-Global Effects of Developed Country Trade Restrictions on Textiles and Apparel

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Global Effects of Developed Country Trade Restrictions on Textiles and Apparel

Author(s): Irene Trela and John WhalleySource: The Economic Journal, Vol. 100, No. 403 (Dec., 1990), pp. 1190-1205Published by: Blackwell Publishing for the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2233967 .

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TheEconomicJournal,Ioo (DecemberI990), I I90-I205Printedin GreatBritain

GLOBAL EFFECTS OF DEVELOPED COUNTRYTRADE RESTRICTIONS ON TEXTILES ANDAPPAREL*IreneTrelaandJohn Whalley

This paper reportsgeneralequilibriumestimatesof national and global welfarecosts of both developed country tariffs and bilateral quotas on textiles andapparel using an applied general equilibrium model. It covers quotasnegotiated between three major developed importing countries (the UnitedStates, Canada, and the EC) and 34 supplying developing countriesunder theprovisionsof the Multi-FibreArrangementapplying in mid-i 980's (MFA III).Our results,' based on I986 data, suggest annual global gains fromelimination of quotas and tariffs on developed country textile and apparelimportsof around $23 billion. Gains to the United States, Canada, and the ECare respectively, $12-3 billion, $o8 billion and $2-2 billion, the first which isconsiderably higher than existing partial equilibrium estimates for reasonswhich arediscussedin the text. In aggregate,developing countriesgain around$8 billion.These results also suggest that, despite foregone rent transfers, the vastmajority of developing countrieswould gain from a removal of restrictions ontrade on their textiles and apparel exports, with some gaining proportionatelymore than others. This is because, contrary to popular belief, all developingcountry suppliers (including Hong Kong, South Korea, and Taiwan) arerelatively small compared to developed countries, even in apparel production.Thus, ratherthan losingshare to other developing countriesin previouslytraderestrictedtextile and apparel items under an MFA elimination, higher incomedeveloping countries (like other developing countries) gain market share due

to increased developed country consumption, reduced developed countryproduction, and reduced inter-developed country trade. Sensitivity analyses,not surprisingly, suggest that a number of model features are important forresults, but the main themes of results appear to be preserved under thesensitivity analyses we have performed.

* This is a revised and shortenedversion of NBER Working Paper No. 26I8, 'Do Developing CountriesLose From the MFA?' This work has been presented to seminars at Western Ontario and Guelph, and toa NBER Symposium on Applied General EquilibriumAnalysis, held at Stanford, March 5-6, I988. We aregrateful to participants in all thesesessionsforcomments, as well as to CarlHamilton and Kiichiro Fukasaku.

1 These are different than those reported in earlier versions, and in Trela and Whalley (I990), due toadjustmentsto the imports data used, revised quota premium data, and a new allocation of interdevelopedcountry trade acrossquota restrictedand unrestrictedproducts.The differencesare most pronouncedfor theUnited States and Canada, due to the different treatment of interdeveloped country trade; results forindividual developing countries are more similar.[ I I90


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[DEC. I990] GLOBAL EFFECTS OF TRADE RESTRICTIONS I I9I

I. A GENERAL EQUILIBRIUM MODEL FOR ANALYSING THE EFFECTS OFRESTRICTIONS ON GLOBAL TRADE IN TEXTILES AND APPAREL

Imports of textiles and apparel have been restricted by the major developedcountries, including the United States, Canada, and the EC, since 1974 by aseries of international agreements among exporting and importing countries,commonly known as the Multi-fibre Arrangements (MFAs) (of which therehave now been four). The result is a series of discriminatory bilateral quotasthat now restrict exports by most lower cost developing countries to the majordeveloped countries.2Under these agreements, licences to export are issued to exporting countries,who then allocate them to firms within their country. These quotas restricttrade by limiting imports, and also further distort the pattern of trade becauseof their bilateral nature. Since the quotas are specified in physical terms, theyalso have the effect of encouraging upgrading of quality by exporters. Thus,protected producers in importing countries tend to produce lower quality itemsthan they otherwise would, since the relative price of these increases in theprotected domestic market.

We use an applied general equilibrium model to analyse the trade effects ofthese arrangements, along with the effects of developed country tariffs. Themodel covers three major developed country importers, the United States,Canada, and the EC, thirty-four developing country exporters,3 fourteenspecific textile and apparel product categories,4 and one composite other good.5The fourteen product categories reflect the constraints implied by generatinga cross country data set covering trade under the different MFA quotacategories used by the major importing countries (the United States, Canada,and the EC)6.

2 Most developed countries continue to impose tariffs on textile imports. Over the years GATTnegotiations have slightly reduced these tariffs, but not to the same degree as for other manufacturedproducts.3 These are: Bangladesh, Brazil, Bulgaria, China, Columbia, Czechoslovakia, Costa Rica, DominicanRepublic, Egypt, Guatemala, Haiti, Hong Kong, Hungary, India, Indonesia, Republic of Korea, Macau,Malaysia, Mauritius, Mexico, Nepal, Pakistan, Panama, Peru, Philippines, Poland, Romania, Singapore,Sri Lanka, Taiwan, Thailand, Turkey, Uruguay, and Yugoslavia.

4 The fourteen textile and apparel products in the model involve seven restrictedand seven comparableunrestrictedproducts. This approach is employed because despite the MFA, significantvolumes of trade intextiles and apparel take place in unrestricted quota categories. If products in unrestricted categories aretreated as perfect substitutes for quota restricted products, then in a competitive model countries wouldsubstitute costlessly into products not subject to quota. In practice, there are differencesbelow the level ofaggregation in what is restricted and what is unrestricted and, in addition, a numberof bilateral agreementsinclude provisionsfor consultations that can result in unrestricted products being brought under restraint.An assumption of qualitative differences between comparable restricted and unrestrictedcategories is theway we treat this difficulty in the model.5 We define the composite other good to be residual GDP in the basic variant of our model; 'othermanufactures' are used in our sensitivity analysis reported on later.6 We are unable to include all the MFA quota categories in each country since they include productswhich belong to more than one of the fourteen specific product categories we identify in our model. Thecategories not included are: handkerchiefs (categories 330 and 630), gloves (33I, 43I and 63I) and otherapparel (359, 459, 659) in the United States; work gloves (3I) and swimwear (44) in Canada; andhandkerchiefs (i9), knitted gloves (io), swimwear (72), shawls and scarves (84), woven ties (85), and otherclothing accessories (88) in the EC.


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I I92 THE ECONOMIC JOURNAL [DECEMBERIn the model, production in each country involves nested constant elasticityof transformation (CET) production possibilities frontiers involving thefourteen textile and apparel products and composite other good (residualGDP). Consumer demands in each region reflect utility maximising behaviour,

with a single demand side agent assumed in each country; nested constantelasticity of substitution (CES) functions are used. Details of these functionsand how they are used in the model are given in a technical model appendixavailable on request to interested readers.All developed countries are treated as net importers of textiles and apparel(and exporters of the other good), while all developing countries are modelledas exporters of textiles and apparel (and importers of the other good). Tradein textiles and apparel among developing countries does not take place in themodel; otherwise differences in supply prices between these countries would bearbitraged away. Interdeveloped country trade is quota (although not tariff)free. Thus, the model captures trade diversion effects between developedcountries due to their joint bilateral quotas on exports by developing countries,and domestic prices in the various developed countries therefore depend on thequota policies of all developed countries.Importantly, the model treats traded goods as homogeneous betweencountries, rather than heterogeneous (the Armington assumption) as iscommonly done in other applied general equilibrium trade models (see thediscussion of the Armington assumption in Shoven and Whalley (I 984)). Thisis because it greatly reduces both the dimensionality of the equilibrium problemto be solved relative to an Armington type treatment and the difficulties inseparating out data by country so as to incorporate product quality differencesacross countries. Also, the need to deal with cross hauling (countries bothimporting and exporting the same product), which is part motivates the use ofthe Armington assumption, does not arise here in the same way as in othermodels since little two way trade between developed and developing countriesoccurs in textiles and clothing. In addition, the Armington assumption is wellknown (Brown, I987) for the strong and often artificial terms of trade effectsit induces in results.The model is calibrated to a I986 multi-country microconsistent data setinvolving production, consumption, and trade in fourteen major textile andapparel product categories and one other good (residual GDP) for each of thethirty-seven countries captured. This provides the benchmark equilibriumaround which counterfactual equilibrium analysis is done for various possiblepolicy changes in the model. In equilibrium, markets clear and external sectorbalance condition by country holds. Quota restrictions have the effect ofsegmenting national from global markets, so that in the presence of quotarestrictions separate market clearing prices for each quota restricted product ineach country are determined in the model. In counterfactual equilibria whererestrictions are removed, producer prices in developing countries increase,stimulating both production and exports, while consumption increases andproduction falls in developed countries. Comparing counterfactual andbenchmark equilibria provides the basis for policy evaluation with the model.


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I990] GLOBAL EFFECTS OF TRADE RESTRICTIONS I I93Constructing the benchmark set requires information on supply prices byproduct by country, and estimates of key elasticity parameters. The dataavailable for estimating supply prices are not free of problems. For example,while there are some (albeit limited) quota price data for Hong Kong, there is

little direct information on supply prices for other supplying countries, and anindirect method, related to that recently used by Hamilton (I988), has to beemployed. Also, because of incompatibilities among the various quotacategories used in the major developed country MFA participants (the UnitedStates, Canada, and the EC), capturing effects of quotas on interdevelopedcountry trade in textiles and apparel is difficult. Below we discuss in more detailhow some of these difficulties are accommodated in the data we use.

II. DATA, MODEL PARAMETERISATION, AND ELASTICITY PARAMETERVALUESTo determine parameter values for the demand and production functions inthis model, we use calibration procedures similar to those used in other appliedgeneral equilibrium models (see Mansur and Whalley (i 984)). We use a multi-country microconsistent equilibrium data set we have constructed for 1986,which we augment by values of elasticities of transformation and substitution.Several data sources are used in assembling the microconsistent data set forI986 on which model calibration is based. Data on the value of imports, byMFA product category and country of origin, are from the U.S. Departmentof Commerce (i987a, b, c), Canadian Department of External Affairs(unpublished data, I987), and the European Commission (I987).7 The majorproblem with these data is that it is difficult to make comparisons acrosscountries because of the different textile and apparel categories used inadministering quotas in each country or region. Since no such cross countrydata set currently exists, we have constructed as close as comparable 14-goodcross-country data set as possible to produce trade data under the differentaggregated MFA quota categories used in the model.8

7 In using these data we assume that all bilateral quotas were fully binding in the year in question.Whethertextile quotas are or are not binding has been a source of controversy for some time. For some exportingcountries not all the allocated (category-specific) quotas are fully utilised in any given year (see GATT(i 984) and USITC (i 987)). Thus it appears, at first sight, that the cost to the United States of imposing theserestraints may be overestimated by the model. However, there are many reasons why data for exportcountriescan seem to indicate non-binding quotas and yet in fact be binding. Quotas assigned to firms withinan exporting country may not be fully utilised due to capacity constraints within firms and the unwillingnessof firms to reassign or reallocate quota (or sell if there are legal markets) for fear of losing their quotaallocation in future years. Other reasons can lie in the way quota is allocated among importers. Textilequotas in the EC, for instance, are often allocated between importing countries on the basis of historicalmarket shares with no trading of quota across countries, so that quotas for, say, coats can be binding inNorthern Europe but not in Southern Europe. Also sub-aggregate quotas, say for types of shirts, may begreater than an aggregate quota for shirts and hence not appear to be binding at subaggregate level whilebe binding at aggregate level.

8 In orderto capture trade diversion effects between developed countries due to theirjoint bilateralquotason exports by developing countries we have had to allocate interdeveloped country trade between quotarestricted and unrestricted products. Otherwise, based on the level of aggregation used in our model, allinterdeveloped country trade would be in unrestricted products, and trade diversion effects would not beproperly captured by the model. We assume that foreach developed country the distribution between quotarestricted and unrestricted products in interdeveloped country trade is the same as the distribution of thedeveloped country's trade with the developing countries in these products.


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I I94 THE ECONOMIC JOURNAL [DECEMBERData on the value of production in the United States for textiles and apparelin separate aggregate categories are taken from the U.S. Department ofCommerce (I987 d), while data in Canada, the EC and the developingcountries are from the United Nations (I986).9 These data are disaggregated

in order to provide estimates of production for the fourteen product categoriesin the model using the ratios of trade in the individual categories to total tradein the corresponding broad category (textiles or apparel) by country. For eachmodel product in each country, the value of consumption is determined as theresidual between value of production and imports, on the one hand, and valueof exports on the other.As noted in the introduction, data on unit costs of production of individualtextile and apparel products (supply prices) in the various developing countriesare not currently available. While the unit costs of quota unrestricted productscan be approximated by the United States price minus the tariff, the problemwith data arises when we try to estimate supply prices of quota restrictedproducts. These are central to any calculation of the impacts of developedcountry textile quotas, since they affect estimates of rent transfer per unitexport.Although quotas are freely traded in several exporting countries, com-prehensive quota price data are only readily available for Hong Kong, and onlylimited quota price data are available for Taiwan. Hence, quota price data in arange of countries cannot be used. Also quotas are not necessarily allocated tothe most efficient producers within countries, and so even if actual costs ofcurrent producers were known, the minimum potential unit cost for each textileand apparel product in the various countries remains unknown. We, therefore,use an indirect method of estimating supply prices of quota restricted items indeveloping countries closely related to that used by Hamilton (I988).We take a simple average of Hong Kong quota prices in I983 and the firstfive months of I984, for each of fifteen apparel product categories exported byHong Kong to the United States, based on calculations made by Hamilton(I986), and assume them to reflect the quota prices for the fifteen categories inI984; I982 quota prices also from Hamilton (I986), are used in modelsensitivity analyses reported on later. Both of these sets of price data are givenin Table i. Hong Kong quota prices of the other MFA apparel productsexported to the United States are calculated on the basis of an average of thequota prices given in Table i. In aggregating the MFA apparel products inthe United States into the six restricted apparel product categories used in themodel, new quota prices are calculated by taking trade weighted averages ofquota prices using the Hamilton data that fall within the categories used in themodel.Quota prices for textile products from Hong Kong would appear to besignificantly lower than for apparel, as quota restrictions are less severe. Since

9 We were unable to obtain production data for some of the developing countries. In these cases tradedata, along with estimates of mill consumption to export ratios obtained from FAO (i985) were used tocalculate the value of production of each of the fourteen product categories in each country.


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I990] GLOBAL EFFECTS OF TRADE RESTRICTIONS I I95Table I

Hong Kong Quota Prices* for SelectedApparelItems Exportedto the United States

CategoryCategory description number i982 I984tMen's cotton jacket 333/334 I0 I9Ladies' cotton jacket 335 20 27Cotton knit shirt and blouse 338/339 49 50Men's cotton woven shirt 340 6 38Ladies cotton woven shirt 34I I I 36Ladies cotton woven skirt 342 n.a. 37Cotton knit sweater 345 n.a. 59?Men's cotton pant 347 8 50Ladies cotton pant 348 IO 63Ladies wool knit blouse 438 I I9Wool knit sweater 445/446 2I I20Men's MMF jacket+ 633/634 n.a. 23?Ladies' MMF shirt+ 635 n.a.MMF knit shirt and blouse+ 638/639 2 27Men's MMF woven shirt+ 640 n.a. 65?Ladies' MMF woven blouse+ 64I 6 s811Ladies' MMF pant 648 8 3411Average** I0 42

n.a., Not available.* As a percent of export price.t Average over the periodJanuary I983 to May I984.+ MMF, man made fibres.? January to May i984 only.11January to December i983 only.** From the proportion of total rent to total export value inclusive of total rent.[Derived from: Hamilton (I986).]no data are available, we assume quota prices on textile products to be one-halfthe average of quota prices for apparel products given in Table i.'0The calculated quota prices, expressed as export tax equivalents, are thenconverted into import tariff equivalents" and used, along with data on tariffrates on U.S. imports of textiles and apparel obtained from GATT (I984), tocalculate unit production costs in Hong Kong of each of the seven restrictedproduct categories used in the model.Our method of calculating production costs of quota restricted items in othersupplying countries is to assume that for each product category, the unit costcan be approximated by the unit cost in Hong Kong multiplied by the ratio ofthe supplying country's relative wage rate in textiles and apparel compared toHong Kong. We apply a further correction for the relative efficiency of labourand product quality across countries by also multiplying by each country'srelative value of gross output per worker in textiles and apparel compared to

10 This is consistent with Cline (I987) who assumes that the tariff-equivalent of textile quotas hasaveraged I 5 % increment beyond tariff protection since i98I, and some 25 % on apparel." U.S. export tax equivalents are converted into import tariff equivalents by multiplying by the ratioof f.o.b. and c.i.f. values of clothing importedfromHong Kong. (The f.o.b./c.i.f. ratio is approximately0o93.)See Hamilton (I986).


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I196 THE ECONOMIC JOURNAL [DECEMBERHong Kong. This makes a large difference to estimated supply prices.'2 Valueof gross output per worker is given by dividing wages per employee by wagesin value added, and then dividing by value added in gross output. Data onwages per employee, value added in gross output and wages in value added,for textiles and apparel are from UNIDO (I 985). The resulting average supplyprices of quota restricted products by country, both adjusted and unadjustedfor differences in labour productivity and product quality, for both I982 and1984, are presented in Table 2. As can be seen the correction for labourproductivity and product quality makes a very large difference to theseestimates; as large as a factor of ten in some cases. The value of quota rentsreceived by each of the developing countries is calculated by using the supplyprices of quota restricted products by country and the trade data by modelproduct category by country.'3The value of production of other goods in all countries is given bysubtracting the value of production of textile and apparel products from GDPin each country. Data on GDP by country are from the World Bank (i 986) andfrom Europa (I987). External sector balance conditions are then used tocalculate the value of trade in other goods in each country.The model also requires elasticity values for transformation surfaces andpreferences in each country. For the bottom level of nesting, assumed values of-o so and 5yo are used for all pairwise nests between comparable restrictedand unrestricted commodities and in all countries. Given there are no literatureestimates to the choice of these values we justify our specification as follows. Anassumption of smooth substitutability in production between comparablerestricted and unrestricted commodities would not be appropriate, since therewould be no effect of the quotas. Therefore, a low elasticity value is used for allcountries, implying a limited ability to substitute products on the supply side.In contrast, a high degree of substitutability is assumed on the demand side ofthe model. This has some claim to plausibility since from the consumers pointof view the relative difference in product characteristics is small.

12 Hamilton (I988) analyses these differences between Hong Kong, Taiwan, and South Korea andconcludes they are small and can be ignored. Here, with thirty-foursupplying countries, these factorsbecomeconsiderably more important.13 Our estimate of quota rentsaccuringto developing countries fromtextile trade restrictionsin developedcountries is about $8'7 billion. In a recent related general equilibrium model, Tarr (I989) estimates thatquota rents transferredjust from the United States to developing countries are about $7-i billion. Moreover,Tarr also uses Hamilton's quota price data. These differences in estimates are explained mainly by twofactors. First, by differences in supply prices used. For example, in calculating supply prices of quotarestricted items in developing countries we incorporate the bilateralism in the quotas, whereas Tarr treatsthe rest of the world as a single supplying region and calculates a single quota premium rate on textile andapparel equal to the weighted average of Hamilton's (I988) quota premium rate for Hong Kong apparelproducts in the United States in the first five months of I984 of 47 % and an assumed quota premium rateon textiles of 5 %. On this score, Tarr's estimate of quota rents will be downward-biased.Second, and perhaps dominant, there are important differences in the trade data used for calculatingquota rents. For example, in calculating our quota rents we use data on quota restricted imports of MFAcategories. On the other hand, Tarr uses data on US imports of all textile and apparel categories,ignoring the fact that not all categories are MFA categories, and that duie to bilateralismin the quotas, notall imports of MFA categories are quota restrained. This procedure will apply a quota premium to importsfrom other developed countries, which are not quota restrained. Consequently, on this score, Tarr's quotarent estimate will overstate the true quota rents involved.


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I990] GLOBAL EFFECTS OF TRADE RESTRICTIONS I I97Table 2CalculatedAverageSupplyPricesof QuotaRestrictedTextilesandApparelbyCountry,I982 andI984Adjusted Unadjustedfor differences in for differences inlabour productivity labour productivityand product quality and product quality

Exporting country I 982 I984 I982 I984Bangladesh 0-4I 0?3I 0o05 0?04Brazil 0o35 0o25 0?34 0o25Bulgaria o-76 ?o55 0o42 0-3IChina o-62 0-46 o0I 2 oogColombia 0o53 0o39 0o35 0-26Czechoslovakia 0o76 o056 0o42 0.31Costa Rica 0o70 0-5I o-6o 044Dominican Republic 0o76 056 0o36 0-26Egypt o-67 0?49 o-i8 0-13Guatemala o-67 0o49 0?34 0-25Haiti o062 0o46 0-I5 OsI IHong Kong 076 os6 0o76 os6Hungary o 6o 0?44 0o23 OI7India o-62 0o46 0?0 0o07Indonesia o58 0o42 00?9 0?07Korea 0-55 0-4I 0?43 0o32Macau o067 0?49 o-68 0osoMalaysia 0o52 0o38 0o22 o i6Mauritius 0o58 0o42 o?I8 0 13Mexico o-67 0?49 O07I 0 52Nepal o-62 0-46 o-6o 0o04Pakistan o-62 046 o0I 2 oogPanama 0o76 o-56 0 53 0?39Peru o-67 0o49 0?34 0-25Philippines o-69 0o5I 014 o0IOPoland 0-76 0?55 0o42 0-3 IRomania o-67 0?49 0-76 0 55Singapore 0o70 0o52 o-62 0o45Sri Lanka o-62 0o46 OI3 01IOTaiwan o-67 0?49 o-67 0?49Thailand o-67 0?49 0?22 o i6Turkey 0o36 0o27 0 40 0?30Uruguay o07I 0?52 0o73 0 53Yugoslavia o.65 0-48 0?52 0o38

Source: Based on data from Hamilton (i986) and methods described in the text.All prices are expressedrelative to U.S. supply prices of unity.

Elasticity values at the top two levels are calculated as follows. For thedeveloped countries, we base our selection of these values on estimates ofUS total demand elasticities and assumed supply elasticities of I o. Forthe developing countries, we assume a Cobb-Douglas specification for bothtransformation and preference functions, which is equivalent to setting all these


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I I98 THE ECONOMIC JOURNAL [DECEMBERelasticities to unity.'4 Because of the potentially crucial nature of these elasticityvalues for model behaviour, we use a central set of elasticity values aroundwhich sensitivity analyses are performed.The US total demand elasticity of -o'6o is based on estimates of thiselasticity for textiles and apparel, reported in Cline (I987). Since nocomparable information on supply elasticities is available we use a value of i-o,which is an assumed value used by other researchers (see, for instance, Cline(I989), Jenkins (I980), and Hufbauer et al. (I986)). We calculate impliedelasticities of transformation and substitution for the top two levels of nestingin the developed countries15 consistent with these estimates. These values are,however, not necessarily consistent with literature estimates of import demandelasticities for textiles and apparel,"6 reflecting the well known incompatibilitiesbetween literature estimates of demand and supply elasticities on the one hand,and import demand elasticities on the other.The calibration procedures used to generate the parameter values for themodel involve first decomposing the data represented in value terms intoseparate price and quantity data. This is done through a units conventionwhich defines physical units for all commodities as those amounts which inequilibrium, sell in the United States for $ I. Hence domestic prices indeveloping countries for quota restricted items are less than one, and domesticprices in Canada and the EC are less than, greater than, or equal to one,depending upon the direction of trade. Once elasticity values have beenselected, share parameters for the CES and CET functions in the model aregiven from the price and quantity data and the assumption of agentoptimisation in each country (see Mansur and Whalley (I984)).

III. RESULTSThe general equilibrium model described above has been used to analyse avariety of possible changes in quota and tariff restrictions used by developedcountries towards imports of textiles and apparel. In these analyses major focusis on welfare effects, reported as Hicksian equivalent variations (EVs)"7 bycountry in billions of i 986 dollars, but trade volume and production effects arealso reported. Table 3 presents the welfare, production, and trade effects ofremoving both developed country bilateral quotas and tariffs on the fourteentextile and apparel products covered by the model.Results clearly show that the vast majority of developing countries gain fromthe removal of restrictions on trade in textiles and apparel, with some gaining

14 The reason for making this assumption is because there are currently no estimates of import or exportdemand elasticities for the developing countries from which implied transformation and substitutionelasticities can be calculated.15 We assume common values across nests.16 Hufbauer et al. (I986) believe a conservative estimate of import elasticity of demand for importedtextiles and apparel in the United States to be about - I'8. We estimate import elasticity of demand in theUnited States at -6-4.17 Welfare estimates under Hicksian equivalent and compensating measures are very close, and so onlyEVs are reported.


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1990] GLOBAL EFFECTS OF TRADE RESTRICTIONS I I99Table 3

GeneralEquilibriumEffectsof RemovingBilateral MFA Quotas and Tariffs onTextiles and Apparel in all Developed Countries*Change in value Change in value ofof production of imports or exports oftextiles and apparel textiles and apparelHicksian EV's at benchmarkprices at benchmark prices($ billions I986) (%) (%)

United States I2-309 -251I4 305'49Canada o-83 I - I8.58 200- I7EC 2-2I5 - I242 IgO-I6Exporting countriesBangladesh 0237 38-Ig I4I100Brazil I*I33 7990 474-I 2Bulgaria o-oo6 7.2 I 41I2China I827 I-26 43357Colombia 0477 39-43 I045-00Czechoslovakia o0ogI I 234 43 I 0o6Costa Rica 0-04 4'04 6-6iDominican Republic - o-oo6 - I .48 -61I5Egypt 0-022 9-48 532-23Guatemala o-oo6 81I4 I 2079Haiti - 0-002 9.78 201I3Hong Kong -0O5I9 I5.86 66-I5

Hungary 01I24 2201I I9738India 0077 8-20 I97.78Indonesia o6io 54. I9 46I0OIKorea I1579 34.60 3I488Macau -0-030 3'29 25-60Malaysia 0-2I7 531I 3 27482Mauritius 0-02I 24I I IOI-48Mexico o I37 8 96 342-56Nepal 0-028 I2.24 I6I.I3Pakistan o-oo8 I3-24 23.29Panama 0003 I8-48 74 i8Peru o0o6i i i-88 3091I4Philippines 01I27 25.83 I 83-14Poland OI76 I21I6 4184IRomania 0-208 25-44 I37.69Singapore -00 1I2 37.82 I22-30Sri Lanka 0-048 44'92 I05-34Taiwan I-93 2759 223 97Thailand 0025 24-74 5401 ITurkey o I 29 5-44 25-82Uruguay o-oio I I.24 7736Yugoslavia 0043 II10I 6704All developing 8-078

countriesAll countries 23435* Transformationand substitutionelasticities set equal to -o5 and 5-o in the bottom level of nesting forall countries in the model. In the top two levels, elasticitiesof transformationand substitution in all developedcountries reflect literature estimates of US total demand elasticities and assumed supply elasticities of i-o.Ihe elasticities are -o-oi and o-6i in all developed countries. Cobb-Douglas specificationsare used at thetop two levels in all developing countries.


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1200 THE ECONOMIC JOURNAL [DECEMBERproportionately more than others. The effects by country reflect improvementsin each country's market share in developed country markets, as well as therent transfer effect of the bilateral quotas. The percentage changes in the valuesof production and consumption (and trade) in developed countries may appearslightly inconsistent with the elasticity configuration used. This discrepancy isaccounted for by differences in the percentage changes in producer andconsumer prices because of the different aggregation function implied by theassumptions on technology and preferences of the composite textile product.In aggregate, developing countries gain around $8 billion, suggesting thatgains to developing countries from improved access more than offset losses fromforgone rent transfers as quotas and tariffs are abolished. This is even the casefor relatively larger holders of quotas such as South Korea and Taiwan, whomit has always been argued, have a protected market niche against lower costcompetition under the MFA. In the presence of quotas (and tariffs) they, alongwith other developing countries, are non-marginal suppliers to developedcountry markets. Removing protection improves all supplying developingcountry market shares in developed country markets in previously traderestricted textile and clothing items rather than reallocating shares amongthem. 18The global welfare gain is $23-4 billion with gains to the United States of$1 23 billion. This estimate is significantly higher than that of Cline (I987) whoplaces the net welfare cost of textile and apparel protection in the United Statesat around $8 billion using I986 data. Importantly, this divergence in resultsoccurs even though Cline uses a partial equilibrium approach which tends tooverstate the welfare costs of protection to the United States. This is becauseunder a partial equilibrium approach, the United States is modelled as amarginal importing country, and so if textile and apparel protection isabolished the world market supply price to the US market would beunchanged, thus implying full rent transfer. But the reason why our results arehigher than Cline's is because our model captures the added costs ofbilateralism in these trade restrictions, while Cline does not. In addition, ourmodel considers the tariff-equivalent of quota protection in textiles and apparelto be higher than the estimates used by Cline.In Table 4 we report results where bilateral quotas alone are removed,leaving tariffs in place. In this case all developing countries are worse offcompared to the case in Table 3, because their market access is reduced bydeveloped country tariffs. Even larger gains result for the developed countries.This reflects their more advantageous terms of trade as a result of not alsoeliminating their tariffs, indicating that in the non-small open economy case,optimal tariffs for developed countries are non-zero, and that I986 tariff levelsare below optimal tariffs. This again emphasises the difference in the analysisfrom the small open economy case.

18 Most supplying developing countries, however, lose market share in unrestricted textile and apparelitems under an MFA elimination. Therefore, whether a developing country's market share in developedcountry markets increasesor decreasesdepends on the combined effect of an increase in the country'smarketshare in the previously quota restricted textile and apparel categories and an increase or decrease in itsmarket share in the unrestrictedcategories.


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1990] GLOBAL EFFECTS OF TRADE RESTRICTIONS 1201Table 4

Welfare, Productionand TradeEffectsof RemovingBilateral Textile and ApparelQuotas,But Not Tariffs*Change in value Change in value ofof production of imports or exports oftextiles and apparel textiles and apparelHicksian EV's at benchmark prices at benchmark prices($billions I986) (Oo) (O%)

United States I5-038 - i9-64 235-80Canada 0o928 - I0-26 i i5-66EC 3'039 -7-I9 II7-2IExporting countries

Bangladesh o i88 30.3 I 90'25Brazil o963 70'74 396.82Bulgaria -o0ooI I 30 -7.8IChina 0 944 6-23 2I0-78Colombia 0o368 3 I*35 774 97Czechoslovakia 0-02 I 6-og 2I I-8ICosta Rica -0-002 -2-02 -I 394Donminican Republic -0-020 -6-25 -2 I'20Egypt 0-007 4-55 245-62Guatemala 0-002 I137 7'03Haiti -O0OI I 4-75 5 44Hong Kong - i-o8o I0-07 44 63Hungary 0-075 I5'92 I 28-44India -0 07 I 2-00 3 I73Indonesia 0o36I 4184 355-55Korea 0?779 28-I8 2544IMacau -o-o89 2-66 26.33Malaysia o0I43 44 79 220-99Mauritius 0-004 I8-38 68-98Mexico 0-047 2-66 731I 3Nepal O-OI7 7-47 72-88Pakistan -0-036 6-72 I1O78Panama 0o000 9.46 44.9 IPeru 0o032 6-I7 I43-25Philippines 0 003 I 74I i i8-87Poland 0o072 6-29 200-82Romania 0o078 I6.37 84.63Singapore - o-o84 26.97 88-52Sri Lanka -00oI5 34-00 80o03Taiwan 0o308 20'77 I 75 28Thailand -0-048 I6.49 35-I 4Turkey 0-028 0-02 -4 93Uruguay o0ooI 5-32 32.43Yugoslavia - 0055 5-36 30 05All developing 2-934 -_countries

All countries 2I-94I* Transformation and substitution elasticities set equal to -o5 and 5-o in the bottom level of nesting forall countries in the model. In the top two levels, elasticities of transformation and substitution in all developedcountries reflect literature estimates of US total demand elasticities and assumed supply elasticities of i-o.The elasticities are -o-oi and o-6i in all developed countries. Cobb-Douglas specifications are used at thetop two levels in all developing countries.

41 ECS 100


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I202 THE ECONOMIC JOURNAL [DECEMBERTable 5

Sensitivity Analyses on Resultsfrom Table 3 (Hicksian Equivalent Variationsinbillions of I986 dollars)Case I Case 2 Case 3 Case 4 Case 5 Case 6

United States ii -86o 8-64 14-578 3 424 49.328 I2-179Canada o0830 0-582 0-984 0-242 3-529 o-825EC I-582 0o952 3-30 -o i6o 2 I 950 2-I60Exporting countriesBangladesh 0-292 o-266 0?553 0-2I8 I-229 0-2I8Brazil I-255 0?995 I-609 1-047 -0-076 I-044Bulgaria ooI4 0 0 I 2 0o007 o-oo6 0-02 I o-oo6China 2-557 2-031 2-099 0o907 33'404 I8ioColombia o.596 o-462 0574 0.204 0-I24 0459Czechoslovakia 0-I39 O-IO9 0-085 00-26 0-2 I I 0-092Costa Rica 0-026 0o030 0o024 o-oo8 -o-oI I 0-0I5Dominican Republic 0o007 o oi6 -0o004 0o007 -0o035 -0o005Egypt 0-033 0-028 0-024 0 007 I-O90 0-020Guatemala o0oog o0oog o-oo8 0-002 o-oo8 o-oo6Haiti 0o007 0 0o9 0 0o9 0-004 o-oo6 -o ooIHong Kong -o-o62 -oII09 -o-694 0?043 - 2-o60 -0464Hungary o-i6i 0-138 0-I76 o-o87 0-238 0-I27India 0-I87 0-I59 0-092 0'203 2-784 0?007Indonesia 0o837 o0647 o-686 01I92 8-429 0-542Korea 2-I56 I-480 I-605 0o779 - 0955 1-569Macau 0o0 I 2 0 0IO -0-038 o-o6 i -0-285 0-024

Malaysia 0-275 0-206 0-275 0?I59 0-283 0-2I3Mauritius 0o037 0o03 I 0?033 o oi6 0o043 o-oi8Mexico 0?235 O-I90 0-I58 o-o58 o-68i 0-I40Nepal 0-039 0o033 0o035 0-04 I-599 0-028Pakistan 0-034 0-037 0-017 0-034 0-034 0-007Panama 0o007 0o007 0o004 000 I 0 004 0 003Peru o-o86 0?072 0o072 o0oI8 o-o8 i o-o6 iPhilippines 0-2I7 0oI64 0o44 oog I 5-47 0- II9Poland 0252 0-222 0-2I0 0040 0-264 0-I77Romania 0?293 0o253 0o254 O-I I I -0-03I O-I99Singapore o0o55 0-028 -0-028 OOOI -0-229 -O0OIOSri Lanka 0o097 o-o69 0-052 0?043 O-I I I 0-025Taiwan 1929 I-350 I-III 0 502 -114I 1I92Thailand 0-08I o-o67 0-03I 0-047 0-02I o-oi8Turkey 0o204 0?235 o-6I7 0-194 -o-i8i 01I34Uruguay oo I7 o-oi 6 0 o13 0?005 0o025 o00o9Yugoslavia o I 20 0-I I5 o-o63 0?094 - 0-206 0-048

All developing I2-2i8 9 395 9-889 5 245 50-584 7 934countriesAll countries 26-491 19'543 28-583 8-75I 125.393 23-100Case I. As in Table 3, but with Cobb-Douglas specifications used at the top two levels of nesting oftransformation and preference functions in all developed countries.Case2. As in Table 3, but with both transformationand substitutionelasticities set equal to o-6i in the toptwo levels of nesting in all developing countries in the model.Case 3. As in Table 3, but with transformation and substitution elasticities set equal to - 2-5 and 7-0 inthe bottom level of nesting in all countries in the model.Case 4. As in Table 3, except that supply prices in Hong Kong are based on i982 quota prices.Case 5. As in Table 3, except that for each developing country the ratio of their relative wage rate(compared to the Hong Kong base) is used as an indicator of relative product price at international values.No account is taken for differences in labour productivity or product quality.Case 6. As in Table 3, except that the composite other good is defined to be other manufacturesinsteadof residual GDP.


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1990] GLOBAL EFFECTS OF TRADE RESTRICTIONS 1203The sensitivity of these resultshas been tested through a seriesof experimentsreported on in Table 5. Cases I, 2 and 3 report the impact on results of variouschanges in elasticityvalues for transformationsurfaces and preferencesin eachcountry. Cases 4 and 5 provide an indication of the magnitudes involved asassumptionson supply prices by country are changed. Case6 reportsthe effectson results if the composite other good is defined to be other manufacturesinstead of residual GDP."9Results in Cases I, 2 and 3 of Table 5 suggest that for some of the countriesthe results are highly sensitive to changes in elasticities, while results for othersare less so. The degree of sensitivity seems to be collinear with the size of thecountry price effects, and correspondingquantity effects, which are producedwhen tariffs and quotas are eliminated. If supply prices for quota restrictedproducts in Hong Kong are calculated using i982 rather than i984 quota

prices (case 4), supply prices in all developing countries for these products rise.Both the welfare estimates and the size of quota rents transferredto foreignersare reduced when this happens. A lossresultsfor the EC. This is due to the highvolume of export trade of the EC with other developed countries in MFAproducts which are quota restrained from developing countries. Thus, underan MFA elimination, the EC loses share to other developing countriesin theseproducts, which in this case, more than offsets the gains from removingprotection on its import trade.Case 5 of Table 5 showsthat if relative wage rates (compared to Hong Kong)are used as an indicator of relative product supply prices, this has a significantimpact on our welfare measures. Prices of quota restricted products decreaseconsiderably in all developing countries, except Macau, Mexico, Romania,Turkey and Uruguay where prices increase. The effect of decreasing supplyprices is to expand the differentials between foreign production costs and theprice paid by importers. As a result, developed countries gain even more fromelimination of textile and apparel protection. Some developing countries areworse off, while others are better off. In aggregate they gain more, despitegreater forgone rent transfers.Finally, results in case 6 of Table 5 show thatusing an alternativedefinition of the composite other good to cover only othermanufactures rather than residual GDP does not have large effects on results.

IV. CONCLUDING REMARKSIn this paper we report results from an applied general equilibrium model wehave used to analyse the impacts of textile and apparel restrictions used bythree major developed countries against textile and clothing imports fromdeveloping countries. The model captures trade in fourteen key textile andapparel categories involving three developed and thirty-four developing

19 The value of production of other manufactures in all countries is calculated by subtracting the valueof production of textiles and apparel from total manufacturing production. Data on total manufacturingproduction by country are taken from the same sources as production data for textiles and apparel. However,data are unavailable for some developing countries. In these cases, production data for textiles and apparelalong with estimates of the share of textiles and apparel in manufacturing production from GATT (I984)were used to calculate the value of total manufacturing production in each country.41-2


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1204 THE ECONOMIC JOURNAL [DECEMBERcountries. In the model, countriesare represented by their actual size in termsof GDP, weakening rent transfer effects compared to partial equilibriumanalysis.We evaluate both the national and global welfare costsof the bilateralquotasand tariffscaptured by the model. Using data for I986, resultssuggest globalgains from elimination of quotas and tariffs of around $23 billion. In aggregate,developing countriesgain around $8 billion. This suggeststhat despite foregonerent transfers,the vast majority of developing countries would receive gainsfrom eliminating textile and apparel protection through improved access todeveloped country markets.Results also show most developing countriesgaining in the central variant ofthe model from an elimination of the MFA only, leaving tariffson textile andapparelproductsin place. This is contraryto popularbelief which suggeststhathigher income large quota recipient countries (such as South Korea andTaiwan) would lose. In the model, since all of the developing country suppliersare quota constrained and relatively small compared to large developedcountries, they increase their marketsharein previouslytrade restrictedtextileand apparel items at the expense of developed country producersrather thanlose share to other developing countries.Estimatesof the gains to the United States from the model for the removalof tariffs and quotas are significantly higher than those of other partialequilibrium studies, such as Cline (I987), who places the net welfare cost oftextile and apparel protection in the United States at around $8 billion, ratherthan the $I2f3 billion reported here. This divergence in results occurs eventhough the partial equilibriumassumptionsof price taking behaviourfor largedeveloped countrieswill tend to cause the costsof textile and apparelprotectionto be overstated. The difference stems mainly from the added cost ofbilateralism which our model captures. As might be expected, results showsensitivity with respect to elasticity parameters and assumptions as to howsupply prices vary across countries, but the main themes of results remain.Universityof WesternOntarioUniversityof WesternOntarioandNationalBureauof EconomicResearchDate of receiptoffinal typescript:June i19o

REFERENCESBrown, D. K. (1987). 'Tariffs, the terms of trade, and national product differentiation.' Journalof Policy

Modelling,vol. 9 (Fall), pp. 503-26.Cline, W. R. (I 987). TheFutureof WorldTradein TextilesandApparel.Washington: Institute for InternationalEc.onomies.Europa (I987). TheEuropaYearbook1987: A WorldSurvey,vols. I and II. Europa Publications Ltd.European Commission (1987). Microfiche Eurostat sce 1520.Food and Agricultural Organisation of the United Nations (FAO) (1985). WorldApparelFibreConsumptionSurvey.FAO.General Agreement on Tariffs and Trade (GATT) (1984). Textilesand Clothingin the World Economy.Background study prepared by the GATT Secretariat to assist work undertaken by the contracting


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1990] GLOBAL EFFECTS OF TRADE RESTRICTIONS 1205Parties in pursuance of the decision on textiles and clothing taken at the November 1982 ministerialmeeting. Geneva: GATT.Hamilton, C. (I986). 'An assessmentof voluntary restraintson Hong Kong exports to Europe and USA.'Economicavol. 53, August.(1988). 'Restrictivenessand international transmission of the "new " protectionism.' In Issuesin US-EC TradeRelations (eds R. Baldwin, C. Hamilton, and A. Sapir). National Bureau of EconomicResearch and University of Chicago Press.Hufbauer, G. C., Berliner,D. T. and Elliont, K. A. (i 986). TradeProtectioninthe UnitedStates:3I CaseStudies.Washington: Institute for International Economics.Jenkins, G. P. (1980). Costsand Consequencesof the New Protectionism:The Caseof Canada'sClothingSector.Ottawa: North-South Institute.Mansur, A. and Whalley, J. (1984). 'Numerical specification of applied general equilibrium models:estimation, calibration and data.' In AppliedGeneralEquilibriumAnalysis(eds H. Scarf and J. Shoven).Cambridge: Cambridge University Press.Shoven,J. and Whalley, J. (i 984). 'Applied generalequilibriummodelsof taxation and international trade.'Journalof EconomicLiteraturevol., 22 September, pp. 1007-51.Tarr, D. G. (I989). A GeneralEquilibriumAnalysisof theWelfareandEmploymentEfectsof U.S. Quotasin Textiles,Autosand Steel.Bureau of Economics Staff Report to the Federal Trade Commission.Trela, I. and Whalley, J. (1988). 'Do developing countries lose from the MFA?' National Bureau ofEconomic Research Working Paper No. 26I8, Cambridge, Massachusetts.(I990). 'Unraveling the threadsof the MFA.' In TextilesTradeand theDevelopingCountries:Eliminatingthe Multi-FibreArrangementin the i99os (ed. Carl B. Hamilton). Washington, D.C.: World Bank.United Nations (I986). IndustrialStatisticsYearbook1984. Vol. I: GeneralIndustrialStatistics.New York.United Nations Industrial Development Organisation (UNIDO) (I985). Handbookof IndustrialStatistics1984.New York.U.S. Department of Commerce. Office of Textiles and Apparel (June 1987a). U.S. GeneralImportsof CottonManufacturers(TQ2730).(June I987 b). U.S. GeneralImportsof WoolManufacturers(TQ 2740).June I987 c). U.S. GeneralImportsof Man-MadeFibreManufacturers(TQ 2760).Bureau of Industrial Economics (i 987 d). U.S. IndustrialOutlook.Washington.- (I985). U.S. Production,ImportsandImport/ProductionRatiosfor Cotton,WoolandMan-MadeFiber TextilesandApparel.U.S. International Trade Commission (USITC) (i 987). U.S. Importsof TextilesandApparelUndertheMultifiberArrangement:StatisticalReportThroughi986. USITC Publication, I986.Whalley, J. (I985). TradeLiberalizationAmongMajor WorldTradingAreas,Cambridge: MIT Press.World Bank (I986). WorldDevelopmentReporti986. New York: Oxford University Press.

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