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

Abstract

Employing a difference‐in‐difference estimation technique on firm‐level data on Indian exporters, we show that the removal of US textile and apparel quotas was associated with a relative increase in sales of products where India was previously quota restricted, but a relative decrease in sales and the unit value of products where China was previously quota restricted. Our study hence highlights the importance of accounting for falling trade barriers for rival exporters in analyzing trade liberalization effects. Additionally, we find evidence indicating that quota rights were not allocated efficiently, suggesting potential gains from reallocation with the dismantling of the Indian quota licensing regime.

Impact of Trade Liberalization on Indian Textile Firms: A Panel Analysis

“…They find that while the MFA phaseout presented an opportunity for India to increase its global market share for textiles exports, this was contingent on the continuation of safeguards on China's textile and clothing exports and that once these safeguards were lifted, Indian textile exports would be adversely affected in a quota-free world unless the Indian industry became more price-competitive. At the firm-level, a study by Edwards and Sundaram (2012) finds that the reduction in MFA-related quotas on India's textile exports has been associated with an increase in the sales of quota-restricted textile products relative to non-quota restricted textile products and that the extensive margin has played a greater role in the adjustment of Indian textile and clothing firms. Another firm-level study by Kar and Kar (2015) finds that Indian textile and clothing firms have become more competitive and more export-oriented in the post-MFA regime, but that this has been accompanied by higher industry level concentration at home, possibly in response to the growing cost competition in the global market.…”

Structural change and global trade flows: Does an emerging giant matter?

“…By studying a range of trade creation and diversion effects that are of significance not only for advanced economies but also for EMEs, our work complements the body of literature that uniquely focuses on the impact of the rise of China on employment in the United States (Feenstra & Sasahara, 2018; Caliendo et al., 2019). There are also industry‐based studies of trade creation and destruction that focus on a single destination country and find heterogeneous outcomes across origin countries, like the differential impact of the removal of U.S. textile and apparel quotas on rival exporters (Brambilla, Khandelwal, & Schott, 2010; Edwards & Sundaram, 2017). Finally, using a calibrated model, Bekkers, Koopman, and Rego (2019) make forecasts about the consequences of structural change in China on global trade relations, whereas we employ a theory‐driven accounting framework and observed data.…”