Trade Adjustment Costs in Developing Countries: - World Bank ...

13Exporter Adjustment to the Endof Trade Preferences:Evidence from the abrupt end oftextile and apparel quotasJAMES HARRIGAN1. INTRODUCTIONTrade policies are often discriminatory: tariffs and quotas apply unevenly to acountry’s trading partners. Economics teaches that such discrimination can beeven more distortionary than a Most Favored Nation (MFN) trade policy, sincediscrimination may lead an importer to import inefficiently from high-cost suppliers.This inefficiency is of course costly for the importing country, but it alsocan distort the global pattern of specialization: countries with preferential accessinvest too much in providing the protected products, while low-cost suppliersare prevented from fully exploiting their competitive advantage.These insights from economic theory are the basis of much policy advice, and inparticular the prescription that if countries need to protect their domestic marketsthen they should do so using nondiscriminatory policies. This note provides empiricalevidence to support the theory and policy advice from one of the largest andmost abrupt trade policy changes in recent years: the end of the global regime of textileand apparel quotas on January 1 2005. This regime, best known as the ‘MultiFiber Arrangement’ (MFA) but renamed the ‘Agreement on Textiles and Clothing’(ATC) at the conclusion of the Uruguay Round in 1995, was long thought to distortglobal textile and apparel trade severely, and its demise has confirmed this view. 1This paper, based on my joint work with Geoffrey Barrows (Harrigan and Barrows,2009), focuses on how exporters to the US market adjusted when the MFAended 2 . As discussed in greater detail in Harrigan and Barrows (2009), the bulkof MFA liberalization was put off until the last minute, with the result that US importsof textiles and apparel changed dramatically in 2005 in ways that can becredibly attributed to the end of the MFA. I will show that1 For simplicity, I will continue to use the older term MFA in the remainder of this note.2 For background on the rise and especially fall of the MFA, see Harrigan and Barrows (2009);Evans and Harrigan (2005a); and Brambilla et al. (2007).