Impact of MFA Phase-Out on the World Economy -- An Intertemporal, Global General Equilibrium Analysis Xinshen Diao Trade and Macroeconomic Division International.

Impact of MFA Phase-Out onthe World Economy

-- An Intertemporal, Global General Equilibrium Analysis

Xinshen DiaoTrade and Macroeconomic Division

International Food Policy Research Institute

Agapi SomwaruEconomic Research Service

U.S. Department of Agriculture

June 2001

Outline

• Introduction

• Trends in World T&A Trade

• Growth and T&A Trade

• Perspectives of a Post MFA World

Introduction

• MFA quantitatively restrains world T&A trade.

• ATC under the UR will end MFA over a 10-year period until 2005.

• The study evaluates the effects of MFA phase-out on the world economy, with developing countries focus.

Trends in World T&A Trade

• T&A trade grew 50 times, 6 billion $US in 1962 vs. 300 billion $US in 1999.

• Apparel trade grew

100 times; textile

trade 30 times; 2/3

of world T&A trade

is apparel.

Figure 1.World Textile and Apparel Exports

(In Billions US Dollars)

0

50

100

150

200

250

300

350

62 66 70 74 78 82 86 90 94 98

ApparelTextileAll

Trends in World T&A Trade

• The ICs dominated world T&A trade though 1990

Figure 3.Share in World Textile and Apparel Exports

10

20

30

40

50

60

70

80

90

62 66 70 74 78 82 86 90 94

ICs

LDCs

Trends in World T&A Trade

• The ICs import 70% of T&A traded in the world.

• The EU imports 40 – 50% of T&A traded in the world.

Figure 5.Shares in World Textile and Apparel Imports

0

20

40

60

80

62 66 70 74 78 82 86 90 94

All ICs

EU

US

Trends in World T&A Trade

• 50% of the EU’s imports are intra-EU trade

Figure 6.Share of Intra-Industrial Countries' Trade in Industrial

Countries Total Imports

20

40

60

80

62 66 70 74 78 82 86 90 94

Textile

Apparel

All

Growth and T&A Trade

• Data for 91 countries over 37 years• Time-series and cross-section

estimation between trade share and GDP per capita

• Total trade• Total nonagricultural trade• Agricultural trade• Textile and apparel trade

tiittiit TY ln

Table 1. Trade and income

Parameter estimate (standard error in

parentheses)

Variable/Statistic

Totaltrade

Agr. tradeNonagrtrade

Textiletrade

Appareltrade

Textile &Apparel

trade (1) (2) (3) (4) (5) (6)

Intercept 8.957 6.879 9.512 8.325 8.442 8.443

(0.0135) (6.37E-7) (2.14E-7) (1.42E-8) (2.79E-8) (5.664E-8)

Trade share 0.431 -3.531 1.158 2.658 3.570 2.864

(0.009) (1.29E-7) (4.53E-8) (1.703E-7) (8.37E-8) (1.704E-7)

Ln population -0.094 0.013 -0.121 -0.058 -0.066 -0.0658

(0.0007) (3.21E-8) (1.05E-8) (7.71E-10) (1.34E-9) (3.033E-9)

R-squared 0.999 0.990 0.990 0.999 0.999 0.999

Results are all statistically significant at the 1-percent level

What we did in the study?Grouping countries according to the degree of MFA

restrictions

Countries restrained by MFA1. China; 2. India; 3. Region of the other South and Southeast

Asia

4. Region of the Middle-east countries;

5. Region of Former Soviet Union countries;

6. Region of L.A. countries excluding Mexico and Caribbean;

Countries free from MFA quota7. Region of N. African and E. European countries

8. Region of the other African countries

9. Mexico and Caribbean countries

Restraining IC countries10. N. America; 11. The European Union

Other IC countries12. Australia and New Zealand; 13. Japan, Korea, and Taiwan

What we did in the study?

• Increase the efficiency coefficients in the export function

• 30 – 40% tariff reduction in T&A trade

• Incorporate the econometric results • Data: GTAP database 5, pre-release 3

• Sectors1. Cotton2. Other crops3. Livestock4. Processed food5. Textile6. Apparel7. Other manufacturing and services

Summary of Simulation Results

• More T&A trade in the world– LDCs T&A exports increase more– ICs textile exports increase

• LDCs gain market shares– Asian countries gain more; countries free from MFA lose

Results may underestimate changes in world market structure– Intra-regional trade ignored– Effect on growth patterns ignored

• Welfare effect differential among countries– China gains the most– Welfare loss among the countries free from MFA– ICs gain

Simulation Results

• Apparel trade up more than twice of textile trade

Figure 11.Increase in World Textile and Apparel Trade(Simulation results, % change from the base)

0

10

20

30

1 5 9 13 17 21 25

Textile

Apparel

All

Simulation Results

• LDCs exports increase more

• ICs textile

exports

increase

Figure 12.Increase in Textile and Apparel Exports

(Simulation results, % change from the base)

0

10

20

30

40

50

1 5 9 13 17 21 25

All- IC

All- LDC

Textile- IC

Apparel- LDC

Table 3. T&A Trade Market Shares for Selected Countries/Regions

------------ Simulation results ------------

Base Year-5 Year-10 Year-15 Year-20

Developing countries 59.57 60.37 61.71 63.41 64.68

(1) China 19.69 20.24 20.85 21.60 22.15

(2) India 4.40 4.45 4.64 4.88 5.07

(3) Other Asia 13.00 13.72 14.51 15.50 16.26

(4) Middle East 5.03 5.31 5.62 6.01 6.30

(7) E. Europe 6.50 6.07 5.76 5.41 5.14

(9) Mexico and Caribbean 6.09 5.69 5.43 5.11 4.87

Industrial countries 40.43 39.63 38.29 36.59 35.32

(10) N. America 6.61 6.33 6.12 5.85 5.64

(11) EU 14.39 13.92 13.46 12.87 12.42

Table 4. Welfare effect in the simulation

Year-5 Year-10 Year-15 Year-20

Billion

$ %Billion

$ %Billion

$ %Billion

$ %

Developing countries

China 9.00 1.74 9.91 1.91 10.59 2.04 11.65 2.25

India 2.97 0.97 3.34 1.10 3.90 1.28 4.90 1.61

Other Asia 5.06 0.90 5.30 0.94 5.76 1.02 6.55 1.16

Middle East 2.66 0.48 2.97 0.53 3.46 0.62 4.32 0.77 Former Soviet Union -2.99 -0.65 -3.16 -0.68 -3.13 -0.68 -2.96 -0.64

Other L.A. -2.28 -0.19 -1.66 -0.14 -1.06 -0.09 -0.03 -0.00

E. Europe -2.18 -0.52 -2.22 -0.53 -2.20 -0.52 -2.18 -0.52

O. Africa -2.37 -0.45 -2.45 -0.46 -2.45 -0.46 -2.54 -0.48 Mexico & Caribbean -1.56 -0.40 -1.53 -0.39 -1.48 -0.38 -1.42 -0.36

Industrial countries

N. America 0.07 0.00 3.42 0.05 7.42 0.10 11.91 0.16

EU 0.06 0.00 3.78 0.05 8.36 0.12 13.23 0.19 Australia, New Zealand 0.09 0.03 0.16 0.05 0.26 0.07 0.40 0.11 Japan, Korea, Taiwan 2.79 0.08 3.47 0.10 4.52 0.13 5.98 0.17

Table 5. Share of textile and apparel in GDP T&A value-added (1) Exports (2)Developing countries China 5.26 5.38 India 3.25 2.64 Other Asia 3.02 3.89 Middle East 1.36 1.68 Former Soviet Union 1.32 0.43 O. Latin America 3.29 0.16 E. Europe 2.86 3.10 O. Africa 2.14 1.08 Mexico and Caribbean 3.29 3.00Industrial countries N. America 1.22 0.18 EU 1.06 0.40 Australia and New Zealand 0.87 0.47 Japan, Korea and Taiwan 1.20 0.86(1) GDP at factor cost(2) GDP at expenditureData source: GTAP database version 5.

Conclusions

• 70% of T&A traded go to ICs; an open and free trade market in ICs is important for LDCs to keep their growth momentum

• 50% of IC markets, especially EU market, not available to

LDCs

• Regression results show a strong linkage between T&A trade

and income growth

• More T&A traded post MFA; LDCs export more

• Asian countries gain market share; countries free from MFA

lose

• Welfare gains in the countries restrained by MFA and ICs

• A compensation policy for the countries free from MFA needed