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Is Wilbur Ross's strategy of betting on protectionism starting to unravel?
Economist Staff, The Economist
January 26, 2004
As an investor in troubled and bankrupt firms, Wilbur Ross can boast of turning round a bust Japanese bank, butting heads with South Korea's militant labour unions and tackling the corporate wrecks that litter America's telecoms industry. Most recently, Americans have toasted Mr Ross as the saviour of their steel industry, much of which he has bought out of bankruptcy, merged and restructured. Last month, Mr Ross floated his steel firm, International Steel Group, on the stockmarket, turning an $80m investment into shares worth $1.3 billion.
With success like this, investors in the family of so-called "vulture" funds (Mr Ross prefers to call them "recovery" funds) run by Mr Ross's firm, WL Ross & Co, are naturally anticipating more magic in America's textile industry, where he has recently made big bets. However, Mr Ross now finds his meticulously tailored plans for textile-makers seemingly in jeopardy.
Mr Ross will soon control two American textile manufacturers: Burlington Industries, a clothing-to-carpet maker that he bought out of bankruptcy last November for $614m; and Cone Mills, a bust denim manufacturer for which he is the sole bidder. He may soon add a third bankrupt firm, Galey & Lord, to his interests. His strategy in textiles appears to be similar to the one he followed in the steel industry. This is sometimes characterised as "betting on protection"—taking stakes in industries likely to benefit from swelling anti-free-trade sentiment, as America's steel industry did when President George Bush slapped (now-lifted) tariffs on steel imports in March 2002.
But Mr Ross's tactics are more nuanced than that. His key contribution in steel was to cut a deal with the United Steelworkers of America, the industry's powerful union. Its hostility to reform had hitherto frustrated management efforts to cut labour costs. By championing the union's protectionist line, Mr Ross gave it cover behind which it agreed changes essential to compete against cheaper foreign rivals: fewer jobs, reduced pension and health-care benefits, and modern work rules.
From this sprang Mr Ross's Free Trade for America Coalition (Freetac), a grouping of beleaguered manufacturers and agricultural interests that he launched in September, ostensibly to widen the battle against "unfair" trade. Among Freetac's founding members were two big textile lobbies, the American Manufacturing Trade Action Coalition (Amtac) and the American Textile Manufacturers Institute (ATMI). But by last month, this budding relationship had hit the rocks, as Amtac and ATMI split with Mr Ross over a proposed new Central American Free Trade Agreement (CAFTA), which he backed. ATMI says that 95% of the textile industry is against CAFTA, and calls Mr Ross an "outcast". Jock Nash, the general counsel at Milliken, a big textile firm, calls the concessions that Mr Ross claims to have won for American textile firms out of the CAFTA talks "bullshit".
At first blush, the textile industry ought to have been less of a challenge for Mr Ross than steel. Making textiles is relatively capital-intensive, and the unions do not play a big hand in shaping trade policy on textiles. It is the mill owners, through their trade associations, who influence trade rules. Mr Ross charmed the steel unions, but cannot win over the textile capitalists.
His pitch to the textile-makers seemed clever. In 2005, an ancient quota system that shields rich-country textile-makers from poor-country exporters is to end. Lobby groups from America's retailers say that, without serious restructuring, the end of quotas is likely to kill domestic textile-makers, which make much of their money by exploiting current trade rules that, among other things, heap costs on foreign firms by forcing production to be spread across many countries. Once the quota system is abolished, say the retailers, they will be seeking integrated suppliers in Pakistan, India, China and Vietnam, who can do everything from make the cloth to stitch the clothing.
A Stitch Up?
Mr Ross's counter to the Asian threat was, in essence, to propose a free-trading textiles zone for the Americas, in which American, Mexican and other textile-makers could export to garment stitchers in central America and the Caribbean for duty-free re-importation to America. Even after the end of quotas, Asian producers will still face tariffs. These tariffs, plus the advantages of a supply chain closer to America, and the need for retailers to diversify suppliers, ought to be enough to offset cheaper Asian labour costs, figured Mr Ross—as long as the domestic industry also merged and trimmed itself into better shape. Happily, this would help Mr Ross's companies, which have plants in Mexico, and position him as the industry's consolidator. Politicians and trade officials leapt on board.
But Amtac and AMTI protest that Mr Ross's proposals help him but hurt other American manufacturers, by providing more reason to move production abroad. They say they will not agree to any deal that harms American manufacturers. "This billionaire guy came like a knight in shining armour," says Mr Nash. "He made all the right noises, and seemed like one of us. But all he's won is a fraction of a fraction of the industry." With Amtac's hostility (so far, it has built a coalition of 18 manufacturing associations against Mr Ross), CAFTA looks dead, at least in its present form, as do Mr Ross's plans for the industry.
Or do they? If the retailers are right, America's textile-makers have been cosseted for so long that they have lost touch both with customers (Mr Nash calls retailers "bastards") and with their likely fate after the end of the quota system in 2005—probably, a rash of bankruptcies like that which overwhelmed the steel industry. Mr Nash, pointing to his 19 years in textiles, scorns Mr Ross, who he says is "just passing through". But Mr Ross has his own 20 years (and more) in the bankruptcy business. More often than not, he gets what he wants in the end.