Since the 1960s, world trade in textiles and apparel has been subject to an increasing array of bilateral quota arrangements. The range of products subject to restraints expanded from mostly cotton textiles under the early quota arrangements in the 1960s and early 1970s to an ever increasing list of natural and manmade fibers under four iterations of the Multi-Fiber Arrangement (MFA) beginning in 1974.
In the United States, the textile and apparel industries receive higher levels of protection than does any other manufacturing sector. The estimated tariff rate equivalent of all U.S. protection (tariffs and quotas combined) is 23.4% of textiles, and 48% of apparel (Schott, 1994). Restraints under the MFA and earlier quota arrangements may have provided a certain degree of market certainty and, consequently, a stable environment that allowed U.S. manufacturers to undertake major technological changes. However, by limiting import competition, the MFA trade restraints may have enabled U.S. manufacturers to enjoy higher market power and profit margins (Pelzman, 1984). Consequently, they cost U.S. consumers billions of dollars in terms of welfare loss. Hufbauer and Elliott (1994) estimate that total elimination of import quotas would provide more than $15 billion welfare gain to U.S. consumers.
Theoretical literature on the role and effect of trade policy in imperfectly competitive markets is well-established. Helpman and Krugman (1989) offer a synthesis of the "new" theory of trade policy arising specifically from the presence of imperfect competition. On the other hand, much empirical trade literature assumes perfect competition for the market under investigation. In trade policy analysis, imperfect competition and market power can lead to non-standard policy effects. Therefore, empirical analysis of trade policy should be based on a modeling approach that allows for imperfect competition and market power.
Recently, trade economists have begun to apply methods of the "new empirical industrial organization," which advocates applying time series data from single industries or from closely related industries to trade policy studies. Levinsohn (1993), for instance, uses a method of the new empirical industrial organization to investigate the pro-competitive effect of trade liberalization policy in the Turkish manufacturing sector in 1984 and finds that reducing import barriers depressed domestic price-cost margins.
This article tests the hypothesis that MFA trade restrictions, by limiting import competition, promoted domestic non-competitive behavior and raised domestic profit margins. The empirical analysis also is conducted in the spirit of the new empirical industrial organization. For the selected sub-sectors of the textile industry, the results show significant evidence of the anti-competitive effect of trade restrictions. Protection under the MFA has enabled U.S. producers to raise their profit margins and has reduced domestic welfare due to increased domestic market power.
II. HISTORICAL BACKGROUND
In the 1950s, the U.S. textile industry experienced market adjustment problems caused by the shift to man-made fibers, technological changes, and intensifying import competition from Japan. To partially alleviate these problems and to be able to undertake technological adjustments with the least market disruptions caused by import competition, the U.S. textile industry sought protection from import competition primarily from Japan. The administration, pursuant to the authority granted under the Agricultural Act of 1956, negotiated a five-year voluntary restraint agreement on cotton textile exports from Japan for the period 195761. (The information here and throughout this section comes from The U.S. International Trade Commission's various publications.)
Because of their discriminatory nature, the voluntary export restraints curtailed imports only from Japan while encouraging imports from smaller unrestrained exporting countries. …