Mr Protectionism’s Riskiest Call

Is Wilbur Ross's strategy of betting on protectionism starting to unravel?

As an investor in troubled and bankrupt firms, Wilbur Ross can boast of turning round a bust Japanese bank, butting heads with South Korea’s militant labour unions and tackling the corporate wrecks that litter America’s telecoms industry. Most recently, Americans have toasted Mr Ross as the saviour of their steel industry, much of which he has bought out of bankruptcy, merged and restructured. Last month, Mr Ross floated his steel firm, International Steel Group, on the stockmarket, turning an $80m investment into shares worth $1.3 billion.

With success like this, investors in the family of so-called “vulture” funds (Mr Ross prefers to call them “recovery” funds) run by Mr Ross’s firm, WL Ross & Co, are naturally anticipating more magic in America’s textile industry, where he has recently made big bets. However, Mr Ross now finds his meticulously tailored plans for textile-makers seemingly in jeopardy.

Mr Ross will soon control two American textile manufacturers: Burlington Industries, a clothing-to-carpet maker that he bought out of bankruptcy last November for $614m; and Cone Mills, a bust denim manufacturer for which he is the sole bidder. He may soon add a third bankrupt firm, Galey & Lord, to his interests. His strategy in textiles appears to be similar to the one he followed in the steel industry. This is sometimes characterised as “betting on protection”—taking stakes in industries likely to benefit from swelling anti-free-trade sentiment, as America’s steel industry did when President George Bush slapped (now-lifted) tariffs on steel imports in March 2002.

But Mr Ross’s tactics are more nuanced than that. His key contribution in steel was to cut a deal with the United Steelworkers of America, the industry’s powerful union. Its hostility to reform had hitherto frustrated management efforts to cut labour costs. By championing the union’s protectionist line, Mr Ross gave it cover behind which it agreed changes essential to compete against cheaper foreign rivals: fewer jobs, reduced pension and health-care benefits, and modern work rules.

From this sprang Mr Ross’s Free Trade for America Coalition (Freetac), a grouping of beleaguered manufacturers and agricultural interests that he launched in September, ostensibly to widen the battle against “unfair” trade. Among Freetac’s founding members were two big textile lobbies, the American Manufacturing Trade Action Coalition (Amtac) and the American Textile Manufacturers Institute (ATMI). But by last month, this budding relationship had hit the rocks, as Amtac and ATMI split with Mr Ross over a proposed new Central American Free Trade Agreement (CAFTA), which he backed. ATMI says that 95% of the textile industry is against CAFTA, and calls Mr Ross an “outcast”. Jock Nash, the general counsel at Milliken, a big textile firm, calls the concessions that Mr Ross claims to have won for American textile firms out of the CAFTA talks “bullshit”.

At first blush, the textile industry ought to have been less of a challenge for Mr Ross than steel. Making textiles is relatively capital-intensive, and the unions do not play a big hand in shaping trade policy on textiles. It is the mill owners, through their trade associations, who influence trade rules. Mr Ross charmed the steel unions, but cannot win over the textile capitalists.

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