Skip to content

Clothing prices (CGL)

Here's a blog post of a single graph, drawn from today's release by the Bureau of Labor Statistics (BLS) of the Consumer Price Index for August 2017. The WTO came into effect in 1995. Until then textile trade fell under the Multi Fibre Arrangement (MFA), a complicated spaghetti web of product-specific, country-specific bilateral quotas. The WTO shifted such trade to most-favored-nation tariffs, that is, from 1995 the US stopped restricting the quantity. You can look at the tariff schedule for one class of apparel. For example, the tariffs for "men's or boys' shirts of cotton" are:
     6205.20.10 00 Certified hand-loomed and folklore products............ 8.7%
     6205.20.20 Other.................................................... 19.7%
This may sound high, but the "shadow price" tariff created by quotas was much higher. Furthermore, demand increased over the past 20 years as incomes and population rose. If the quota had remained, with quantity fixed (a vertical supply curve) prices would have risen. With tariffs, prices are a function of wage rates in exporting countries. If (corrected for productivity) those don't rise, then US prices stay flat.

30 thoughts on “Clothing prices (CGL)

  1. johnsonj20

    The fact that the Consumer Price Index for all urban consumers for apparel has remained stagnant since 1990 suggests that the total factor productivity in that sector has leveled off or decreased, depending on whether the Consumer Price Index takes into account inflation.

    1. the prof

      Do we have any domestic apparel manufacturing? IF not, THEN this becomes a trade story. If productivity in the sector rises a lot, while wages in Bangladesh do not (at least so far and in relative terms), then holding foreign exchange rates constant, what should happen to prices?

      1. Juliana Kerper

        If productivity in a sector rises a lot while wages do not (in Bangladesh and other countries or companies), do you think this means specific companies may inevitably be headed for long-term failure since there is such a large disparity between company prosperity and employee prosperity? Does globalization in some ways weaken the connection between companies and their employees when company output increases but wages do not?

        1. the prof

          If firm level productivity rises, it needs fewer workers per unit of output and has more bargaining power versus potential workers. That could cause problems at the national level, if all firms are becoming more productive. It's not a problem for the individual firm. Such composition questions – what happens if we look at aggregates across industries – is a key distinction between "micro" and "macro" reasoning.

    2. wilkinsonw20

      If productivity were to increase while wages remained constant, the price for clothing should decrease as there is a greater supply at the same cost. My other question is whether or not this case could be similar to Hong Kong's loss of comparative advantage while producing clothes from chapter 5? Despite demand increasing for clothing, could the producers be moving away from producing a labor intensive product like clothing to a more technology or capital intensive product? It would make sense as importing clothing would allow us to focus on more profitable industries.

      1. the prof

        In the case of HK, production initially moved to China, initially in the neighboring areas of Guangdong Province. Much, much lower wages, and a shared language and in many cases extended family ties that made shifting production easy.

  2. yuy20

    I'm wondering how the actions of the WTO in 1995 have affected other countries' decisions in regards to tariffs and quotas. Obviously they know tariffs are more beneficial, but how did this shift in trade occur?

    1. the prof

      That's the beauty of the pairing of reciprocity and MFN (most favored nation), in a negotiating framework that in the GATT included the majority of the world economy. (China was not part of that process, but had to negotiate the terms under which it could join the WTO, which in fact were much stricter than for existing developing country members of the WTO.)

      Since the breakdown of the WTO process, in large part due to agriculture, a number of countries have aggressively negotiated bilateral FTAs (free trade agreements). Mexico is maybe the best example. For the auto industry, that now makes it one of the best places to locate an assembly plant (cf. Audi). That's because the US has a 2.5% tariff, Europe has a 10% tariff (Japan's is 0%), and parts of South and Central America much higher ones. Exports from Mexico pay nil, no tariffs. For the EU, that 10% is a big deal – for an Audi that might wholesale for $40,000, that's a $4,000 per car difference. When a factory exports 40,000 cars to Europe, that comes to $160 million in extra profits and/or greater ability to discount against the competition.

      1. yuy20

        I looked up information on Mexico's trade data and they had 44 free trade agreements with other countries a couple years ago, double the amount in the US. Their plants also run an incredibly long time and are shifting from simple manufacturing jobs to more skilled production to attract companies

        1. the prof

          Yes, though I'm a bit skeptical of this FTA count, some FTAs are very narrow, not much trade and only limited freeing, some are broad and deep-cutting. Apples and oranges and some itsy bitsy calamansi. For the auto industry, what matters are those that do have relevant clauses: the US, the EU [a big deal], Brazil and much of the rest of Central/South America [in the aggregate a big deal, given their combined size and Mexico's cost advantage in shipping to those markets]. Next June I hope to get to an auto industry conference in Brazil, I'll know a lot more after that.

  3. Chris Vogel

    The CPI for all items has seen a relatively steady rise since the early 90's, while the CPI for clothing has fallen since then. With inflation, the CPI for all goods can be explained, but the decrease in CPI of clothes must come down to supply. There is no reason (with a growing population) that demand would have decreased... so there must have been an advancement in technology or production of materials that made clothes less expensive/easier to produce. I don't think this comes down to strictly trade (open competition from foreign competitors may drive the price down) because there are domestic producers of apparel who have been in business before and after the 90's.

    1. the prof

      Textile / garment production began in New England, then shifted to the South. But not much remains. The garment district in Manhattan is long gone. There are a few boutique producers of high fashion, and (I suspect) the local t-shirt printer shows up as a manufacturer in the data. There's lots written on this, good books that follow the production of a t-shirt from a beach vendor back to the farms that grew the cotton and the producers of dyes.

  4. lentza20

    The interesting this about this graph is the level at which it is taken. Considering the varying levels of wealth and poverty around the country, this graph could look extremely different depending on how large of a area was polled. Thinking on a large scale of the entire country, is there any significance to the fact that the Consumer Price Index for all products has outgrown that of the Consumer Price Index for apparel since around 1980? Does this reflect a upward trending pattern of change in wealth, as stated in the description? Or rather a change in the amount of tariffs placed on specific trade items?

    1. the prof

      We'll look at what the CPI measures next week (or maybe it's friday). As a first approximation, apparel prices vary little from place to place in the US. Nor will prices fall just because people spend more on other things – there's enough competition that it's shifts in cost that dominate. So it's trade that is driving this.

  5. bishopandally

    The consumer price index stopped increasing around 1990, prior to the formation of the World Trade Organization in 1995. Did this trend influence the US's decision to stop restricting the quantity in 1995, or are the two unrelated?

    1. the prof

      You are correct, they do diverge a bit, but if you put your cursor over the graph, it should give you the date / value. It didn't really flatten until 1993 or so. Not a perfect fit to the story, but I didn't delve into the details of the MFA, and a quick glance at Wikipedia suggests parts of it continued until 2004. But was that true for the US? I ought to ask Prof Anderson, I do have a recollection of changes in the textile/garment regime in that era. I may not have time to look at the trade data, but if there was a regime change, it should show up as a shift in the volume of trade.

  6. Mac

    Technology has allowed for an advancement in producing consumer goods at a lower cost. As production costs lower, then consumer costs should eventually lower as well. This is evident in the CPI apparel graph as it flattens out around the early 90's. However, the CPI of all urban products continues to increase rapidly. Possible reasons for this is inflation and an increase in income for urban dwellers. I fail to recognize the impact the WTO had on the graphs since it became involved in 1995 and there is no change in the paths of both CPI urban apparel and all products graphs.

  7. grims20

    It is interesting that when the WTO came into effect in 1995, the textile prices stopped rising and stayed flat. I never really thought about how implementing tariffs would actually keep the prices flat as opposed to rising, which they were doing when quotas were in place. By opening the textile market to more countries and implementing tariffs, the supply of textiles could more easily meet the increase in demand that resulted from a rise in income and population, without driving up the price.

  8. williamse19

    Confused by why the apparel industry’s CPI continued to rise while the rest of consumer products fell, I quickly searched google for information on the fashion industry in the 1980’s. Not only did textile exports fall in 1980, but also, the fashion culture shifted and began moving operations overseas. But this also isn’t a new story—globalization affects all goods and sectors—so why is apparel so different than common consumer goods? Perhaps this could also be a function of what clothing americans choose to wear. As shown by our closets being built larger, we are simply choosing to purchase more clothing. This is not clothing that serves a specific purpose but only our tastes and aesthetics, thereby making it more likely that we would spend more money on clothes because they have a certain brand or look. A secondhand white t-shirt serves the same purpose as a Calvin Klein one, yet CK remains in business. So perhaps the apparel CPI is greater than the average good by choice.

    1. the prof

      I think it turns out to be a wage story: wages in producing countries haven't risen, logistics costs haven't risen, competition in the final market is vigorous. So prices don't rise. Yes, there's a bit of a shift towards branded goods – but there's also Walmart. And in terms of the share of retail sales, I think Walmart ends up mattering more than Calvin Klein.

  9. thaia19

    I'm curious to know why the CPI for apparel stopped increasing around 1990, prior to the creation of the WTO. Was the US decision to stop restricting the quantity of apparel related to this trend in the CPI of apparel, or are they unrelated?

  10. gutierrezcuadras20

    For the US, tariffs on clothes are more appropriate than quotas. In the US, we have experienced a considerable growth amongst the middle class that can cater with the additional increase in clothing price. A low quota, on the other hand, would limit supply, driving prices to astonishing rates if high demand for textile goods remained.

  11. hartigank20

    This graph suggests that the introduction of the tariff in 1995 helped to level the CPI of apparel for all urban consumers. As the textbook stated, a tariff is better than a quota to use for trade barriers and this graph proves it. Based on the increase in national income, restricting the quantity of apparel sold would’ve driven prices up.

  12. liur20

    The consumer price index for all Urban customers had risen since the 1960s, while the CPI for clothing had remained flat since the establishment of WTO since 1995. The raise of CPI for all goods could be explained by two factors, one is monetary inflation. From the historic data for inflation, we could see that during the late 1970s and the 1980s, inflations are high. In 1979 and 1980, the inflation rate was in the double digits and remained high throughout 1980. This explained why the CPI rose sharply during the 1980s. Another reason that caused the rise of CPI for all goods is the variety of goods a consumer could choose. With more and more advanced goods appearing, people could chose more and therefore raising the price for all goods of CPI. As of why the CPI for cloths did not rise rather stayed flat is because the U.S. outsources all the manufacturing jobs out to countries that had a comparative advantage in producing cloths at lower prices.

  13. patelp20

    At first I was surprised to see the CPI for Apparel leveling off while the CPI for All Items continued to trend upwards. However considering the fact that most apparel is cheaply manufactured overseas and then shipped to a secondary location where it is sold, it makes sense for the CPI to flatten out. I feel like apparel prices are an outlier amongst other consumer items because they are made for so cheap, and can be sold for the same high price for a long time.

  14. perelk20

    If we are considering the value of technology as it decreases the CPI for clothing, then I believe we have to consider it for all items. I agree with Pranam that textiles and clothing should be considered an outlier in terms of how cheaply they can be produced. The term "all items" is so general that I believe it can have outliers of its own towards the other end of the spectrum raising the CPI. Therefore I am lead to believe that technology increased for all items, but the category in which it is categorized is misleading.

  15. Andrew Blair

    It is interesting to pull different factors into this equation. As Kyle mentioned that technology has advanced through time we are able to produce at a more efficient rate, but it is interesting that apparel has leveled off and all other items has continued to increase since the 1990's. It makes sense that apparel has leveled off because with the technological advances, clothing can be produced for very cheap then exported to be sold with such high margins. Why hasn't all other items leveled off if China is the main producer? Shouldn't we have seen the chart level off too?

  16. motturt20

    The CPI for apparel was hovering between 130 and 132 from 1995 to early 2000, a change from the steady rise of preceding years, but by 2005 was down to 119, a dramatic change over a five year period (2000-2005) that outshines the change that occured in the five year period immediately following the implementation of the WTO. Is this drop something that can be attributed solely to rising productivity and technological advances as mentioned, or is there a lurking economic variable that came into effect around 2000 to explain the change from stagnation to decline?

  17. Kathryn Martin

    When you mention "The WTO shifted such trade to most-favored-nation tariffs, that is, from 1995 the US stopped restricting the quantity.", I'm assuming the "quantity" you're referring to is quantity of imports. So, when the US stopped restricting the quantity of textile imports, the graph shows the CPI for apparel plateauing. The CPI for apparel is only compared to the CPI for all items in this graph. It would be interesting to break down the "all items" into separate categories like CPI for technology or food to compare apparel to different trade markets.

  18. the prof

    One final comment: the details of the changes in textile trade policy are complex, but consist of a shift from country-specific quantitative restrictions to most-favored-nation (same for everyone) tariffs. My sense is that is the only thing that changed, that manufacturing technology did not change. Now there was increased use of container ships which dropped the transport part of costs, and the management of Chinese firms became more capable, they were able to provide better color matching and quality control so could move into higher-priced manufacturing (such as W&L logo wear). Both these are "technology." However, my sense is that trade policy was more important.

Comments are closed.