Trade, Terror, and Tariffs:

How Regulatory Capture from the Textile Industry

Affects Post-9/11 American Security

Robert Hobart III and Professor John W. Welborn

Political Economy of Regulation

ECON 16

Dartmouth College

May 27th, 2018

Abstract American trade policy is carried out with the aim of preserving or upholding
America's interests abroad. In the months and years following the 9/11 attacks, the Bush
Administration began a broad effort to incentivize potential security partners in the Global War
on Terror (GWOT). Through bilateral economic agreements, either favorable trade terms or
direct aid, the Bush Administration hoped to find partners in the challenging and anxiety-
producing battle against radical Islamic terror groups. Yet the very agreements intended to
strengthen American security have caveats that undermine their purposes. In many ways, the aid
provided to partner nations like Pakistan was counterproductive in its design and its deployment.
Furthermore, these trade agreements have diffused greater cost onto the American consumer.
The root cause of these externalities lies with lobbyists seeking to defend a beleaguered
industry—textiles—against foreign competitors.

Keywords International trade ⋅ Terrorism ⋅ George W. Bush ⋅ Textiles ⋅ Regulatory capture ⋅

Foreign aid ⋅ Pakistan

JEL Classification F35 ⋅ F53

Word Count 3053 (excluding bibliography).

 1. A New World

On September 20th, 2001, nine days after the September 11th attacks, United States Trade

Representative Robert B. Zoelick wrote an opinion article in The Washington Post arguing that

“the staying power of [America’s] new coalition” against terror required “U.S. leadership in

promoting the international economic and trading system” (Zoelick 2001). Zoelick also

described what he called “a toolbox of cooperative policies”, a vague description of the aid

packages being designed to entice the developing world into following American leadership, and

therefore collaborating with the United States in the fight against global terror. Zoelick’s

statement and its underlying principles were not a drastic departure from the traditional,

conservative, free-market economics of the Republican Party or President George W. Bush. Yet

the way Zoelick’s “toolbox” manifested itself was a departure—its nebulous “cooperative

policies” would take different forms, few of which can be interpreted as a promotion of a free

and open international trading system, especially in the case of Pakistan.

2. Pakistan

Focusing on Pakistan-US relations in this new post-9/11 world is key for several reasons.

Firstly, Pakistan is a developing nation (ranked in the bottom quartile of the Human

Development Index), but one with enough industrialization in its textile industry to have

significant production capacity and a connection to global supply lines (Ali 2017). Secondly,

Pakistan’s relationship with the GWOT has been both complex—in some cases, friendly, and in

other cases, troublesome. Pakistan offers logistical and intelligence support to Operation

Enduring Freedom–Afghanistan (OEF-A) but has also been accused of covertly supporting

Taliban fighters in eastern Afghanistan and intentionally concealing al-Qaeda leader Osama bin

Laden prior to his death in 2011. This is among other forms of covert support the Pakistani
intelligence service has been accused of providing to extremist groups including the Taliban and

al-Qaeda. Yet US policymakers, speaking on then-President of Pakistan Pervez Musharraf, said

that during the invasion of Afghanistan in 2001, “[Musharraf] was the crucial barrier between

stability and a worst-case scenario” (Goldstein 2005). The United States has a tenuous

relationship with Pakistan, a relationship that is tested by Pakistan’s own ambitions, but still

relies on Pakistani support to carry out its goals in Operation Enduring Freedom, and more

recently, against offshoots of the Islamic State organization in Afghanistan and Pakistan.

Figure 2-A: History of US Obligations to Pakistan, millions of US$(2011). Note the sharp increase in military

assistance but the relatively middling economic assistance from 2001-onwards (Center for Global Development).

From FY2002 to FY2011, the United States Departments of State, Defense, and

Agriculture, as well as USAID, appropriated approximately $22 billion in aid money to Pakistan.

Of this $22 billion, from FY2002 to 2011, roughly $14 billion went to security-related costs
(military aid, from training to advanced equipment) and reimbursements to Pakistan for logistical

and operational support of US-led military operations in Afghanistan as a part of Operation

Enduring Freedom. Of the roughly $8 billion that have gone to economic aid in Pakistan, a

significant percentage is a part of what USAID refers to as the “Economic Support Fund”,

ostensibly supporting private sector investment, manufacturing, and education.

3. Textiles

The details of how this money is targeted are critical to understanding why I mention the

American textile industry at all in this analysis. “What Pakistanis want more than F-16s or

helicopters is to sell us shirts,” writes American University Professor Joshua Goldstein. “The

textile and clothing industries account for more than half of Pakistan’s industrial employment

and 80% of the country’s export earnings…at the World Trade Organization meeting in fall

2001…Zoelick stuck to his guns on textiles even while giving ground in other areas of

negotiation” (Goldstein 2005). In the months following the 9/11 attacks, the United States was

generous with guns, cash, and debt forgiveness—but not with reducing barriers for Pakistani

textile manufacturers in the American market like a 25% import duty on cotton clothing

(Bradsher 2002). Moreover, a joint report from United States Chamber of Commerce and the

U.S.-Pakistan Business Council shows that much of the economic development money flowing

to Pakistan outlined above is going to the energy sector and the beverages sector, not specifically

Pakistan’s textiles sector—in spite of the fact that textiles make up such a large share of

Pakistan’s economy (U.S. Chamber of Commerce et al. 2009).

Why is this? What is it about the textile industry specifically that is a nonstarter for

American trade negotiations? Wouldn’t it be better if Pakistani manufacturers could sell

Americans shirts? They would make more money, the Pakistani people would be pro-American,
and President Musharraf and his successors would have more political capital to pursue policies

that benefit the GWOT. The answer lies not in Pakistan, but in the southeastern United States.

Like many sectors of American manufacturing, the American textile industry is hanging

on by very thin thread. From 1995 to 2009, the industry suffered what National Council of

Textile Organizations Chairman Jeff Price called “a historic and heartbreaking contraction…

precipitous [job] losses” (Price 2016). In 2005, textile quotas were eliminated from the US trade

scheme, and American manufacturers struggled to keep up with an influx of cheap product from

manufacturers in China, Bangladesh, and, to a lesser extent, Pakistan (Tangboonritruthai et al.

2007).

Since 2009, the industry has weathered additional storms by raising general capital

investment by around 87% ($960 million to $1.8 billion). In spite of this, the industry has also

seen capital investment in apparel drop 39% (Lu 2018). Data from the Bureau of Labor Statistics

also shows that the number of jobs in the American textile and apparel industries have dropped

by approximately 50% from FY2005 to FY2017, a loss of nearly 150,000 jobs lost. Dr. Sheng Lu

from the University of Delaware’s Department of Fashion & Apparel Studies attributes this drop,

however, not to rising imports, but to the classically-predicted trade phenomena as developing

countries increase their capital, technology, and therefore their competitive advantage in making

labor-intensive products like apparel.

Unsurprisingly, the American textile lobby does its best to uphold what little advantage

American textile manufacturers might have. The aforementioned NCTO donated heavily in the

years following 9/11 to Republican representatives in North Carolina, Georgia, and Kentucky,

led by the late textile businessman Charles Hayes. Hayes, by all accounts, was a supporter of free

trade—even moving some of his own company’s production to Mexico after NAFTA was
signed—but made the compelling argument to Republicans in Congress that whatever good

could be done for Pakistan should not come at the expense of the American textile industry

(Goldstein 2005).

In 2003, Pakistani President Pervez Musharraf travelled to the United States and met with

Zoelick at the Washington Hilton to establish a comprehensive framework on trade and

investment between the US and Pakistan. This framework was standard diplomatic boilerplate

but had key points were supposedly the bedrock upon which the United States and Pakistan

would forge a new economic alliance. The 11th pre-ambulatory clause reads: “Taking into

account the need to reduce tariffs and eliminate non-tariff barriers in order to facilitate greater

access to the markets of both countries and the mutual benefits thereof…” (Trade and Investment

Framework, 2003).

In that section, the signatories (the United States and Pakistan) agree that the elimination

of tariffs and other barriers is key to accruing the mutual benefits of free trade—democracy,

prosperity, etc. Yet neither Zoelick nor Congress followed through with meaningful action to

those ends. Rather, around a year earlier, Congress approved a bill authorizing the Bush

Administration to negotiate new trade agreements without Congress’ approval, with President

Bush promising Republicans from textile-heavy districts that any actions regarding Pakistan and

trade would not hurt US textile manufacturers. The bill in question, the Bipartisan Trade

Promotion Authority Act (H.R. 3005, 107th Congress) passed by a single vote—that of North

Carolina’s Robin Hayes, himself a wealthy mill owner (Smith 2008). House Republicans,

influenced by textile lobbyists, refused to give President Bush the ability to sign his own trade

agreements without guarantees that the American textile industry would not be impacted

(Brainard 2001). In essence, the implicit good faith in the agreement Zoelick and Musharraf
signed extended to many different facets of US-Pakistan relations—but certainly not the textile

industry, thanks to the lobbying efforts of the NCTO.

Fig. 3-A: Robin Hayes at a campaign rally in 2001.

Hayes continued to represent North Carolina’s 8th District until 2009 (Yang 2003).

4. The Economic Costs of Locking Off Pakistani Textiles

Forgetting the broader security concerns behind a weakened Pakistani economy—which I

will go into later—it is important to go over the ways by which the American textile industry

was able to barricade itself from foreign competition (and stay afloat in spite of its decline). The

Producer Price Index for “Finished Manmade Fiber” (apparel, textiles, etc.) dropped in the

months following September 11th, but later rose approximately 33% in the years following.

There are several reasons for this, none of which are good for American consumers, all of which

are good for the American textile industry’s bottom line:

In 2005, the United States, European Union, and other rich nations ended their quota system

on manufactured textiles (Gresser 2004). This was initially met with great enthusiasm by

consumer analysts and textile-manufacturing countries alike—the developed world was open for

business. At the time, the International Trade Commission had suggested that quotas may have

raised clothing prices by 25% across the board, making Americans pay approximately $50

billion more annually for clothing products than they should have.
 There were two issues with the lifting of these quotas. Firstly, lifting quotas meant that the

countries with the largest and most developed manufacturing bases could quickly swoop in and

become America’s “supplier of choice”. Pakistan, moderately developed, could not directly

compete with Chinese and Indian manufacturers—Pakistani government officials say that the

“high cost of doing business, power shortage, poor industrial infrastructure and slow external

demand” locked, and continues to lock Pakistan into “stiff competition with regional players”

(Khan and Khan 2010).

Secondly, the elimination of quotas did not mean the elimination of tariffs and other

duties. To be fair, neither China nor Pakistan have ever signed textile-specific agreements with

the United States, nor broader free trade agreements. If tariffs were negatively affecting

economic development in Pakistan, the natural and logical response would have been to reduce

tariffs—as Musharraf lobbied for in 2002. By doing so, textile liberalization would no longer

force the poorest and least competitive countries to compete with powerhouses like China.

Countries like Cambodia, Pakistan, and Paraguay would have a more level playing field against

the highly-industrialized Chinese textile industry. Moreover, “Tariff Preference Levels” would

allow countries to export finished apparel duty free to the United States, so countries like

Nicaragua can import unfinished product from Pakistan and export a portion of it to the United

States tax-free.

The NCTO, however, opposed TPLs, and continues to lobby for their elimination in

Congress (Price 2016). Without TPLs or other free trade agreements, Pakistan is unable to make

significant inroads against larger manufacturers in other countries. American consumers pay

higher prices, as evidenced by textiles’ rising PPI, and Pakistani firms are unable to compete

effectively in the American market. Since 2014, the Pakistani textiles industry has lost around
500,000 jobs—the effects of which could spell more than just economic trouble (Mangi and Kay

2016).

5. Security Costs

When the American textile lobby prevented Congress and President Bush from rolling back

tariffs, it affected more than domestic textile production. If Pakistan is unable to grow its

economy, much of which is based on textile manufacturing, it is more susceptible to political

unrest and instability—the sort of instability an extremist group thrives on. A driving factor

behind extremist recruitment is the promise of financial incentive. Moreover, anti-American

sentiment in Pakistan is high, and drives recruitment for militant groups that promise to expel

American forces from the region.

In 2002, The New York Times interviewed a Pakistani apparel worker named Ashraf Sajid.

Sajid told the Times that Pakistanis had assumed that America would buy more clothes from

Pakistan in exchange for Pakistan’s support in the GWOT. But, as mentioned above, the United

States government took no action to make that a reality. Sajid was laid off for seven months and

explained to the NYT correspondent that “America is like poison” to him now (Bradsher 2002).

Although Sajid represents just a single voice in the massive Pakistani textile industry, his

sentiment is proof that funneling money to fighter jets and body armor doesn’t play as well as the

United States might hope with the Pakistani people. Then-Minister of Commerce Razaq Dawood

told the Times that “…if the United States had been willing to [lower tariffs], it would have given

people like me the ability to talk, to say that the United States is creating jobs”.

Part of why American development aid is needed is because of Pakistan’s volatility and

perceived danger to foreign investors. Data from the University of the Punjab in Lahore shows

that there is a strong negative correlation (-.742) between foreign direct investment net inflows
and an index of terrorist attacks, casualties, and injuries (Alam et al. 2017). When Pakistan is

more volatile, and extremism and related terror attacks become more prevalent, foreign direct

investment into Pakistani manufacturing drops—and conversely, reduced foreign investment

limits economic opportunities, and drives young people towards extremism.

This is problematic given past and current Pakistani sentiment towards the United States. A

2007 poll by American research organization D3 Systems and the Pakistan Institute for Public

Opinion showed that among Pakistanis, President Musharraf had only a 38% approval rating,

and President Bush had only a 9% approval rating. More troubling is the fact that Osama bin

Laden had a 46% approval rating, the Taliban had a 38% approval rating, and local extremist

groups polled as high as 49% (Bergen 2007). In a fight to win hearts and minds, the United

States is losing.

These trends continue today as Pakistan’s textile industry ages and languishes. From FY2014

to FY2016, more than 500,00 jobs have been lost across the country (Mangi and Kay 2016).

Shortages in electricity and gas—affecting 60 to 70% of textile plants—have made filling the

limited export orders that do come in difficult (Khan and Khan 2010). An estimated $32 billion

is needed to revamp production to meet the government’s export targets, which translates to a

replacement of roughly 65% of Pakistani textile machinery nationwide.

These job losses and capital modernization problems form a deadly combination with current

Pakistani opinion regarding US-designated extremist groups. A 2014 Pew study revealed that

only 59% of Pakistanis surveyed held unfavorable views of the Taliban, while only 42% held

unfavorable views of al-Qaeda (Pew 2014). Evidence also shows an “alarming” increase in

Islamic State activity in the country’s north—and while IS does compete with the Pakistani
branch of the Taliban for recruits, both share the same hostility towards the Pakistani

government and the United States (Jamal 2018).

Moreover, the Pakistani Taliban—also known as Tehrik-i-Taliban Pakistan, or TTP—pulls in

young, male recruits with hefty salaries 50% larger than those they could earn working in a

textile factory, assuming the factories themselves are even running (Bradsher 2002; Abbas and

Qadi 2013). In spite of major victories against extremist groups in Operations Enduring Freedom

and Inherent Resolve, the United States and its coalition of partner nations are still unable to cut

off extremist groups’ ability to recruit new fighters. It is apparent based on the data that this is

not only because of military strategy or logistics, but a lack of proper economic incentives.

American troops have yet to wind down combat operations against the Taliban, and although the

Islamic State has lost significant ground in Syria and Iraq, its followers threaten to import its

ideology and brutality into another section of the Islamic world rich with willing participants. As

long as American troops are dying from Taliban or IS action, American security is compromised.

6. Concluding Remarks

It would be disingenuous to say that Congress and American policymakers are, or were, blind

to this issue. In 2009, Representative Chris Van Hollen (D-MD) introduced H.R. 1318, the

Afghanistan-Pakistan Security and Prosperity Enhancement Act. H.R. 1318 would authorize the

President to designate “Reconstruction Opportunity Zones” inside Afghanistan and Pakistan that

provide for the duty-free treatment of textile and apparel products through 2024 in exchange for

progress on the establishment of a market-based economy, upholding the rule of law and core

labor standards, and eliminating barriers to trade.

Unfortunately, H.R. 1318 did not clear the House Committee on Ways and Means (nor did

the Senate equivalent, S.496, the Afghanistan and Pakistan Reconstruction Opportunity Zones
Act of 2009, make it out of the Committee on Finance), and Van Hollen left the House to be

elected junior United States Senator from Maryland in 2016. Since then, no bills or resolutions

have been proposed in either the House or the Senate on the subject.

It seems unlikely that President Donald Trump or this Congress will loosen any textile duties

from Pakistan—or China, for that matter. In fairness, the new Harmonized Tariff Schedule of the

United States proposed by the Trump Administration and his trade advisor, the heterodox trade

hawk Peter Navarro, does not include any new tariffs or duties on textiles or clothing. Yet in the

past, Navarro has complained about Chinese manufacturers undercutting American

manufacturers by cutting corners on safety and environmental regulations, subsidizing exports,

and undervaluing their currency (Navarro 2006). Perhaps Navarro and Trump will come to see

Pakistani textile exports as the lesser of two evils and recognize the complex and interconnected

nature of Pakistan’s manufacturing sector and its internal security—and vicariously, the United

States’ battle against radical Islamic terror groups.

Ironically, the 2018 State of the US Textile Industry Address, given in the same ballroom

where President Musharraf implored Robert Zoelick for loosened tariffs on Pakistani exports,

praised President Trump for his defense of American manufacturing (McCrary 2018). It seems

unlikely that positive change will occur in the near future.

For now, the American textile industry, in spite of its recent troubles, has been thrown a

lifeline. The Pakistani textile industry (and with it, Pakistani internal security) continues to

unravel.
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