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

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

7. U.S. Cotton Exports & Share of World Trade

8. U.S. Cotton Mill Use

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

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

16. Scenario 2:Removal of MFA and3% decrease in LDP

17. Scenarios 3: Removal of MFA, 5% increase in foreign cotton supply

18. Scenario 4: Removal of MFA, 3 % decrease in LDP, & 5% increase in foreign cotton supply

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