International Trade
Freeing fashion

There is general agreement that the Multi-Fibre Arrangements (MFAs), which regulate trade in textiles and clothing, have slowed the natural shift in comparative advantage towards developing countries, but there is substantial disagreement over the degree and changes in their restrictiveness. In Discussion Paper No. 716, Research Fellows Riccardo Faini and Jaime de Melo, with Wendy Takacs, consider the various potential inefficiencies arising from the MFAs' effects in reallocating production from constrained exporting countries to domestic suppliers and among themselves or from constrained to unconstrained exporting countries: inefficient allocation of production among firms due to export-licensing restrictions, reallocations of consumption across importing countries due to bilateral quotas, and inefficient allocation of consumption between constrained and unconstrained countries.

The authors examine trends in developing countries' aggregate market shares in US and EC markets during 1964-90, which broadly suggest that their growth was effectively arrested by the successive MFAs negotiated since 1974. They use data on shipments, unit values and bilateral quota utilization rates for major MFA imports into the Community from 27 countries to assess the inefficiency of their allocation. There is significant variance in the allocation of product quotas across and within countries, suggesting that this reflects producers' interests as well as historical shares. High utilization rates across exporters suggest that their constraints were binding quite tightly, while overshipments were largest for the most important products (by shipment value) and concentrated among a few leading exporters (China, Hong Kong, Taiwan and Thailand) and importers (Benelux, Germany and the UK).

Faini, de Melo and Takacs also find a positive correlation between the coefficients of variation in prices and quota utilization rates for China, Hong Kong and South Korea, which persists even after controlling for exporting countries' characteristics. Correlations on levels, rather than variability, of prices and utilization rates yield a turning-point around rates of 100%, which suggests that binding quotas will be associated with higher import prices.

A Primer on the MFA Maze
Riccardo Faini, Jaime de Melo and Wendy Takacs

Discussion Paper No. 716, September 1992 (IT)