Computation of a world general equilibrium under bilateral quotas and an application to the analysis of textile trade restrictions

Abstract

This article describes general equilibrium computational techniques for analyzing models of world trade in which bilateral quota restrictions are imposed on sales by specified sellers to specified buyers. The use of these techniques is motivated by the need to analyze voluntary restraint and ather measures that now restrict a sizeable fraction of world trade. The bilateralism in such arrangements generates the added efficiency cost that buyers will typically not purchase from their least-cost source of supply. From a computational point of view, the presence of bilateral quotas increases the dimensionality of the equilibrium fixed-point problem by a factor equal to the number of trading countries and commodities for which quota restrictions apply. Bilateral quotas are first analyzed in pure exchange economy for which the Gale-Nikaidô mapping must be modified for existence and computation of equilibrium. This is followed by a discussion of the extensions needed to incorporate production. An application of the computational techniques to the analysis of global restrictions on trade in textiles and apparel under the Multi Fiber Arrangement is presented, and, in a final section, further areas of potential policy application are discussed.