A Primer on the MFA Maze

Abstract

It is generally agreed that the arrangements that have regulated trade in textiles and clothing have slowed the natural shift in comparative advantage from industrial countries to developing countries. But there is quite a bit of disagreement about how restrictive the Multi-Fibre Agreements (MFA) are. The authors address the potential sources of allocative inefficiency occasioned by the MFA and search for evidence that the MFA has indeed led to such inefficiency. In a theoretical section, they identify five sources of inefficiency relating to allocations across countries, across consumers, and among firms within constrained countries. In the empirical part of the paper, first they provide evidence of the restrictiveness of the quota arrangements from trends in import shares for aggregate categories of textiles and clothing, before and during the MFA. Then they provide evidence from a detailed examination of quota utilization rates and price differentials among EC importing countries. Among their findings: relatively high utilization rates across exporters suggest a relatively high degree (and stability) of quota bindingness across exporters; overshipment was highest for the most important (by shipment value) products; there is concentration among a few leading exports (China, Hong Kong, Taiwan, and Thailand) and a few importers (Benelux, Germany, and the United Kingdom); the data suggest a positive correlation between the coefficients of variation in prices and quota utilization rates for China, Hong Kong, and Korea suggesting that prices are related, as one would expect, to the degree of bindingness; and the data suggest that binding quotas would be associated with higher import prices.