The Impact of the MFA Removal on Global Textile and Cotton Trade

Doris Yan XiaDoris Yan XiaCenter for North American StudiesDept. of Agricultural Economics

Texas A&M University

Objective

Analyze and Quantify the ImpactAnalyze and Quantify the Impact of Elimination of the Multi-Fiber of Elimination of the Multi-Fiber Arrangement on Textile, ApparelArrangement on Textile, Apparel and Cotton Market with Alternativeand Cotton Market with Alternative ScenariosScenarios..

Overview

IntroductionIntroduction MethodologyMethodology

Theoretical ConsiderationsTheoretical Considerations U.S. farm programU.S. farm program Equilibrium Displacement ModelEquilibrium Displacement Model ParametersParameters

Scenarios & ResultsScenarios & Results ConclusionsConclusions

Introduction

Multi-Fiber Arrangement (MFA)Multi-Fiber Arrangement (MFA) Protect Importing Countries’ Textile Protect Importing Countries’ Textile

SectorSector Emerged into ATC from 1995Emerged into ATC from 1995 Removal of all MFA Quotas by Jan. 2005Removal of all MFA Quotas by Jan. 2005 Impact on Textile/Apparel Trade &Impact on Textile/Apparel Trade &

Cotton MarketCotton Market

Introduction The United StatesThe United States

Leading Textiles & Apparel ImporterLeading Textiles & Apparel Importer • • 10.6% & 31.7% of world T&A Imports, 200210.6% & 31.7% of world T&A Imports, 2002 (WTO)(WTO) • • Decade Trend of Import ExpansionDecade Trend of Import Expansion • • Exports Remain Steady (ERS)Exports Remain Steady (ERS)

Leading Cotton ExporterLeading Cotton Exporter • • 41.82% of world cotton exports, 2003 (NCC)41.82% of world cotton exports, 2003 (NCC) • • Domestic Consumption Declined (ERS)Domestic Consumption Declined (ERS)

• • Cotton Exports IncreasedCotton Exports Increased

U.S. Cotton Textile Trade

Source: ERS/USDA

19951995

19961996

19971997

19981998

19991999

20002000

20012001

20022002

20032003

00

55

1010

1515

2020

Million Bales

ExportsImports

U.S. Cotton Exports & Share of World Trade

Source: PS&D/USDA1995 1996 1997 1998 1999 2000 2001 2002 2003

0

2

4

6

8

10

12

14Million Bales

0

20

40

60

80

100Percentage

Share of World Trade

Exports

U.S. Cotton Mill Use

Source: ERS/USDA, Bureau of Census1995 1996 1997 1998 1999 2000 2001 2002 2003

0

2

4

6

8

10

12

14Million Bales

0

10

20

30

40

50

60

70

80Percent

Share of Demand

Mill Use

Introduction

People’s Republic of China Largest textile exporter to U.S. under MFA

19.62% of U.S. textile/apparel imports, 2003 (AMTAC)

Third largest importer of U.S. cotton 28% of U.S. cotton, 2003 (FAS)

Accession into the WTO Textile: Quota-free access to the U.S. and EU market Still with tariff Cotton: Agree to reduce TRQ on cotton imports

Methodology – Theoretical Considerations Domestic and Import Textile Demand TTii = T = Tii(PT, PT*, PX, Y)(PT, PT*, PX, Y)

TTii* = T* = Tii*(PT, PT*, PX, Y)*(PT, PT*, PX, Y) PT – domestic price PT* – import pricePT – domestic price PT* – import price PX – price for other goods Y – per capita incomePX – price for other goods Y – per capita income Output Supply and Input Demand P = AC (W)P = AC (W) X = X (W, Y)X = X (W, Y) W – input prices YW – input prices Y i i – ith output– ith output X – input vector AC – average costX – input vector AC – average cost

Theoretical Considerations

Equilibrium price PPMM == PPS S • (1+T)• (1+T)

U.S. Farm Program Direct Payment

Fixed Decoupled from current production (ERS)

Counter-Cyclical Payment CCP rate = Target price –

(DP rate + max{loan rate, price}) Reduce revenue variability and risk

Marketing loan (Loan Deficiency Payment) Fixed Directly coupled to current production

Economic Model and EDM Five country-group: U.S., EU, China, AO, and k Textile & Apparel Market

Consumption - U.S., EU Production - China, AO

Cotton Market Demand - U.S., EU, China, AO Supply - U.S., k SC=SC(PC, LDP)

World Textile/Apparel Export Price Weighted average of export price of exporters

Trade Restrictions & Equilibrium Condition Total differentiation of all equations to get EDM

Parameters Textile & Apparel Demand Elasticities - Cost Share & Output Share - , Input Demand Elasticities - Cotton Supply Elasticities - T&A Export Market Share of China & AO to the U.S. & EU - Cotton Import Market Share - Tariff Equivalent MFA Quota – T, A

Scenario 1:Removal of MFA quota U.S. import demand for textiles/apparel 23.98/ 35.21U.S. domestic demand for textiles/apparel -3.75/ -25.9U.S. import price of textiles/apparel -18.26/ -22.09China textiles/apparel export supply 34.36/ 30.44AO textiles/apparel export supply 17.90/ 37.15U.S. cotton price -1.38World adjusted cotton price 0.86U.S. cotton supply -0.69U.S. demand for domestic cotton -12.01China’s demand for U.S. cotton 13.57China’s demand for foreign cotton 4.78AO demand for U.S. cotton 10.37AO demand for foreign cotton 8.6EU demand for U.S. cotton -10.75

Scenario 2:Removal of MFA and3% decrease in LDP

U.S. import demand for textiles/apparel 24.30/ 35.09U.S. domestic demand for textiles/apparel -3.87/ -25.95U.S. import price of textiles/apparel -18.51/ -21.85China textiles/apparel export supply 35.02/ 32.33AO textiles/apparel export supply 18.02/ 36.21 U.S. cotton price 1.46World adjusted cotton price 2.67U.S. cotton supply -2.27U.S. demand for domestic cotton -13.51China’s demand for U.S. cotton 9.58China’s demand for foreign cotton 11.73AO demand for U.S. cotton 8.16AO demand for foreign cotton 8.17EU demand for U.S. cotton -11.18

Scenarios 3: Removal of MFA, 5% increase in foreign cotton supply

U.S. import demand for textiles/apparel 24.80/ 36.25U.S. domestic demand for textiles/apparel -3.76/ -26.02U.S. import price of textiles/apparel -18.66/ -22.17China textiles/apparel export supply 60.04/ 23.46AO textiles/apparel export supply 9.04/ 40.91 U.S. cotton price -1.21World adjusted cotton price -0.83U.S. cotton supply -2.84U.S. demand for domestic cotton -12.62China’s demand for U.S. cotton 8.73China’s demand for foreign cotton 15.79AO demand for U.S. cotton 4.76AO demand for foreign cotton 10.53EU demand for U.S. cotton -15.55

Scenario 4: Removal of MFA, 3 % decrease in LDP, & 5% increase in foreign cotton supply

U.S. import demand for textiles/apparel 24.92/ 36.23U.S. domestic demand for textiles/apparel -3.80/ -26.05U.S. import price of textiles/apparel -18.63/ -22.11China textiles/apparel export supply 61.04/ 23.76 AO textiles/apparel export supply 8.75/ 40.77U.S. cotton price -0.30World adjusted cotton price -0.55U.S. cotton supply -3.72U.S. demand for domestic cotton -13.18China’s demand for U.S. cotton 6.46China’s demand for foreign cotton 19.14AO demand for U.S. cotton 3.22AO demand for foreign cotton 10.85EU demand for U.S. cotton -16.48

Conclusions Textile and Apparel Market

U.S. & EU — Increase in import demand — Decrease in domestic demand — Decrease in import price — Mixed results for domestic price

China & AO — Significant increase in export supply with different export mix

Conclusions Cotton Market

Decrease in LDP rate affected future U.S. cotton price & adjusted world price Demand for cotton

— U.S. Domestic demand continue falling — Decrease in EU — Increase in China and AO with different import mix

U.S. cotton supply decreased slightly

Conclusions U.S. cotton sector evolves from a primary supplier to its textile industry to a stronger exporting competitor in the global market Policy shock in textile market, MFA quota elimination, have significant impact on cotton market Policy shock in cotton market, decrease in LDP rate, doesn’t have explicit effect on textile market