Effects of Quantitative Restrictions on international trade flows: Evidence from the textiles and clothing sector

Abstract

Although most economists agree about free trade being beneficial, various types of trade barriers exist. Quantitative Restrictions, as a type of trade barrier, are seen to possibly cause far-reaching impacts. It is therefore interesting to analyse possible effects of Quantitative Restrictions on international trade flows, by looking at theory as well as evidence from the textiles and clothing sector. Of the various types of Quantitative Restrictions, only bilateral import quotas and Voluntary Export Restraints (VER’s) are assayed in this thesis. In the textiles and clothing sector, bilateral import quotas and VER’s were notably and extensively used under the Multifibre Arrangement (MFA), which was subsequently phased-out under the Agreement on Textiles and Clothing (ATC). This extensive use and rather abrupt end of these two trade barriers in this sector make it a useful case to analyse their effects in practice. Several effects of these trade barriers on international trade flows, as set out by trade theory, were observable in this case: The MFA appears to have led to reduced trade volumes in textiles and clothing. Moreover, quota-hopping investment and transshipment strategies, in order to circumvent these MFA trade barriers, were apparent. These were obvious in case of Chinese clothing exports, via Sub-Saharan African countries, into the USA. Furthermore, trade diversion effects were visible during the MFA. In particular, these could be observed in Mexican’ and Caribbean’ countries clothing exports into the USA. Also, trade deflection effects, notably in case of Chinese textiles and clothing exports, were displayed. When the MFA bilateral import quotas and VER’s were phased-out, some developments indicated trade focusing in textiles and clothing. Other developments however suggested the opposite. The phasing-out of the MFA led to freer international trade in textiles and clothing. Pursuant to the principle of comparative advantage and the factor proportions theory, several countries have thereupon specialized increasingly, according to their endowments with factors of production. Notably, developing countries such as China, India, Vietnam, Bangladesh and Cambodia, have increased their exports of labour-intensive clothing. Meanwhile, developed countries such as the EU and the USA, have specialized increasingly in capital- and skill-intensive segments of the textiles and clothing industry. In compliance with new trade theory, economies of scale and product differentiation were also observable, following this trade liberalization in textiles and clothing.