10/29/01 Wall St. J. A1 2001 WL-WSJ 29676183 Page 1 The Wall Street Journal Copyright (c) 2001, Dow Jones & Company, Inc. Monday, October 29, 2001 Looming Battle: Pakistan's Textile Bind Presents Bush Team With a Tough Choice Cut Tariff to Help Key Ally Or Protect U.S. Industry; Gap Inc. Backs Islamabad Indian Drugs, Russian Steel By Helene Cooper, Staff Reporter of The Wall Street Journal A battle over Perry Ellis slacks and Gap crew-neck shirts has become the first major clash between economic and security interests in President George Bush's post-Sept. 11 world order. The government of Pakistan, a critical U.S. ally in the Afghan war, is asking the Bush administration to reduce tariffs on textiles from Pakistan. Unless tariffs are cut, Pakistani officials argue, U.S. clothing firms will continue to cut back purchases from Pakistani factories for fear of disruption and higher insurance costs. But that makes U.S. textile executives like Anderson Warlick fear they are about to become the next victims of the war on terrorism. Mr. Warlick, chief executive of cotton-yarn manufacturer Parkdale Inc., in Gastonia, N.C., says that even in a time of war and national crisis, the U.S. has no business putting the interests of Pakistan ahead of that of the textile industry in North Carolina. "We're paying 30 pieces of silver for limited support in Pakistan, at best, and our industry is being given away," he says. On Friday, Parkdale said it will shut down two yarn plants, a move that will put about 120 people out of work. Mr. Warlick blames imports for the closing and says the U.S. government should do more to protect the domestic industry. "I've never seen an industry get picked on more than ours," he adds. Behind the public scenes of the post-Sept. 11 era -- the bombing, the briefings, the public-health pronouncements -- a new battle is taking shape that puts two critical American policy interests on a collision course. On one side is the imperative to promote U.S. security by shoring up Pakistan and other querulous allies in the Muslim world. On the other side is the perennial pressure to support domestic manufacturers of textiles and other products that seek desperately to preserve trade constraints on those very same countries. If President Bush wants to reach out to U.S. Muslim allies, there are few better things he can do than allow them greater access to the U.S. textile market. Exporting textiles has long been a critical first step that poorer nations can take on the road to becoming full participants in the world economy. But access to the U.S. textile market remains tightly controlled by a domestic industry with considerable political clout in Washington. The Pakistani case is testing the willingness -- of the industry and the Bush administration -- to open the door wider. And textiles aren't the whole story. Across the manufacturing spectrum, the U.S. will have to choose between protecting domestic industries or helping key allies. Last week, the U.S. moved closer to blocking imported steel at the behest of U.S. steelmakers, who complain that cheap imports are bankrupting their industry. But such a move would anger such steel-producing countries as Kazakstan, another important ally on the Afghan border, and Russia, which in the long run could be the most important partner in a world-wide campaign against terror. Elsewhere, the Bush administration is struggling with the issue of intellectual-property protection for big U.S. drug companies. India, Thailand and South Africa -- all key allies in the antiterror war -- want the U.S. to allow them to break patents held by the large pharmaceutical manufacturers, so they can produce inexpensive generic medicines for their poorer populations. But enforcing patent protection has long been a staple of U.S. trade policy. This issue will come to a head next month at the World Trade Organization's meeting in Qatar. How the U.S. treats developing countries at the WTO meeting will say much about America's ability to adjust its trade policy in a new era. Countries such as Pakistan, Egypt, Indonesia, India and Morocco all want the U.S. to stop subsidizing its own farmers and to slash tariffs on agricultural goods and clothing. The countries last week issued a joint statement in which they said they are "deeply disappointed" with how their goals have been addressed so far. Copr. © West 2001 No Claim to Orig. U.S. Govt. Works 10/29/01 Wall St. J. A1 2001 WL-WSJ 29676183 Page 2 While poor countries all over the world are eager to expand their presence in America's textile market, no nation has a stronger case right now than Pakistan. Its biggest industry is textiles, and its biggest market is the U.S. Military ruler Gen. Pervez Musharraf has enraged fundamentalist Muslims at home by backing the U.S. in Afghanistan. Now that decision is costing the Pakistani government dearly: Frightened by television images of young men burning American flags in the streets of Islamabad and Karachi, U.S. companies are fleeing. They are taking their lucrative orders for bras, underwear and shirts with them. For the first three weeks of October, the Pakistani government estimates that textile orders from the U.S. are down 40%, compared with the same period a year ago. Since Sept. 11, some 10,000 workers already have been laid off. "It's just an unstable situation," says Dan Gazitua, import manager for Supreme International, a subsidiary of Perry Ellis International Inc. For 10 years, Perry Ellis has bought cotton shirts, trousers and sweaters from plants in Pakistan. But last month, the Miami-based company halted new orders from there. "With our lead times and shipping windows, if we get things delayed even two weeks, it endangers our business," says Mr. Gazitua. Company executives say they won't return to Pakistan unless the U.S. government cuts tariffs on Pakistani textile imports to offset the higher insurance premiums and financial risk of doing business in a war zone. "I'd love to continue to manufacture there, but the Bush administration has to create an incentive," says Oskar Feldenkreis, chief operating officer at Perry Ellis. Other clothing companies are saying the same thing. So far, the U.S. has done little in response. Last week, U.S. Trade Representative Robert Zoellick told manufacturers at a Washington conference that freer trade with Pakistan, Indonesia and other developing countries will be crucial to the U.S. war against terrorism. But then, echoing a suggestion made by America's textile lobby, Bush administration officials said they are considering giving Pakistan duty-free treatment for only carpets and leather gloves, neither of which are considered to be part of the larger Pakistani textile industry. "Carpets? Which world are they living in?" asks Aleema Khan, director of Cotton Connection, an exporter in the Pakistani city of Lahore. "After all this, all we are offered is carpets?" Carpets and gloves should indeed be the end of the discussion, says the U.S. textile industry. It has seen steady job erosion for the past decade and has lost 60,000 jobs this year alone. Officials at the American Textile Manufacturers Institute -- who are fiercely supported in Congress by Sens. Jesse Helms, a North Carolina Republican, and Ernest Hollings, a Democrat from South Carolina -- had been quick to go on the offensive to stop any potential administration move to cut Pakistan's textile tariffs. On Sept. 26, before Mr. Zoellick and other Bush officials had even focused on the Pakistani textile clash, the textile institute's president, Charles A. Hayes, sent a letter to Commerce Secretary Don Evans. "The American Textile Manufacturers Institute is fully prepared to support the president's campaign against terrorism," Mr. Hayes wrote. Then, he offered the carpet idea, saying, "The United States could provide [duty-free entry] for hand-knotted and hand- hooked floor coverings from Pakistan, which could be worth over $100 million annually to that nation." In the critical line, Mr. Hayes added that the "crisis" in the U.S. textile industry "also prompts us to urge that the United States not go beyond the offers of assistance we have outlined." Bush officials decline to comment on whether their suggestion about lifting tariffs on Pakistani carpets and gloves grew out of the Hayes letter. One senior official would say that the letter "put us on notice." Administration officials are well aware that $100 million in duty-free access for Pakistani carpet makers is modest relief for a country that estimates it will lose $2 billion a year in textile-export revenues if American buyers don't come back. "There is no way we can do this without leaving some [economic] blood on the floor," the senior official says. Once Pakistani exports drew sustained attention within the administration, officials divided into two camps. On one side, officials at the State Department, the White House's National Security Council and the Treasury Department argued that national security demanded that Pakistan get the textile-tariff relief. "It would not serve the interests of the United States to see lots of Pakistani workers put on the streets because of this," one senior State Department official says. Copr. © West 2001 No Claim to Orig. U.S. Govt. Works 10/29/01 Wall St. J. A1 2001 WL-WSJ 29676183 Page 3 But Bush officials at the Commerce Department, including Undersecretary Grant Aldonis, and U.S. Trade Representative Zoellick, urged a more-cautious approach, administration officials say.