Are Apparel Trade Restrictions Regressive?

Beginning of article

Since the Multi-Fiber Arrangement in 1974, the textile and apparel industry has received more comprehensive and persistent protection than any other industrial sector (Cline 1990). According to Hufbauer and Elliott (1994), tariffs and quantitative import restrictions in place in 1990 cost American consumers about $70 billion, more than 1 percent of Gross Domestic Product (GDP). More than a third, $24 billion, of these consumer costs were attributable to textiles and apparel alone (Hufbauer and Elliott 1994).

Currently, trade liberalization programs are underway. The World Trade Organization (WTO) Agreement on Textiles and Clothing provides for the phased liberalization and elimination over the transition period of quotas on textiles and apparel imported from WTO member countries. This agreement was approved as part of the Uruguay Round Agreements Act by the U.S. Congress in December, 1994, and went into effect on January l, 1995. Also, the North American Free Trade Agreement (NAFTA) has created new opportunities for United States' textile and clothing market.

Despite this trend toward free trade, the U.S. Committee for the Implementation of Textiles and Apparel (CITA) notified the Dominican Republic, Colombia, Costa Rica, El Salvador, Honduras, Thailand, and Turkey that their exports of underwear to the U.S. have been protested by U.S. manufacturers (Turck 1995). This move is considered to be a prelude to negotiation for reductions of such imports, which increased nearly 90 percent during 1992-1994. The U.S. also notified Jamaica, Honduras, and El Salvador that it plans to limit their exports of nightwear (Turck 1995). Vosko (1993) examined the extent to which trade between Canada and the U.S. was liberalized in textiles and apparel goods under the NAFTA and demonstrated that while moderate liberalization was achieved in textile trade, protectionism was increased in apparel trade.

Restrictions of the supply of imports tend to raise their prices, and as the prices of imports rise, the prices of competing domestic goods tend to rise in response (Cline 1990; Dardis 1988; Scott and Lee 1996). It is well known that such price increases cause losses in consumer welfare. Past studies have assessed aggregate consumer welfare loss due to trade restrictions in the apparel industry. Clearly, trade restrictions reduce the efficiency of the economy. As Smith (1998, 441) and others have pointed out, however, equity may also be an important goal in assessing policies. Smith (1998, 441) lists three specific equity goals: equalizing the distribution of power, altering income distribution, and reducing uncertainty. Various interest groups, such as labor unions, use equity concerns to argue against trade liberalization (AFL-CIO 1996; Burtless 1995; Freeman 1995, 17).

In terms of equity, the question of which consumer groups stiffer more welfare loss should also be of interest, especially the relative impact on different income groups. There are at least two reasons to believe that the welfare loss is different for different income groups. First, it is suggested in past literature that the price of low-value apparel products tends to be affected more by apparel trade restrictions than high-value apparel products (Bergsten 1972; Christerson 1994; Christerson and Appelbaum 1995). Because low-income consumers are usually buyers of low-value apparel products, they are likely to be affected more by apparel trade restrictions. Second, because consumers with different levels of income respond to price changes in apparel differently, consumer welfare loss due to the same apparel price increase can also vary across consumers with different income levels.

While it is self-evident that low-income households get hurt more by the greater increase in low-value apparel products caused by apparel trade restrictions, it is not obvious how consumer welfare loss differs between low- and high-income consumers due to their different responses to price changes. The purpose of this study is to investigate consumer welfare loss due to high apparel prices with trade restrictions across households with different levels of per capita income.

BACKGROUND

Trade Restrictions

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 fibers led in 1974 to an expansion of the LTA to include trade in these products. This agreement, known as the Multi-Fiber 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).

The MFA was replaced by the Uruguay Round Agreement on Textiles and Clothing (ATC), which entered into force on January 1, 1995, as part of the World Trade Organization (WTO) agreements (ITC 1997a, 1997b, 1997c). Under the ATC, textiles and apparel will be gradually integrated into the GATT regime - they will be brought under GATT discipline and be subject to the same rules as goods of other sectors. As WTO countries integrate their textile and apparel trade into the GATT regime, they are obligated to eliminate quotas on imports of such items from other WTO countries. The GATT integration process will occur over a 10-year period.

In 1996 the U.S. had quotas on textiles and apparel from 46 countries (ITC 1997c). Of these countries, 37 are WTO members whose shipments are subject to the terms of the ATC. For Mexico and Canada, the North American Free Trade Agreement (NAFTA) provides for the elimination of limits on "nonoriginating" textiles and apparel by 2004.

Import Sources

Apparel production is highly labor-intensive (Christerson 1994; Christerson and Appelbaum 1995). The intricate nature of cutting and sewing apparel makes it difficult to introduce labor-saving technology. In addition, fashion trends in industrialized countries over the last 20 years have moved from an emphasis on practicality, simplicity, and standardization to individuality, freedom of expression, and a breakdown of clear conventional standards of dress (Gereffi 1994). This trend toward style and individuality has forced manufacturers to offer a wider variety of styles and colors, which makes automation more difficult, labor costs more important, and offshore sourcing to low-wage areas more attractive. In the last 30 years, low-wage areas, particularly in East Asia, have become a major force in apparel production for export (Christerson 1994; Christerson and Appelbaum 1995). At the same time, the production of apparel in low-wage Asian nations for export to the U.S. has caused the apparel industry in the U.S. to call for government protection (Dicken 1992).

Despite the growth of low-wage production in the Third World, high-wage European nations continue to excel in apparel exports (Christerson 1994; Christerson and Appelbaum 1995). In 1987, Italy was the number one apparel exporter in terms of value, accounting for 12 percent of total world exports. West Germany, France, and Italy combined accounted for almost 20 percent of world apparel exports in terms of dollar value. Christerson (1994) explained these contradictory geographic forces in the apparel industry. For low-value products that tend to compete on cost, labor costs are a significant determinant of trade flows, thus, causing production to be dispersed to low-wage areas. For high-value products, which tend to compete on quality, fashion, and quick delivery, production for export takes place near quality fabric suppliers and final markets, which tend to be in higher-wage areas. Because most of the bilateral quotas restricted exports by low cost developing countries (Trela …