legitimate queries might be raised about the eventual outcome there. International experience also suggests that attempts to achieve reversals in factor intensities in traditional, low technology, labor-intensive industries are futile and expensive in terms of resources 2/ 1/ Best summarized in M. Wolf, "Adjustment Policies and Patterns in Developed Countries," World Bank Staff Working Paper No. 349, Washington D.C., August 1979. 2/ For example, G. Shepherd, "Textile Industry Adjustment in Developed Countries," Thames Essay, Trade Policy Research Centre, London, 1981.  - 58 - The latter argument is more understandable, especially in times of high unemployment, and is supported by orthodox welfare analysis, which points to the merits of withdrawing protection by stages rather than all at once.1! Justification on these grounds does, however, require that no new resources enter the industry, especially investment. The lack of any stch restraint in protected U.K. industries (or of any apparent awareness of the need) suggests some confusion over the objectives of using protection. A second point is that the major force in protectionr-seeking behavior has been business. While trade restraints (and alternative policies) are usually rationalized in terms of employment, in practice that reason is probably less important than whether the firms themselves have satisfactory escape routes or can derive profits from protection. While it can hardly be expected that governments would use the taxpayers' money on a large scale to compensate firms to induce them to quit a protected activity, an approach they have followed with workers, various other options are open. Financial support could be provided, as it has been in the past, to the woolen and cotton textile firms to write off capacity, this assistance should, however, be subject to a condition not imposed in the past -- that additional capacity not be added in activities which rely upon protection, unless a clear 'infant industry" case can be made. Both financial support and technical assistance could be provided to enable small firms to diversify, as is being done for 1/ J. Mutti, "Aspects of Unilateral Trade Policy and Factor Adjustment -Costs," Review of Economics and Statistics 60(l)(February 1978):102-110.  -59- clothing and footwear. Most firms would probably prefer freedom from restrictions rather than assistance: freedom from exchange restrictions on overseas investment; freedom to engage in offshore processing outside of quota limitations; and freedom for large firms to diversify through conglomerate mergers and takeovers. There is one major adjustment problem that the labor-specific industries in question face -- the relatively large numbers of usually immobile, semi-skilled women workers. Little empirical work is available that shows, through tracer studies, what the effects of closures are on women workers specifically. It is perhaps reasonable to assume that industrial contraction imposes somewhat smaller private or social costs on these employees, many of whom are second earners in a family, than they do for steel car or shipyard workers, as two examples, and traditionally their turnover has been high. At the same time, there will be costs unless the local labor markets -- and demand in the service sector in particular -- are buoyant. Traditional remedies for increasing mobility (trying to improve the housing market, for example) are of little relevance here; within local labor markets, the job choice is probably more a function of the cost and availability of public transport. The concept of adjustment used here is microeconomic in character. It embodies an assumption that no prolonged, fundamental disequilibrium exists in the economy as a whole. Yet in several industries, the indications were clear that the firms saw their salvation in a shift from the production of traded goods of any kind to non-traded services (distribution) or the acquisition of overseas  - 60 - assets. This suggests a lack of incentive to move into the production of traded goods and services in whihh Britain has a comparative advantage, probably the result of a seriously overvalued real effective exchange rate. Protection of weak industries is clearly no answer -- at the margin, it exerts upward pressure on the exchange rate and worsens the trade-off between employment and inflation. However, it is all too understandable why firms and workers in individual industries should seek their individual salvation this way.  - 61 - REFERENCES "A Switch in Time." Financial Times. June 3, 1980. British Footwear Manufacturers Federation. "Evidence to the Industry and Trade Select Committee." In Imports and Exports. Parliament. House of Commons. Select Committee on Industry and Trade. First Report. Vol. II. London, 1981. British Radio and Electrical Manufacturers Association (BREMA). "Memo- randum to the Industry and Trade Select Committee." In Imports and Exports. Parliament. House of Commons. Select Committee on Industry and Trade. First report. Vol. II. London, 1981. Consumer Electronics Union. "EEPTU in Action." Internal union circular. London, November 1977. Courtaulds. "Annual Report." London, 1978/80. "Cutlers Last Stand?" Financial Times. September 8, 1981. Economists Advisory Group. Footwear Industry Steering Group. "Report." Unpublished. London, 1977. European Commission. Europe's Problems in the Textile Market. Brussels, October i981. Federation of British Cutlery Manufacturers. "First Survival; Then Growth." Sheffield, April 1981. _ "The Table Cutlery Industry in the UK." Sheffield, 1981. Gurham, R. "The Hosiery Unions 1776-1977." National Union of Hosiery and Knitwear Workers (NUHKW). Nottingham, 1976. Hirsch, S. Rich Man's, Poor Man's and Every Man's Goods -- Aspects of Industrialization. TUbingen: J. C. B. Mohr, 1977.  - 62 - Knitting Industries Federation. "Evidence to the House of Lords Select Committee on the European Communities." Parliament. House of Lords. Select Committee on European Communities. Session 1978/79. 16th report. London, 1979. Mutti, J. "Aspects of Unilateral Trade Policy and Factor Adjustment Costs." Review of Economics and Statistics 60(l)(February 1978):102-110. National Economic Development Office (NEDO). Electronic Consumer Goods Sector Working Party. "Annual Progress Report." London, 1980. __ . Footwear Industry Working Party. "Annual Progress Report." London, 1979. Knitting Sector Working Party. "Annual Progress Report." London, 1980. "Overseas Ventures Can Be Tricky." Knitting International (March 1981). Parliament. House of Commons. Select Committee on Industry and Trade. Imports and Exports. First report. Vol. II. London, 1981. Price, J. Hardware Trade Journal, February 2, 1978. Shepherd, G. "Textile Industry Adjustment in Developed Countries." Thames Essay. Trade Policy Research Centre. London, 1981. _ "UK Economic Politics and Their Implications for Third World Countries: The Case of Textiles and Clothing." Catholic Institute for International Relations Seminar Paper. London, 1980. Shoes and Leather News. London. Various issues. Textiles in Tatters." Observer. 1980. "The Cut of Courtaulds." The Guardian. 1981.  - 63 - The Hosiery and Knitwear Workers (journal of the National Union of Hosiery and Knitwear Workers, NUHKW). Nottingham, 1980. Van der Klugt, C. J. Financial Times. November 18, 1980. Vernon, R. "International Investment and International Trade in the Product Cycle." Quarterly Journal of Economics 80(May 1966):190-207. Viner, B. Sheffield Morning Telegraph, May 4, 1977. "Why UK Shoe Makers Are Down at the Heel." Observer, November 22, 1981. Williams, N. P. "Influences on the Profitability of Twenty-Two Industrial Sectors." Bank of England Discussion Paper No. 15. London, 1979. Wolf, M. "Adjustment Policies and Patterns in Developed Countries." World Bank Staff Paper No. 349. Washington, D.C., August 1979.   World Bank Publications of Related Interest Adjustment Policies and Britain's Pattern of Special- Capital-lmporting Oil Problems in Developed ization in Manufactured Exporters: Adjustment Countries Goods with Developing Issues and Policy Choices Martin Wolf Countries and Trade Alan H. Qelb World Bank Staff Working Paper No. Protection A background study for World 349. August 1979. 236 pages (includ- Vincent Cable and Development Report 1981. Uses a ing references). Ivonia Rebelo simple two-sector model involving *ng references). Rebelo traded and nontraded goods as a Stock 1Yo. WP-0349. $10.00. World Bank Staff Working Paper conceptual framework to compare the No. 425. October 1980. 61 pages evolution of critical macro and sec- (including 3 appendixes) toral variables for a number of oil A4justment to External economies after 1974 and discusses Shocks. in Developing Stock No. WP-0425. $3.00. government responses to the oil Economies crisis and the effects of these Bela Balassa responses of the nonoil economies. A background study for World World Bank Staff Working Paper No. Development Report 1981 Analyzes 475. August 1981. 38 pages (including adjustments to external shocks, in 9 tables). the form of changes in the terms of Stock No. WP-0475. $3.00. trade and the slowdown in foreign export demand, in twenty-eight developing economies, classified according to the character of external shocks, the level of industrial devel- opment, and the policies applied. World Bank Staff Working Paper No. 472. July 1981. 31 pages (including appendix). Stock No. WP-04 72. $3.00.  NEW The Export Experience of Oxford University Press. 1982. Developing Countries 224 pages (including index). The Developing Countries Barend A. de Vries LC 82-6309. ISBIN 0-19-520211-2, and International Shipping The English-language edition is $22.50 (f10.50) hardcover. (A specially Harald Hansen out of print. priced edition will be available in India Considers whether developing coun- French: Resultats obtenus en matire from Oxford University Press branches.) tries can benefit from investments in d'exportation par les pays en voie de international shipping and discusses developpement. Dunod Editeur, 24-26, Industrial Country Policy the circumstances under which such boulevard de l'/lopital, 75005 Paris, and Adjustment to Imports investment might be favorable. France. 1969. . from Developing Countries World Bank Staff Working Paper Nlo. LC 67-28942, 10 francs. J. M. Finger 502. November 1981. iii + 148 pages (including 12 annexes, 38 tables, Spanish: La experiencia de los paises A background study for World bibliography), ~~~en desarrollo en materia de exporta- Development Report 1981. Reviews Stogk pho. P Y ciones. Editorial Tecnos, 1969. and interprets recent analyses of the 2tock No. WP-0502. $5.00. policies established by industrial 20.0 pesetas. countries in response to increasing imports from developing countries. Effects of Mon-Tariff Bar- Export Promotion Policies World Bank Staff Working Paper No. riers to Trade on Prices, Barend A. de Vries 470. July 1981. ii + 20 pages (includ- Employment, at d Imports: World Bank Staff Working Paper No. ing references). Textile and Clothing .313. January 1979. v + 75 pages. Stock No. WP-0470. $3.00. Industry Stock No. WP-0313. $3.00. Carl Hamilton Italian Commercial Policies World Bank Staff Working Paper No. NEW in the 1970s 429. October 1980. ii + 61 pages nzo (including appendix, bibliography). On Exports and World Bank Staff Working Paper No. Stock No. WP-0429. $3.00. Economic Growth 428. October 1980. 47 pages. Gershon Feder Stock No. WP-0428. $3.00. An analytical framework is developed Energy, Intematfonal Trade, to analyze the sources of growth dur- and Economic Growth ing the period 1964-73 for a group of On the Political Economy of Alan S. Manne and semi-industrialized developing coun- Protection in Germany Sehun Mim tries. Discusses the relationship H. HI. Glismann and between export performance and F D Weiss A background study for World economic growth and concludes that Development Report 1981. growth can be generated not only by World Bank Staff Working Paper No. Constructs a small-scale international increases in the aggregate levels of 427. 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October 1980. 21 pages Protection aga nst India's Exports (including footnotes, references). from Deva a opig Countres: M artin Wolf Stock No. WP-0430. $3.00. from Dvelopig Counries: Despite improved performance, the A Case Study in the Politi- growth of India's exports continues to cal Economy of Protection lag behind need, potential, and the E. Verreydt and achievements of several of its com- J. Waelbroeck petitors. This study examines India's overall export performance in the World Bank Staff Working Paper NO. 1960s and 1970s, with emphasis on 432. October 1980. 25 pages. the central role of incentives. The Stock No. WP-0432. $3.00. major problems and policies are discussed, as well as current strategic options.  NEW Prospects for Partnership: The Structure of Protection Industrialization and Trade in Developing Countries Patterns of Barriers to Policies In the 1970s Bela Balassa and others Trade in Sweden: A Study in Helen Hughes, editor The Johns Hopkins University Press, the Theory of Protection The Johns Hopkins University Press, 1971, 394 pages (including 5 appen- Lars Lundberg 1973. 310 pages. dixes, index). This report is part of an inquiry being LC 72-12369. ISBN 0-8018-1498-7, LC 77-147366. ISBN 0-8018-1257-7, undertaken by the World Bank in con- $20.00 (412.00) hardcover. $25.00 (l15.00) hardcover junction with scholars from twelve industrial countries into the penetra- ISBN 080I8-1500-2, $6.95 (24.25) Spanish: La estructura de la protecci6n tion of the markets of industrial paperback. en paises en desarrollo. CEMLA, Depar- countries by exports of manufactures tSmaneistas persectivas del comercio Mento de Publicaciones, Durango 54, from developing countries. Spteacinish: Lapespetrivasdlz6 cyeri Mexico 7, D.f., Mexico. 1972. World Bank Staff Working Paper No. polfticas comerciales en la decada de 494. October 1981. 35 pages (including los 70. Editorial Tecnos, 1974. The Tokyo Round: Results 3 appendixes). ISBN 84-309-0497-2, 575 pesetas. and Implications for Stock No. WP-0494. $3.00. Developing Countries Ria Kemper The Political Economy of NEW World Bank Staff Working Paper No. Protection in Belgium On Protectionism in 372. February 1980. iii + 35 pages F. K. M. Tharakan the Netherlands (including annex). World Bank Staff Working Paper K.A. Koekkoek J. Kol, and Stock No. WP-03 72. $53.00. No. 431. October 1980. 22 pages L.B.M. 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Based for the eriod 199-1985.on data derived from a sample of Stock No. WP-0492. $3.00. for the period 1979-1985. thirty-three developing countries World Bank Staff Working Paper No. that account for about 60 percent of 521. October 1982. 212 pages. developing countries' exports to ISBN 0-8213-0009-1. $5.00. one another. World Bank Staff Working Paper No. 4 79. August 1981. iv + 112 pages Structural Change in Trade (including 2 appendixes, references). in Manufactured Goods Stock No. WP-0479. $5.00. between Industrial and Developing Countries Bela Balassa World Bank Staff Working Paper No. 396. June 1980. 46 pages. Stock No. WP-0396. $3.00.  NEW Trade Policy for Developing P""'7 Countries Can Developing-Country E sxports eep Trade and Employment Donald B. Keesing Groling in the 190an? Helen Hughes and Jean Waelbroeck Policies for Industrial World Bank Staff Working Paper o. World Bank Reprint Series: Number 194. Development 353. August1979. vil + 264 pages Reprinted from The World Economy (June Keith Marsden (including references). 1981).127-47. In the last decade, the developing Stock No. WP-0353. $10.00. Stock No. RP-0194. Free of charge. countries have proved that they can compete intemationally in exporting Questions on InternatJonal Trade in manufactured goods, as well as pri- Trade Policy Issues for the TextUes and Clothing mary products and services. This Developing Countries in Donald B. Keesing and Martin Wolf paper examines three sets of issues: the 1980s World Bank Reprint Series: Number 202. 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Determinants and Develop- ment-Related Issues World Trade and Output of Andre Sapir and Manufactures: Structural Emst Lutz Trends and Developing A background study for World Countries' Exports Development Report 1981. Finds that Donald B. Keesing trade theories can help explain the World Bank Staff Working Paper No. patterns of trade in services in spite 316. January 1979. v + 69 pages of varying and often substantial (incldnstitcaane) degrees of protectionism. Represents ludfng statIstical annex). the second stage of a research Stock No. WP-0316. $3.00. project on trade in services. World Bank 5taff Working Paper No. 480. August 1981. 38 pages (including appendix, references). Stock No. WP-0480. $3.00.  WORLD BANK PUBLICATIONS ORDER FORM SEND TO: WORLD BANK PUBLICATIONS WORLD BANK PUBLICATIONS P.O. BOX 37525 or 66, AVENUE D'IENA WASHINGTON, D.C. 20013 75116 PARIS, FRANCE U.S.A. Name: Address: Stock or ISBN # Author, Title Qty. 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