Quantity restrictions and price adjustment of Chinese Textile Exports to the US

Abstract

The elimination of the Multifibre Arrangement (MFA) in 2005 provides an unusual opportunity to examine the effects of a trade policy shock on export prices and firm behaviour. It was massive in scale, discrete in timing and exogenous to firms and consumers in the textile industry. Since the MFA quota removal did not affect all textile products at the same time, we are able to use a difference‐in‐difference approach to estimate the causal effects of the MFA. Using transaction‐level data from the Chinese Customs Trade Statistics over the period 2000–06, we find that the MFA removal reduced average export prices by about 25%. This fall was mainly caused by a combination of the entry of new low‐price exporters and new low‐price products, rather than a fall in prices of existing firm–product combinations. We also find that price reductions are twice as large for heterogeneous than for homogeneous products.

Trade Liberalization, Rival Exporters and Reallocation of Production: An Analysis of Indian Manufacturing

“…Results show that the US quota phase-down was associated with falling unit values for Indian firms in products where China was previously quota restricted, so that the negative effect on Indian firm sales was partly driven by a fall in product prices owing to competition from China. This evidence is consistent with previous literature that finds significant drops in unit values associated with China's surge in exports following the end of the MFA regime (Barrows and Harrigan, 2009;Bernhofen et al, 2011). We find no significant effects for products in which India was previously quota restricted.…”

“…The impact of the removal of quotas on Indian imports operated primarily via the intensive margin. Results suggest that unit values of products where China was previously quota restricted decreased, a finding consistent with previous studies (Barrows and Harrigan, 2009;Bernhofen et al, 2011). Finally, we find evidence consistent with inefficiencies in India's quota licensing regime.…”

“…Third, the removal of quotas on India and particularly China, a large economy with considerable influence on the world price, is expected to also influence prices of products that were previously quota restricted. The removal of quotas is expected to reduce prices as new competitors enter the market and as firms potentially downgrade the quality of their exports in response to the quota removal (Bernhofen et al, 2011). To measure these effects, we consider the log of the product unit value (as a proxy for price) as a dependent variable in our preferred specification (2).…”

“…The final removal of quota restrictions on the import of clothing and textile products under the Agreement on Textile and Clothing (ATC), the successor of the Multifibre Arrangement (MFA), on 1 January 2005 led to a surge in imports of these products into previously protected markets of advanced economies such as the USA, EU and Canada. 1 The increase in imports from China was most dramatic and has been studied widely in the context of US quota restrictions (Barrows and Harrigan, 2009;Brambilla et al, 2010;Bernhofen et al, 2011). Yet, quotas were also binding on other large labor-abundant economies with a comparative advantage in clothing and textile products.…”

“…More specifically, our study relates to the literature analyzing the impact of the MFA quota removal on exports, firm behavior and upgrading of product quality, focusing primarily on China (Bernhofen et al, 2011;Brambilla et al, 2010;Barrows and Harrigan, 2009). Our evidence is also consistent with the idea proposed by Khandelwal et al (2013), where inefficiencies in licensing institutions in China meant that quotas were not allocated to the most productive firms, causing a reallocation towards these firms with the removal of the quotas.…”