The dynamic response to trade policy: Evidence from the U.S. textile and clothing industries

I study the behavior of textile and clothing makers in the U.S. as they were exposed to a large, anticipated increase in foreign competition through the removal of import quotas. I find a strong decline in capital investment in the industries that are likely to be the most vulnerable to such competition. The decline appears just after announcement of the policy, which is as many as nine years before the scheduled liberalization date. I present models of optimal industry investment in the presence of capital adjustment costs, and I establish their predictions regarding these industries when trade liberalization is to be introduced. Using industry panel data, I examine developments in the output and capital markets for these industries, and I find that they are broadly consistent with the models' predictions. A simulation using plausible parameter values produces a path for investment that closely matches the observed path. These findings suggest that capital adjustment costs played a central role in driving the dynamics that were precipitated by this episode of trade liberalization. Using plant-level data from the U.S. Census, I find that reductions in both the number of plants and in investment per plant played important roles in the decline. Investment per plant declined more for older plants, while plant counts fell more among younger plants. Plants that exported had somewhat higher survival chances, while the opposite was true of plants that were members of multi-plant firms. However, the decline in survival was still fairly uniform across these and a variety of other plant characteristics.