The impact of the multifibre arrangement on world clothing and textile markets with special reference to China

Abstract

China's clothing and textile exports have grown rapidly since the mid-1970s. This brought China into the Multifibre Arrangement (MFA) system in the late 1970s. While China benefited from the existence of MFA restrictions on other exporters in the 1970s, the MFA inflicted losses on China when the MFA restrictions became binding in the early 1980s. Simulations suggest that the MFA imposed a global welfare cost of over US$4 billion annually in the mid-1980s (an estimate which is smaller than most other contemporary estimates). Industrial and developing countries shared this loss equally. The welfare cost to China was moderate (US$l60 million a year) mainly because of its relatively small share in the world clothing and textile market. However, the MFA has become increasingly restrictive over time. The global welfare cost is growing at over 10 per cent per year, even without the increasing export volumes being taken into account. China is facing more rapid growth of restrictions than most other developing countries, and its welfare loss is growing at over 18 per cent per year, implying a doubling every four years. Thus, an early abolition of the MFA is highly desirable and necessary if its i~creasing costs are to be avoided. It is in China's interest to join a world effort to eliminate the MFA as soon as possible. The rising protection induced by the MFA also explains part of the commonly observed rapid increases in the prices of restricted exports, a phenomenon widely regarded as the outcome of MFA-induced upgrading and an offset to quota restraints. It seems that once this component of the price increases is taken into account, only limited relief on the increasing MFA cost can be expected from upgrading. For China and Hong Kong's exports to the EC, only about half of the China's clothing and textile exports have grown rapidly since the mid-1970s. This brought China into the Multifibre Arrangement (MFA) system in the late 1970s. While China benefited from the existence of MFA restrictions on other exporters in the 1970s, the MFA inflicted losses on China when the MFA restrictions became binding in the early 1980s. Simulations suggest that the MFA imposed a global welfare cost of over US$4 billion annually in the mid-1980s (an estimate which is smaller than most other contemporary estimates). Industrial and developing countries shared this loss equally. The welfare cost to China was moderate (US$I60 million a year) mainly because of its relatively small share in the world clothing and textile market. However, the MFA has become increasingly restrictive over time. The global welfare cost is growing at over 10 per cent per year, even without the increasing export volumes being taken into account. China is facing more rapid growth of restrictions than most other developing countries, and its welfare loss is growing at over 18 per cent per year, implying a doubling every four years. Thus, an early abolition of the MFA is highly desirable and necessary if its i~creasing costs are to be avoided. It is in China's interest to join a world effort to eliminate the MFA as soon as possible. The rising protection induced by the MFA also explains part of the commonly observed rapid increases in the prices of restricted exports, a phenomenon widely regarded as the outcome of MFA-induced upgrading and an offset to quota restraints. It seems that once this component of the price increases is taken into account, only limited relief on the increasing MFA cost can be expected from upgrading. For China and Hong Kong's exports to the EC, only about half of the restricted product categories have showed any upgrading. Initial simulation results suggest that the trade and welfare effects of MFA-induced upgrading are small in comparison to the overall trade and welfare effects of the MFA. The impact of the MFA on China will depend on the future development of the Chinese economy. Economic reforms have stimulated China's clothing and textile exports, but supply constraints remain. Further reforms to the foreign trade system and to trade policies are necessary to increase the efficiency of China's clothing and textile production and exports. China's export prices of clothing and textiles are considerably lower than those of the newly industrialized economies (NIEs), particularly for clothing and synthetic textiles. Moving up-market while seeking diversification thus provides opportunities for further export expansion. This, however, poses serious challenges to China, given the current structure of production and trade and the problems facing the economy in general.