(FORTUNE Magazine) – On Jan. 1, a decade-old international agreement that allows the U.S. to limit foreign textile imports will expire. From the lamentations of the National Council of Textile Organizations, a protectionist lobbying group, you might conclude that an already comatose U.S. textile industry is about to flat-line. Not so. Textile manufacturers are alive and bubbling with new ideas ranging from revolutionary bandages that are saving lives in Iraq to tennis shirts that won't stink a week after being stuffed unwashed in a locker.

It's true that many U.S. garment plants have shut down or moved abroad in recent years. The fabric, yarn, and fiber mills that supplied those plants have also faced layoffs and closings (see box). But apparel accounts for one-third, at most, of the gross national textile product, according to Blanton Godfrey, dean of the Textile College at North Carolina State University. The bulk of U.S. textile production is in household and industrial items: everything from diapers, to carpeting, to crop covers, to highway underlining, to the cabin air filter in your Honda Accord.

In fact, any product made with natural or synthetic fibers is a textile. By that definition, many golf clubs and boat hulls are also textile products. Fibers will account for about half the weight of Boeing's upcoming 7E7 airliner. Most of this stuff is still made in the U.S., and most of the manufacturers are doing just fine, supporting Godfrey's claim that the textile industry is second only to motor vehicles in its contribution to U.S. GDP.

What's going on is a 21st-century demonstration of the hoary economic principle of comparative advantage. As labor-intensive plants move to low-wage countries, surviving manufacturers tend to substitute technology for labor. While there are fewer jobs per factory, the remaining workers are highly skilled and better paid. In the American South, some of these new factories are foreign-owned car and truck assembly lines and the factories that feed them. But new and different textile mills have also been opening throughout the region. Running 24 hours a day, seven days a week, fabric lines costing as much as $100 million each and manned by as few as five people now turn out more material in one hour than 500 conventional looms can weave in four. Many of them spew out more than 500,000 square meters of material on an eight-hour shift. One year's production is enough to wrap a 20-foot-wide ribbon around the globe north to south plus once around the equator, with enough left over for a bow.

Unless you aren't toilet-trained, most of these mills don't make fabrics you can wear. They're turning out so-called nonwoven textiles for which major uses, besides diapers, include carpet backing and medical fabrics such as gowns, scrubs, and tray covers. There are probably some 50 pounds of nonwoven fabric in your car, including the carpet backing and the sound deadener under the hood.

The U.S. leads the world in nonwoven fabric production. INDA, the industry's trade group, calculates that this year the U.S. will make 1.2 million tons of nonwovens, worth nearly $5 billion. That's a third of global output. The total includes about $1 billion in exports and gets multiplied many times when converted from bulk fabric to finished products. Even as garment jobs leave the country, foreign companies are creating nonwoven jobs in the U.S. One of the four biggest U.S. producers is German-owned, and another is British-owned. More foreigners are piling in. In North Carolina, where there are already 30 nonwoven factories, a Swiss, a Japanese, and an Israeli company are each opening plants.

While nonwoven manufacturers set output records, innovation has been sweeping through the "traditional" woven-fabric sector. Already available in your local mall's Gap: khakis that shed spills when you get sloppy with your beer. Now arriving in hospitals: sheets that kill germs. And due to hit the market soon: an undershirt that alerts the fire chief if one of his team in the fire zone is in trouble.

Given that the textile industry is widely seen as moribund, it's startling to observe the ferment in university textile labs. An exciting strain of academic research traces from the discovery of carbon nanotubes, submicron-dimensioned cylinders formed by pure carbon atoms. Scientists are combining nanotubes with other synthetics to create fibers as strong as steel.

In Cary, N.C., 3TEX has developed a line of body and vehicle armor woven from Kevlar and regular carbon fibers. 3TEX was founded in 1996 by Mansour Mohamed, a North Carolina State University researcher who became the company's chief scientific officer. He invented a method of weaving in three dimensions by adding a vertical yarn to the horizontal warp-weft pattern. His original machine is still used for some fabrics, but most current production is on standard weaving looms that have been modified to weave T shapes as well as material up to one inch thick.

At first 3TEX generated more publicity (in FORTUNE and elsewhere) than sales. But the company's small plant in Rutherfordton, N.C., is now busy weaving thick fiberglass fabric for the marine industry. Instead of applying several layers of fiberglass and resin, boat builders can form hulls using one thick layer of 3TEX fabric. The technique saves labor and produces a lighter structure that can't delaminate.

Another discovery, polymers that can conduct electricity, has sparked research into baby clothes and hospital gowns that warn Mom or the nurses' station when something is amiss. Woven fabric is a tempting medium for electronics engineers because the regular intersection of vertical and horizontal fibers allows precise positioning of components and sensors. Yet those junctions are also an engineer's nightmare. "You have to create disconnects so you don't end up sending signals everywhere," says Tushar Ghosh, a professor at North Carolina State's Textile College.

Electronic textile developers also face the challenge of keeping sensors in place near the skin. Sensatex, a Bethesda, Md., startup, has successfully tested an interactive SmartShirt to be worn underneath a firefighter's clothing. Sensors in the shirt track movement, heart rate, respiration, and ambient temperature. The weight of the oxygen tank on the firefighter's back helps keep the sensors properly positioned while they collect data that are broadcast to a computer display outside the fire zone.

The Sensatex shirt is based on Sundaresan Jayaraman's research at Georgia Tech. Jayaraman has since moved on to interactive textiles that respond to body temperature. The fabric can open its weave to cool you down, tighten the weave to provide more insulation, or even heat up (from an electrical power source) if that's what it takes to keep you cozy. Jayaraman is also working on fabric that not only senses when something is wrong but also does something about it. One application would be a shirt that monitors a diabetic's bloodstream and administers insulin when necessary.

In Greensboro, N.C., Burlington Industries is working on an odor-killing fabric treatment that could let hotels convert rooms from smoking to nonsmoking without replacing the drapes and bedspread. Burlington is now trying to manufacture mattress ticking compliant with a California regulation, going into effect on Jan. 1, that imposes tough fire-retardant and self-extinguishing standards. The company has one solution: woven fabric bonded to a fire-resisting nonwoven that it buys from others. That's fine for the side panels, but the feel is probably not soft enough for mattress tops. Burlington researchers are working on that problem.

Burlington also provided spill-resistant upholstery fabric for seats in the Houston Rockets' stadium. The upholstery is a sandwich of water-repellent cloth backed by a moisture-blocking nonwoven fabric. When Yao Ming brings the crowd to its feet, the cloth shrugs off the spilled drinks thanks to a process supplied by a sister company called Nano-Tex. A Taiwan-born chemical engineer named David Soane founded Nano-Tex after he developed a way to graft minute hydrophobic "whiskers" onto cotton molecules. The whiskers make cotton or blended fabric nonabsorbent without significantly changing its other properties. Burlington backed Soane and ended up with 51% of Nano-Tex. Both companies are now controlled by Wilbur Ross Jr., the billionaire financier who spent $614 million this year to bail Burlington out of bankruptcy and make it the core of his International Textile Group.

Nano-Tex now sells two other fabric treatments in addition to spill resistance, one that promotes moisture wicking and one that makes polyester feel something like cotton. The company provides the technology and chemicals for the fabric- altering brew to more than 50 mills around the world in addition to Burlington's own. Nano-Tex's major end users are apparel companies such as L.L. Bean, Perry Ellis, and Gap. But be careful. Spill red wine on your slacks, and it will bead up and roll off onto the hostess's new carpet.

Hospital patients are likely to see their infection risk decline thanks to Medline Industries, a Mundelein, Ill., medical-supply company with $1.8 billion in annual sales. It is introducing hospital linens that kill germs with chlorine using a process devised by Gang Sun, a polymer chemist at the University of California's Davis campus. Although chlorine-bleached sheets are germ-free when they come out of the hospital laundry, the chlorine quickly dissipates. Sun grafted a chemical stabilizer onto cotton fibers. When the treated fabric is laundered, chlorine bleach in the wash water locks onto the stabilizer. Each time the sheet is washed, its chlorine content is refreshed.

Medline passed the technique to its sheet suppliers in China and Pakistan and says the treatment remains effective through 70 washes. Now Sun and his research associate, Louise Ko, are developing clothes for agricultural workers that will neutralize pesticides.

Last year, after the Pentagon got involved, a small Portland, Ore., company called HemCon received FDA approval for a revolutionary new bandage just 48 hours after filing its application. Developed by Dr. Kenton Gregory, the bandage controls severe hemorrhaging and seals wounds. How? The wound side of the bandage is a layer of freeze-dried chitosan extracted from shrimp shells. The bandage sticks to the wound because chitosan is a bio- adhesive, particularly in the presence of blood. HemCon has already shipped nearly 40,000 bandages to the U.S. military, with 70,000 more on the way.

Nowhere in the textile industry is more capital being deployed on new ways to make new fabrics than in nonwovens. You make nonwoven fabric by spreading out a jumble of fibers, bonding them together, and rolling up the result. The technology is nothing if not flexible. You can start with a single type of fiber or a mix of natural and synthetic materials. (You could throw in granola or almost any other substance if you were so inclined.) Some plants use staple fibers: short lengths of material made elsewhere. In others, polymer pellets are melted into fibers and then spewed out across the width of a fast-moving belt. One variation, spunbond, lays down a continuous row of filaments. Another, meltbond, sprays out a high- velocity mist of polymers.

The fibers are then locked together by penetrating the mass with mechanical needles (relatively slow) or firing jets of water through it (very fast). And there are many ways to bond the material: pressure, heat, resins, or some combination. By varying all these techniques, manufacturers can alter thickness, flexibility, feel, strength, stretchability, porosity, and so on.

On one line in Simpsonville, S.C., BBA Fiberweb makes medical-garment fabric by laying down spunbond fiber, follows that with three layers of meltbond, and tops off with another spunbond layer. DuPont recently spent $130 million revamping part of an old plant outside Nashville to make new nonwoven fabrics. The first offering is Suprel, a polyester-polyethylene blend used to fashion more comfortable and protective medical scrubs. DuPont's main competitor in this market, the German manufacturer Freudenberg Nonwovens, is setting up a production line in one of its three plants in Durham, N.C. The new line will produce a three-dimensional fabric called Novolon. Possible uses: concrete reinforcement, underlining a cast so that air circulates next to the skin, and padding the shoulder of a shooting jacket.

Nonwoven plants are under constant pressure to make all their fabrics more quickly and cheaply. "This is a capital- intensive industry where every product quickly becomes a commodity," says Mike Ward, site manager for British-owned BBA Fiberweb's multiplant site in Simpsonville. "In the past, you depreciated a loom over 20 years. Now you have to replace equipment every few years."

Disposable diapers are one of the biggest, most competitive niches in the nonwoven industry. Ward's facility, for example, supplies Procter & Gamble. Around the world, P&G buys more than ten billion square meters of nonwoven fabric each year for products that include Tampax and sanitary wipes as well as Luvs and Pampers, its two brands of disposable diapers.

Diapers are important for Wal-Mart and other giant retailers because they build store traffic. The retailers constantly pressure P&G and other manufacturers to reduce diaper prices. P&G passes that pressure on to Ward and his competitors; they must cut costs by producing thinner material ever more quickly without sacrificing quality. P&G's chief competitor, Kimberly-Clark, manufactures most of its own nonwoven fabric. But K-C is rethinking its vertical integration strategy, industry gossips say. That's because the company is losing market share to P&G, which exploits its buying power to drive down nonwoven prices.

A clue that you might soon be wearing garments that weren't woven or knitted is provided by a new Freudenberg fabric called Evolon. The manufacturing process starts with a composite fiber whose cross-section looks like pie cut ready to serve: Tranches of polyester are separated by nylon segments that resemble knife cuts. On the production line, jets of water blow the filament apart into microfibers. The resulting fabric is light and soft, drapes like conventional garment textiles, and can be designed to either repel or absorb water. Freudenberg CEO Stephan Tanda foresees uses in industry, shoes, and luggage as well as in athletic and casual apparel.

Evolon is just the beginning. The major nonwoven manufacturers all support the Nonwovens Cooperative Research Center at North Carolina State University in Raleigh. The center operates two pilot plants, one processing staple fiber and the other pellets. Researchers produce limited runs of experimental fabrics for textile industry members. As a security precaution, all visitors are locked out when the lines are running. Asked what's going on inside the production facility, research director Behnam Pourdeyhim simply smiles. "Come back in a year," he says. "Apparel is going to get interesting."

IS SOUTHERN EMPLOYMENT REALLY TANKING?

Although garment makers are suffering, aggregate job statistics tell a different story.

As the import quota regime draws to a close, complaints about the loss of U.S. textile jobs are heard across the land, not to mention in the halls of Congress. It's true that garment makers and their suppliers have suffered. In the decade after 1992, shipments by U.S. apparel plants dropped from $97.6 billion a year to $45.5 billion. Employment in garment plants and the fabric mills that supply them declined from 1,594,000 workers to 618,000. That happened partly because of improved productivity in the mills, but mostly because of cheap imported garments.

But take a closer look at the confederacy of traditional textile states. The unemployment rate in Alabama, North Carolina, Georgia, Mississippi, Tennessee, and Virginia is lower today than it was at the end of 1992. The only exception is South Carolina, where unemployment is no worse than it was in 1993. Even in that state, many workers are earning good pay at BMW, Bosch, and Michelin plants, to name just a few foreign companies that have created jobs there. At least in gross terms, the economy is absorbing textile job losses.

Which is not to say nobody's hurting. The new jobs require up-to-date skills. Many unemployed textile workers, meanwhile, have 20-year-old diplomas from weak high schools. These people are the victims of shortsighted textile companies that chose protection over adjustment to the global economy--and of the federal and local officials who abetted them.

A bandage made from dried shrimp shells can stanch bleeding and seal off combat wounds.

In the capital-intensive nonwovens industry, every product quickly becomes a commodity.

P&G buys more than ten billion square meters of nonwoven fabric worldwide each year.