Economic and Policy Developments in the Apparel and Textiles Sector
CRS Report for Congress
Economic and Policy Developments in the
Apparel and Textiles Sector
August 24, 1999
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
This report analyzes recent economic developments in the apparel and textiles industries and
their future prospects as a large employer in the U.S. manufacturing sector. The impact on
these industries of various trade and innovation policies are evaluated. This report will not be
Economic and Policy Developments in the Apparel and
The apparel and textiles industries together employed just under 1.4 million
workers in 1998, accounting for almost 7% of all manufacturing employment in the
United States. Over the past dozen years, however, there has been a marked
downward trend in employment for these industries. This trend has accelerated in
recent years, with over 275,000 jobs lost since 1993. This job loss is the most
important issue facing these industries.
Much of this job loss has been linked to increasing domestic consumption of
imports. Concerns about these industries have influenced recent trade negotiations
involving the United States, most notably the Uruguay Round of the General
Agreement on Tariffs and Trade (GATT) and China’s accession into GATT’s
successor, the World Trade Organization (WTO). The WTO, whose membership is
made up of 132 nations, including the United States, is an organization committed to
the dismantling of trade barriers between nations.
Related to the issue of import-induced job loss is the debate over renewal of
programs aimed at helping workers displaced by trade find new jobs — the Trade
Adjustment Assistance (TAA) program. Less crucial than these issues, but still
relevant, is the effect on these industries of federally sponsored programs aimed at
spurring innovation the manufacturing sector as a whole.
Probably the most important unresolved issue that will influence the ability of
these industries to maintain employment in the coming decades will be the impact of
China’s prospective accession into the WTO. China is already the leading exporter of
apparel into the United States, so the future growth of U.S./Chinese apparel trade will
in large part determine employment numbers in the industry. Also important will be
the continued efforts by the industries to remain internationally competitive through
innovation. Here, federal policies like the Research and Experimentation
(R&E) Tax Credit and cooperative government/industry collaborations will influence
the degree of success the industries attain.
The A&T Sector: Recent Performance................................2
Employment, Productivity, and International Trade..................2
Issues in the 106th Congress........................................6
International Trade and Adjustment..............................6
Phaseout of Quotas......................................6
China and the WTO......................................7
R&E Tax Credit........................................10
MEP and CRADAs.....................................11
Summary ..................................................... 13
Economic and Policy Developments in the
Apparel and Textiles Sector
The apparel and textile industries (“A&T sector” hereafter) constitute a
significant part of the production chain responsible for providing consumers with
clothing and other fabric-based products. Textile mills manufacture fabrics generally
intended for use in apparel production, although other products are also made in
textiles mills (rugs, carpets, and material for seatbelts and automobile seats are some
examples). Apparel factories turn the textiles into clothing to be sold in the retail
The A&T sector, while experiencing declining employment over the past quarter
of a century and frequently asserted by many observers to be in permanent decline,
remains an important source of employment in the manufacturing sector of the United
States. As of 1998, these industries employed just under 1.4 million workers, about
7% of all manufacturing employees, and more than either the aircraft or automobile
industries, and almost as many as these two combined (1.37 million vs. 1.5 million).
In recent years, however, this sector has experienced large-scale job losses — over
employing former workers of this sector make up the most important issues facing
Much of this job loss is related to international competitiveness and recent
import surges in the sector, making the status of ongoing international trade
negotiations an important issue regarding the future prospects of the A&T sector.
Concerns about this sector have influenced recent trade negotiations involving the
United States, most notably the Uruguay Round of the General Agreement on Tariffs
and Trade (GATT) and China’s possible accession into GATT’s successor, the World
Trade Organization (WTO). Related to this, the outcome of the debate over renewal
of the Trade Adjustment Assistance (TAA) program is also important. Less crucial
than these issues, but still relevant, is the status of several programs aimed at
enhancing the international competitiveness of the manufacturing sector as a whole.
1The author was an economic analyst in the Resources, Science, and Industry Division in the
summer of 1999. Further questions on the apparel and textiles industries should be directed
to Bernard Gelb (7-7738).
2U.S. Department of Labor, Bureau of Labor Statistics. Employment and Earnings. March
The A&T Sector: Recent Performance
Employment, Productivity, and International Trade
It often is asserted that the A&T sector in the United States is a “sunset”
industry — one that will perform poorly in the future in providing employment, trade
shares, and productivity growth. A common view of the A&T sector is that it mass-
produces a standardized output and seems to have poor prospects for technological
progress, meaning that competition will fall predominantly along labor-cost lines. As
the United States becomes economically integrated with countries whose average
wage is a fraction of that for U.S. workers, some analysts believe it will be impossible
for U.S.-made A&T to remain competitive in the world market.
Much of this perception probably stems from rapid import penetration into the
U.S. market over the last two decades, primarily from countries with substantially
lower national wage rates than the United States. However, while the U.S. A&T
market has seen a rising share of imports, the output of the domestic industry has
increased modestly over the last dozen years. Combined, apparel and textiles account
for 4% of all manufacturing output; their gross product roughly equals those of the
instrument, paper, and primary metal manufacturing industries (individually).3
Additionally, the output multipliers for the apparel and textiles industries are among
the highest in manufacturing. Output multipliers measure the stimuli given to the
aggregate economy by money spent in individual sectors. The average sectoral output
multiplier for the overall economy is $1.89, meaning that $1 spent in the average
sector will induce $1.89 in total economic activity.4 An explanation of these
multipliers is that if money is spent on the output of an industry, this money will go
to wages of employees (who will be able to demand more goods of other sectors), to
investment in plant, equipment, and inventory, or to profits, which may be re-invested
in the firm, increasing demand for capital goods. For the A&T sector, $1 spent in the
textile industry generates $2.77, and $1 spent in the apparel industry generates $2.51.5
While often lumped together as one sector, and sharing many commonalities, the
textiles and apparel industries are distinct in some important respects. In 1998, total
employment in the apparel industry averaged 771,000 while textile industry
employment was 596,000. Employment in the apparel industry peaked at 1.3 million
in 1973 and has generally declined since, falling especially fast during the recessions
of 1981-82 and 1990-91 without gaining much ground after each. Between 1978 and
3The output measure used here is gross product originating in the industry -- the industry's
contribution to (national) gross domestic product. For further explanation and data, see U.S.
Department of Commerce, Bureau of Economic Analysis. Survey of Current Business.
November 1997 and November 1998.
4These output multipliers are Department of Commerce estimates for 1987 based upon input-
output tables for 1982. For discussion of and more information on output multipliers, see:
CRS Report 93-370, Manufacturing Industry: Its Impact on the U.S. Economy, by David
employment peaked at 0.9 million in 1973 and also has steadily declined, but it has
not fallen as fast as in the apparel industry, with 314,000 jobs lost in this period, or
207,000 jobs and textiles losing 70,000. These large employment decreases occurred
during a time that production levels were essentially unchanged.
Rapid employment losses combined with stable output necessarily implies gains
in labor productivity, defined as output produced per worker. Labor productivity
growth in the economy as a whole determines how fast living standards can rise; thus
industry labor productivity gains are very important. Economists generally attribute
many of the increases in labor productivity to two separate phenomena: investment
in labor-saving machinery that makes each worker more productive, called capital
deepening; and technological advance. Both means of increasing labor productivity
are extremely important, and many economists have posited that each is equally
responsible for rising living standards.
Labor productivity growth in the textiles industry has actually outstripped that
of the economy as a whole, increasing at 2.8% per year from 1970 to 1996, compared
with 1.2% per year for the aggregate economy. Textiles productivity growth was fast
even compared to the rest of the manufacturing sector (2.8% vs. 2.3%) and this
higher rate of labor productivity growth has been maintained in the 1990's (4% vs.
3.5%).7 Much of the increase in the textiles industry’s productivity was due to capital
deepening that occurred beginning in the 1970s. Over this decade, capital
expenditures by textiles producers outstripped their profits, with about $3 billion
annually invested in new plant and equipment.8
Labor productivity in the apparel industry grew more in line with the rest of the
manufacturing sector, at just under 2.5% annually from 1970 to 1996. Capital
deepening occurred, but was not nearly as dramatic as in the textiles industry. Even
while investing more in the 1970's than in the previous two decades combined, the
rate of capital formation was less than half that of the textiles industry. The main
reasons for this investment disparity are probably: 1) that the flexibility needed for
apparel production makes mass production less feasible; and 2) that apparel firms
tend to be smaller, and hence less able to finance major capital improvements. Many
observers of the sector believe that prospects for further productivity-enhancing
capital improvements are dim. Many textiles factories have become almost completely
machine-driven, leaving little room for further labor-saving, and the apparel industry
seems ill-suited to such mechanization. However, increases in multifactor efficiency
are much harder to predict, and information technology improvements that allow
better communication between retailers and producers and “mass customization” of
6Employment and Earnings. March 1974 and March 1999.
7Productivity data produced by the U.S. Department of Labor, Bureau of Labor Statistics
(BLS), Office of Productivity and Technology, and obtained from the BLS Internet web site
8Mittelhauser, Mark. Employment Trends in Textiles and Apparel, 1973-2005. Monthly
Labor Review. U.S. DOL. August 1997.
some clothing lines may have the potential to provide further productivity increases
to both parts of the A&T sector.
While a considerable part of textiles employment losses can be explained by
productivity increases, increased imports also played a small role; mostly through the
indirect impacts of apparel imports. In the 1970's the U.S. textiles industry was the
only one in a major industrialized country that kept its domestic market share stable,
providing over 95% of domestic consumption. By 1992, the share of imports had
increased to 11%.9 While direct imports did not significantly affect the industry, it
was affected greatly by increasing apparel imports. The largest market for
domestically produced textiles is the domestic apparel industry. As apparel imports
gained market share, fewer domestic textiles were demanded.
The U.S. textiles industry has made considerable efforts in trying to locate
alternative markets besides the domestic apparel market. By 1991, 63% of textiles10
production was for the nonapparel market, up by 20% from 15 years earlier. This
ability to find and keep new markets will be crucial for the future success of domestic
textiles manufacturers. Exports grew 12.1% in the textiles sector from 1989-1996, but
have shrunk very slightly (1.2%) since 1997, due probably to lingering effects of
foreign currency devaluations induced by the Asian crisis.
Apparel production did not experience the same rapid productivity gains as the
textiles industry and, probably partly as a result, experienced higher levels of import
penetration into the domestic market for apparel and a higher rate of employment
loss. Imports grew from 5% to 26% of the apparel market from 1970 to 1988. Many
of these imports came from developing countries — by 1995 China, Hong Kong,
Taiwan and Mexico accounted for a fifth of all apparel sold in the United States, and11
imports as a whole accounted for over half.
Many of the apparel imports entered the United States under a special provision
in U.S. trade law (heading 9802 of the Harmonized Tariff Schedule (HTS), “HTS
9802" henceforth) that allows imports that have been assembled from U.S. materials
to enter the United States and be assessed an import duty only on value-added
generated abroad. The assembly and subsequent return export of foreign materials is
generally called production shared trade (PST). The economic rationale for PST is
to allow producers a greater opportunity to lower costs. These savings can be realized
through: 1) enhanced access to lower-cost labor for certain aspects of production
(often referred to as slicing the value chain),12 or, 2) economies of scale that arise
from greater specialization across plants. PST has been especially prevalent in the
9Murray, Lauren A. Unraveling Employment Trends in Textiles and Apparel. Monthly
Labor Review. August 1995.
10Department of Commerce International Trade Administration. Home furnishings, industrial
uses, and automobile interiors are three examples of non-apparel markets for textiles.
12It should be noted that this labor savings (lowering of unit labor costs) may not result solely
from low wages per se, but rather depends on the relationship between wages and
apparel industry. PST imports as a percentage of total imports have risen 50% in the
1990's (from 14% to 21% of total imports). Almost all apparel (83%) entering the
United States under HTS 9802 comes from the countries targeted by the Caribbean13
Basin Economic Recovery Act (CBERA). Apparel is well-suited to PST with the
CBERA nations because of easy access to low-cost apparel assembly workers there
and generally high import duties on apparel entering the U.S. Following the passage
of the North American Free Trade Agreement (NAFTA), much of this trade was
diverted from CBERA countries to Mexico, as NAFTA eliminates all duties on
Mexican imports, while CBERA imports still had to pay a duty on value-added
generated offshore. In addition to the HTS 9802 program, apparel imports from
CBERA countries that have been produced with U.S.-made textiles are counted at
less than full value when figuring quotas for these countries.
Apparel production has long been one of the first industries that developing
countries establish, as it requires far less initial capital investment than many other
manufacturing industries. Critics of the HTS 9802 program contend that it provides
incentive for U.S. employers to move production off-shore to low-wage countries,
thus adversely impacting the wage and employment prospects of U.S. workers,
especially the unskilled. These criticisms, however, point out another difficulty in
forecasting the future prospects of the domestic A&T sector. Imports of apparel can
adversely effect the domestic textiles industry by decreasing demand for its output;
however, not only the level, but the origin of these apparel imports are important. The
cost of transporting textiles long distances, combined with the existence of
competitive textiles factories in East Asia, may mean that apparel imported from these
areas could be wholly made with foreign textiles products. However, the close
proximity of the CBERA nations and Mexico, combined with these regions’ relative
dearth of competitive textiles plants, means that apparel imports from these nations
may well add to the demand for the U.S. textiles industry’s output. In fact, apparel
imports from CBERA nations and NAFTA grew during the same period that textile
exports grew. Efforts to expand NAFTA and create a larger regional trading bloc may
then, perhaps unexpectedly, be helpful to the textiles sector if much apparel trade is
diverted from Asia to countries in the Western Hemisphere. The apparel sector,
however, seems quite vulnerable to low-wage competition whatever the origin.
13Statistics on PST from: United States International Trade Commission Report, Production
Sharing: Use of U.S. Components and Materials in Foreign Assembly Operations,
Publication Number 3146, November 1998.
Issues in the 106th Congress
International Trade and Adjustment
Phaseout of Quotas. Fears of employment loss brought on by import
penetration originally led to the adoption in 1974 of the Multi-Fiber Arrangement
(MFA), a series of bilateral quota restrictions on apparel and textiles imports into
industrialized economies, and has slowed full liberalization of the A&T sector even
today. The Uruguay Round of 1995 produced a treaty calling for the gradual phasing
out of quota restrictions on apparel and textiles imports into developed countries, the
Agreement on Textiles and Clothing (ATC). The ATC mandates that signatories’
quotas be progressively eliminated by product line over a 10-year period, when, in
2005, all quota restrictions will lapse. As it is up to the importing countries to decide
in what order to eliminate product line quotas, it may well be the case that the full
economic effect of the ATC will not be felt until late in the agreement.
Proponents of managed trade arrangements like the MFA and more gradual
quota reduction agreements like the ATC argue that these agreements reduce
substantial labor adjustment costs that would be incurred if the industry was abruptly
opened to foreign competition. It has been posited that workers laid off due to
pressure from foreign trade have longer layoffs and lose more income than those laid
off for other reasons.14 Much of this difficulty in re-employment stems from the
generally poor skills profile of the labor force in many import-sensitive industries, and
the fact that, unlike jobs displaced because of cyclical fluctuations or the closing of
an individual plant within an industry, international trade represents a structural shift
in an economy, meaning that these jobs (and the opportunities for workers to exploit
job-specific skills) will likely be permanently lost.
Further, proponents of managed trade and more gradual liberalization point to
evidence showing that adjustment costs caused by layoffs in the A&T sector are
substantially higher than those in many other sectors, as A&T workers generally are
not college educated, have developed skills that are specific only to the A&T sector,
and are disproportionately female and/or minorities. Textile workers also tend to be
clustered geographically in areas where there are fewer alternative job opportunities
— generally in isolated communities in the South — meaning that community
disruption is another factor related to trade-induced job displacement. Proponents of
a more rapid move towards liberalization in the sector claim that these adjustment
costs will have to be incurred eventually, and that such measures are inefficient tools
for saving jobs. For example, estimates of the cost to American consumers for each
textile industry job saved ranged as high as $52,200 per year, and $46,000 per year
for each apparel industry job saved.15
14For a more complete discussion, see: Kletzer, Lori, Trade and Job Displacement in U.S.
Manufacturing, 1979-1991. Imports, Export and the American Worker, Collins (ed.).
Brookings Institution Press. 1997.
15Grennes, Thomas. The Multifiber Arrangement and the Management of International
Textile Trade, Cato Journal, Vol. 9, No. 1. These estimates are based on how much more
consumers have to pay for textiles and apparel due to tariffs levied on imports, or due to
By 2005 the ATC will expire, and apparel and textiles will be subject to the rules
and regulations of WTO, which forbid the use of quotas. Estimates of the impact of
this on the U.S. A&T sector vary widely, but most studies project employment losses16
from 200,000 to 650,000. The apparel industry is projected to bear most of these
losses, while the textiles industry will suffer mainly from the indirect effects of a
smaller domestic apparel industry17.
China and the WTO. The biggest unresolved issue regarding the A&T
industry and the WTO concerns China’s possible accession and how fast quotas on
Chinese apparel and textiles may be expanded or eliminated.18 While the ATC is set
to expire in 2005, 10 years after it was first implemented, some advocates for the
A&T sector assert that the 10-year phaseout of quotas on Chinese apparel imports
should not begin until the date of Chinese accession to the WTO. Chinese apparel
(including Hong Kong) already makes up 15% of the U.S. market. With expanding
quotas, this could grow very rapidly in the future, perhaps inducing large employment
shifts in the United States.
Presently, U.S.-China trade relations are governed by Title VI of the Trade Act
of 1974. The Jackson-Vanik Amendment to this Act mandates that the status of U.S.
trade relations with China be reviewed annually by the Administration. If China is
accepted as a member of the WTO, this review would be contrary to existing WTO
obligations, as acceptance into the WTO requires the granting of unconditional most-
favored-nation (MFN) status to the products of all WTO members. H.R. 557,
introduced in the 106th Congress, aims to rectify this conflict by exempting China from
the Jackson-Vanik review in the event of that country’s accession into the WTO.
There is no legislative requirement presently for the President to obtain statutory
authorization to approve the inclusion of China into the WTO. Three bills pending in
the 106th Congress (H.R. 884, S. 742, S. 743) would require the President to obtain
congressional approval before the United States could support China’s WTO
accession.19 Two of these three bills (H.R. 884, S. 743) require that the United States
withdraw from the WTO if China becomes a member without U.S. support.
higher prices caused by supply shortages resulting from quotas imposed on foreign goods.
16The range of estimates is wide due to uncertainty regarding future U.S.-China trade
relations, and the effect of trade liberalization on foreign demand for U.S. apparel and textiles.
For more on this, see: Murray, Lauren A. Unraveling Employment Tends in Textiles and
Apparel, Monthly Labor Review. U.S. Department of Labor. August 1995. The specific low
and high estimates cited are from the U.S. Congressional Budget Office and the American
Textile Manufacturers Institute, respectively.
17Again, it is hard to predict what effect the phaseout of the ATC will have on the demand for
U.S. textiles from foreign producers, once tariffs on U.S. goods are lifted.
18For more information see: U.S. Library of Congress, Congressional Research Service,
China-U.S. Textiles Trade: Growth and Confrontation, by Edward Rappaport, CRS Report
19H.R. 884 was introduced March 1, 1999 by Representative Gephardt. S. 742 was introduced
on March 25, 1999 by Senator Grassley. S. 743 was introduced on March 25, 1999 by
Adjustment Programs. The TAA and NAFTA-Transitional Adjustment
Assistance Program (TAAP) initiatives were developed to meet the challenge of
structural adjustment to the pressures of international competition. Both programs are
generally two-pronged: they provide technical assistance to firms to help them
reorganize and become more competitive, and they provide extended benefits to
workers who have been displaced by imports.
The technical assistance provided to firms is coordinated through the Economic
Development Assistance (EDA) Program of the Commerce Department. Firms that
believe that they have been adversely affected by imports petition to the EDA for
certification of eligibility for assistance. If this eligibility is granted, then the firm may
receive assistance in drafting an adjustment proposal — a plan for how the firm can
remain competitive within the industry. If this proposal is accepted, the firm may then
apply for TAA grants that assist the firm in enacting the measures enumerated in the
proposal. To receive the award, the firm’s plan must demonstrate a viable adjustment
program, provide proof that its economic resources are devoted to adjustment, and
give consideration to the employees of the firm.
The TAA program is unusual compared to other government programs in that
it allows grant money to be spent on private sector consultants. Many proponents of
the TAA program for firms point to this as a strength, arguing that private sector
consultants allow a greater range of advice and flexibility than do strictly
governmental assistance programs. A comprehensive review of the program has found
that firms that receive TAA funding generally perform better in terms of sales and20
employment than similar firms who do not. This same report asserts that the apparel
industry has been a prime beneficiary of this program, although industry-specific
breakdowns of employment and/or earnings performance are not given. The TAA
program officially expired June 30, 1999. Two bills in the 106th Congress (H.R. 1491
and S. 220) reauthorize the TAA program for firms. While a relatively small program,
TAA has been controversial since its inception in 1962. Many critics claim that there
is no economic difference between trade competition and domestic competition;
consequently, offering assistance to firms impacted by trade pressures is tantamount
to preferential treatment. Others believe that TAA only serves to distort the normal
market adjustment processes, impeding the benefits gained from trade liberalization.
Proponents of the program argue that it is an essential complement to trade
liberalization, allowing the adjustment process to proceed less painfully and giving
firms a fair chance to adopt to a changed business environment.
20Effective Aid to Trade-Impacted Manufacturers: An Evaluation of the Trade Adjustment
Assistance Program , a report to the Economic Development Administration by the Urban
Institute, November 1998.
The TAA and NAFTA-TAAP programs for workers are coordinated by the
Department of Labor. These provide extensions of unemployment insurance to
workers who have been displaced by direct imports and who have enrolled in certified21
training programs. The present TAA programs for workers were part of the 1974
Trade Act, and were widely seen as having been developed in exchange for organized
labor’s support for, or at least acquiescence to, further trade liberalization. Funding
for the TAA program for workers also lapsed as of June 30, 1999. The merging of
TAA programs with other programs aimed at worker retraining and displacement has
been proposed repeatedly, but has never been enacted. Several bills now pending
would continue funding this part of the program for the next three to four years (H.R.
Caribbean Trade. The CBERA was originally passed in 1984 in an effort to
promote economic development for the targeted countries. A&T products wereth
largely excluded form the Act’s trade liberalization, but the 106 Congress is
considering two proposals to enhance trade benefits to CBERA countries, both in the
context of larger bills aimed at providing economic aid in response to the damage
inflicted by Hurricane Mitch and Georges. Both S. 371 and H.R. 984 would broaden
the provisions of HTS 9802 to something closer to the access of Mexico under
NAFTA, even allowing duty-free and quota-free importation of apparel not made of23
material formed and cut in the United States. The House bill provides a larger range
of preferentially treated product lines. An expected Administration proposal that has
not yet been introduced as legislation, but is purportedly closer to the Senate bill,
provides for more stringent labor and environmental protections, and would allow
tariff benefits for a shorter period of time than either congressional initiative (2 years
instead of 5).24
African Trade. Legislation introduced in the 106th Congress (H.R. 434/S. 666
and H.R. 772) would increase duty-free benefits for products from Sub-Saharan
Africa and eliminate U.S. quotas for textiles and apparel from these countries.25 In
the short run, such measures would be likely to have a small effect on the industries,
mostly because such trade presently is so small in volume — less than 1% of U.S.
apparel and textile originate in these countries. If, however, this legislation spurs
21Direct imports means imports of goods directly in competition with the output of the
industry in which the worker was employed. Critics have pointed out that many jobs may be
at risk less directly from imports — service industries that support manufacturing industries
that are directly affected by imports, for example.
22H.R. 1491 was introduced April 20, 1999 by Representative Matsui. H.R. 1728 was
introduced May 6, 1999 by Representative English. S. 220 was introduced January 19, 1999
by Senator Moynihan.
23H.R. 984 was introduced March 4, 1999 by Representative Crane. S. 371 was introduced
on February 2, 1999 by Senator Graham.
24For more information on this, see: U.S. Library of Congress, Congressional Research
Service, Trade and the Americas, by Raymond Ahearn, CRS Issue Brief, 95017.
25H.R. 434 was introduced on February 2, 1999 by Representative Crane. H.R. 772 was
introduced February 23, 1999 by Representative Jackson. S. 666 was introduced on March
investment in these countries, the longer term impact of such trade on the A&T sector
could be substantial. This impact may be blunted, however, if goods produced in
Africa merely displace exports from other sources, notably East Asia.26
The A&T sector benefits from several broad programs aimed at enhancing the
pace of innovation in the U.S. manufacturing sector. This support takes many forms:
tax credits, technology transfer programs, and training credits. Some of the issues
coming before the 106th Congress are: the status of the research and experimentation
(R&E) tax credit, the funding of Manufacturing Extension Partnership Program
(MEP), and regulations affecting Cooperative Research and Development
Agreements (CRADA) between the industry and the federal government.
R&E Tax Credit. The R&E tax credit allows firms, across industries, to claim
a credit against their federal income tax liability for qualified spending on research and
experimentation. Private sector research and development (R&D) is vital to aggregate
economic growth, yet individual firms may be reluctant to fund high levels of R&D
because of uncertainty about the private returns to such spending. The R&E tax credit
is aimed at spurring higher levels of private R&D. Perhaps surprisingly, a
comprehensive study of the manufacturing sector found that: “the own-price elasticity27
of company-financed R&D does not vary much from industry to industry....”,
meaning that efforts to make research and development cheaper (the purpose of the
R&E tax credit) spur almost the same amount of additional R&D activity in every
industry, including the apparel and textile industries. In fact, the measured elasticities
in the study for the A&T sector were higher than elasticities in those industries
considered more technology-intensive, such as scientific instruments.
This implies that, for the purposes of inducing R&D efforts, the R&E tax credit
may be more important for the A&T sector.28 This probably is because more
technology-intensive industries consider R&D spending a fixed cost of their sector —
activity that must be undertaken to remain competitive, regardless of public policy;
while for the A&T sector, the amount of R&D engaged in is variable, depending on
the expense. Recent technological advances in the A&T sector range from computer-
aided design (CAD) in the pre-production phase, to chemical advances in dyes and
coloring, to communication efficiencies linking retailers and factories. The future of
the R&E tax credit may determine to a large degree the rate of continued technical
progress in the A&T sector.
While it has always been a temporary provision of the Internal Revenue Code,
the R&E tax credit has generally enjoyed wide congressional support. Much of this
support stems from its status as an indirect mechanism for encouraging research and
26For more information on this, see CRS Issue Brief, 98015, African Trade and Investment:
Proposals in the 106th Congress, by Dagne, Theodros S. and Sek, Lenore.
27Mamuneas, Theofanis and M. Ishaq Nadiri. Public Research and Development Policies and
Cost Behavior of U.S. Manufacturing Industries. NBER Working Paper No. 5059. June
28However, the differences in elasticities are very small.
development in the private sector, in that it is not targeted at any specific industry. A
number of bills making the R&E tax credit permanent were introduced in the 106th
Congress.29 H.R. 2488, passed by both the House and the Senate with slight
variations, has been reported out of a conference committee. It would extend the
credit to 2004.30
MEP and CRADAs. The MEP and CRADAs represent federal efforts to
promote private sector R&D by reducing the risks and costs associated with it, and
by giving small and medium-sized firms access to expertise and research that would
be out of their reach without government assistance. These programs aim to foster
cooperative efforts between government, industry, and academia, but do not provide
any direct financial assistance (subsidies, for example) to firms participating in them.
The Manufacturing Extension Partnership Program (MEP) is a network of
regional centers set up to assist small and medium-sized companies in adopting new
technologies and manufacturing techniques derived from R&D performed in federal
laboratories. Administered by the Department of Commerce’s National Institute of
Standards and Technology (NIST), this is a cooperative effort between the federal
government, state and local governments, universities, and/or the private sector.
While funding has generally been sufficient to meet federal obligations, questions still
remain whether or not the centers will become self-sufficient, a stated goal of the
The MEP provides no direct financial assistance to firms; rather it makes
available a wide range of consulting functions in areas such as: business strategy,
worker retraining, marketing, and equipment upgrading. The centers are selected in
an open competition, and presently must provide 50% of their funding from non-
federal sources. A comprehensive review of the MEP has been issued by the General
Accounting Office (GAO), in a report titled Manufacturing Extension Programs,
Manufacturers’ Views About Delivery and Impact of Services. Of the firms surveyed,
73% reported that their relationship with an MEP center had a positive effect on their
business performance. This same report tallied the delivery of MEP services by
industry. Firms in the A&T sector constituted 3% of the total firms serviced. The
NIST has reported that since its inception in 1988, the MEP has assisted over 62,000
companies. Appropriations legislation H.R. 2670, for the Commerce Department
includes $99.8 million for the MEP, while its Senate counterpart, S. 1217, provides
$109.8 million. Recent decreases in funding mostly reflect statutory requirements that
centers provide two-thirds of their own funding after 6 years.32
29For more information see: CRS Issue Brief, IB92039, The Research and Experimentation
Tax Credit, updated periodically, by Gary Guenther,.
30H.R. 2488 was introduced July 13, 1999 by Representative Archer.
31For more information see: Congressional Research Service, Manufacturing Extension
Program: An Overview, by Wendy Schacht, CRS Report 97-104.
32H.R. 2670 was introduced August 2, 1999 by Representative Rogers. S. 1217 was
introduced June 1, 1999 by Senator Gregg.
CRADAs are mechanisms established by the Federal Technology Transfer Act
that allow the transfer of technology from government laboratories to the private
sector for commercialization. The government may provide financial support in the
way of overhead for research and development performed and necessary in its own
laboratories, but is prohibited from providing direct funding to its CRADA partner.
This requirement that the industry partner invest its own time and money in the R&D
process is meant to insure that the R&D performed is relevant to industry needs.33
Preference is given to small and medium-sized manufacturers.
The American Textiles (AMTEX) Partnership, a collaboration between the
textiles industry and the Department of Energy (DOE), began in 1993. The AMTEX
partnership has resulted in several potential productivity-enhancing innovations for
the industry. The most important in terms of its immediate impact is the “Demand
Activated Manufacturing Architecture”, a secure, Internet-based information system
that links sectors in the A&T production and distribution chain. The aim of the system
is to reduce supply shortages and redundant inventory, two pressing problems of the
sector. “Computer-Aided Fabric Evaluation” allows image-processing computer
technology to scan large swaths of textiles fabric for flaws before these cause
improper cutting or printing. Such innovations, while holding promise for improving
the international competitiveness of American-made textiles, may be of limited use in
addressing the problem of future employment prospects for many of the industry’s
present employees. Like many productivity enhancing developments, these may
necessitate changes in the composition of the workforce of the textiles industry,
increasing demand within the industry for higher-skilled workers while displacing
what were traditionally less-skilled positions.
H.R. 209 of the 106th Congress was passed by the House on May 11, 1999. It
would revise requirements affecting industry licensing of innovations achieved by a
federal laboratory through a CRADA. Among other requirements, the license
applicant must commit to achieving practical, commercial utilization of the innovation
within a reasonable time, and prohibits a government agency from providing an
exclusive or partially exclusive license on a federally owned invention without
providing 15 days public notice and considering comments upon the license
application and receiving a development plan from the license applicant.34
33For more information see: CRS Report 95-150. Cooperative Research and Development
Agreements (CRADAs), by Wendy Schacht,
34H.R. 209 was introduced January 6, 1999 by Representative Morella.
Despite the effects of labor-displacing productivity growth and foreign
competition, the A&T sector will continue to be an important source of
manufacturing employment — the Bureau of Labor Statistics projects that in 2005 the
sector will employ 1.3 million workers. While the apparel industry seems to exhibit
a consistent downward trend in employment, the textiles industry may well have stable
employment for the foreseeable future.
The A&T sector, already running a substantial trade deficit, will almost surely
see its international position worsen in coming years, especially if China joins the
WTO and CBERA/NAFTA parity proposals are enacted — making these issues
probably the most important the industry will face in the 106th Congress. The extent
of this erosion of the industries’ international performance will depend in large part
on the success of the textiles industry in finding export markets to compensate for the
declining demand from domestic apparel producers.
The size and labor force profile of the A&T sector implies that the adjustment
costs incurred by a relatively sudden job loss would be substantial. Both the TAA
programs and the general competitiveness policies assisting manufacturing enterprises
could reduce these costs. The 106th Congress has shown little interest in substantially
changing the character of these programs, but it seems safe to say that the historical
controversy over their precise configurations will continue.