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The Impact of the MFA Removal on Global Textile and Cotton Trade

The Impact of the MFA Removal on Global Textile and Cotton Trade. Doris Yan Xia Center for North American Studies Dept. of Agricultural Economics Texas A&M University. Objective. Analyze and Quantify the Impact of Elimination of the Multi-Fiber Arrangement on Textile, Apparel

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The Impact of the MFA Removal on Global Textile and Cotton Trade

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  1. The Impact of the MFA Removal on Global Textile and Cotton Trade Doris Yan Xia Center for North American Studies Dept. of Agricultural Economics Texas A&M University

  2. Objective • Analyze and Quantify the Impact of Elimination of the Multi-Fiber Arrangement on Textile, Apparel and Cotton Market with Alternative Scenarios.

  3. Overview • Introduction • Methodology • Theoretical Considerations • U.S. farm program • Equilibrium Displacement Model • Parameters • Scenarios & Results • Conclusions

  4. Introduction • Multi-Fiber Arrangement (MFA) • Protect Importing Countries’ Textile Sector • Emerged into ATC from 1995 • Removal of all MFA Quotas by Jan. 2005 • Impact on Textile/Apparel Trade & Cotton Market

  5. Introduction • The United States • Leading Textiles & Apparel Importer • 10.6% & 31.7% of world T&A Imports, 2002 (WTO) • Decade Trend of Import Expansion • Exports Remain Steady (ERS) • Leading Cotton Exporter • 41.82% of world cotton exports, 2003 (NCC) • Domestic Consumption Declined (ERS) • Cotton Exports Increased

  6. U.S. Cotton Textile Trade Million Bales Exports 20 Imports 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: ERS/USDA

  7. U.S. Cotton Exports & Share of World Trade Million Bales Percentage 14 100 12 80 10 Exports 60 8 6 40 4 20 Share of World Trade 2 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: PS&D/USDA

  8. U.S. Cotton Mill Use Million Bales Percent 14 80 70 12 Share of Demand 60 10 50 8 40 6 30 Mill Use 4 20 2 10 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: ERS/USDA, Bureau of Census

  9. Introduction • People’s Republic of China • Largest textile exporter to U.S. under MFA 19.62% of U.S. textile/apparel imports, 2003 (AMTAC) • Third largest importer of U.S. cotton 28% of U.S. cotton, 2003 (FAS) • Accession into the WTO Textile: Quota-free access to the U.S. and EU market Still with tariff Cotton: Agree to reduce TRQ on cotton imports

  10. Methodology – Theoretical Considerations • Domestic and Import Textile Demand Ti = Ti(PT, PT*, PX, Y) Ti* = Ti*(PT, PT*, PX, Y) PT – domestic price PT* – import price PX – price for other goods Y – per capita income • Output Supply and Input Demand P = AC (W) X = X (W, Y) W – input prices Yi – ith output X – input vector AC – average cost

  11. Theoretical Considerations Equilibrium price PM=PS • (1+T)

  12. U.S. Farm Program • Direct Payment • Fixed • Decoupled from current production (ERS) • Counter-Cyclical Payment • CCP rate = Target price – (DP rate + max{loan rate, price}) • Reduce revenue variability and risk • Marketing loan (Loan Deficiency Payment) • Fixed • Directly coupled to current production

  13. Economic Model and EDM • Five country-group: U.S., EU, China, AO, and k • Textile & Apparel Market • Consumption - U.S., EU • Production - China, AO • Cotton Market • Demand - U.S., EU, China, AO • Supply - U.S., k SC=SC(PC, LDP) • World Textile/Apparel Export Price • Weighted average of export price of exporters • Trade Restrictions & Equilibrium Condition • Total differentiation of all equations to get EDM

  14. Parameters • Textile & Apparel Demand Elasticities -  • Cost Share & Output Share - , • Input Demand Elasticities -  • Cotton Supply Elasticities -  • T&A Export Market Share of China & AO to the U.S. & EU -  • Cotton Import Market Share -  • Tariff Equivalent MFA Quota – T, A

  15. Scenario 1:Removal of MFA quota U.S. import demand for textiles/apparel 23.98/ 35.21 U.S. domestic demand for textiles/apparel -3.75/ -25.9 U.S. import price of textiles/apparel -18.26/ -22.09 China textiles/apparel export supply 34.36/ 30.44 AO textiles/apparel export supply 17.90/ 37.15 U.S. cotton price -1.38 World adjusted cotton price 0.86 U.S. cotton supply -0.69 U.S. demand for domestic cotton -12.01 China’s demand for U.S. cotton 13.57 China’s demand for foreign cotton 4.78 AO demand for U.S. cotton 10.37 AO demand for foreign cotton 8.6 EU demand for U.S. cotton -10.75

  16. Scenario 2:Removal of MFA and3% decrease in LDP U.S. import demand for textiles/apparel 24.30/ 35.09 U.S. domestic demand for textiles/apparel -3.87/ -25.95 U.S. import price of textiles/apparel -18.51/ -21.85 China textiles/apparel export supply 35.02/ 32.33 AO textiles/apparel export supply 18.02/ 36.21 U.S. cotton price 1.46 World adjusted cotton price 2.67 U.S. cotton supply -2.27 U.S. demand for domestic cotton -13.51 China’s demand for U.S. cotton 9.58 China’s demand for foreign cotton 11.73 AO demand for U.S. cotton 8.16 AO demand for foreign cotton 8.17 EU demand for U.S. cotton -11.18

  17. Scenarios 3: Removal of MFA, 5% increase in foreign cotton supply U.S. import demand for textiles/apparel 24.80/ 36.25 U.S. domestic demand for textiles/apparel -3.76/ -26.02 U.S. import price of textiles/apparel -18.66/ -22.17 China textiles/apparel export supply 60.04/ 23.46 AO textiles/apparel export supply 9.04/ 40.91 U.S. cotton price -1.21 World adjusted cotton price -0.83 U.S. cotton supply -2.84 U.S. demand for domestic cotton -12.62 China’s demand for U.S. cotton 8.73 China’s demand for foreign cotton 15.79 AO demand for U.S. cotton 4.76 AO demand for foreign cotton 10.53 EU demand for U.S. cotton -15.55

  18. Scenario 4: Removal of MFA, 3 % decrease in LDP, & 5% increase in foreign cotton supply U.S. import demand for textiles/apparel 24.92/ 36.23 U.S. domestic demand for textiles/apparel -3.80/ -26.05 U.S. import price of textiles/apparel -18.63/ -22.11 China textiles/apparel export supply 61.04/ 23.76 AO textiles/apparel export supply 8.75/ 40.77 U.S. cotton price -0.30 World adjusted cotton price -0.55 U.S. cotton supply -3.72 U.S. demand for domestic cotton -13.18 China’s demand for U.S. cotton 6.46 China’s demand for foreign cotton 19.14 AO demand for U.S. cotton 3.22 AO demand for foreign cotton 10.85 EU demand for U.S. cotton -16.48

  19. Conclusions • Textile and Apparel Market • U.S. & EU — Increase in import demand — Decrease in domestic demand — Decrease in import price — Mixed results for domestic price • China & AO — Significant increase in export supply with different export mix

  20. Conclusions • Cotton Market • Decrease in LDP rate affected future U.S. cotton price& adjusted world price • Demand for cotton — U.S. Domestic demand continue falling — Decrease in EU — Increase in China and AO with different import mix • U.S. cotton supply decreased slightly

  21. Conclusions • U.S. cotton sector evolves from a primary supplier to its textile industry to a stronger exporting competitor in the global market • Policy shock in textile market, MFA quota elimination, have significant impact on cotton market • Policy shock in cotton market, decrease in LDP rate, doesn’t have explicit effect on textile market

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