Its not just the economy, stupid trade competitiveness in the 21st century

After analyzing specific trade deals between the United States and Latin American and Caribbean countries, the book offers recommendations for establishing mutually beneficial trade rela

It’s Not Just the

Economy, Stupid!

Trade Competitiveness

in the 21st Century

It’s Not Just the

It’s Not Just the Economy, Stupid!

Trade Competitiveness in the 21st Century

By Sarita D Jackson

This book first published 2016

Cambridge Scholars Publishing

Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library Copyright © 2016 by Sarita D Jackson

All rights for this book reserved No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner

ISBN (10): 1-4438-8729-3

ISBN (13): 978-1-4438-8729-8

C ONTENTS

List of Illustrations vii

List of Tables ix

Preface xi

Acknowledgments xii

Introduction 1

Background Methodology Process Tracing Theoretical and Practical Contributions Chapter Overview Chapter One 10

Industry Competitiveness and Decision-Making: A Call for a New Paradigm Importer Firm Decision/Behavior Export Industry Competitiveness in Specific Markets Importer Firm Behavior, Exporter Industry Competitiveness, and Path Dependency Chapter Two 31

Apparel Importers Using More Costly Textiles Honduras El Salvador Costa Rica Dominican Republic Chapter Three 50 History of U.S.-Latin American and Caribbean Trade Relations

U.S Protectionism and LAC Neoliberalism (1930s–1940s)

LAC Protectionism and U.S Neoliberalism (1940s–1980s)

U.S.-LAC Trade Integration (1990s–)

Contents vi

Chapter Four 66 Trade Rules as Critical Junctures

Political and Economic Crises in Latin America and the Caribbean From Crises to Critical Juncture

Trade Institutions and Power Dynamics

Chapter Five 91 Path Divergence: Jamaica and Guatemala

Jamaican Microeconomic Policy Overview

Jamaican Textile and Apparel Industry Profile

U.S Unilateral Production-Sharing Program and Jamaican Textile Imports (1984–2004)

Evolution to a Bilateral Trade Regime

Jamaica’s Current Path: Costly or Makes Cents?

Guatemalan Textile and Apparel in a Reciprocal Trade Regime

Chapter Six 116 Twentieth-Century Trading Rules in the Twenty-First Century:

List of Abbreviations 131 Bibliography 133 Index 146

Figure 2-5 U.S Exports of Textiles to El Salvador (2010–2014) (US$) Figure 2-6 Salvadoran Imports of U.S and Asia Yarn and Fabric (2013) (%)

Figure 2-7 Costa Rican Imports of Yarn and Fabric from the United States and China (2013) (%)

Figure 2-8 Costa Rican Imports of Yarn and Fabric from the United States and Asia (2013) (%)

Figure 2-9 Costa Rican Apparel Exports to the United States (2002–2013) (US$ million)

Figure 2-10 U.S Exports of Textiles to Costa Rica (2010–2014) (US$) Figure 2-11 Dominican Yarn and Fabric Imports from the United States and Asia (2013) (%)

Figure 2-12 Dominican Yarn and Fabric Imports from the United States and China (2014) (%)

Figure 2-13 U.S Exports of Textiles to the Dominican Republic (2010–2014) (US$)

Figure 3-1 Mexican GDP Growth Rate (1961–1990) (%)

Figure 3-2 Mexican Textile Exports to the United States (1994–2000) (US$ billion)

Figure 3-3 Mexican Apparel Exports to the United States (1993–2000) (US$ billion)

Figure 3-4 U.S Apparel Imports from Mexico, the Dominican Republic, and China (1993–1999) (US$ billion)

Figure 4-1 Nicaragua Cotton Exports, Value and Unit Value (1978–1986) (US$ millions in 1987 prices)

Figure 4-2 Nicaragua Cotton Exports, Volume (1978–1986) (US$

millions in 1987 prices)

Figure 4-3 U.S Exports to Fabric to Caribbean Basin Countries (1989–2005) (US$ million)

List of Illustrations viii

Figure 4-4 U.S Exports of Fabric to DR-CAFTA Countries (1989–2005) (US$ billion)

Figure 4-5 U.S Imports of Textile and Apparel and Footwear under HTS 807A/9802 Program (1985–1999 (US$ million)

Figure 4-6 U.S Yarn and Fabric Exports under CBTPA (1999–2004) (US$ thousand)

Figure 5-1 Jamaican Net Foreign Debt (1970–1979) (US$ million) Figure 5-2 Jamaican Apparel Exports to the United States (1983–1987) (US$ million)

Figure 5-3 Jamaican Imports of Yarn and Fabric (1990–2004) (%) Figure 5-4 Jamaican Textile Imports (2006–2014) (%)

Figure 5-5 U.S Imports of Apparel from Jamaica (1992–2014) (US$ million)

Figure 5-6 Guatemalan Yarn and Fabric Imports from the United States and Asia (2013) (%)

Figure 5-7 Guatemalan Yarn and Fabric Imports from the United States and China (2013) (%)

Figure 5-8 Guatemalan Imports of Yarn and Fabric from the United States and China, (2000–2014) (US$ million)

Figure 6-1 Lesotho Yarn and Fabric Imports (2000–2014) (US$ million) Figure 6-2 Sub-Saharan African Textile Market, by Market Share (2013) (%)

L IST OF T ABLES

Table 2-1 Top Five Yarn and Fabric Suppliers to Honduras (2014) (US$) Table 2-2 Top 10 Honduran Exports to the United States (2014) (US$) Table 2-3 Top Five Sources of Imported Yarn and Fabric in El Salvador (2014) (US$) (%)

Table 2-4 Top 10 Exports from El Salvador to the United States (2014) (US$) (%)

Table 2-5 Top 10 Dominican Republic Exports to the United States (2014) (US$) (%)

Table 3-1 Commodity Composition of Latin American Exports (1929) (%

Table 3-4 From CBTPA to DR-CAFTA in Textiles and Apparel

Table 4-1 Regional Political and Economic Crises in Latin America and the Caribbean (1960s–1980s)

Table 4-2 U.S Imports of Textiles and Apparel from Mexico (1990) (US$ millions in 1992 dollars)

Table 5-1 U.S Imports of Knit Apparel (1995)

Table 5-2 U.S Imports of Non-knit Apparel (1995)

Table 5-3 U.S Imports of Jamaican Apparel (1995–1998) (US$ million) Table 5-4 Jamaican Textile and Apparel Exports to Quota Markets (1997–2001)

Table 5-5 Jamaican Apparel Costs to Export to U.S Market: Path

List of Tables x

Table 6-4 Lesotho’s Imports from the United States, China and Asia (2000–2014) (US$)

Table 6-5 Mauritius’ Imports from the United States, China and Asia (2000–2014) (US$)

P REFACE

This book first began to take shape during my doctoral research and then with continued studies on the impact of reciprocal trade agreements on particular industries The path-dependency model offers insight into importer behavior and industry competitiveness, but it only goes so far and therefore needs to be rethought, especially in terms of the cost of path divergence

The book aims to complement existing scholarship on the behavior and decision-making of importers The book evaluates current assumptions, particularly those from the rational school of thought and the focus on institutions An alternative framework is proposed—path dependency—to encompass the process that shapes the decisions of importers Furthermore, with respect to industry competitiveness, the book adds a complementary approach to the commonly accepted theory of competitive advantage, which focuses on an industry’s ability to compete in the global market The same framework—path dependency—is used to explain the process in which industries compete, not in global markets but, rather, specific markets

The book also aims to contribute to policy debates over trade agreements Some proposed trade agreements adopt provisions similar to those codified in the twentieth century However, due to changes in the international trading system, some of these rules may no longer be the most useful in the twenty-first century After analyzing specific trade deals between the United States and Latin American and Caribbean countries, the book offers recommendations for establishing mutually beneficial trade relations with other regions, in particular Sub-Saharan Africa

A CKNOWLEDGMENTS

This book owes its publication to support and guidance from a number of people and organizations over the years First, I thank Tanya Golash-Boza, Fabrice Lehoucq, Phung Nguyen, and Gabriel Noel for taking the time to offer insight to sharpen my analysis and critique earlier work, which first appeared as an article in an academic journal (“Path Dependency and U.S Textile Competitiveness in the Dominican Republic Market,” Journal of Competitiveness Studies, 2014) Second, I thank Gregory Weeks, for

commenting on an earlier paper and presentation at the February 2011 meeting of the North Carolina Political Science Association and encouraging me to expand my case study of the Dominican Republic into

a larger project, which grew into this book Third, I would be remiss if I did not express my gratitude to Donald Blondin and Dorothy H Jackson for proofreading and commenting on sections of the book

In addition, several organizations have been instrumental in providing the necessary funding for this project over the years I extend my appreciation for financial support from the Fulbright Scholar/Lecture Award (Dominican Republic) during my tenure as an assistant professor at North Carolina A&T State University Furthermore, previous graduate research support, such as the Belfer Family Graduate Fellowship and the Irene Diamond Fellowship, helped in the initial phases of the project These fellowships made it possible to travel overseas, conduct extensive interviews and collect additional data required to complete this project

I am also grateful to the numerous individuals in Washington, DC, Central America, and the Dominican Republic who shared their time, resources, first-hand knowledge, and networks in helping me to better comprehend trade negotiations and the textile and apparel industries

In addition, I thank the staff at Cambridge Scholars Publishing for their guidance during the publication process

My gratitude also goes to Debra E Soled for copy editing and providing detailed feedback to ensure the quality of the final published work

Last, but certainly not least, I am forever grateful to my family for their unwavering support and encouragement through the research stage and writing process My mom, dad, and brother provided the physical space and emotional support necessary for me to complete the book

I NTRODUCTION

Free trade has inspired both support and a backlash, in particular in 2015

as the United States and 11 countries in the Asia-Pacific region signed the largest trade deal since the North American Free Trade Agreement (NAFTA): the Trans-Pacific Partnership (TPP) agreement Questions have been raised regarding the benefit to countries and specific industries, as well as the environment, labor, and consumers Debates have highlighted the benefit of market access, in which importers from a TPP signatory country can purchase goods and services from another TPP member country duty-free As a result, the latter country would benefit from a competitive edge in other TPP markets In the course of the debate, some analysts have questioned the validity of free trade theories and earlier trade deals, including those between the United States and countries in Latin America and the Caribbean

A number of theories have emerged that offer insight into firm behavior and the ability of countries, industries, and firms to compete globally As far back as the nineteenth century, economists have argued that the market determines a country’s or industries’ ability to succeed in the global market More specifically, a country that specializes in those industries that is more efficient than its trade partner will experience economic growth Some scholars have analyzed the ability of firms and industries to compete in the global market and found that factors such as government policy, quality, industry clusters, human capital, geographic concentration, technology, and strategy remain key (Freund and Wallace 2004; Porter 1990) Contrary to theories on firm and industry competitiveness, the globally less competitive U.S textile industry has shown its ability to compete in specific markets throughout Latin America and the Caribbean Competition is measured by an industry’s share of any given import market

Regarding firm behavior, business models assume that firms act rationally by seeking to maximize profits while keeping costs low Seyoum (2010) asserts that importers determine the origin of goods based

on cost Again, counter to the rational choice argument for firms, some Latin American and Caribbean apparel manufacturers import mostly the more expensive U.S textiles, specifically yarn and fabric, to use in regional apparel The use of U.S yarn and fabric by some Latin American

Introduction 2

and Caribbean apparel manufacturers persists although lower-cost options from Asian suppliers exist

The contradiction between the expected outcomes and the actual actions of many Latin American and Caribbean apparel producers, which give the U.S textile producers a competitive edge in their markets, leads

to the main question of this book: If the goal of firms and producers is to maximize profit while reducing costs, why do many Latin American and Caribbean apparel producers continue to import the more expensive U.S textiles?

With this question in mind, the book focuses on two specific areas: (1) the determinants of importer decisions regarding the origin of inputs and (2) industry competitiveness at a specific market level The book argues that, in addition to market-based explanations, factors such as history, trade rules, and bargaining power shape importer decisions and industry competitiveness in specific markets More specifically, the path-dependency model offers deeper insight into the findings presented here The findings presented tell the often neglected story of how trade relationships, policies, and negotiation outcomes play a highly significant role in firm behavior and industry competitiveness

Background

Countries such as Honduras, El Salvador, and the Dominican Republic import the majority of their yarn and fabric from the United States U.S yarn and fabric account for 50–90 percent of these markets Costa Rica imports more yarn and fabric from the United States than from China Therefore, U.S yarn and fabric producers have a competitive edge over Asian suppliers, including those in China, in these specific markets

In 2012, textile production in China comprised nearly 54 percent of the total world production “Today, China’s textile industry has been crowned

as the world’s largest in terms of output, due to the condition of plenty of resources and cheap labour force in this industry,” writes Huang (2012) In addition to being the largest manufacturer of textiles in the world, China is also the largest global exporter (Huang 2012) In 2014, China exported US$112 billion worth of yarn and fabric to the global market or 38 percent

of the total world textile exports, according to the United Nations Commodity Trade database (UN Comtrade) China is more competitive than the United States in terms of the cost and quantity of production

In 2014, the United States was the fourth-largest textile exporter in the world, after India (no 2) and Germany (no 3) U.S textile exports reached

a value of US$14 billion and make up only 5 percent of the world total,

It’s Not Just the Economy, Stupid! 3

thus the United States ranked far behind China in terms of both dollar value and global market share (UN Comtrade)

The seemingly obvious answer to the question as to why these Latin American and Caribbean countries import mainly from the United States is geographic proximity A closer examination of other cases, such as Guatemala, Nicaragua, and Jamaica, in which yarn and fabric imports from China exceed those from the United States, shows that geography does not determine importer decisions Nicaragua has imported mainly from China for a long time Guatemala and Jamaica began to import mainly Chinese yarn and fabric in the past decade

The different outcomes within the same region highlight the need to look beyond existing economic and business models and examine other factors that determine the decisions of importers and the specific-market competitiveness of the U.S textile industry To identify alternative factors, the process leading to the final results becomes important

Methodology

The study relies on process-tracing qualitative research methods, just as scholars use qualitative research methods to address problems with more complex causes (Elman 2008) For instance, the cases selected for this study have a number of similarities in the areas of geography, economic size, apparel export markets, and production costs The geographic proximity between the United States and the Latin American and Caribbean countries enables transport time between two and seven days

By comparison, Asian exports to the West Coast of the United States can take from 12 to 45 days (Freund and Wallace 2004) All the Latin American and Caribbean countries studied here are developing economies Costa Rica is considered upper middle income, whereas the others fall in the lower income bracket Each country’s labor costs are around US$1.00

to US$2.00 per hour

Despite these similarities, the outcomes differ Guatemala, Nicaragua, and Jamaica import their yarn and fabric mainly from China The other countries use yarn and fabric mostly from the United States Therefore, the textiles from the United States are competitive in Honduras, El Salvador, Costa Rica, and the Dominican Republic, compared to those from China and Asia as a whole

The method of difference calls for identifying a single causal variable However, in the cases presented in the book, it is difficult to identify a single variable that explains the decision of the importers in some countries compared to the others Doing so ignores a variety of possible

Introduction 4

explanations Scholars have pointed out the limitations of the method of difference, along with its counterpart, the method of agreement

The methods of agreement and difference are outdated and inappropriate procedures for comparative or historical analysis based on a small number

of cases The methods cannot employ a probabilistic perspective, deal with data errors, use multivariate analyses, or take into account interaction effects All of these are critical features in contemporary ways of thinking about social processes … This is not surprising since Mill himself recognized that these methods were inappropriate for the kinds of problems addressed in most social research (Lieberson 1994, 1225)1

Process Tracing

Process tracing provides a better alternative and has been widely used in political science to study and comprehend complex decision-making as well as identifying causal processes (George and Bennett 2005) As Tansey writes:

[T]he goal of process tracing is to obtain information about well-defined and specific events and processes, and the most appropriate sampling procedures are thus those that identify the key political actors—those who have had the most involvement with the processes of interest The aim is not to draw a representative sample of a larger population of political actors that can be used as the basis to make generalizations about the full population, but to draw a sample that includes the most important political players who have participated in the political events being studied (2007, 765)

The book relies on information as it pertains specifically to trade initiatives and deals—the Caribbean Basin Initiative (CBI), Harmonized Tariff Schedule (HTS) 807A, the Dominican Republic–Central American Free Trade Agreement (DR-CAFTA) and NAFTA—that have created a historical trade relationship, set rules to define that relationship, and involved bargaining for the most beneficial rules The outcome of these trade initiatives and deals shaped the decisions of textile importers and the ability of the U.S textile industry to compete in these markets Rather than trying to generalize about all importers and all industries in manufacturing, the book aims to offer a unique insight based on these particular cases that may be useful for understanding other cases with similar conditions

1

The methods of agreement and difference were proposed by the philosopher John

Stuart Mill in his 1843 book A System of Logic, Ratiocinative and Inductive

It’s Not Just the Economy, Stupid! 5

Process tracing entails assembling a large amount of data from a variety

of sources, such as interviews (Tansey 2007) Key textile and apparel industry representatives were interviewed over a 12-year period (2003–2015) The interviews serve two purposes: (1) to get a sense of industry preferences around the time that a trade agreement is actually being negotiated or shortly afterward, while details are still clear in the mind of interviewees2 and (2) to show an evolution of apparel industry import preferences and U.S textile industry competitiveness in select markets over a period Personal interviews took place in Washington, DC, and the Dominican Republic All the remaining interviews were conducted by telephone These interviews fall into three separate categories: government representatives, trade negotiators on behalf of textiles and apparel, and industry representatives from the countries highlighted in the book The selection of specific interviewees may result in the selection bias but also allows for the incorporation of key actors who might otherwise be ignored

in a random sampling (Tansey 2007) These interviews were designed to identify particular processes and patterns that influence the import behavior of the Latin American and Caribbean apparel producers The interviews have also been helpful in confirming information gathered from secondary sources

Researchers have found that interviews offer benefits that other primary sources may not Interviews present information at a much deeper and richer level regarding particular thought patterns and attitudes that one would not gain from restricted surveys with fixed categories Furthermore, interviews allow researchers to go beyond the official version of any given event presented in documents and gain insight from participants about the nuances of particular events (Tansey 2007) The use of this type of primary data makes it possible for the book to reveal industry-level interests and some of the intricacies of the trade negotiations

Interviews also present limitations of their own One concern presented here is the reliability of all information, particularly with subjects even a few years after an event has taken place Shifts in judgment and an inability to recall all events clearly may affect some of the data However, that can also be supported by the collection of primary documents (i.e., notes) from an event, in this case, trade negotiations

2 Interviews regarding textiles and apparel during the 2003 U.S trade negotiations with Central America (excluding Belize and Panama) took place during the last round of negotiations and a few months after talks concluded Interviews pertaining to U.S.-Dominican Republic textiles and apparel trade occurred a year after the implementation of the DR-CAFTA in the Dominican Republic

Introduction 6

Process tracing also involves the use of documentary research (George and Bennett 2005) Information presented in the book also comes from local newspapers and government reports, which offer official data on trade flows, legislation, and the time frame of events

Lastly, trade databases provide the data for the final outcomes—top markets from which to import for Latin American and Caribbean apparel producers and U.S textile industry competitiveness in specific markets For a comparison across cases, databases such as the United Nations Commodity Trade Statistics (UN Comtrade), the International Trade Administration (ITA) Trade Stats Express, and the Office of Textile and Apparel (OTEXA) trade data have been the most useful.3

Theoretical and Practical Contributions

The book presents a complementary framework within which to assess importer behavior and industry competitiveness—path dependency In terms of importer behavior, path dependency looks deeper than existing theories, such as rational choice and institutionalism, which identify a single variable The same goes for industry competitiveness, in which existing scholarship emphasizes specific variables, such as cost competitiveness, factors of production (land, labor, and capital), technology, and the state Porter’s model turns our attention to a combination of factors, such as government policy, firm strategy, interfirm relationship, demand conditions, and factors beyond the industry’s control These influential theories point mainly to economic conditions and business strategy, while also taking into account the role of technology and government policy The path-dependency model brings to light other conditions, such as history, trade rules, and power relations, which can affect the decisions of importers, especially those that do not satisfy the expectations of these theories Also, the path-dependency approach turns our attention to other variables that help a globally uncompetitive industry

to compete in specific markets

The complementary approach to importer decision-making and industry competitiveness has practical significance as well First, the book’s focus

on importers in specific markets that use inputs from a globally uncompetitive country shows that an industry can still succeed and contribute to its local, state, and national economies through employment The U.S textile industry has declined tremendously over the years due to

3

The International Trade Administration and the Office of Textiles and Apparel are both agencies within the U.S Department of Commerce

It’s Not Just the Economy, Stupid! 7

automation, outsourcing overseas in search of cheaper labor, and trade agreements that removed tariff barriers, making it easier to do business in countries such as Mexico Living in North Carolina for six years gave me the opportunity to travel to areas that were once vibrant textile centers with job security and economic growth In 1940, textile and apparel manufacturing accounted for 40 percent of North Carolina’s employment (Mercer 2014) Now, those areas are merely a shell of their former selves

In 2013, only 1.1 percent of North Carolina’s jobs were in the textile industry (Mercer 2014) In recent years, some textile manufacturing plants have experienced success due to their awareness of and willingness to take advantage of free trade agreements The United States exports 65 percent

of its textiles to countries that have signed a reciprocal trade agreement (RTA) or free trade agreement with the United States (U.S Department of Commerce).4 Other factors have helped as well, such as increasing labor costs in China and the “Made in the USA” trend (Mercer 2014)

Second, the information in the book can be used to develop policies and business strategies that make these trade agreements effective and enable firms to take advantage of these agreements One topic discussed, particularly in Chapter Seven, is the formulation of policies in the area of textiles and apparel that align with the realities of the twenty-first century

so that U.S textile producers can increase their exports to other markets and the apparel industry in these markets also benefits The benefit to the apparel industry in the Latin American and Caribbean regions is not just in terms of increased exports to the United States but also in the producers’ ability to compete in the U.S market and, thus, contribute to employment and economic growth in their countries

Chapter Overview

Chapter One presents the theoretical foundation of the study The theories considered range from the classical liberal theory of absolute advantage and the free hand of the market to the neoliberal theory of comparative advantage to present-day competitive advantage The chapter illustrates how the path-dependency model advances our understanding of importer decision-making and industry competitiveness

4 The term “reciprocal trade agreement” (RTA) is used in the book instead of “free trade agreement,” because, as many scholars and practitioners have pointed out, and I concur, there is no such thing as free trade in the pure sense Rather, today,

we have a regulated market economy that allows for the free flow of goods and services yet still involves government intervention

Introduction 8

Chapter Two describes the realities of the textile and apparel trade market The chapter provides an overview of the apparel industries in the selected Latin American and Caribbean markets as well as the U.S textile market Official trade statistics demonstrate that in some of the countries, apparel manufacturers import the majority of their yarn and fabric from the United States although less expensive alternatives exist, and, in others, Asian suppliers of yarn and fabric are preferred

Chapter Three offers a historical overview of U.S.-Latin American and Caribbean trade in general and in textile and apparel in particular The trade relationship evolved from economic integration to economic isolation and then back to economic integration The integration in terms

of textile and apparel trade increased following trade initiatives that set a particular pattern, encouraging the use of U.S textiles so that Central American and Caribbean apparel exporters could access the U.S market duty-free

Chapter Four explains the impact of the historical trade policies on the U.S.-Latin American and Caribbean textile and apparel trade within the context of path dependency The argument is proposed in terms of the path-dependency model—crisis, critical juncture, institutions, and power The Central American and Caribbean regions,5 in particular, faced political and macroeconomic instability in the 1970s and 1980s As a result, U.S policies emerged to address the political and economic crises, which, in turn, established the pattern that we see today in terms of the preference among apparel producers in these regions for mainly U.S yarn and fabric

As Chapter Five illustrates, some countries in the Western Hemisphere, such as Guatemala and Jamaica, diverged from the established path According to the path-dependency literature, the cost of path divergence can be higher than pursuing an alternatively more efficient path While this may be true in some cases, I argue that, as the larger context changes, so does the cost-benefit calculation in path dependency In these two cases, diverging from the path has not been more costly Rather, staying on it has not proven any more beneficial To illustrate the point, the costs are broken down in practical, not theoretical, terms to show the true costs of importing U.S yarn and fabric and exporting apparel to the United States, compared to importing from China This chapter highlights the importance

of developing twenty-first-century trade policies that also allow trade partners to enhance their industries’ ability to compete

5

The Central American and Caribbean regions were labeled the Caribbean Basin region From this point forward, the term “Caribbean Basin” is used to describe the Central America and Caribbean countries combined

It’s Not Just the Economy, Stupid! 9

Chapter Six views the same argument in the context of a different case—U.S.–Sub-Saharan African trade in textiles and apparel The chapter offers policy recommendations for twenty-first-century textile and apparel trade relations The Sub-Saharan African region was selected because the United States implemented a unilateral trade policy with the region, the African Growth and Opportunities Act (AGOA), which is similar to its unilateral initiatives with Caribbean Basin countries Additionally, AGOA contains important provisions governing U.S.–Sub-Saharan trade in textiles and apparel However, the twentieth-century unilateral approach to U.S.–Sub-Saharan African trade has had disappointing results in the twenty-first century The chapter ends with recommendations on how twenty-first-century trade policies could be implemented and strengthened Chapter Seven concludes with a summary of the theoretical arguments and policy recommendations presented in the book The chapter also offers suggestions for future research

C HAPTER O NE

Economic theory contends that, as efficiency-seeking rational actors, people aim to maximize the utility of a product or service relative to its cost Rational choice theory has been used to describe the behavior of individual producers and firms in the international market.1 The theory assumes that firms enjoy perfect information and seek to maximize their profits This assumption forms the basis of neoclassical economic theory and its focus on market competition For instance, the economist Adam Smith writes:

It is not from the benevolence of the butcher, the brewer or the baker that

we expect our dinner, but from their regard to their own self-interest … [Every individual] intends only his own security, only his own gain And

he is in this led by an invisible hand to promote an end which was no part

of his intention By pursuing his own interest, he frequently promotes that

of society more effectually than when he really intends to promote it (1994, 15)

In other words, individual producers and consumers are self-interested However, the self-interested behavior of producers and consumers results

in a wider benefit for all involved, even if that is not the original intent of the individuals More importantly, the benefit to society occurs due to market forces and without government intervention

Game theory also maintains that firms act rationally At the same time, game theory goes beyond individual calculation to argue that individual

1

Government, which shapes the decision of individuals, political parties, and individual voters all behave in a manner that seeks to maximize output for a given input (Downs 1957) Almost two decades later, Becker (1976) explores rational decision-making in relation to a variety of issues, such as marriage and education

Industry Competitiveness and Decision-Making 11

decisions are based on what the other actor does in an effort to maximize wealth and be competitive (von Neumann and Morgenstern 2004)

Following the rational choice theory of decision-making, we would expect apparel producers in the Caribbean Basin to purchase most of their textiles from the lowest-cost suppliers, such as Bangladesh, Cambodia, Lesotho, Madagascar, or Nepal, in order to maximize their efficiency (“Textiles and Garments,” n.d.) However, empirical evidence reveals contradictory real world practices, and the failure of the rational choice approach to explain such outcomes calls for deeper examination of other possible factors

The path-dependency approach, which takes into account the role of history, power, and institutional rules, offers more insight into comprehending importer decision-making and export industry competitiveness in specific markets

Importer Firm Decision/Behavior

The rational choice approach to understanding behavior in general has a number of limitations This particular theory assumes perfect information

in the decision-making process Therefore, rational choice theory has minimal explanatory power for cases in which there is uncertainty or limited information Another problem with rational choice theory is in the difficulty it has in adequately describing the underlying motives of human behavior “There may, for example, exist several ways by which to reach the optimum position; they depend upon the knowledge and understanding which the individual has and upon the paths of action open to him” (von Neumann and Morgenstern 2004, 9)

Game theory has been commonly accepted as an adequate explanation

of firm decision-making and behavior The game-theoretical model emerged from a “logical analysis of games of chance rather than from a psychological analysis of risk and value The theory was conceived as a normative model of an idealized decision maker, not as a description of the behavior of real people” (Tversky and Kahneman 1986, S251) Unlike rational choice theory, game theory takes into account imperfect information According to game theory, actors behave rationally in terms

of self-interest However, individual actors also behave according to the information that they have at the time about the actions and behavior of another actor In other words, one actor has the capacity to influence the behavior of another actor, and the game is noncooperative and zero sum,

in which there is a winner and a loser (von Neumann and Morgenstern 1944)

Chapter One 12

The game-theoretical model has been applied to the study of international trade (see Abbott and Kallio 1996; Zhuang, Luo, and Fu 2014) Even in the game of international trade, both countries and firms either cooperate or compete based on the actions of other countries or firms Game theory assumes that the Caribbean Basin garment firms in this study base their decisions to import textiles from specific countries on the actions, such as product pricing, of the textile firms in those countries However, the Caribbean Basin apparel manufacturers do not appear to import based on price alone

Game theory has been lauded for being an approach to decision-making that is “more careful and more precise than is typical in economics” (Friedman 1992, 355) However, game theory has also been criticized as having limited utility because of its emphasis on theoretical development rather than practical applicability and results (Ashford 1977; Fisher 1989; Friedman 1992; Tversky and Kahneman 1986) Fisher writes:

There is a strong tendency for even the best practitioners to concentrate on the analytically interesting questions rather than on the ones that really matter for the study of real-life industries The result is often a perfectly fascinating piece of analysis But so long as that tendency continues, those analyses will remain merely games [that] economists play (1989, 123)

Additionally, the game-theoretical model is static, which means that it fails

to take into account a variety of factors that can influence decision-making and the complexities associated with decision-making

Lastly, the game-theoretical model assumes that all parties have the same information and belief systems Such a restrictive, static approach limits the applicability and reliability of the final conclusions drawn about firm behavior Perhaps, the bounded rationality model better addresses the differences in belief systems among decision-makers (Friedman 1992) The bounded rational model argues that, while individuals behave rationally, they seek to satisfice or have a “good enough” outcome, rather than to maximize self-interest (March and Simon 1958) Much like individuals, firms to seek to satisfice results, rather than merely achieve profit maximization (Cyert and March 1963) In a discussion about firm decision-making behavior, Machlup writes:

Thus, behaviorism rejects the assumptions of marginal analysis that economic action is directed by the objective to maximize the attainment of ends with given means, and that business action can be deduced from a postulate that firms attempt to maximize money profits Instead, we are

directed to observe how businessmen really act and by what processes

they reach decisions (1967, 4)

Industry Competitiveness and Decision-Making 13

The bounded rational model builds on cognitive psychology studies by showing the limits of individual decision-making due to uncertainty (Simon 1997) The bounded rationality explanation explores other motives that guide firm decision-making, which can help explain the decision-making behavior of the Caribbean Basin apparel firms that import more expensive textiles, thus cutting into their profit margin and ability to compete in the U.S market If the goal of a firm is to remain a step ahead

of its competitors, then the question remains as to why Caribbean Basin apparel firms do not rely mainly on the low-cost textiles from Asian suppliers to reduce their costs in order to compete in the U.S market The rational and bounded rationality approaches focus on firm preferences at the expense of formal rules and institutions that also shape behavior Something larger than the individual firm may shape the decisions that these same actors make For example, Brander and Spencer (1984) emphasize the decision-making of individual firms while also mentioning the role of export subsidies, which refer to a government policy under which exporters receive financial support The two economists find that export subsidies bring about cooperation

By the early 1970s, scholars began to take into account the role of institutions, as well as the power capabilities of those institutions, including in the area of political economy For example, Galbraith (1983) examines the power relations between businesses and government and finds that economics is a function of power Power is “the bending of the will of one person to another by straightforward purchase” (Galbraith

1983, 47)

Notably, Galbraith’s work focuses on the United States and examines the internal relationship between U.S corporations and the government Galbraith’s work lays the foundation for this study, which examines power relations among firms across borders and the foreign trade policies that are enforced

Still, the shift toward the institutional approach was gradual “Political scientists have been slow to develop an alternative paradigm for policy analysis, because they have mainly confined themselves to the economist’s basic unit of analysis, the individual,” writes Ashford (1977, 571) Institutional theory eventually emerged with the idea that institutions, not individual preferences, play a key role in behavior and are autonomous actors Furthermore, the emphasis on institutions in the late 1970s, which has become known as old institutionalism, maintains that a single event in history shapes outcomes (Ashford 1977)

Old institutionalism adds value to the aforementioned economic models

by shifting the focus away from individual-level preferences and outcomes

Chapter One 14

to a close examination of “the actual capabilities and characteristics of modern state institutions” (Ashford 1977, 573) This approach offers insight into additional factors, such as history, that drive decisions Old institutionalism also assumes efficiency in history “By ‘historical efficiency’ we mean the idea that institutions become in some sense

‘better’ adapted to their environments and quickly achieve a uniquely optimum solution to the problem of surviving and thriving” (March and Olsen 2009) However, old institutionalism’s recognition of the role of history was ephemeral Additionally, the old institutionalist approach’s explanatory value has been limited because of its failure to address institutional change and outcomes As a result, a revised version, new institutionalism, emerged to account for these fallacies

New institutionalism highlights the fact that institutions do change and evolve over time.2 Institutions may change because of new technologies and through the combination of existing and newly created rules (Neale 1987) Unlike its predecessor, new institutionalism finds that “[h]istory cannot be guaranteed to be efficient” (March and Olsen 1984, 737) The emphasis on an event in history that sets in motion certain behavior can bring us closer to understanding the decision of some Caribbean Basin garment manufacturers to import higher-cost U.S yarn and fabric History cannot be ignored in these cases, because many of the firms that export apparel to the United States are taking advantage of the opportunities offered by the historical trade programs that exist with the United States These trade programs offer Caribbean Basin apparel exporters special access to the U.S market in exchange for the use of U.S inputs

The new institutionalist approach also provides a more systemic definition of institution Institutions are autonomous actors that shape individual preferences (Krasner 1984; Levi 1981; Nordlinger 1981; Skocpol 1985) Some scholars dig deeper to explain how institutions shape people’s behavior through a repeated system of rules

An institution is identified by three characteristics First, there are a number of people doing Second, there are rules giving the activities repetition, stability, predictable order Third, there are folkviews—most

certainly what Walton Hamilton meant by a “bundle of intellectual usages”—explaining or justifying the activities and the rules (Neale 1987, 1182)

Furthermore, new institutionalism explains how institutions form in the first place Institutions are created by “some peculiar historical conjuncture

2

For a detailed overview of new institutionalism, see March and Olsen (1984)

Industry Competitiveness and Decision-Making 15

rather than contemporaneous factors” and, in following a branching model, “once a particular fork is chosen, it is very difficult to get back on a rejected path” (Krasner 1984, 225)

Institutions play a key role in decision-making and firm behavior Specific government policies can change the rules of the game, which, in turn, shapes the behavior of firms in the international market For instance, although many neoliberal economists decry export subsidies, Brander and Spencer (1984) find that “export subsidies can appear as attractive weapons because they improve the relative position of the domestic firm

in non-cooperative rivalries with other firms, and allow it to expand its market share” (19)

Institutions also affect the distribution of resources (Korpi 1985; Steinmo, Thelen, and Longstreth 1992) “In interdependent decision-making the distribution of power resources among rational actors is likely

to be crucial for their choice of strategies,” according to Korpi (1985, 40) Korpi goes on to argue that the type of power resource an actor uses shapes the behavior of other actors For example, if both actors use pressure to reach their ultimate goal, the probability of conflict is high If the same two actors use rewards as a mean to an end, there is a greater chance for a mutually beneficial exchange However, when the stronger actor exerts pressure while the other weaker actor offers rewards, the stronger actor will exploit the weaker one As Korpi writes:

[P]ower resources can be used to structure the conditions and the situations in which action and decision-making take place as well as to create institutional structures for decision-making and conflict resolution

By determining the context and conditions as well as the methods, principles, and structures for decision-making, power resources can have major consequences without being directly or continuously exercised in decision-making (1985, 38)

These power resources are invested in institutions that constrain the behavior of others, including in market relationships

The Nobel laureate in economics Douglass North later incorporated the rules of the game and history into the following definition of institutions: Institutions are the rules of the game in a society, or more formally, are the humanly devised constraints that shape human interaction In consequence, they structure incentives in human exchange, whether political, social or economic Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change (1990, 3)

Chapter One 16

Pénard (2005) does not throw out game theory altogether either Rather, in his essay titled “Game Theory and Institutions,” Pénard (2005) purports that game theory explains the purpose behind institutions Rather than looking at institutions as outside factors that shape the decisions of economic actors, Pénard looks internally to define institutions as the interaction between one player and other players in a game, in which those players holds a “specific status” and are able to directly affect the rules of the game and the final outcome (2005, 2) Institutions facilitate coordination, commitment, information sharing, and cooperation.3

Van de Ven and Lifschitz (2013) propose the reasonable behavior approach, which also looks endogenously at economic actors within markets and institutions as well as their ability to constrain behavior and promote collective action The reasonable behavior approach shifts the focus back to individual behavior within institutions but also highlights the good in economic actors Reasonable behavior is defined as “a socially constructed set of norms and standards of what society considers prudent, fair, and just behavior” (Van de Ven and Lifschitz 2013, 157)

The problem with the reasonable behavior approach is its predominantly theoretical premise Van de Ven and Lifschitz’s piece gives an elaborate account of the various theoretical models used to explain individual behavior in the market context However, the scholars’ work lacks empirical evidence that would be useful in comprehending what actually happens in the global market Consequently, the reasonable behavior model provides little in terms of explaining exploitation in the global market and the 2005 collapse of multilateral trade talks such as the Free Trade Area of the Americas (FTAA) and the Doha Round of the World Trade Organization (WTO)

Overall, institutionalist literature addresses complex aspects of making through the focus on history and the use of methods such as process tracing This aspect of institutionalism becomes useful when studying the decision of Caribbean Basin apparel exporters to import the more expensive U.S textiles Furthermore, institutionalism takes into account the role of institutions in distributing power resources that eventually shape the decisions that economic actors make While useful, institutionally based arguments also face an important challenge—their failure to distinguish among the types of firms, the resources available to

3

See March and Olsen (1984) for a broad overview of studies that look within institutions to study the processes and capabilities of the institutions themselves, rather than external factors that determine the ability of institutions to have any influence

Industry Competitiveness and Decision-Making 17

them, and their interests As a result, the new institutionalism is limited in its ability to explain the differences between importer and exporter behavior Some scholars have examined the behavior of importer versus exporting firms, thus filling this gap Many studies of international trade focus on exporters as driving international trade while importers behave as passive actors However, as Liang and Parkhe (1997) argue, importers are actually the strategic actors that drive exporters through their selection of particular countries and products as well as forming joint ventures with exporters A number of factors influence the behavior of firms that import, which may help shed light on the decisions of Caribbean Basin garment producers that import textiles

Costs are one factor that shape a firm’s decision to import (Hallen 1982; Liang and Parkhe 1997; Scully and Fawcett 1994; Swamidass 1993) The cost of material becomes more important than direct labor cost for importers seeking to compete in the international market As a result, firms use global sourcing to access lower-price goods (Scully and Fawcett 1994).4 However, cost is not the only reason that firms import

Other determinants of importer decisions include advancing one’s competitive position in the international market (Frear, Metcalf, and Alguire, 1992; Swamidass 1993) In their study of large and small U.S firms, Frear et al (1992, 2) consider “international sourcing to be an important element of competitive strategy Likewise, purchasing from foreign suppliers to achieve lower cost is an effective competitive action.” Although firms’ desire to compete drives their decision to import, cost still plays a role Cost competitiveness is key to “winning” in the global market

Firm size and geography also explain importer behavior Larger firms import more than smaller firms (Birou and Fawcett 1993; Carter and Narasimhan 1990; Mittlestaedt, Raymond, and Ward 2005; Scully and Fawcett 1994).5 Furthermore, urban firms and geographically concentrated industries are more likely to import (Mittelstaedt, Raymond, and Ward 2005)

Studies of importer behavior offer useful insights into the decision of some Caribbean Basin apparel producers to import the more expensive U.S textiles These studies vary from previous ones, because they focus

on the firm as the unit of analysis Furthermore, the literature contributes

to theory development and practical application (Swamidass 1993) Lastly,

Chapter One 18

yet just as important, is the fact that the literature recognizes the significant role of importers in international trade

At the same time, studies of importer behavior fail to recognize the exogenous factors that influence decisions, such as trade rules Examining such external forces requires an emphasis on the exporter side of the equation, since the trade rules govern the interaction between exporters and importers

Export Industry Competitiveness in Specific Markets

Countries compete in the global market by specializing in goods that they are able to produce most efficiently (i.e., more output per worker), according to Adam Smith’s classical liberal economic theory of absolute advantage The economist David Ricardo’s comparative advantage theory argues that a country can compete by exporting products in which it has a lower opportunity cost than its exporting partner (Ricardo 1996) That country should import goods for which the opportunity cost is much higher, even if the partner country is not able to produce anything efficiently Other models build on Ricardo’s neoliberal economic approach For instance, the Hecksher-Ohlin theorem highlights a country’s inherent factors, such as land, labor, and capital, all of which contribute to its ability to compete in the international market Thus, a country should export products that use its most abundant resources and import goods that use its scarce factors

The classical and neoliberal theories highlight one important factor for competitiveness: lower costs These theories assume that textiles from the United States are at a comparative disadvantage relative to the many low-cost textile suppliers around the world, such as those in Asia However, the opposite remains true when U.S textile competitiveness in specific markets is closely examined Perhaps, other factors must be examined to understand how an industry in any given country can compete against much lower-cost suppliers in specific markets

Many studies in the second half of the twentieth century shift the focus

to the exogenous factors that can determine a country’s ability or inability

to compete in the international market The development economist Hans Singer (1964) maintains that underdeveloped countries specialize in primary commodities, that is, agricultural goods and raw materials that are exported to industrialized countries at a very low cost By contrast, industrialized countries manufacture goods that can be sold at a higher price to the less developed countries and earn a higher profit This type of

Industry Competitiveness and Decision-Making 19

international trade dynamic benefits the industrialized countries more than the less developed ones

The economist Raúl Prebisch (1950), in his study of Latin American underdevelopment, finds that countries can become competitive only by reducing their dependence on international financial institutions, which control trade, financial investment, and technology These underdeveloped countries benefit from having a state-led economy, in which the government supports the growth of manufacturing As a result, underdeveloped countries will industrialize and provide a guaranteed local market for domestic manufacturers, which, in turn, will lead to a country’s economic growth

In Latin America, reality is undermining the out-dated schema of the international division of labour, which achieved great importance in the nineteenth century and, as a theoretical concept, continued to exert considerable influence until very recently

Under that schema, the specific tasks that fell to Latin America, as part

of the periphery of the world economic system, was that of producing food and raw materials for the great industrial centers (Prebisch 1950, 1)

The economist goes on to argue:

The United States is now the principle cyclical centre of the world … Its economic influence over other countries is obvious, as in that influence, its enormous increase in productivity has played a vital part It has profoundly attracted foreign trade, and through its variations, the rate of economic development of the rest of the world and the international distribution of gold

The Latin American countries, with their high coefficient of foreign trade, are extremely sensitive to such economic repercussions (Prebisch

1950, 15)

The theories of both Singer and Prebisch became known as the Prebisch theory Prebisch presented a key proposal to help the Latin American countries industrialize and develop their ability to compete in the global market Prebisch encourages the Latin American countries to focus on state-led development, which formed the basis of the import substitution industrialization (ISI) model ISI is characterized by high import tariffs, government subsidies, quotas, import licenses, and production mainly for the local market Many Latin American producers benefited from protection but did not develop the skills necessary to

Singer-Chapter One 20

compete in the export market, which became even more evident as Latin American countries began opening their markets in the 1980s and 1990s

In the late 1960s and 1970s, dependency theory also argued that external forces hindered Latin American growth and development while shifting away from a discussion of the internal structural challenges that the region faced “By dependence we mean a situation in which the economy of certain countries is conditioned by the development and expansion of another country to which the former is subjected” (Dos Santos 1970, 231) The proposed solutions varied from Prebisch’s structure-based model, and scholars in this school of thought differed in their proposals for Latin American growth and development For example, the economic historian and sociologist André Gunder Frank (1967) argued that Latin American countries remain underdeveloped because of exploitation and could not overcome their underdevelopment except through revolution On the contrary, the sociologist and former president

of Brazil Fernando Henrique Cardoso (1995–2003)6 and the sociologist Enzo Faletto argued, autonomous development could still take place in the periphery (Cardoso and Faletto, 1979) Such development is possible using heavy state intervention to limit the influence of both local and international economic elites.7

Structuralism and dependency theory draw from various disciplines, such as anthropology, history, politics, sociology, and economics As a result, these theories offer better insight into both the exogenous and endogenous factors that contribute to economic growth “Historical evolution, shifting class structures and modes of political control are central to the economic analysis, not extraneous to [structuralism and dependent theory] as in much standard economics” (Street and James

1982, 682) Whereas structuralism encourages state-led economic growth

to develop local manufacturing, many dependency theorists borrow the Marxist approach to class struggle and promote a social revolution The solutions focus on changing an exploitative global market system

Industry Competitiveness and Decision-Making 21

While the dependency argument is useful, much like its structural ancestor, the theory does not address how firms should compete in the global market Although firm competition is beyond the scope of dependency theory, it would still be useful to know what firms and industries can actually do to survive in an unfair global market Such information becomes more and more important as the international economic system continues to shift to a predominantly open-market trade regime

During the 1970s, dependency theorists took a firm-level approach and centered on the influence of multinational corporations (MNCs) on underdeveloped and developing economies These theorists maintain that MNCs create a level of dependence in three ways: (1) the foreign investment benefits are unevenly distributed between the MNC and the host country, thus they fail to provide resources for economic development of the host country; (2) foreign investment perpetuates economic distortions in the recipient country; and (3) foreign investment threatens national sovereignty

by allowing MNCs to influence the local political process (Moran 1978) Institutionalism also examines the larger economic system, yet focuses

on the role of institutions in determining competitiveness Examples of institutions include the authoritarian bureaucratic governments, MNCs, and international lending agencies (Street and James 1982, 685) Institutional economics focuses on bargaining transactions (Elliott 1978, 103) Galbraith (1983) supports the idea that political economy is a system of power among businesses as well as a power struggle between businesses and the government (Elliott 1978, 107) These institutionalist arguments remain valuable considering that the global market is regulated through trade deals, which establish the rules for international trade among countries and regions

The competitive advantage theory presents an industry-level analysis, which includes the firms in a particular industry This theory advances the idea that competitiveness can be created regardless of the supply of natural resources and cheap labor

Comparative advantage, as it had come to be understood, rests on endowments of inputs such as labor, natural resources, and financial capital I argue that factor inputs themselves have become less and less valuable in an increasingly global economy Neither is competitiveness secured by size or military might, because neither is decisive for productivity (Porter 1990, xi)

Therefore, firms develop structures and a strategy that allow them to compete in other countries Furthermore, the government facilitates

Chapter One 22

competitiveness through policies that reduce regulations and allow the private sector to flourish Lastly, competitiveness requires industry clusters, which are groups of interconnected firms, suppliers and related industries that “not only reduce transaction costs and boost efficiency and improve incentives and create collective assets of information, specialized institutions and reputation among others” (Porter 1990, xii–xiii)

Competitive advantage theory’s focus on the firm as the level of analysis contributes greatly to clarifying firm-level global competitiveness

in a variety of industries, including textiles and apparel The book takes competitive advantage theory a step further by looking at competitiveness

in specific markets

Parrish, Cassill, and Jones (2004) focus on competing in specific markets or niche markets Niche market refers to selling a particular product to consumers in specific markets, which allows firms to compete against lower-cost producers Once again, competitiveness returns to the idea of cost competitiveness According to this study, niche markets can increase a company’s bottom line, despite the smaller market size, because that firm becomes more familiar with the needs of a specific consumer base and develops the capacity to meet those needs Furthermore, the niche market strategy is a defense against potential competitors, because these markets are small and attract only one or two competitors

The niche market strategy is not without risks According to Parrish, Cassill, and Jones (2004), a firm could face stiff competition from another firm that wants to be a part of that profitable niche, a change in consumer preferences could result in the erosion of that niche market, and another company might introduce a new product that can wipe out any existing products in that same niche market

The limitations of these approaches to firm decision-making and industry competitiveness in specific markets call for a more comprehensive framework

Importer Firm Behavior, Exporter Industry

Competitiveness, and Path Dependency

The global market revolves around historical trade relations, bargaining, and institutional rules Therefore, any complementary paradigm must capture these components of a multifaceted global economy Path dependency incorporates each of these variables and offers deeper answers

to the questions posed in the book

Industry Competitiveness and Decision-Making 23

Path dependency means that an event that took place at an earlier moment has an impact on events that take place later The economic historian Paul David writes:

[I]t is sometimes not possible to uncover the logic (or illogic) of the world

around us except by understanding how it got that way A path dependent

sequence of economic changes is one of which important influences upon the eventual outcome can be exerted by temporally remote events, including happenings dominated by change elements rather than systematic forces … In such circumstances, “historical accidents” can neither be ignored, nor greatly quarantined for the purpose of economic analysis; the

dynamic process itself takes on an essentially historical character (1985,

332)

Later proponents of path dependency provide a narrower definition of this approach In other words, path dependency is more than the idea that history matters Rather, history is a significant player in path dependency, because a critical past event might influence future results These events are identified through process tracing to draw a direct connection between the past and present

Mahoney writes:

Path dependence characterizes specifically those historical sequences in which contingent events set into motion institutional patterns or event chains that have deterministic properties The identification of path dependence therefore involves both tracing a given outcome back to a particular set of historical events, and showing how these events are themselves contingent occurrences that cannot be explained on the basis of prior historical conditions (2000, 507–8)

The path-dependency approach has evolved to explore the effect of different types of institutions, technology, and a firm’s capacity on final outcomes Institutions have three different levels—macro or constitutional, collective or policy, and operational or individual (Kay 2005) Another set

of distinct levels of path dependency has been identified These levels include the macro level of institutions; the meso level, technology and government modes; and the micro level, organizational resources and capabilities (Vergne and Durand 2010) Macro-level institutions create the rules of the game that give one party power over another even if these rules are inefficient in the global context The meso level refers to the technological inefficiencies resulting from repeated research and development investment Lastly, the micro level focuses on a firm’s

Chapter One 24

resources and capabilities As with technology, repeat investment in resources builds competitive advantage as well as “rigidities and harmful lock-in” (Vergne and Durand 2010, 740)

Usually, a single event occurs that establishes an institution setting a particular path of action in motion Over time, it becomes too costly to deviate from that path Institutional formation and change can best be explained by evolutionary theory’s punctuated equilibrium (Krasner 1984) In other words, institutions usually experience a long period of stability and predictability However, these stable institutions can be

“punctuated” by a crisis that leads to sudden change, leading to a different outcome That change becomes the norm and sets an alternative pattern that persists and would be too costly to diverge from This pattern is often inefficient (March and Olsen 1984; North 1990; Pierson 2000)

Collier and Collier (2002) take the idea of punctuated equilibrium further in their argument that a critical juncture leads to the persistence of

a particular path A critical juncture is a “period of significant change” that produces long-term outcomes that depart from previously established patterns (Collier and Collier 2002, 27) These changes occur in unique ways in different cases For instance, throughout Latin America, specifically Argentina, Brazil, Chile, Mexico, Peru, Venezuela, and Uruguay, the persistence of particular national political legacies can be attributed to a critical juncture (Collier and Collier 2002) In their study of these seven countries, Collier and Collier (2002) find that the critical juncture was the state’s role in incorporating and institutionalizing the labor movement Crises, in this case labor organization and protests, leads to any given critical juncture These crises can be either endogenous or exogenous Robust changes in society contribute to internally created crises, whereas crises formed externally arise because of threats from the international system This book focuses on the latter—externally created crises resulting

in the formation of institutions designed to address those crises

Furthermore, critical junctures are characterized by contingency Contingent events refer to the inability of theory to predict or explain the occurrence of a specific outcome Some argue that contingency is random, whereas others have pointed out that repetitive patterns can have a nonrandom origin (Vergne and Durand 2010) As in the case of the commonly accepted rational model for explaining economic behavior, the apparel producers’ decisions as to where to import their textile from contradict the expectations of the rational model Path dependency’s focus

on the role of institutions offers more insight into the question raised in this book with regard to the behavior of Caribbean Basin apparel manufacturers

Industry Competitiveness and Decision-Making 25

A number of political and socioeconomic variables interact with institutions to form a path and “mold behavior in distinctive ways” (Steinmo et al 1992, 1) Institutions shape the goals pursued by actors, and they influence the power relations between those political actors, with winners and losers

At every step along the way there are choices—political and economic— that provide … real alternatives Path dependence is a way to narrow conceptually the choice set and link decision-making through time It is not

a story of inevitability in which the past neatly predicts the future (North

1990, 98–99)

The idea that institutions, generally speaking, influence decision-making has been applied to institutions at the policy level For example, Pierson (2000) argues that comparative advantage is not inherent but, rather, is created over time Policy arrangements, including some controversial policies that determine winners, can shape actors’ incentives and available resources Various structures in a policy system are path dependent, because past policies serve as institutions that influence present policy decisions (Kay 2005) The focus of this study is not policy decisions but, rather, the effect of policy on the trade activity of firms in a specific industry For example, Latin American and Caribbean importers of textiles often relied on local producers prior to the 1980s That trend owed to domestic protectionist policies, in which apparel manufacturers purchasing textiles required import licenses, as in the case of Mexico However, these manufacturers still did not have unlimited access to the lowest-cost textiles, because they were restricted to local textiles Nevertheless, local textiles were still less expensive compared to U.S textiles Domestic policy and, eventually, foreign policy shaped the decisions of the apparel manufacturers throughout Latin America and the Caribbean

By the 1980s, comparative advantage, in which producers could be cost competitive due to cheap labor, was still highly important Because of this focus on cost competitiveness, the apparel manufacturers in this study would be expected to import most of their yarn and fabric from the lowest-cost producers in Asia Instead, a distinctive import pattern emerged because of the U.S trade policy toward the region In this case, the policy institution is the Harmonized Tariff Schedule (HTS) 807A for textiles and apparel, which created an incentive for Caribbean Basin apparel producers

to utilize U.S textiles while also offering U.S textile producers a guaranteed foreign market HTS 807A is a unilateral program, in which the rules are established by the U.S Congress Consequently, Congress maintained the authority to shape the textiles and apparel trade relationship

Chapter One 26

with the Caribbean Basin countries for the benefit of U.S textile producers The Caribbean Basin recipient countries, for their part, have minimal influence over the provisions in these unilateral trade accords These unilateral policies persisted for the next two decades before the U.S relationship with many of the recipient countries shifted to a reciprocal trade policy The rules established under the reciprocal trade deals, such as the Dominican Republic–Central America Free Trade Agreement (DR-CAFTA), perpetuated the cycle created under the unilateral programs For instance, many of the signatory countries to the DR-CAFTA continued to utilize mainly U.S yarn and fabric, because they did not have a strong textile industry (see Chapters Two and Four) As our cases illustrate, policy-level institutions shape the decisions that actors make over time Institutions become self-perpetuating after they have been established (Collier and Collier 2002; Krasner 1984; Skowronek 1982; Thelen 1999) The new institutions replicate themselves over time, because there is a need to develop a unique infrastructure following the loss of the long developed source of “information, trust, and shared expectations” (Krasner

1984, 235) “[A] given set of causes shape a particular outcome or legacy

at one point or period, and subsequently that pattern that is established reproduces itself without the recurrence of the original cause,” according

to Collier and Collier (2002, 35) Even if there is a desire to change the institution or follow an alternative path, it would be too costly to reform that institution or reverse direction, even when other options are available (Krasner 1984; Mahoney 2000; Pierson 2000) The high cost of diverging from an existing institutional pattern has been labeled increasing returns, self-reinforcing sequences, and positive feedback (Krugman 1991; Mahoney 2000; Pierson 2000) Given that Caribbean Basin apparel producers benefited from duty-free and quota-free access at a time when other producers could not, the costs of accessing the U.S market would have been much greater

In addition to influencing decision-making, path-dependent institutions distribute and reinforce power capabilities Self-reinforcement creates further disparities in power by distributing power unequally (Mahoney 2000; Pierson 2000).8 “These mechanisms of reproduction involve in part the fact that, once founded, a given set of institutions creates vested interests, and power holders within these institutions seek to perpetuate

8 Mahoney (2000, 523) also mentions that while the power-centered dependent studies help us to understand how an institution persists, this same approach can also help clarify the decline of an institution or institutional change This key point is explored in the book in its examination of path divergence by the Jamaican and Guatemalan apparel manufacturers

path-Industry Competitiveness and Decision-Making 27

their own position” (Collier and Collier 2002, 35) The power-based argument becomes useful considering that the rules that Caribbean Basin apparel producers and the U.S textile manufacturers follow are the results

of negotiated trade policies, in which each side has to try to shape those policies in its favor

Path dependency has also been used to explain competitiveness in the international trade market For example, Dierickx, Cool, and Barney (1989, 1510) argue, “A firm’s current strategy involves choosing optimal time paths of flows whereas its competitive position and hence its potential profitability is determined by the level of its stocks.” Their study looks at how investment flows contribute to competitive advantage Krugman (1991) finds that path dependency contributes to the selection of

a specific location by firms in a given industry, which determines the firms’ competitive position

Pierson (2000) finds that increasing returns, which also refers to reinforcement or positive feedback processes, determine competitiveness

self-If comparative advantage results from “natural” features of different countries, then one would expect most trade to occur between quite different countries, such as North-South trade of manufactured goods for raw materials Yet, most trade is North-North, including extensive exchanges within particular industries … Why have broadly similar countries developed highly specialized niche comparative advantages?

Increasing returns provide an answer Knowledge-intensive sectors are prone to positive feedback Countries that gain a lead in a particular field, for whatever reason, are likely to consolidate that lead over time (2000, 255)

In Pop Internationalism, the economist Paul Krugman (1996)

maintains that existing advantages may decline because of changes in technology or markets At the same time, “a country may establish a lead

in an industry due to historical accident—or government support Once this lead is established, it becomes self-reinforcing and tends to persist” (97) In other words, history becomes important in understanding industry competitiveness

The U.S textile presence in the Caribbean Basin apparel market is the result of a policy that offered U.S textile producers a guaranteed market The rules set by the United States helped the U.S textile producers consolidate a lead in the Caribbean Basin market U.S yarn and fabric make up the majority of textile imports by Caribbean Basin apparel manufacturers, despite their relatively high costs The trade policies set by