United States

Department

of Agriculture

www.ers.usda.gov

Electronic Outlook Report from the Economic Research Service

CWS-05c-01

April 2005

The Forces Shaping World

Cotton Consumption After

the Multifiber Arrangement

Abstract

The phaseout of the Multifiber Arrangement (MFA) and other forces are reshaping

world textile and cotton markets. The elimination of the MFA is helping reduce

clothing prices in the United States and the EU and effecting a shift in industrial

demand for cotton to China, India, and Pakistan. At the same time, world cotton

consumption has accelerated along with economic growth since 1999, especially

in developing Asia, where an emerging consumer society is driving increases in

household consumption of clothing and other cotton products. In the long run,

income growth and technical change have more of an effect on world cotton

consumption than the elimination of the MFA.

Keywords: Textiles, cotton, clothing, apparel, Multifiber Arrangement, quotas,

trade policy, China, India, fiber, income.

Acknowledgments

The authors wish to thank the following individuals for their insightful comments:

Marjorie Norton, Virginia Polytechnic Institute and State University; John Baffes,

World Bank; Carol Goodloe, USDA’s Office of the Chief Economist; James

Johnson, USDA’s Foreign Agricultural Service; Carol Skelly, USDA’s World Agricultural Outlook Board; Paul Westcott, Cheryl Christensen, Praveen Dixit, Karen

Hamrick, Joy Harwood, Demcey Johnson, and Leslie Meyer, USDA’s Economic

Research Service. Appreciation is also extended to the editor, John Weber, and to

Wynnice Pointer-Napper, for her efforts in designing the report.

Stephen MacDonald and Thomas Vollrath
World cotton consumption has been growing strongly in recent years,

rebounding from nearly a decade of stagnation during the 1990s. During

this time, the Multifiber Arrangement’s (MFA) phaseout was concluded on

December 31, 2004, setting in motion changes in global textile production

and consumption. The MFA and its predecessor agreements have influenced

world textile and clothing trade patterns for nearly 50 years (see box, “From

Cotton to Clothing—The Textiles Complex”). These agreements protected

U.S. and EU textile and clothing producers from imports, but raised prices

and reduced consumption in these developed countries. The gradual

phaseout of MFA quotas has already driven shifts in world textile production and consumption. More changes are likely in 2005 and beyond. Over

time, the level of world cotton consumption will likely be strongly influenced by factors other than the removal of the MFA.

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Introduction
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About 80 percent of all cotton fiber-based products are consumer products,

primarily clothing (also known as apparel or garments). Other consumer

products include sheets, towels, and other home furnishings (also known as

home textiles).

The industry that creates clothing and other products from fiber and

delivers them to consumers is most broadly described as the “softgoods

industry.” The industrial portion of the softgoods industry supply chain is

often referred to as the “textiles industry,” although the term “textiles” is

often reserved for intermediate products, like yarn and fabric. In this

report, “textiles” refers to yarn and fabric.

Fiber is transformed into consumer products as follows:

The fibers spun into yarn are predominantly polyester and cotton, but

include rayon, wool, jute, flax, and silk. Yarn is either woven or knitted

into fabric. Fabric is then dyed, printed, or otherwise “finished” with

softeners, wrinkle-resistance resins, or other processes. Note that finishing

can account for a substantial part of the value added in fabric production.

Clothing is produced from fabric that has been cut and then sewn.

Yarn and fabric production is often vertically integrated, that is, a single

firm controls both processes. Home furnishings are occasionally produced

by firms integrated with yarn production. In fact, bed linen and towels are

aggregated with fabric and yarn as textiles in the Standard International

Trade Classification (SITC, division 65). Textile production and clothing

production are not typically integrated within one firm.

From Cotton to Clothing—The Textiles Complex

Fiber

Textiles

Clothing and

home furnishings

Fabric

Yarn }
In the 1930s, Japan rose to become the world’s largest textile exporter

during a period of global economic distress, leading Europe and the United

States to restrict imports from Japan as a way to protect domestic industries.

Quotas restrained Japan’s exports throughout the 1950s, and by 1960, textile

imports from Hong Kong, Pakistan, and India faced similar restraints. These

restraints were codified in a series of multilateral agreements that culminated in 1974’s MFA. Under the MFA, quotas were implemented on a

country- and product-specific basis when textile and clothing exports posed

a threat of “market disruption.” Over time, these barriers increasingly

constrained the major developing-country suppliers.1

In 1962, the United States had one bilateral export restraint agreement, with

Japan. The number of agreements grew to 30 countries by 1972 and 40 by

1994, with restraints governing about half of U.S. clothing imports.2 These

agreements specified annual import limits for as many as 105 categories of

products, and sometimes included an additional set of import limits for

groups and subgroups of these products. Exporters were allowed some flexibility to shift quotas to different products and different years. Quotas typically grew from one year to the next at varying rates. The MFA specified a

target of 6-percent annual growth, although lower rates were typically negotiated with major exporters.

Starting in 1995, the MFA was formally replaced by the Agreement on

Textiles and Clothing (ATC). The ATC established a schedule for eliminating the MFA’s quotas and for accelerating the annual growth rates in the

import quantities permitted under quota. The ATC also lowered textile and

clothing tariffs and highlighted the need to bring all trade policies applied to

the sector into alignment with World Trade Organization (WTO) rules.

Bilateral quotas have fragmented world production and altered patterns of

trade. The MFA has effected greater production of textiles and clothing in

the United States, the EU, and many countries with preferential access to

these developed-country markets.3 The agreement also raised prices for

clothing and lowered consumption in the United States and the EU

(appendix). MFA quotas added an estimated 5-10 percent to clothing prices

paid by U.S. consumers, according to a range of studies. The agreement’s

impact on developing-country suppliers varied. The MFA restrained some

countries’ exports, but in others, such as Bangladesh and Mauritius, it

created an export industry that might not otherwise have existed. 

Quota Restraints Like a Tax on Exports

The complexity of the MFA hindered direct measurement of its impact.4 A

quota’s impact depends on market conditions as well as the quota’s size and

conditionality. A widely accepted measure of the restrictiveness of the MFA is

the price that exporting firms paid for the right to export to the United States

and the EU. Quotas raise the price of a product in importing countries and limit

shipments from exporting countries, which makes these exports particularly

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How the Multifiber Arrangement Affected

World Textile Markets

2There were 45 agreements in 2002.

Japan has been outside the system

since 1995.

1See Dickerson (1999). Cline (1990)

also provides a summary through the

1980s.

3Regional trade agreements, such as

NAFTA, typically reduced applied textile and apparel tariffs and relaxed or

removed quota restrictions.

Agreements with development objectives sometimes also offered similar

access, such as the EU's Lomé

Convention and the U.S. African

Growth and Opportunity Act (AGOA).

4Economists view quotas less favorably than tariffs for several reasons,

including lack of transparency

(Feenstra, 1995). One of the founding

principles of the General Agreements

on Tariffs and Trade (Article 11) is

that quantitative restrictions should be

replaced with tariffs.
profitable. The size of the “excess profits” corresponds to the restrictiveness of

a particular quota. 

Exporting countries’ total quotas were determined by bilateral agreement with

importers. Exporting countries allocated quotas among domestic firms either

on the basis of their past export performance, auction bids, or ad hoc criteria.

For example, 70-80 percent of Thailand’s and India’s garment quotas were

usually distributed free of charge on the basis of past export performance.5 In

China, the Textiles Chamber of Commerce sold quota rights to firms at

market-determined prices, according to the U.S. International Trade Commission (USITC, 2004a). Indonesia’s system in the early 1990s reportedly lacked

transparency. “The absence of published information on quotas serve[d] to

reinforce suspicion and mistrust..., and to force exporters to spend excessive

amounts of time lobbying key government officials.”6

Firms receiving quotas could sometimes exchange quota licenses on open

markets.7 The price of these licenses corresponded to the opportunity to earn

excess profits, or rents (appendix). Economists often used an export tax equivalent (ETE) derived from these license prices (or “quota premiums”) as an indicator of the MFA’s restrictiveness. ETEs could be calculated as a ratio of the

license prices to the export price of the restricted product (after the license

price was deducted from the price)—but for many countries, ETEs were

imputed from quota trading in Hong Kong, the most open market.

ETEs have varied across countries, and through time (table 1).8 Most recently,

China’s exporters, on average, have faced a 20-percent ETE on clothing and

10 percent on textiles. China is widely regarded to be the world’s most

competitive exporter, and its ETEs were typically higher than those for other

countries. A downward trend over time in a number of countries’ ETEs shows

that the restrictiveness of the MFA quotas has been declining.

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6Krishna et al. (1997).

7Outside of Hong Kong, secondary

quota markets were illegal in many

countries throughout most of the time

the MFA was in force.

8Estimates also vary from study to

study. Yang et al. (2004) estimated

China's clothing ETE at 34 percent

and India's at 8 percent.

5Suphachalasai (1998) for Thailand, and

Kumar and Khanna (1990) and Kathuria

and Bhardwaj (1998) for India.

Table 1—Tariff equivalence of U.S. Multifiber Arrangement quotas, estimated “export tax equivalence” (ETE) 1

Exporting country Textiles ETE Clothing ETE

1992 1998 2001 2002 1992 1998 2001 2002

Percent

China 18 20 21 10 40 33 27 20

Hong Kong 8 1 0 1 18 10 0 19

South Asia 18 15 — — 40 8 — —

India — 10 9 18 — 34 7 12

Bangladesh — — — 0 — — — 22

Pakistan — — — 12 — — — 11

Indonesia 12 8 13 0 47 8 7 5

Thailand 9 8 4 — 35 13 2 —

South Korea 10 2 2 — 23 2 0 —

Taiwan 8 2 2 1 19 8 0 1

Africa / Middle East 5 1 — — 10 1 — —

Turkey — 7 0 — — 5 1 —

Latin America 9 7 2 — 20 5 1 —

Mexico 9 0 — — 20 0 — —

Brazil 9 — — — 20 — — —

1 If both a region (e.g., South Asia) and major components of that region (e.g. India and Bangladesh) are reported, then the regional estimate is

for the remaining countries (in this case, Pakistan accounts for most of the remaining activity). If a particular region or exporter was not included

in the study used for a given year’s estimate, a “—” is reported.

Sources: Hertel et al. (1996) and Harrison et al. (1997) for 1992 data; Francois and Spinanger (2001) and Rivera et al. (2003) for 1998 data;

Francois and Spinanger (2004) for 2001 data; Andriamananjara et al. (2004) for 2002 data.
Supply and demand in the importing market, along with the conditions in the

exporting country and its competitors, jointly determined the restrictiveness of

each quota. Intuitively, the smaller the quota, the more restrictive the trade

barrier. But, the size of the import market is also a factor—as is the size of the

industry in the exporting country—in determining the economic effect of a

particular quota. More generally, the relative competitiveness of the producing

industries in the importing and exporting countries determines the restrictiveness of a given quota. Under the MFA, quotas generally grew each year,

reflecting the fact that consumption in importing countries tended to grow.

Moreover, rising wages tended to increase costs in importing countries, and

technology transfer and improved infrastructure could cut costs in exporting

countries. Finally, the impact of a quota imposed on an exporter also depended

on the quotas imposed on its competitors. 

Effect of the MFA Varied Over Time

The locus of competitive textile and clothing production regularly shifted over

the last 40 years. Quotas imposed first on Japan and Hong Kong helped shift

production to South Korea and Taiwan.9 By the end of the 1990s, production

costs had risen in these countries. Eventually, producers of textiles and clothing

in these relatively high-income Asian countries became beneficiaries of the

protection the quota system offered against competition from China and India.

Over time, the effect of the MFA was to actually increase textile and

clothing exports by some developing countries. Resources from restricted

countries flowed to other countries not constrained by quotas, giving their

exports a boost. Eventually quotas were imposed on many of these newly

producing countries as well. While firms purchasing quota in these countries

may have paid a high ETE, they were often net beneficiaries of the quota

system. The excess profits creating the ETE were ultimately derived from

the restrictions imposed on other exporters. Bangladesh, for example, had

one of the highest clothing ETE’s in the world (table 1), but its clothing

industry is generally believed to be larger because of the MFA.10

World trade policy for textiles and clothing encompasses more than the MFA

quotas. Tariffs are substantially higher than the 4-percent global average for

manufactured products: applied tariffs generally range from 10 to 20 percent

for textiles and from 20 to 40 percent for clothing. Nontariff barriers (NTB)

also exist, including burdensome custom procedures, stringent labeling requirements, and outright bans on clothing imports. For example, many countries

have outright bans on used clothing imports; for a time, Egypt banned all

clothing imports. Many other countries reportedly implement minimum import

prices and other customs procedures as NTBs. Smuggling is a problem in a

number of developing countries, suggesting trade barriers other than the MFA

can be significant. Antidumping cases are frequently pursued by both developing and developed countries in the sector.

Given the level of protection observed around the world, the removal of

MFA quotas will have significant impacts on global textile markets.

However, other factors will also help shape how global textile and cotton

markets change with the end of the MFA.

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9See Trela (1998) for overview.

10Yang and Mlachila (2004).
Over the last several years, worldwide consumption of cotton has accelerated, boosted by favorable trends in incomes, fiber prices, and clothing

trade. Global consumption of cotton fell slightly in 2003/04, its first decline

since the Asian financial crisis in 1998/99, but has recently increased well

above the longrun average rate.11 After growing 0.3 percent during the

1990s, cotton consumption grew at an estimated 3 percent annually during

the first 5 years of the 21st century.

Clothing is the primary consumer good produced with cotton, and clothing

consumption is very responsive to shortrun changes in income. During the

Asian financial crisis, for example, urban incomes in South Korea dropped

15 percent in the second quarter of 1998, while clothing consumption fell

33 percent, the largest decline of any expenditure category.12 While clothing

is a necessity, its purchases can be delayed, making demand potentially

extremely responsive to short-term changes in income. In the long run,

clothing consumption is far less responsive to changes in income, actually

growing more slowly than income on average (fig. 1).

Global Income Trends Have Been 

Particularly Favorable

The International Monetary Fund forecasts a 4.3-percent increase in global

economic output in 2005, the third consecutive year of above average

growth.13 Since 1998, world GDP growth has been below its longrun

average level only twice, in 2001 and 2002. The outlook for 2005 is indicative in several other ways of income trends seen in recent years. China is

expected to remain the fastest growing major market in 2005, increasing at

an 9-percent annual rate. India’s economy is also expected to grow rapidly,

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11Over 1980-2003, world cotton consumption grew 1.6 percent annually.

Total fiber consumption grew 2.6 percent annually.

Trends in Global Cotton Consumption

12Korea National Statistical Office.

13International Monetary Fund (2005).

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30 35 40

Figure 1

International fiber consumption and income, 2000

Source: Calculated by ERS based on data from Global Insight, International Cotton 

Advisory Committee, and World Bank.

Kilograms of fiber

GDP per capita (1,000 dollars, PPP adjusted)

U.S.

South Korea

Singapore

Switzerland

Denmark Canada

Ireland

Hong Kong

Czech Republic

Spain Greece

Portugal

Turkey

Kuwait

Slovenia

China

Hungary

India
increasing at a 7-percent rate. The economies of the EU and Japan have

grown substantially slower than those of the rest of the world since 1999,

and will continue to do so in 2005.

Income growth trends have been conducive to market expansion for

clothing. Not only has world income grown at an above-average rate, but

income growth has been particularly high in many of the lower income

countries where the demand for clothing is particularly strong. As shown in

figure 1, clothing purchases respond more strongly to income changes in

poorer countries. For example, Zambia and Mali have the highest income

elasticity of textile consumption while Luxembourg and the United States

have the lowest.14 Even though consumption is less responsive to income

growth in Asia than in Africa, the potential for increased consumption in

Asia is high. Household fiber consumption in developing Asia is only 5.6

kilograms per capita, compared with 33 kilograms in the United States.15

Clearly, consumers in Asia are much further from satiation of potential fiber

demand than are consumers in the developed countries. Moreover, Asian

consumers direct a greater proportion of their growing incomes toward

clothing purchases than do consumers in either the United States or the EU.

Consumption growth in the developing countries has helped sustain aboveaverage global cotton consumption over the last 5 years.

Lower Prices Encourage Consumption of

Clothing and Cotton

Declining prices, in addition to rising incomes, have driven worldwide

demand for clothing higher. Local currency, inflation-adjusted clothing

prices in a basket of 10 countries fell 7 percent during 1999-2003.16 The fall

in clothing prices was greatest in the developed countries (fig. 2). Trade

liberalization—like the phaseout of the MFA—and reduced transportation

costs helped open U.S. and EU markets to lower priced products from

abroad. Clothing price declines were much less pronounced in lower income

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14Seale et al. (2003).

15International Cotton Advisory

Committee/ Food and Agriculture

Organization of the United Nations

(2003).

16Brazil, China, France, Germany,

Japan, South Korea, Taiwan, Thailand,

Turkey, and the United States.

Figure 2

Real clothing prices

Sources: Calculated by ERS based on data from U.S. Department of Labor, Bureau of 

Labor Statistics; Federal Statistical Office, Germany; National Bureau of Statistics of China; 

Ministry of Internal Affairs and Communications, Statistics Bureau (Japan); Korea National 

Statistical Office; Bureau of Trade and Economic Indices, Ministry of Commerce Thailand.

Index, 1994=100

1995 96 97 98 99 2000 01 02 03

70

80

90

100

110

120

United States

Germany

China

Japan

South Korea

Thailand
countries. Prices in South Korea and China fell just 1 percent between 1999

and 2003.

Global changes in trade policies have accounted for some of the decline in

clothing prices. A growing web of bilateral trade agreements permitted the

United States and the EU to tap the opportunities for lower processing costs

in nearby countries. In the years following the 1994 implementation of the

North American Free Trade Agreeement (NAFTA), Mexico replaced China

as the largest single source of clothing exports to the United States.17 The

EU’s use of free-trade agreements throughout much of the Mediterranean

region and Eastern Europe means about 45 percent of EU imports have been

sourced from the region. More recently, China has recovered its role as the

top-ranked U.S. clothing supplier despite Mexico’s preferential access, and

has increased its exports to the EU as well.

Trade liberalization has also occurred under the aegis of the WTO. In 1995,

the WTO’s Agreement on Textiles and Clothing mandated lower tariffs, the

progressive removal of import quotas, and more rapid growth in the quantities allowed under the remaining quotas. Under the ATC’s provisions, the

EU’s quotas grew 64 percent between 1994 and 2004, while U.S. quotas

grew 90 percent.18 China’s accession to the WTO in December 2001 was a

milestone for global cotton markets, ensuring that the world’s largest

exporter participated in the liberalization of global textile trade.

Figure 3 indicates that although the U.S. and the EU receive a substantial

portion of their clothing imports from preferential trading partners, such as

Mexico (for the United States) and the Mediterranean region (for the EU),

world clothing trade is dominated by U.S. and EU imports from other developing countries. Trade with these countries was largely governed by the

MFA through December 2004. 

International Trade Increasingly Important

Opportunities for trade have been enhanced by lower shipping and transaction costs. While international shipping rates rose due to a surge in global

merchandise trade and an increase in oil prices in 2004, the longer term

trend has been significantly downward. At the end of the 1990s, unit costs

of sea freight had declined almost 70 percent in real terms over the

preceding 10-15 years, while air freight costs fell 3-4 percent annually

during this period.19 In addition, falling telecommunications and computing

costs increased the efficiency of importing, permitting retailers to extend

electronic data interchange (EDI) of sales and inventory data to manufacturers overseas as well as domestically.20

Trade liberalization and reduced transactions costs have helped expand imports

of cotton products in developed countries. On a global basis, 31 percent of the

clothing and other consumer products consumed in the world were imported in

2000, up from 23 percent in 1992.21 Imports accounted for the majority of

cotton clothing consumed by developed countries (see table 2). As of 2004,

trade’s role in world clothing consumption has probably increased,

approaching 90 percent in the U.S. and Japan by some measures. 22

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17See ERS's Bilateral Fiber and Textile

Trade database,

www.ers.usda.gov/data/fibertextiletrade/

18United Nations Conference on Trade

and Development (1998).

19World Trade Organization (1998).

20Barcode scanning allows retailers to

electronically track product sales.

With EDI, sales data can be shared

with suppliers for timely inventory

replenishment.

21International Cotton Advisory

Committee/ Food and Agriculture

Organization of the United Nations

(2003).

22Clothing is traded in heterogeneous

units (e.g., pieces, pairs, dozens), and

aggregate measures of activity for the

industry are reported in terms of value,

square-meter equivalents, or units of

weight. Import penetration estimates

can vary depending on the units and

product aggregation used.
Rising incomes and falling clothing prices have driven demand for clothing

higher, boosting world demand for fiber. Fiber prices have also fallen,

ensuring that increased clothing consumption translates directly into

increased fiber consumption.23 Furthermore, cotton prices have fallen even

more than prices for competing fibers. Just as fiber is only one portion of

the bundle of goods and services that make up clothing, cotton is only one

of the alternative fibers transformed into clothing. Cotton accounts for about

40 percent of global fiber use and has been losing ground to polyester for

many years. While polyester prices during 1999-2003 were down 28 percent

in real terms from the previous 5 years, cotton prices fell 35 percent,

helping stabilize cotton’s share of world fiber consumption.24

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Figure 3

World clothing trade, 2002

Note: “Mexico, Mediterranean” also encompasses the Caribbean Basin, 

Eastern Europe, and much of Sub-Saharan Africa—the countries with 

preferential access to the U.S. and EU markets. “MFA Exporters” is the 

rest of the world, which includes some countries outside the MFA, 

but is predominantly comprised of MFA-constrained exporters, such as China.

Bil. dollars

U.S. & EU

MFA Exporters

U.S. & EU

Mexico, Mediterranean

MFA Exporters

Japan, Korea, Taiwan

0

10

20

30

40

50

60

70

Importers

Exporters

Mexico, Mediterranean

Japan, Korea, Taiwan

Source: U.S. Department of Agriculture, Economic Research Service (2004).

Table 2—Imported share of cotton clothing

1992 1996 2000

Percent

United States 32 45 63

Japan 29 43 61

EU 71 75 84

Source: International Cotton Advisory Committee/Food and Agriculture Organization of the

United Nations (2003).

23Fiber prices also affect clothing

prices—U.S. retail prices for men's

blue jeans have a 30-percent correlation with cotton prices (Messura,

1996).

24Rising petroleum prices have likely

constrained declines in polyester

prices in recent years. 
Since the commercial introduction of polyester in 1949, cotton’s role in

world fiber consumption has been retreating. As early as 1965, cotton came

to account for less than 50 percent of household consumption of fiber-based

products in developed countries. Since 1997, developing-country consumers

have also relied on cotton products for less than 50 percent of their household consumption. The adoption of synthetic fibers has, however, slowed in

recent years, due in part to shifting global price trends.

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The world is entering the post-MFA era led by several trends in addition to

those cited in the previous section. Investment in textile production has

grown significantly in China as well as in India and Pakistan. Meanwhile,

disinvestment has occurred in North America, the EU, and higher income

East Asia. These two trends are clearly linked. U.S. textile plants have been

shut down, disassembled, and shipped to a number of countries, most

prominently, China, India, and Pakistan.25

Macroeconomic developments have had a bearing on changes in the location

of textile and clothing production in recent years. The U.S. dollar, after rising

dramatically in value during the last half of the 1990s and reaching a peak in

2001, has been steadily losing value on international markets. In recent years,

the Chinese economy has started booming. Economic growth in China has

spurred a strong rebound across East and Southeast Asia. The consumer

society that appeared first in higher income Asian countries like Korea and

Thailand, and then in China, has more recently taken hold in India. 

Textile Production To Continue Falling in the

United States and the EU

Domestic clothing production in the United States and the EU is likely to

continue declining after 2005 but will not disappear. “Lean retailing” practices

ensure important niches will remain for U.S. and EU producers. Retailers in

the developed countries have adopted practices that reduce overhead by eliminating warehousing and inventory functions and by relying on more rapid

response and careful management of deliveries from manufacturers. Technological change, such as the development of EDI, has transformed the industry.

EDI has proved particularly successful in facilitating inventory management

of “basic” goods that are sold year-around and for years at a time.26 Following

the development of bar codes, retailers used EDI to better coordinate production and shipment schedules with manufacturers, eliminating the need for

large inventories. For manufacturers close to retail distribution centers,

reduced shipping times can make them preferred suppliers. 

Shipping merchandise from Mexico and Central America to the United

States takes 1-6 days. By contrast, shipping goods from southern China to

the U.S. west coast takes 11-15 days, and it takes 25 days to ship goods

from India. However, the extension of EDI to include overseas firms is

increasing China’s competitiveness. With improved efficiency and reliability, firms producing in southern China, often through intermediaries in

Hong Kong, have become an attractive sourcing option for many basic

clothing products despite their great distance to developed-country markets. 

Demand for newly introduced products, or for those at the end of their

product cycle, is highly variable, enhancing the benefit of minimal shipping

times in “quick-response” strategies by manufacturers. Producers in the

United States and the EU will be more successful in these niches. Furthermore, by reducing the cost of product differentiation, lean retailing has also

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25Sparshott (2004).

Trends in Production and Consumption

After the MFA

26Men's jeans and underwear are

examples of "basic" goods. See

Abernathy et al. (1999) for an extensive discussion on the significance of

EDI and modern inventory management for basic goods sourcing.
facilitated product proliferation, expanding these and other niches for higher

cost producers of basic products.27

In contrast with basic goods, “fashion” items are often sourced on a onetime basis and with smaller production runs.28 Imported goods already

account for much of the fashion items sold in developed countries, since

timely inventory replenishment is not an issue, and their production often

has small economies of scale. The removal of the MFA quotas is likely to

increase the level of such imports. However, as with basic goods, proximity

allows quick response, again leaving niches for producers in the United

States, the EU, and nearby countries. For example, the Spanish retailer Zara

is vertically integrated into manufacturing. and produces almost entirely

within Europe. Zara takes products from the design stage to retail delivery

in as little as 3 weeks. Abernathy et al. note that in the late 1990s most

clothing products had a comparable cycle of 40-50 weeks.

With developed-country apparel producers filling nontrivial market niches,

local textile producers there will still have customers and will demand fiber

to make fabric for clothing. Cotton consumption in 2005 is, therefore, not

expected to drop precipitously in the United States, Mexico, the EU, and

Turkey. Furthermore, the long-anticipated MFA phaseout influenced investment in the capital-intensive textile sector well before 2005, shifting

capacity out of developed countries. The ability of the U.S. textile sector to

maintain capacity in recent years was also constrained by an above-average

U.S. exchange rate. As a result, some of the geographic shifts in industrial

demand for fibers pre-dated 2005.

Exporters Differentiated by Timeliness 

as Well as Wages

The time and cost to produce a garment can be balanced in various ways.

Assembling a men’s shirt may require 12 minutes of sewing, but those 12

minutes can be spread over 30 days or 5 days depending on the urgency of

the order. The cost and time required to produce a garment reflects a combination of the prevailing wages, productivity of the workforce, managerial

skill, and the reliability of local input supplies and infrastructure. For

example, while wages in Bangladesh and India are half those in China

(which are one-tenth of U.S. wages), orders from China require only 60

days’ lead time for delivery. For India, the lead time ranges from 90 to 120

days; for Bangladesh, 120 to 150 days.29

Industry sources and economic studies indicate that China and India will see

the largest gains in clothing exports and output in the years after the MFA’s

removal. China’s exports soared in the first months after December 2004,

supporting this projection. In some cases, these gains will be at the expense

of other lower income clothing exporters, like Bangladesh, Mauritius, and

Mexico. Without the quota system, sourcing from these countries is far less

attractive for importers in the United States and the EU. 

Cotton is not directly consumed by clothing producers, but is an input for

the yarn and fabric that clothing manufacturers purchase. In the post-MFA

world, cotton consumption is expected to increase in India, China, and

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27Beath and Katsoulacos (1991) provide a theoretical discussion.

28“Fashion” items include much of

women’s clothing, although Pashigian

(1988) notes white shirts accounted for

72 percent of U.S. men’s dress shirts

sold in 1962, but only about 20 percent

by the 1980s. Patterned or colored

shirts are more subject to changes in

taste over time, and in some cases will

be a fashion item. 

29Local or nearby fabric supplies help

reduce lead times. The least sophisticated clothing producers assemble pre-cut

pieces of fabric, and lead times include

procurement of these pre-cut components. A firm offering “full-package”

production is responsible for procuring

fabric and other components such as

zippers, as well as cutting and sewing.
Pakistan as their textile industries supply domestic clothing producers and

those in other countries with yarn and fabric. Cotton consumption is,

expected to decline in many other textile-producing developing countries,

such as Mexico and Mauritius. Bangladesh and Central American producers

may also lose their competitiveness in clothing to lower cost producers in a

global market free from quota restrictions. Similarly, U.S. and EU mills

would be expected to use less cotton as the number of their local clothing

manufacturers is reduced.

The outlook for cotton consumption in such countries as Taiwan, South

Korea, Indonesia, and Thailand is less obvious. Clothing production, in

contrast to textile production, is not easily automated, and remains a laborintensive activity. For this reason, clothing is a classic growth sector especially suitable for low-income countries having a relative abundance of

low-cost labor. As incomes rise in these countries, wages also rise, rendering

traditional producers less competitive. Eventually, economic dynamics

induce shifts in the location of clothing production to other countries as

patterns of comparative advantage change. Today, neither South Korea nor

Taiwan rank among the world’s top ten net clothing exporters (table 3),

while Indonesia and Thailand are ranked eighth and ninth.

Textile Production Shifting to 

Lower Income Countries

Had the MFA been removed in the early 1980s, South Korea and Taiwan

would have probably increased their clothing exports and cotton consumption. In the early 1990s, the same would have likely held for Thailand and

Indonesia.30 But incomes have risen in these countries, and the productive

capacity of China and India has increased. Since the economies of South

Korea, Taiwan, and Thailand are more capital rich than China’s, these newly

industrialized countries would appear to be a natural source of fabric for

China and other low-cost clothing exporters. Globally, South Korea and

Taiwan outrank China as net textile exporters (table 3). While Indonesia is

barely among the world’s top ten, on a per capita basis it exports many more

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30See Trela and Whalley (1990) and

Hertel et al. (1996) for examples.

Table 3—Leading destinations and sources for world textile 

and apparel trade, 20021

Clothing, Clothing, Textiles, Textiles,

net imports net exports net imports net exports

Billion dollars

US 60.7 China 39.9 US 6.3 Taiwan 8.4

Japan 17.1 Turkey 7.8 Mexico 3.4 Korea 7.5

UK 11.4 Hong Kong 6.7 UK 2.6 China 7.5

Germany 10.8 Italy 7.0 Romania 2.1 Italy 6.0

France 6.4 India 6.0 Poland 1.8 India 5.1

Russia 3.6 Mexico 4.4 Canada 1.6 Pakistan 4.6

Switzerland 2.7 Bangladesh 3.9 Morocco 1.3 Belgium 2.8

Spain 2.1 Indonesia 3.9 Tunisia 1.2 Germany 2.2

Netherlands 2.1 Thailand 3.2 Australia 1.2 Indonesia 2.0

Canada 2.0 Romania 2.8 Sri Lanka 1.1 Japan 1.5

1See ERS’s Bilateral Fiber and Textile Trade database for more details, 

www.ers.usda.gov/data/fibertextiletrade/

Source: WTO, and United Nations.
textiles than China. However, in recent years, industrial consumption of

cotton has already either declined significantly or stagnated in these four

newly industrialized countries as China’s capacity has increased.

The MFA’s direct impact was primarily on clothing. For example, the ETE on

China’s textile exports was half that for clothing in 2002 (see table 1).

Increasing clothing exports by one country, however, can boost exports of

textiles by other countries if the clothing industry imports fabric. For example,

until recently, China’s lack of capacity for finishing fabric necessitated large

imports from Japan, South Korea, and Taiwan to supply its clothing industry.

While China still imports fabric for processing into clothing, it has increased

it capacity to supply its own clothing sector with domestically produced

fabric, following a reported $24-billion investment in textiles since 2000.31

India reports less than half as much investment in textiles. However, India’s

capacity to produce textile inputs to produce clothing has also increased

substantially. With substantially improved capacity in India and China, cotton

consumption is likely to decline in Taiwan and South Korea and increase by

only a small amount in Thailand and Indonesia.

Outlook for World Cotton Consumption

While households do not purchase cotton themselves, household clothing

purchases are what ultimately determine the consumption of cotton. World

cotton consumption has been growing strongly in recent years, largely due

to increased demand for clothing by increasingly affluent Asian consumers.

However, demand has been far less favorable in developed countries. Trends

have been weak for clothing consumption in much of the developed world

in recent years, particularly for cotton products. Spending on clothing has

lagged in Japan and Germany, and while spending has been relatively

stronger in the United States, it has not been sufficient to significantly offset

declines elsewhere.

World cotton consumption is not expected to be strongly affected by the

removal of the MFA quotas because the overall demand for clothing is not

likely to change fundamentally. Clothing consumption is likely to increase

in the United States and the EU as prices fall in response to the total elimination of quotas. Clothing (and home furnishings) consumption in these

markets accounts for about 40 percent of the cotton fiber products sold

worldwide (fig. 4). Clothing prices in the rest of the world would face

upward pressure as demand rises in the United States and the EU and world

prices equalize (appendix). Trade barriers and product differentiation will

probably insulate many developing countries from this effect, but Japan,

Australia, and, to some extent, the Middle East could see import costs rise

as a result of global trade liberalization. These markets have high import

penetration, reflecting openness to trade, and consume products similar to

those imported in U.S. and EU markets. 

Outlook for Clothing Prices in the United

States and the EU

While the quotas added 20 percent to the average price of imports from

some countries, clothing prices in the United States and the EU are likely to

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31National Bureau of Statistics of

China.
drop by substantially less with the removal of the MFA. Some of the savings

from quota elimination could be absorbed along the marketing chain.

However, no segment within the chain has obvious market power. For

perspective, U.S. apparel retailing remains less concentrated than grocery

retailing on a national level even though U.S. retailing has become more

concentrated in recent years. The recent merger of K-Mart and Sears will

further increase the four-firm concentration level of apparel retailing.32

Moreover, price adjustments from quota removal are likely to be spread out

over several years. The costs of the bilateral quotas were not confined to the

payments some firms needed to obtain export licenses. On the one hand, the

license prices might have understated the rents created by the system of

quotas.33 Furthermore, competition for quota rights involved inefficient

investment in physical and human capital. Shifting these investments to

realize all potential efficiency gains could take years. Some of the adjustments undoubtedly began before 2005 due to the gradual phaseout of MFA

quotas. Others will likely occur now that these quantitative restrictions have

been fully removed.

Quota removal also promises to change the mix of clothing products

imported by the United States and the EU. Quota-constrained exporters

move into higher valued product categories in order to maximize profits per

unit exported. Without MFA quotas, exporters will likely be more willing to

supply lower cost qualities of clothing. The removal of distortions in the

composition of clothing trade is an important source of the welfare gains of

quota removal.34

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32U.S. apparel retailing's four-firm

concentration was 23 percent in 2001,

and would have been 27 percent with

the merger. Grocery retailing's concentration was 31 percent in 2002.

Figure 4

Global household cotton product consumption, 2000

Note: EU is EU-15; North America is Canada and the United States; NIE is Newly 

Industrialized East Asia (Hong Kong, South Korea, Singapore, and Taiwan); and 

Rest of Europe includes Russia and other former members of the Soviet Union.

Africa+M. East

8% Rest of Europe

4%

EU

16%

N. America

25% Latin America

9%

Japan

6%

China

13%

India

9%

NIE

4%

Rest of Asia

6%

Source: International Cotton Advisory Committee/ Food and Agriculture Organization 

of the United Nations (2003).

33Krishna and Tan (1998) point out

that importing firms may have captured some of the rents associated with

the quota system (appendix).

34Feenstra (1995). See appendix for

discussion of the welfare impacts of

quotas.
Prospects for U.S. Household Cotton Product

Consumption

Consumers in the United States indirectly purchase more fiber in their clothing

and home furnishings than any other market, surpassing even the EU. In 2000,

20 percent of the world’s annual consumption of fiber was embodied in products sold in the United States. For cotton, the U.S. share was 24 percent.

Through their clothing purchases, U.S. consumers accounted for a substantial

share of the growth in total world demand for cotton during the 1990s.

However, U.S. household demand weakened thereafter, growing at only a 1-

percent annual rate after 1998. U.S. consumer demand for cotton products is

unique—not only is the U.S. share of total fiber consumption higher than that

of any other developed country, but the United States has the world’s only

significant consumer promotion effort for cotton.35

The removal of all MFA quotas on December 31, 2004, is likely to lead to

lower clothing import prices in the United States. The 1995 Agreement on

Clothing and Textiles called for a phased removal of bilateral quotas over a

10-year period, providing time for producers to prepare themselves for

adjustments to a more open international market. But, the agreement

permitted the “backloading” of quota removal. Strictly speaking, importing

countries were not obliged to remove virtually any quotas in the initial

stages of the phaseout. Importing countries were only obliged to forgo the

right to impose or maintain quotas for a given share of their imports, for

example, 16 percent of their imports in the first phase of liberalization

(1995). This 16-percent share could include products not yet protected by

quota, and largely did. The same was true of the second phase (1998), and,

to a lesser extent, the third phase (2002). As a result, 80 percent of the effective quotas in the United States remained in place through 2004, according

to the International Clothing and Textile Bureau (2001). Given this backloading of quota removal, the full impact of the ATC on U.S. market prices

has yet to be realized. 

U.S. price reductions associated with trade liberalization for clothing and

textiles is likely to have a larger than average impact on cotton products

because 60 percent of net textile product imports are made of cotton rather

than polyester, wool or other fibers. Also, developing countries have traditionally been more competitive in cotton-based than man-made-fiber-based

products. As a result, gains in U.S. household consumption of cotton are

likely to be higher after 2004 than before.

One potentially offsetting factor is the weakening of the U.S. dollar on

foreign exchange markets. The declining international value of the dollar,

which began its descent in early 2002, exerted upward pressure on domestic

prices in 2004. Not surprisingly, the U.S. consumer price index for apparel

began to rise in nominal terms for the first time since 1998. However,

studies of the “pass-through” of exchange rate changes to changes in

domestic U.S. prices have indicated that only about half of the changes in

the U.S. exchange rate are reflected in changes in U.S. prices. For apparel,

the proportion is even less.36 The fact that the largest exporter to the United

States, China, has a nominal exchange rate that has been fixed at 8.3

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35Lewis (2002). Cotton Incorporated's

2003 budget for domestic marketing

operations totaled $31.3 million.

36See Goldberg and Knetter (1997) for

general conclusions. See Olivei (2002)

and Pollard and Coughlin (2003) for

results specific to U.S. textiles.
renminbi per dollar since 1995 limits the role a weakened dollar can play in

raising U.S. clothing prices.

EU and Japan Consumer Spending Lagging

The EU, just like the United States, is likely to see lower clothing prices in

2005 following the MFA quota removal. Furthermore, the rise in the value

of the euro is likely to continue to exert downward pressure on domestic EU

clothing prices.37 The euro has strengthened significantly, rising 30 percent

in real terms against the dollar between spring 2002 and late 2004. 

Marketing margins, however, are higher in the EU than in the United States,

suggesting that changes in spending may not completely translate into changes

in fiber demand. Also, clothing expenditures have been rising slowly

throughout the EU in recent years, as consumers, particularly those in

Germany and France, increasingly prefer to save rather than consume (table 4).

The conservative pattern of spending is likely to continue in the foreseeable

future, particularly limiting increases in EU household demand for products

made of cotton. Recent research suggests cotton product consumption is more

income responsive in Germany and France than elsewhere in the EU.38

In Japan, cotton’s share of the fiber embodied in household purchases and

total consumer spending have been weak, as in the EU, and marketing

margins are even higher than in the EU. Japan’s spending on clothing during

1993-2003 was even weaker than that of France and Germany. All other

things being equal, economic theory suggests clothing prices could rise in

Japan as a result of the elimination of the MFA (appendix). Japan could

offset some of this price change through its own textile trade policy 

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37Exchange-rate pass-through is

reportedly greater in the EU than the

United States (Campa and Minguez,

(2002). See Uctum (2003) for similar

results for Japan.

38Lopez and Malaga (2004).

Table 4—Changes in GDP, clothing prices, and personal consumption

expenditures on clothing, 1999-2003

Personal Share of

Real clothing consumption global cotton

prices expenditures, consumption,

Country Real GDP (local currency) clothing (real) 2000

———— Percent change ———— Percent

China 36 -1 41 12

United States 10 -15 19 24

Korea 24 -1 19 3

France 8 -6 0 4

Germany 4 -5 -3 4

Japan 5 -5 -12 6

Turkey 13 -8 — 4

Brazil 8 -10 — 4

Thailand 20 -3 — 1

Note: — indicates no data available.

Sources: National Bureau of Statistics of China; U.S. Department of Labor, Bureau of Labor

Statistics, and U.S. Department of Commerce, Bureau of Economic Analysis; Korea National

Statistical Office; Ministry of the Economy, Finance, and Industry, National Institute for

Statistics and Economic Studies; Federal Statistical Office, Germany; Ministry of Internal Affairs

and Communications, Statistics Bureau; Republic of Turkey, Prime Ministry State Institute of

Statistics; Brazilian Institute of Geography and Statistics; Bureau of Trade and Economic

Indices, Ministry of Commerce Thailand; National Statistical Office, Ministry of Information and

Communication Technology; International Cotton Advisory Committee/Food and Agriculture

Organization of the United Nations (2003); and Global Insight.
(officially characterized as “market surveillance”). Furthermore, structural

change in Japan’s distribution sector has been favorable. Product distribution

has been notoriously inefficient in Japan, but recent deregulation and the

rise of discount retailing have helped reduce marketing margins, trends that

are likely to continue.

As in the EU, trends in clothing consumption have been weak in Japan.

Clothing spending has declined 8 percent in real terms since 2000. Household cotton product consumption in Japan declined in the last few years and

unless consumer sentiment improves, the prospects for significant gains in

consumption are poor.

China’s Consumer Spending Booms

The booming U.S. economy defined much of the decade before 2001. More

recently, China’s economic surge has taken center stage. China’s demand for

raw materials since becoming a member of the WTO has helped commodity

prices rebound as its exports of manufactured products have soared. Rising

incomes have profoundly transformed the lives of millions of China’s

consumers. China is now the world’s fastest growing economy, with

reported GDP growth exceeding 9 percent in 2004. China tightened lending

requirements in 2004, seeking to moderate its economic expansion. Slower

growth is expected in 2005, but GDP is still expected to expand at least by 7

percent for several years.

China is widely recognized as the world’s largest producer and exporter

of textiles. However, China is also one of the world’s largest consumers

of textiles. While per capita urban incomes reached only $1,000 in 2003,

the lower cost of services and other nontradables in China means that

household income based upon purchasing-power-parity (PPP) is about

$5,000.39 According to data from China’s National Bureau of Statistics,

real clothing spending nationwide rose 41 percent between 1999 and

2003 (table 4). Annual growth rates have ranged between 10 and 15

percent since 2001.

Because current data on the fiber embodied in household’s purchases in

China is limited, the volume and mix of fibers in these purchases can only

be hypothesized. For many years, China subsidized its synthetic fiber

industry through petroleum subsidies and import protection. Consequently,

household cotton product consumption in China declined even as total fiber

product consumption rose strongly. According to the World Bank (1997),

China’s petroleum subsidies were largely gone by 1995, slowing consumers’

shift to products containing synthetic fibers. ERS analysis shows that household consumption of cotton products in China has recently stabilized.

Undoubtedly, much of China’s additional spending on clothing in recent

years was devoted to increasing the quality and retail services associated

with clothing rather than simply increasing the consumption of fiber. The

International Cotton Advisory Committee has estimated that household

consumption of cotton products in China grew at a 3.6-percent annual rate

since 2000.40 Economic growth forecasts for China suggest that this trend

would continue.

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39PPP adjustment from the

International Comparison Program

(World Bank, 2002).

40International Cotton Advisory

Committee (2004).
Cotton Consumption Grows in 

Developing Asia

The consumer society emerging in China appeared even earlier in higher

income Asian countries, and most recently has started to take hold in India.

Products purchased by Indian consumers account for more cotton than the

products purchased in almost any other country (fig. 4). India has also seen

above-average economic growth in recent years, driving clothing consumption higher. Domestic policies in India were long biased against manmade

fibers, ensuring consumers largely purchased cotton products. Market liberalization during the 1990s removed some of this bias, contributing to a

declining share for cotton products in Indian household consumption. More

recently, cotton products’ share of household demand has stabilized.41

India’s economy and consumer spending are expected to continue rising in

2005 and beyond, and consumers appear to have responded positively to

recent industry efforts to promote cotton products, based on recent surveys.

The end of the MFA quotas could, however, result in higher clothing prices

in India (just as in China) somewhat dampening demand increases, although

market segmentation may minimize this in the short run.

Elsewhere in Asia, clothing consumption slowed with the Asian financial

crisis but then rebounded. Financial sector restructuring throughout the region

helped encourage consumers to shift from saving to spending.42 For example,

real expenditure on clothing rose 19 percent in Korea between 1999 and 2003.

Consumer credit is now much more widely available throughout Asia. As a

result, developing Asia has replaced North America over the last 5 years as the

source of growth in world household consumption of cotton fiber. Clothing is

just one of a number of consumer goods where markets are increasingly influenced by Asian consumers as well as producers. 

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41Textile Committee (2002).

42Rohwer (2001).
World cotton consumption is expected to grow 8 percent in marketing year

2004/05, which includes the first year of the post-MFA era.43 The removal

of the textile quotas has had only a minor impact on this forecast. The

impact of MFA liberalization on total world cotton consumption is likely to

be small and spread out over the years preceding and following the

December 2004 elimination of MFA quotas. The removal of these quotas is

expected to affect the geography of textile production more than the level of

worldwide consumption. Developed country consumers will, however,

consume more cotton products, and developing country textile mills will

consume more cotton fiber.

The removal of MFA quotas has and will continue to affect the geographic

distribution of industrial production. The economics of comparative advantage

favors production of clothing in lower income countries. The MFA quota

phaseout has empowered market forces of demand and supply to relocate

production. Market forces will continue to influence decisions about location

that will undoubtedly reshape the landscape of production after 2005.

Strong economic growth, particularly in Asia, and falling cotton prices have

driven world cotton consumption to above average growth rates in recent

years. These factors account for much of the expected strong performance in

2004/05. In the longer run, world consumption growth for cotton is

expected to again slip below the 1980-2004 annual rate of 1.6 percent, as

developing Asia’s economic growth rates slow, converging with those of the

rest of the world.44 However, gains in world cotton consumption over the

next decade are expected to outpace the poor performance of the 1990s.

Continued strong income growth is expected to support increased consumption in developing countries, and continued adjustment to trade liberalization is expected to kindle increased consumption in the United States and

the EU.

As with any forecasts, much uncertainty remains. China’s economic expansion has seemed relentless. However, reports of rising labor costs and electric power shortages suggest costs there are rising. Moreover, China’s

exchange rate, which has been firmly tied to the U.S. dollar for about a

decade, is viewed as being overvalued. Forward trading in foreign exchange

markets suggest a revaluation is possible, but these markets also foretold a

devaluation that failed to materialize late in the 1990s. A successful revaluation of the renmimbi would also tend to increase the cost of producing in

China relative to the rest of the world.

There are also many unresolved issues regarding the potential effects of

quota removal on trade policy in importing and exporting countries. China

imposed export duties on about 60 percent of its clothing exports in

December 2004, to help alleviate concerns about its post-MFA export

prospects. Also, China’s WTO accession agreement included provisions for

importing countries to impose special safeguards on textile and apparel

imports from China through 2008. If invoked, these safeguards limit annual

import growth to 7.5 percent on a product specific basis for 1 year. The

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43U.S. Department of Agriculture,

Economic Research Service (2005).

44See ERS's Agricultural Baseline

Projections briefing room for an

overview,

www.ers.usda.gov/Briefing/Baseline/

Future Developments
United States imposed safeguards on three products in 2003.45 In October

2004, the U.S. textile industry requested that the U.S. government extend

product safeguards established in 2003 and cap China’s shipments on

trousers, shirts, and sheets.

More recently, Turkey announced plans to limit textile imports from China

in 42 product categories, the European Commission has expressed concern

about China’s textile exports, and the U.S. Committee for the Implementation of Textile Agreements initiated safeguard proceedings in early April

2005 to determine whether imports of certain Chinese origin textile and

apparel products are contributing to the disruption of the U.S. market.46

Although the MFA quotas have been completely phased out, other policy

instruments, such as tariffs and preferential agreements, will affect the

market. Tariffs on textiles and clothing remain significantly higher than

tariffs on most manufactured products. Countries with preferential market

access typically pay lower tariffs, and this will also influence future production trends. For example, the EU is considering regulations that would move

China to a less preferential duty category. On the other hand, more preferential access can be extended, such as the proposed Central America Free

Trade Agreement under current consideration in the United States.

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45Knit fabrics (Category 222),

brassieres (Category 349/649), and

robes and dressing gowns (Category

350/650). See the U.S. Department of

Commerce website for information on

requests for China Textile Safeguard

Action in 2004:

http://otexa.ita.doc.gov/Safeguard_intro.htm

46Cotton knit shirts and blouses

(Category 338/339), cotton trousers

(Category 347/348), and cotton and

man-made fiber underwear (Category

352/652).
Abernathy, Frederick, John Dunlop, Janice Hammond, and David Weil.

(1999). A Stitch in Time: Lean Retailing and the Transformation of

Manufacturing—Lessons from the Apparel and Textile Industries, Oxford

University Press, New York.

Andriamananjara, Soamiely, Judith Dean, and Dean Spinanger. (2004).

“Trading Apparel: Developing Countries in 2005,” 7th Annual

Conference on Global Economic Analysis, June 17-19, 2004,

Washington, DC. 

Beath, John, and Yannis Katsoulacos. (1991). The Economic Theory of

Product Differentiation, Cambridge University Press.

Brazilian Institute of Geography and Statistics. “SIDRA Database,”

www.sidra.ibge.gov.br/bda

Bureau of Trade and Economic Indices, Ministry of Commerce Thailand.

www.price.moc.go.th/web4_e/index.asp

Campa, Jose Manuel, and Jose Minguez. (2002). “Differences in Exchange

Rate Pass-Through in the Euro Area,” Centre for Economic Policy

Research Discussion Paper 4389.

Cline, William. (1990). The Future of World Trade in Textile and Apparel,

Institute for International Economics.

Dickerson, Kitty. (1999). Textiles and Apparel in the Global Economy,

Prentice-Hall Inc.

Directorate General of Budget, Accounting and Statistics, Executive Yuan,

Republic of China. Statistical Yearbook of The Republic of China,

various issues.

Federal Statistical Office, Germany, “GENESIS Database.”

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Feenstra, Robert. (1995). “Estimating the Efects of Trade Policy, ”

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Francois, Joseph, and Dean Spinanger. (2001). “With Rags to Riches but

Then What? Hong Kong’s T & C Industry vs. the ATC and China’s WTO

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Global Insight. “Global Insight’s World Overview,” various issues,

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A simple framework can illustrate how the Multifiber Arrangement (MFA)

quotas affected world clothing trade, prices, consumption, and production.

In Appendix figure 1, quota-imposing countries’ domestic clothing production is shown as1,

Sd = a + bP,

where Sd is domestic production and P is the domestic price. Domestic

consumption is illustrated as,

Dd = c – dP.

With no imports or exports, Sd = Dd, (point E in the figure). The rest of the

world also produces and consumes clothing, and does so at a lower price.

When imports are possible, the total supply (St

) available to consumers in

the quota-imposing country is the domestic supply plus the rest of the

world’s excess of production over consumption:

St = Sd + Σ(Sd – Dd)i ,

where Σ(Sd – Dd)i is the sum of excess supply in every other country in the

world. This excess supply, and the price at which it is available, Pw, is

determined by a global market equilibrium that includes the quotaimposing countries.

Market equilibrium with free trade, St = Dd, is at point “f” in Appendix

figure 1, where the quantity q2 is consumed at the price Pw. At this price,

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The Forces Shaping World Cotton Consumption After the Multifiber Arrangement

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1Appendix figure 1 is constructed to

illustrate markets such as the United

States and the EU, in which MFA quotas were imposed. For this illustration,

consider the figure to represent the

total production and consumption of

all quota-imposing countries. Countries

with preferential access to these markets, like Mexico and Turkey, would

also be included in the figure's domestic supply and demand.

Appendix: The Impact of Quotas on World

Clothing Trade

Appendix figure 1

Quota-imposing countries

Price

q1

e b

c

a

d f

q2 q4 q3

Quantity

St

Sd

Stq

Dd

Pw

Pq

E
domestic production is q1, resulting in imports of q2 – q1. If the U.S. has an

import quota, the quota prevents St from ever exceeding Sd by more than

the quota. Total supply with a quota becomes Stq, which intersects Dd at

“c.” Price rises to Pq, and with consumption lower (q4) and production

higher (q3), imports are smaller, at q4 – q3, which equals the quota.

Since the rest of the world is no longer permitted to supply the quota-imposing

countries with more clothing than the amount q4 – q3, the price of clothing in

the rest of the world falls. Thus, importers that don’t impose quotas import

more (app. fig. 2)2, and exporting countries export less (app. fig. 3)3, at the

price Pq′.

In this framework, consumers are assumed to be indifferent to the source of

their clothing. While households have demonstrated a willingness to

consume clothing from almost any country, retailers and importers may

have a more heightened interest in the source of clothing, but no such differentiation is assumed here.

Extensions of the Framework: Exchange

Rates, Welfare Effects, Quota Rents

In this framework, a currency devaluation by the quota-imposing countries has

no impact on either the domestic price of clothing or the amount consumed

when quotas are constraining imports. Within a relatively broad range, changes

in the exchange rate have no effect on Stq. For example, a stronger currency

will shift St downward in Appendix figure 1, as the free trade price of clothing

falls in local currency terms, but Pq will be unchanged.

When quotas are imposed, clothing imported by the quota-imposing countries

receives a higher price than clothing in the rest of the world. Consumers in the

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The Forces Shaping World Cotton Consumption After the Multifiber Arrangement

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q1 q3 q4

St

Sd

Stq

Dd

Pw

Pq′

q2

Appendix figure 2

Nonquota-imposing importing countries

Price

Quantity

2Appendix figure 2 illustrates

importers that do not impose MFA

quotas, including much of the Middle

East, Russia, Switzerland, and Japan.

This figure shows no trade barriers,

although Japan's and Switzerland's

“market surveillance” does affect

imports.

3Appendix figure 3 illustrates competitive exporters, which includes China,

India, and Pakistan, among other

countries.
quota-imposing country see their welfare decline as they pay more for imports,

and pay more for a larger amount of domestically produced clothing. These are

transfers of welfare from consumers to producers. The welfare of consumers in

the United States is further reduced by “deadweight losses,” which are the

consequence of reduced opportunities for exchange.

The transfer from consumers to producers in the quota-imposing countries

equals the area in Appendix figure 1 within the points Pq, Pw, e, and a. The

deadweight losses there equal the area of the triangles within the points e, a, b

and d, c, f. However, welfare improves in other importing countries as lower

world prices increase the opportunity for exchange. In appendix figure 2,

welfare improves in the non-quota-imposing importers as lower world prices

improve their terms of trade with the rest of the world, and their imports

increase. The two smaller triangles in appendix figure 1 illustrate the increases

in welfare in addition to the transfers from exporting countries. Global welfare

declines as the deadweight losses exceed the gains.

Quota rents are generally considered transfers from consumers in the United

States and other quota-imposing countries to exporting countries. Exports to

the quota-imposing countries are sold there for Pq in appendix figure 1,

which is above the free trade price, Pw, and above the world price with

quotas, Pq′. The excess earnings stemming from restricted trade with quotas

in place are referred to as quota rents, and equal the area of the rectangle in

appendix figure 1 with the points a, b, c, and d.

In an otherwise competitive market, an exporter would be willing to purchase

the right to export to the United States for Pq – Pq′ dollars. This is important

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The Forces Shaping World Cotton Consumption After the Multifiber Arrangement

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Appendix figure 3

Competitive exporting countries

Price

Sd′ Dd

Pw

Pq′

 

Dt

Dtq

Sd

q1 q3 q2 q4

Quantity

Note: Equilibrium in the exporting countries is illustrated with total demand (Dt) 

rather than total supply (St

). Total demand is domestic demand plus excess demand 

from the rest of the world: Dt

 = Dd + Σ(Dd – Sd)

i

 . Also, Dtq is the total demand 

producers in exporting countries face when the United States and other countries 

implement quotas.
5Krishna and Tan (1998) estimated

that half the quota rents for Hong

Kong's exports may have been appropriated by importers. 

because measuring the degree of import protection offered by a quota is not as

straightforward as with a tariff. In this example, Pq is about 20 percent higher

than Pq′, which is a measure of the degree of protection in the model. In real

life, a simple comparison like this is difficult due to product differentiation,

transportation, and other factors. Sales prices for the right to export to quotaimposing countries (license prices or quota premiums) were sometimes available, and have been used to estimate the “export tax equivalent,” or ETE, of

MFA quotas.

Impact of Removing the MFA

Removing the quotas means total supply and total demand in the three

appendix figures returns to St and Dt

, in the importing and exporting countries, respectively. However, MFA removal is expected to have an effect not

captured in the static, single market model illustrated here. The less competitive exporters are able to export a certain amount while quotas are in place

because resources were shifted to these countries from quota-restricted

competitive exporters (see app. fig. 3). Removing the quotas also removes the

incentive to keep resources in these less competitive countries. In this illustration, resources would flow back to the competitive exporters. This shifts Sd in

the figure to Sd′, increasing exports from the competitive exporters. In a graph

for a country losing resources, the new supply curve would be on the other

side of the original supply curve, and exports would decline.

Removing the MFA quotas does not necessarily result in larger world

consumption of clothing. Removing the quotas reduces the price of clothing

in the quota-imposing countries, and consumption rises there. But in the

model used in these illustrations, the price responsiveness of consumers in

the rest of the world is greater, and world consumption is actually lower

without the quotas. This example does not account for all the possible

effects of MFA reform. Quota administration consumes resources, and rentseeking behavior adds to production costs around the world. Also, more efficient allocation of resources would be expected to increase incomes. These

factors suggest lower production costs (shifts in the supply curves) and

higher consumption (shifts in the demand curves) that this simple model

does not capture. Computable general equilibrium (CGE) models have been

used to capture these additional effects and typically show a small increase

in world consumption stemming from liberalization.4

Finally, the use of license prices to determine the degree of protection

offered by the MFA quotas carries some dangers, with implications for

interpretation of the results from studies using these prices. One danger of

using license prices is that they might reflect a longrun right to export, since

past export performance is often used to assign quota rights. In this case the

license price overstates the protection offered by the quota because the

license purchase price is for long term stream of quota rents. License prices

may also overstate the impact of quotas since they reflect Pq – Pq′ which is

greater than Pq – Pw, the true difference between earnings with and without

quotas. Another danger is that retailers, importers, or other intermediaries

might capture some of the difference between Pq′ and Pq, reducing the value

of the right to export. In this case, the impact of the quota on trade is understated by the license price.5

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4Hertel et al. (1996) report a 0.32-percent increase in global textile output

stemming from MFA removal. Yang et

al. (2004) find a 1.6-percent increase.

Clothing production falls 2.7 percent

in Yang et al.'s analysis.