Impact of MFA Phase-Out on the World Economy -- An Intertemporal, Global General Equilibrium Analysis Xinshen Diao Trade and Macroeconomic Division International Food Policy Research Institute Agapi Somwaru Economic 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 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 Apparel trade grew 100 times; textile trade 30 times; 2/3 of world T&A trade is apparel.

Trends in World T&A Trade The ICs dominated world T&A trade though 1990

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.

Trends in World T&A Trade 50% of the EU’s imports are intra-EU trade

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

What we did in the study? Grouping countries according to the degree of MFA restrictions Countries restrained by MFA 1. 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 quota 7. Region of N. African and E. European countries 8. Region of the other African countries 9. Mexico and Caribbean countries Restraining IC countries 10. N. America; 11. The European Union Other IC countries 12. 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 Sectors 1. Cotton 2. Other crops 3. Livestock 4. Processed food 5. Textile 6. Apparel 7. 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

Simulation Results LDCs exports increase more ICs textile exports increase

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