The full impact of the Asian economic crisis on U.S. exporters and importers is yet to be seen. However, given a textile or apparel manufacturer's level of export dependency on the region, it may be necessary to focus on new markets. Given the level of import dependency, it may be wise to further scrutinize your existing sources of supply or look for new ones.
Understanding the Asian Crisis
A number of factors led to the Asian economic crisis. Thus, during the 1990s, Southeast Asian countries increasingly pegged their currencies to the U.S. dollar. After mid-1995, the dollar began to appreciate vis-à-vis the Japanese yen and major European currencies. Shortly thereafter, China devalued its currency. As time wore on, Southeast Asian exports became more expensive and less competitive, and pressure mounted on exchange rates.
As foreign investment flowed into East Asia, a rising share was directed into speculative real estate ventures, which promoted a building boom that fueled domestic demand and stimulated imports. Bankers borrowed a great deal of money from abroad, much of it in U.S. dollars at lower interest rates than could have been obtained domestically, and they did not always lend it wisely.
Loans were made to domestic developers in local currencies, that in turn, became exposed to exchange risks. Compounding weakening financial systems and unsustainable exchange-rate regimes were fragile legal and regulatory systems.
As China opened its doors to foreign investment, capital was diverted there from East Asian countries. Unprepared for this, Thailand, which had few investment controls in place, and failed to address its current account deficit, invest in higher technology manufacturing/infrastructure, or sufficiently educate its labor force, found it could not compete with China in labor intensive sectors.
In late 1996, increasing numbers of foreign investors began to question Thailand’s ability to repay its loans, and proceeded to move their money out of the country. Fearing this would result in a loss of value in the Thai baht, in February 1997, foreign investors and Thai companies began to convert the baht into U.S. dollars — accelerating a loss of confidence in the currency.
In response, the Thai central bank began buying up the baht with its dollar reserves and raised interest rates in hopes that this new demand would increase the currency’s value and make baht-based savings and bonds more attractive investments. The rise in interest rates, however, made borrowing more expensive and drove down demand and prices for stock and real estate. With diminished reserves, the central bank was forced to float the baht, resulting in its downward spiral.
Since it took many more bahts to pay off dollar-denominated loans, defaults become common. Investors and businesses in neighboring Philippines, Malaysia and Indonesia concluded that these economies shared some of the same weaknesses as Thailand. Fearing the local currencies would also tumble, they began converting them into dollars, resulting in a self-fulfilling prophecy. Malaysia, compared to Thailand, was better able to compete with China in low technology sectors. However, its economy was not able to support the country's mega-projects and poor real estate ventures that had diverted huge resources.
Exports of Textile and Apparel Have Secured Many Benefits
During the past decade, U.S. exports of goods and services accounted for one-third of U.S. economic growth. From 1988 through 1997, they rose from $430.2 billion to $932.3 billion, an increase of 117 percent. In 1997, the Office of Economic Affairs, Executive Office of the President reported that U.S. exports of goods and services supported 12 million American jobs. What’s more, workers in jobs supported by exports (directly or indirectly) typically earn 13 percent more per hour than the national average, while workers in jobs supported directly by exports earn 20 percent more.
Companies that export expand their employment base approximately 20% faster than others, and are 10% less likely to fail. Thus, a primary economic goal of the United States is to maintain a high and rising standard of living. In order to achieve this, the United States, which accounts for only 4% of the world’s population, needs to sell to the other 96%.
In 1997, U.S. manufacturers exported almost $17 billion of textiles and apparel globally. This represented an increase of 46 percent over 1994. During this period, exports of yarn rose by almost 47 percent; exports of fabrics increased by 35.9 percent; exports of made-up and miscellaneous textiles edged up 32.5 percent; and apparel exports jumped by 57.5 percent. As a result, the companies and workers responsible for these achievements benefited a great deal.
U.S. Export to be Down
Prior to the crisis, more U.S. merchandise trade crossed the Pacific Ocean than the Atlantic, and in 1997, U.S. exports to Pacific Rim countries reached almost $194 billion. This performance is unlikely to continue in the short-term. This year, U.S. exports to East Asia are anticipated to decrease. How much is unknown at this time.
According to Federal Reserve Chairman Alan Greenspan, “With the crisis curtailing the financing available in foreign currencies, many Asian economies have no choice but to cut back their imports sharply. Disruptions to their financial systems and economies more generally will further dampen demands for our exports of goods and services.”
During the first two months of 1998, U.S. world exports of textiles and apparel rose 7.63 percent. This was dragged downward by a decrease in exports to Asia. Thus, During January and February of this month, U.S. world exports of textiles and apparel to the Association of Southeast Asian Nations (ASEAN) was down by almost 21 percent. ASEAN is comprised of Malaysia, the Philippines, Singapore, Thailand, Brunei, and Indonesia. In other examples, exports of apparel during this period was down more than 83 percent to South Korea and 53 percent to Thailand.
The Impact on U.S. Regions
Certain regions that are more dependent on exports to East Asia will be affected to a greater extent than regions that are less dependent. Western states, such as Washington, Oregon, Arizona, California, and Alaska, are expected to be affected the most, due to their higher concentration of general exports to East Asia which include aircraft, semiconductors, electrical equipment, and processed foods.
Parts of the farm belt, the industrial Midwest and Southern states will be affected to a lesser degree. The Northeast, including New York, New Jersey, Pennsylvania, and Connecticut, should be impacted the least since a smaller percentage of their exports target the affected region.
In 1996 (most recent available statistics by state), 29% of U.S. merchandise exports were shipped to the “Asian 10,” which is comprised of China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand. Of these countries, the economic crisis more severely affected Indonesia, Thailand, Malaysia, Philippines, and South Korea, whose currencies experienced significant devaluations.
Eight states, however, exported at least 50% of their goods to the “Asian 10” in 1996. New Mexico exported 68.8% of its goods there; followed by Hawaii with 64.6%; Oregon, 63.9%; Alaska, 57.9%; Nebraska, 55.7%; Washington, 54.6%; California, 51.9%; and Idaho, 50%. California was the biggest global exporter by far among all U.S. states. And the “Asian 10” are among California’s top 22 export destinations. As a result, the Asian weakening demand for imports will impact California to a greater extent than many other states. Five states — Florida, Michigan, Montana, North Dakota, and Vermont — shipped 10 percent or less of their exports to the “Asian 10.”
U.S. Import Will Rise — But Not as Much as Predicted
Analysts predict that in 1998, U.S. imports from Asia will rise significantly resulting in a large U.S. trade deficit. Thus, imports from Asia of low technology-produced goods, where materials and other inputs are sourced domestically, including textiles and fabrics for apparel, is anticipated to increase in large amounts.
Jim Schelley, vice president and general manager of the New York City-based CIT Group/Commercial Services, has been financing the apparel industry in Southeast Asia for 20 years. He said, Japan, China, Malaysia and the Philippines pose the most immediate threat to U.S. manufacturers due to more competitive export prices as a result of the Asian currency devaluations. In terms of the textile industry, Schelley contends "these countries are able to use domestic raw materials for the manufacturing of textiles" and "will not hesitate to compete on price with goods produced in the U.S."
On the other hand, imports from East Asian manufacturers who typically source their components outside their countries, and require foreign currencies to buy them, is not expected to rise as fast. Thus, when a country's currency depreciates by half its value, it takes twice as much of that currency to import the same value of goods as it did before. As a result, it will import less because costs are twice as high.
Impoverished by currency devaluations and a precipitous drop in domestic demand, Analysts predict that East Asian manufacturers will attempt to work off inventories and export themselves back to health. Japan, with economic and financial problems of its own, will not provide the economic engine required to absorb additional imports. As such, the U.S. market is expected to become primary target, with Europe following, putting downward pressure on domestic and foreign prices.
In the long term, these predictions may be accurate. However, thus far, U.S. imports of textiles and apparel from East Asia have not risen significantly. U.S. imports of textiles and apparel from Latin America, for example, have not been replaced by less expensive East Asian imports. One reason for this: many of the Latin American production facilities are owned by or have long term contracts with U.S. firms. As a result, imports of textiles and apparel from Latin America has not changed very much.
Keep a Close Eye on Asian Import Sources
In terms of sourcing product, it would be wise to ensure that your suppliers are, in fact, able to purchase their inputs and ship you your goods. Schelley cautions, "If your company is doing business in Asia, you need to reevaluate your risks and question past assumptions. In situations like this, the greatest risk can usually be found in the supply chain."
Schelley said South Korea, Indonesia and Thailand are in poor standing compared to other East Asian countries and "face a long, grueling journey back to economic prosperity." "These countries have such severe financial and liquidity problems that companies simply cannot get working capital. Even the Korean subsidiaries of U.S. Fortune 500 companies have been unable to get letters of credit from Korean banks." Consequently, suppliers in these and other Asian countries may not perform as they have in the past.
Investment Opportunities Likely to Increase
U.S. direct investment in Asia on a historical-cost basis jumped by 74 percent from 1991 through 1995 to reach $126 billion. This rate of growth is 42.6 percent higher than the rate of growth in U.S. direct investment worldwide. However, investment in the region is expected to decline over the next few years, holding down growth rates there.
In an attempt to lure fresh investment, East Asian companies will increasingly seek foreign partners with the ability to provide capital and technology. In return, they will make attractive offers that will provide lucrative opportunities. And severe adversity in East Asia is forcing adaptations that would not have been politically feasible during favorable economic times. The crisis has become an impetus to liberalize investment laws and open sectors once reserved only for domestic companies.
This article appeared in Americas Textile International, June 1995.
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