From the September 2005 issue of Entrepreneur

George Shuster, CEO of Cranston Print Works Co., likes to say his company "opened China before Nixon did." The Cranston, Rhode Island, textile company, Shuster says, was importing raw materials from China even before Nixon's 1972 diplomatic breakthrough ended decades of Cold War silence between the countries. "They call us an old, good customer, and an old friend," Shuster says of his Chinese suppliers.

Despite the friendship, China's role in the industry has Shuster concerned these days, and many other U.S. textile companies terrified. When a global system of trade quotas expired at the end of 2004, Chinese imports surged in the United States. In some categories, imports of T-shirts, pants and other textiles jumped more than 1,000 percent through the spring months. Dozens of factories closed their doors, blaming the tidal wave of low-cost competition. Finally, in May, under pressure from factory owners and labor unions, the U.S. imposed new quotas limiting year-over-year increases in Chinese textile imports to 7.5 percent.

Peter Morici, a former chief economist for the U.S. International Trade Commission who now teaches at the University of Maryland in College Park, says the Chinese in effect subsidize their exports by keeping their currency, the yuan, artificially low. That necessitates quotas for the time being, he says. "When they revalue their currency, permanently lifting the quotas will make sense," he says. But not before.

Even so, says Morici, the new quotas will provide only a temporary reprieve. The caps are likely to fall away again in the next couple of years, and when they do, the U.S. textile industry will have to find new ways to compete.

Shuster agrees. The United States, he says, "should be where the value-added manufacturing takes place"--where design, flexibility and speed-to-market trump low-cost competitors. The long-term alternative, he warns, is the "hollowing out of America as we lose our manufacturing jobs."