INTERNATIONAL TRADE QUOTAS:
A CRITICAL APPRAISAL OF THE IMPLEMENTATION OF THE MULTIFIBRE AGREEMENT (MFA) IN SOUTH ASIA
Introduction
Background of the Study
The textile industry is the major export sector in many developing countries. Over 33% of all manufactured exports from developing countries are currently textile and clothing products. (Smith, 1998) Consequently, the protectionist trade policy in developed countries aimed at avoiding market disruption constitutes a source of economic disruption in exporting countries. The history of the international textile trade legal structure since the Second World War has also been a process of legalizing what were otherwise illegal trade practices. This process took the form of the Multifiber Arrangement (MFA), which provides for a legal basis for the quantitative and dispossess the power to retaliate against their adversaries in trade disputes and to absorb the effects of retaliation. For this reason the implementation of the MFA and the performance of the international textile trade are heavily influenced by the textile trade policy of developed countries. While maintaining a high degree of competitiveness in the textile trade, many developing countries lack the adequate bargaining leverage at the negotiations table.
The MFA governed trade in the textile and clothing industry and consisted of a framework of bilateral agreements or unilateral actions that established quotas limiting the amount of imports to countries whose domestic industries were facing serious damage from rapidly increasing imports. The MFA, intended only to be a temporary arrangement, has been in existence for almost twenty-five years. It received four extensions; these being in 1977, 1981, 1986 and 1994. The MFA provided for the application of selective quantitative restrictions when surges in imports of particular goods are caused. Alternatively, threatened to cause damage to the industry of the importing country.
The MFA was concluded on December 20, 1973 as a substitute for the Long-Term Arrangement. Similar to the Long-Term Arrangement, the MFA is intended to strike a balance between the conflicting interests of exporting and importing countries. (Trela and Whalley, 1990) Moreover, the MFA has gone through four phases. MFA I entered into force for a period of four years. A total of forty-two countries, including almost all the important textile and clothing trading partners, participated. During MFA II the number of participants remained forty-two. Nicaragua, Spain, Australia, and Norway did not participate in MFA II, while Bolivia, Czechoslovakia, the Dominican Republic, and Indonesia became new participants. During MFA II negotiations the European Economic Community (EEC) assumed a leading role in pressing the MFA regime further toward a protectionist direction. As a result of the EEC’s efforts, MFA II introduced a new provision, which allowed the “jointly agreed reasonable departure” from MFA provisions. During this third phase of the MFA, there were forty-three participants. Bolivia did not participate in MFA III, but the People’s Republic of China and Norway became members. MFA III eliminated the “reasonable departure” provision, but formally legalized several important “departures” from the MFA. Finally, MFA III expressly sanctioned discriminatory treatment against large exporters. It incorporated an “antisurge” mechanism that modified prior MFA rules and allowed importing countries to impose further restrictions on textile imports already covered by existing quotas. MFA III also allowed importing countries to depart from the MFA basic requirements in the flexibility area, a practice not provided in the MFA. Finally, MFA III expressly sanctioned discriminatory treatment against large exporters. Based on initiatives of the United States, MFA IV incorporated all the major elements of MFA III and made several important modifications that favoured importing countries. Among other things, MFA IV broadened MFA coverage to include vegetable fibres and silk blend fibres, which have been excluded from MFA III. MFA IV also increased importing countries’ discretion to apply unilateral restrictions under MFA Article 3.
On January 1 1995, WTO replaced the MFA with the Agreement on Textiles and Clothing (ATC).
The beautifully worded MFA objectives and principles from the start have only had a symbolic function. (Trela and Whalley, 1990) These broadly worded statements have never become a meaningful deterrent to the increase of import restrictions. This study intends to critically evaluate the implementation of the Multifibre Agreement on traders, industries and countries in South Asia.
Review of Related Literature
The idea behind the formation of the MFA, as indicated in the preamble, is to “take cooperative and constructive action, within a multilateral framework, so as to deal with the situation (of market disruption) in such a way as to promote on a sound basis the development of production and expansion of trade in textile products and progressively to achieve the reduction of trade barriers and the liberalization of world trade in these products.” (Trela and Whalley, 1990) Article 1 further emphasizes this basic guideline, categorizing the objectives of the MFA as: (1) liberalizing the textile trade and reducing trade barriers, and (2) ensuring the orderly and equitable development of the world textile trade and avoiding disruptive effects. To deal with market disruption and ensure an “orderly development” of trade, the MFA permits importing countries to adopt safeguard measures to limit textile imports “in exceptional circumstances.” To ensure the expansion of trade, import restrictions are accompanied by an obligation to pursue an economic and social policy that encourages structural adjustment, and to ensure “an increased access to their markets for textile products.” These general policy statements were reaffirmed in MFA II and MFA III.
While reaffirming these general policies, MFA IV has added two new provisions. (Smith, 1998) First, MFA IV expressly states that the final objective of the MFA system is the application of GATT rules to the trade in textiles. Second, MFA IV incorporates a general commitment by importing countries to the economic and social development of developing countries and a substantial increase in their export earnings from textile products “through improvement in bilateral agreements under this Arrangement, which should provide for increased effective access in overall terms.”
The textile and apparel industry has long received protection from foreign competition (Cline 1990; Chen 1994). From the late 1950s onward, tariffs were supplemented by quantitative restrictions known as voluntary export restraints (VERs). In 1957, a VER was used to restrict Japanese cotton textile exports. In 1962, these restrictions were extended to other countries under the Long Term Arrangement (LTA) on cotton textiles. Increasing imports of artificial fibres led in 1974 to an expansion of the LTA to include trade in these products. This agreement, known as the Multi-Fibre Arrangement (MFA), governed most U.S. imports of textiles and apparel during 1974-1994. Under the MFA, bilateral agreements established textile and apparel quotas without compensation, which is contrary to the general prohibition against their use under the General Agreement on Tariffs and Trade (GATT). As a result, a series of discriminatory bilateral quotas restricted exports by most developing countries (Trela and Whalley 1990).
Trade restrictions such as those provided by the MFA have caught a lot of attention. Several researchers have estimated consumer welfare loss due to trade restrictions. Using 1986 data, Cline (1990), Metzger (1989), Trela and Whalley (1990), and Scott and Lee (1994) estimated consumer welfare loss with different assumptions. Based on a partial equilibrium model, Cline (1990) estimated that the elimination of protection would lower the prices of imported and domestic apparel by 34.6 and 18.9 percent, respectively. The elimination of protection further would cause the volume of imports to increase by 56.7 percent, and the increases in imports would reduce domestic apparel production by 18.9 percent. Cline estimated that the total consumer costs of protection equalled to .6 billion.
Metzinger (1989) estimated consumer welfare loss with the assumption that imported apparels were perfect substitutes for domestic apparels. Since domestic and imported apparels have very high cross-price elasticities of demand, apparel can be modelled as if they were perfect substitutes. Metzinger’s estimation of consumer welfare loss caused by trade restriction was .3 billion. Trela and Whalley (1990) estimated the welfare cost of apparel import restrictions as .3 billion based on a general equilibrium model.
Scope and Objectives
The study intends to employ methods of critical appraisal in order to effectively analyse the effects of MFA. This way, together with skills in finding research evidence and changing practice as a result of research, the study would have a route to close the gap between research and practice and as such makes an essential contribution to improving healthcare quality. Moreover, with the use of critical appraisal, the study could encourage objective assessment of the usefulness of information. Furthermore, the method is not difficult to develop, it is a common sense approach to reading, and user-friendly tools are available to help anyone develop these skills. Nonetheless, it could be time-consuming initially, although with time it becomes the automatic way to look at research papers. Moreover, it does not always provide the reader with the `easy’ answer or the answer one might have hoped for; it may highlight that a favoured intervention is in fact ineffective.
Hypothesis
This study intends to test the following null hypothesis:
“The implementation of the Multifibre Agreement has a significant effect in the textile industry of South Asia.”
Proposed methodology
The study shall be using the descriptive research method. It uses observation. In this method, it is possible that the study would be cheap and quick. It could also suggest unanticipated hypotheses. Nonetheless, it would be very hard to rule out alternative explanations and especially infer causations. This descriptive type of research will utilize observations in the study. To illustrate the descriptive type of research, Creswell (1994) will guide the researcher when he stated: Descriptive method of research is to gather information about the present existing condition. The purpose of employing this method is to describe the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena. The researcher opted to use this kind of research considering the desire of the researcher to obtain first hand data from the respondents so as to formulate rational and sound conclusions and recommendations for the study.
The research described in this document is based solely on qualitative research methods. This permits a flexible and iterative approach. During data gathering the choice and design of methods are constantly modified, based on ongoing analysis. This allows investigation of important new issues and questions as they arise, and allows the investigators to drop unproductive areas of research from the original research plan.
The primary source of data will come from published articles from social science journals, theses and related studies on international trade, the textile industry, and pertinent document of the Multifiber Arrangement. For this research design, the researcher will gather data, collate published studies from different local and foreign universities and articles from social science journals; and make a content analysis of the collected documentary and verbal material. Afterwards, the researcher will summarize all the information, make a conclusion based on the null hypotheses posited and provide insightful recommendations on the dealing with the international trade of textile.
Research Questions
The study intends to shed light into the following queries:
1. What are the strength and weaknesses of the MFA?
2. How does the MFA affect the international textile trade?
3. What are the countries that are directly affected by the MFA?
4. How does these countries benefit/suffer from the MFA?
5. Why did the MFA last twenty-five years before it was replaced by the ATC?
6. How did the MFA affect the traders and textile industries in the countries of South Asia?
References:
Chen, Lein Lein (1994), “The Welfare Effects of Bilateral Free Trade Between the U.S. and Colombia in Textiles and Apparel,” North American Journal of Economics and Finance, 5(1): 39-54.
Cline, William R. (1990), The Future of Worm Trade in Textiles and Apparel, revised edition, Washington, DC: Institute for International Economics.
Creswell, J.W. (1994) Research design. Qualitative and quantitative approaches. Thousand Oaks, California: Sage.
Metzger, Michael R. (1989), A Recalculation of Cline’s Estimates of the Gains to Trade Liberalization in the Textile and Apparel Industries, Working Paper No. 174, Bureau of Economics, Federal Trade Commission, Washington, DC.
Scott, Robert E. and Thea M. Lee (1994), “The Costs of Trade Protection Reconsidered: U.S. Steel, Textiles, and Apparel,” in U.S. Trade Policy and Global Growth: New Directions in the International Economy, R. A. Blecker (ed.), Armonk, NY: Economic Policy Institute: 108-135.
Smith, Kevin B. (1998), “Reforming Regulation,” in Regulation and Consumer Protection: Politics, Bureaucracy and Economics, Kenneth H. Meier, Thomas E. Garman, and Lael R. Keiser (eds.), 3rd edition, Houston, TX: Dame Publications, Inc.: 435-468.
Trela, Irene and John Whalley (1990), “Global Effects of Developed Country Trade Restrictions on Textiles and Apparel,” The Economic Journal, 100(403): 1190-1205.
Credit:ivythesis.typepad.com
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