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- The Global Textile Mill
Charlie Munger addressed the graduating class of the USC Business School in 1994 with a trove of worldly wisdom. Later in the address, he told a story about his and Warren’s time in “the textile business”. The story explains everything wrong with how we think about global trade. When his workers came to him excited about a new loom that could double productivity, Buffett's response was blunt: "I hope this doesn't work, because if it does, I'm going to close the mill."
His reasoning was simple. In a commodity business like textiles, all productivity gains flow through to customers as lower prices. The mill owner gets nothing—just the privilege of spending more money to stay competitive while margins approach zero. The whole world has become Buffett's textile mill, and we're all arguing over who gets to install the better looms.
The $28 T-Shirt That Breaks Economics
Consider a simple branded t-shirt that retails for $28 in America. Current trade statistics record this as a $4 import from Bangladesh, feeding narratives about American manufacturing decline and unfair foreign competition. But this accounting commits the same error as measuring a Hollywood movie's success by the cost of physical film reels.
Here's where the real value actually goes:
$4 (14%) - Bangladesh manufacturing
$8.50 (30%) - American design and marketing
$13.27 (47%) - American retail, logistics, and services
$2.23 (8%) - Transportation and distribution
The supposed "trade deficit" product actually supports more American jobs than Bangladeshi ones. Yet our accounting makes it appear as if Bangladesh is winning while America loses manufacturing capability. We're measuring the world's most sophisticated value-creation system with tools designed for 19th-century commodity exchanges.
Buffett's Mill Goes Global
The parallel to Buffett's textile mill is exact. A surplus exporter keeps installing better manufacturing "looms"—more efficient factories, tighter quality control, faster turnaround times. These improvements are genuine innovations that benefit the global economy. But just like Buffett's mill, all the value flows through to the buyers rather than sticking to the producers.
This creates the global textile mill paradox:
Excess producers chase export volumes, mistaking activity for profitability
Their "surpluses" get recycled into U.S. assets, subsidizing American consumption
Innovation in commodity manufacturing drives margins toward zero
Political tensions rise as trade imbalances appear unsustainable
Everyone fights over who gets the better looms while the mill owners (brand companies, IP holders) capture the profits
Meanwhile, the real value creators—those controlling brands, customer relationships, and intellectual property—operate in what Charlie Munger called the "cereal business" rather than the "airline business." In cereals, competition is rational and profits stick. In airlines (and manufacturing), competition is destructive and shareholders get nothing despite providing enormous value to consumers.
The Innovation Trap
China, Vietnam, and other manufacturing centers genuinely innovate—they develop better processes, more efficient logistics, superior quality control. But these innovations fall into the category that hurts rather than helps the innovator.
As Munger explained, there are innovations that give you nothing as an owner "except the opportunity to spend a lot more money in a business that's still going to be lousy." All the productivity gains flow to customers (American consumers and companies) rather than producers.
This explains why manufacturing nations desperately seek to build domestic brands and move up the value chain. BYD's evolution from battery supplier to integrated car manufacturer represents an attempt to escape the textile mill trap. But even BYD's success comes with a caveat—they're entering a mature automotive market where the best they can hope for is rational competition rather than breakthrough value creation.
The Accounting Mirage
Our trade statistics make this situation worse by creating policy responses that destroy value for everyone. When we record Apple's iPhone assembly as a $380 import from China, we're committing an accounting error that would get a corporate CFO fired.
In reality:
Apple's design and R&D ($240) should count as U.S. service exports
Qualcomm's chips ($80) should count as U.S. component exports
China's actual value-add is closer to $25 for assembly
The "trade deficit" of $380 should be a trade surplus of $200
We're literally counting our own value creation as foreign imports, then getting angry about the resulting "deficits."
This accounting mirage drives destructive policy responses. Tariffs on Chinese goods often tax American intellectual property. Trade wars fight over statistical ghosts while the real dynamics—who controls brands, customer relationships, and platform technologies—remain invisible to policymakers.
Why This Matters Now
The global textile mill problem is reaching a breaking point. Excess producing nations can't indefinitely install better looms while sending all the profits to deficit nations. Political systems in manufacturing countries face pressure to capture more value domestically. Meanwhile, deficit nations see large trade imbalances and assume they're losing competitiveness.
Both sides are partially right and completely wrong. Manufacturing nations are indeed trapped in low-value activities, but the solution isn't tariffs or currency manipulation—it's building capabilities in the "cereal business" of brands, services, and innovation. Deficit nations do face challenges, but not from trade deficits that largely represent their own value creation taking a tour overseas.
The current system works well for global efficiency but poorly for political sustainability. Something has to give.
The Path Forward
The solution isn't to stop global integration or return to autarky. Instead, we need what Ricardo Hausmann calls "economic complexity"—helping countries build complementary capabilities that expand total value creation rather than competing for the same commodity space.
Think of economic development like monkeys swinging through a forest of product trees. Dense parts of the forest (machinery, chemicals, electronics) allow easy movement between high-value products. Sparse parts (raw materials, basic manufacturing) trap countries in low-complexity activities.
The goal should be helping manufacturing nations swing to nearby high-value trees rather than fighting over who gets to cut down the low-value ones. This means:
Graduating technology transfer that builds local capabilities
Encouraging brand development and service innovation
Reforming trade accounting to show where value really comes from
Creating incentives for complementary rather than competitive development
Coming Next
In the next piece, we'll explore how the "monkeys and trees" model reveals specific pathways for countries to escape the textile mill trap. We'll examine how successful knowledge transfer creates win-win relationships rather than zero-sum competition, and why the future belongs to countries that can build complementary capability trees.
The story isn't about America versus China or manufacturing versus services. It's about building an economic system where innovation creates value for everyone rather than just flowing through to whoever happens to own the customer relationships.
Because in the end, the goal isn't to win the textile mill competition—it's to stop being in the textile business altogether.
It will only get to a point where human labor is largely separate actual production processes and find themselves in another tree instead.
Sources and Further Reading
Core Research:
Hausmann, R. & Hidalgo, C. (2009). "The Building Blocks of Economic Complexity." Proceedings of the National Academy of Sciences
Bernard, A. & Fort, T. (2015). "Factoryless Goods Producing Firms." American Economic Review
Koopman, R., Wang, Z. & Wei, S. (2014). "Tracing Value-Added and Double Counting in Gross Exports." American Economic Review
Industry Analysis:
Hart-Smith, L. (2001). "Out-Sourced Profits – The Cornerstone of Successful Subcontracting." Boeing Technical Report
OECD Trade in Value-Added (TiVA) Database: oecd.org/sti/ind/measuring-trade-in-value-added.htm
Dedrick, J., Kraemer, K. & Linden, G. (2010). "Who Profits from Innovation in Global Value Chains?" Industrial and Corporate Change
Podcast Sources:
"Scott Bok on How Bankers Spread the Gospel of Capitalism," Odd Lots Podcast, Bloomberg (May 2024)
"Ricardo Hausmann on What It Takes to Win a Trade War," Odd Lots Podcast, Bloomberg (June 2024)
Data Sources:
U.S. Bureau of Labor Statistics Employment Data
Census Bureau Trade Statistics
Federal Reserve Economic Data (FRED)