In the 30 years since the signing of the Multifibre Arrangement that governs world trade in textiles and clothing, there have been major changes in their patterns of trade and production. In Discussion Paper No. 508, Research Fellow Riccardo Faini and Alberto Heimler examine the possible implications of these changes for this sector's response to trade liberalization and the completion of the European Community's single market. If the quality of developed countries' production is significantly higher than that of developing countries, the painful effects of trade liberalization may be mitigated, since producers will in effect compete in different markets. Theoretical analyses suggest, however, that quantitative restrictions on imports lead to an upgrading of their quality and a corresponding downgrading for domestic production. Quotas are set in physical units, so foreign producers will profitably shift to higher quality and domestic producers will face less competition in low-quality goods. Paradoxically, protection may therefore allow foreign penetration of market segments that were previously dominated by domestic producers and thereby exacerbate the problems stemming from liberalization.

Faini and Heimler present a simple duopoly model in which average costs decline more rapidly for higher-quality goods as a result of liberalization (as may occur if they incur higher fixed costs of design or product development). Protection gives domestic producers a larger market share, increases their output and provides them with an incentive to produce higher-quality goods, for which increasing returns are more pervasive. Faini and Heimler estimate price and quality indices for imports of textiles and clothing from several developed and developing countries into the four major EC countries during 1982-7. They find that quality differences account for about half the variation in unit values for different countries exporting to a given market and that quality upgrading by developing countries has been substantial in clothing, while Italian and Japanese exports of textiles remain significantly higher in quality than those of developing countries. Clothing may therefore face more severe adjustment problems than textiles.

Faini and Heimler also find substantial remaining price differentials across different EC member countries, even after controlling for quality. These differentials appear larger for textiles than for clothing and will probably be compressed following the completion of the internal market. Also, intra-EC price variation is significantly greater for developing countries' products than for EC-produced goods, particularly for clothing, which the authors attribute to differences in the restrictiveness of MFA quotas on clothing across EC national markets. They suggest that the abolition of national quotas and the free circulation of LDCs' exports within the Community should significantly reduce these differentials.

The Quality of Production of Textiles and Clothing and the Completion of the Internal Market
Riccardo Faini and Alberto Heimler

Discussion Paper No. 508, January 1991 (IT)