Monday, 12 July 2010
The US finally benefits from the denim boom. But are technology gains overstated?
The claim by Brazil's Santana that it will begin constructing a US plant by July 15 rounds off an extraordinary boom in denim investment.
This month alone, The Source reports that Brazil's Vicunha plans to be the world's largest denim maker by 2013, even though practically all its competitors are announcing substantial investments in new denim capacity. Even so, many cynics were unconvinced Santana's 2008 announcement of an imminent plant in Edinburg, Texas, would actually materialise.
Local boosters for the US investment are claiming that advanced technology in the new plant made the US a preferred location. The logic is currently fashionable: one competitive advantage the US might claim as a location for denim production is its proximity to cotton growers - and Vicunha has recently argued it believes fabric mills should be located close to raw material production centres too. A high-tech plant (Santana is spending $100 mn on its new Texas mill) certainly eliminates lots of labour – but it still incurs the capital and energy costs that are what really drive denim prices, and capital and energy aren't outstandingly cheaper in the US than elsewhere.
Santana's case for building a mill in the US is rather more complicated. First, the local authorities are pouring a fortune into inducements: tax holidays, training funds, outright grants: just about all the things American textile lobbyists are forever moaning foreigners do to steal jobs from honest Americans. On top of the substantial subsidies US taxpayers pay its cotton producers – and the bizarre $147 mn a year it pays Brazil not to ban imports from the US because of those subsidies. Santana claims it's delayed starting construction because of financial uncertainty: but Santana's clearly been able to use the delay to squeeze even more benefits out of Texan taxpayers.
Second, and possibly more crucial, putting the plant in the US means garments using its denim, when made up almost anywhere round the Caribbean, get into the US duty free. That's not always possible with denim made in Mexico or Central America: US duty-free arrangements are a mass of special exceptions for denim, that make it nigh on impossible, for example, for most denim woven in Mexico to get duty-free status if made into jeans in Guatemala or El Salvador.
All of which said, though, Santana's investment in the US does show that it can make sense to build new textile capacity in rich countries. Not because better technology redresses rich countries' lack of competitiveness – but because some rich countries are happy to distort the market just as much as China