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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 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 and Cotton Market with Alternative Scenarios.
Overview • Introduction • Methodology • Theoretical Considerations • U.S. farm program • Equilibrium Displacement Model • Parameters • Scenarios & Results • Conclusions
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
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
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
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
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
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
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
Theoretical Considerations Equilibrium price PM=PS • (1+T)
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
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
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
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
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
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
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
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
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
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