Rent Sharing in the Multi-Fibre Arrangement: Theory and Evidence from US Apparel Imports from Hong Kong

Abstract

Available estimates of tariff equivalents of quotas and welfare calculations on the costs of multi-fibre arrangements (MFA) for developing countries are based on the premise of perfect competition in both product and license markets. It is also assumed that the exporting countries that administer the MFA quotas receive all the scarcity rents. The authors argue that, in the presence of market power on the buyers'side in the product markets combined with concentration in the license markets, the importing countries might retain part of this rent. Although the impact of imperfect competition on rent appropriation has been analyzed in literature, rent sharing has so far been ignored in both analytical and empirical work. This paper makes a theoretical case for rent sharing, and then analyzes U.S. imports of apparel products from Hong Kong. The authors find that rent sharing substantially affects the estimated magnitude of welfare losses that exporting developing countries suffer because of MFA quotas.