EFFECT OF MULTI‐FIBER ARRANGEMENT TRADE RESTRICTIONS ON TEXTILE INDUSTRY PROFIT MARGINS

Abstract

This article tests the anti‐competitive effect of trade restrictions under the Multi‐Fiber Arrangement in the U.S. textile industry. The modeling approach differs from that of traditional empirical studies. That is, it allows for non‐competitive behavior by domestic firms and therefore permits estimating the effect of trade policy on domestic firms' conduct, market power, and profit margins. The model is estimated for several selected product categories of the U.S. textile industry. Empirical results indicate that trade restrictions enabled domestic producers to behave less competitively and raise their profit margins. The empirical evidence is significant in the man‐made fiber sub‐sectors. The anti‐competitive effect, however, tended to taper off over time, suggesting that higher profits might have induced new entry and hence boosted competition.