Sunday, January 16, 2005

Life Imitates Textbook Economics

Dress by the Toronto:

SCARBOROUGH, Ontario — Amid a worldwide glut of U.S. used clothes, Toronto businessmen like Farokh Gahadali have carved out a profitable niche.

He and dozens of other immigrant entrepreneurs buy tens of millions of pounds of used clothing from the United States for less than 20 cents a pound, sort the garments in industrial parks around Toronto, then ship the items for resale in Africa, Asia and Latin America.

The clothes are sorted into as many as 400 categories — by garment type, fiber and quality — to reap the most profit. Polyester dresses are shipped to Pakistan, baby clothes and cotton trousers to the Congo, winter coats to Albania and jeans to Japan.

"You could write a book about the used-clothing industry" in Toronto, said Gahadali, an executive with H. Salb International. "There's a whole infrastructure living off this business," from sorters to truckers to accountants to used-clothing brokers.

The FLUBA Shadow Russell Roberts Committee agrees. In fact such a book was first written over 180 years ago, and this newspaper article is an excellent real life example of David Ricardo's theory of Comparative Advantage. For instance:

In one of the widening ripples of the new global economy in clothing, Toronto has come to dominate the North American sorting industry.

At the same time, it has driven out of business up to 40 percent of the U.S. firms that once did the same thing. Thousands of American jobs have been lost.

....The business..."has shifted to where the companies have advantages in labor."

Today that's Canada; tomorrow it could be somewhere else.

How Toronto became the North American center of the used-clothing industry is partly a story of how this dynamic Canadian city has transformed itself in the past two decades.

Of the Toronto area's 5 million people, about 45 percent are immigrants — one of the highest percentages of any major city in the world, according to Canadian officials.

Canadian authorities began to loosen immigration laws in the 1970s as birth rates among native Canadians declined and fears arose of an eventual labor shortage....

Millions from Asia, Africa and the Caribbean poured into Canada's cities, providing the entrepreneurial energy, the abundant low-wage labor and, maybe most important, the contacts in the developing world to run clothing-sorting businesses, experts say.

....According to U.S. government trade figures, used-clothing exports to Canada soared more than 613 percent over the past decade to 190 million pounds in 2003 as Americans — enjoying plummeting prices on new imported clothes — bought ever more quantities.

But, before the Perotistas, Pat Buchananites, and denizens of the comments section of Semi Daily Journal protest too much:

....Ironically, many Toronto sorters now think their days are numbered because of a weak U.S. dollar and a stronger Canadian one.

Because their global-clothing transactions are in U.S. dollars, their sales revenue translates into fewer and fewer Canadian dollars to pay their business expenses at home. Last March, the Toronto sorters got $1.40 Canadian for each U.S. dollar. By late November, they were getting only $1.17.

Toronto sorters have two choices: Increase the volume of sorted clothing to earn more revenue, or close down.

The 71-year-old owner of Cantex, a clothing sorter in Scarborough, said it's likely his company will close for six months this year as he waits "to see what happens" to the U.S. dollar.

Others may do the same. "Right now people are barely hanging on," Gahadali said. "This is not a good time for Canadian sorters."

Meanwhile, sorters in the Houston area are expanding. They don't have the currency problem — and they have access to cheaper Mexican labor.

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