Question

Explain using a diagram the partial equilibrium effects of an import quota when the consumer's income decreases. Also, analyse (using a separate diagram) the partial equilibrium effects of an import quota if the technology rate increases.

Answer 1

Quotas will reduce imports, and help domestic suppliers. However, they will lead to higher prices for consumers, a decline in economic welfare and could lead to retaliation with other countries placing tariffs on our exports.

World trade in the textile industry is in the process of liberalization. Developing economies including Asian nations as major exporters of textile-related products, seem to possess mixed sentiments towards the completion of liberalization in 2005. From a general equilibrium perspective, the removal of quota and/or tariff barriers is supposed to increase trade interaction, both within and across industries. The first step towards analyzing these interactions as a whole would be to primarily focus on the initial impact of trade liberalization. This paper addresses the impact of quota removal of textile products. The structure of the paper is as follows. Section 1 reviews the institutional setting of the world textile industry and studies the partial equilibrium (direct) impact of quota removal. Section 2 observes the trade statistics with the case of the US market. Section 3 estimates the potential impact of quota removal in the US market, from the partial comparative-static standpoint introduced in section 1. The final section concludes.

1. A Partial Equilibrium Model of Import Quota Removal The share of textile products in total exports has ore or less remained stable since 1980. In terms of the share of total manufacturing exports, the textile industry is on a slightly declining trend. This seems to reflect the “standardized” or “static” nature of the textile industry, relative to other manufacturing sectors such as electronics.As part of its discussion around trade issues in developing countries, the World Trade Organization (WTO) has focused on the textile industry, as was the case in the former GATT system. The industry is currently going through fundamental change under a ten-year schedule agreed in the Uruguay Round. The system of import quotas that has dominated the trade since the early 1960s is being phased out. Since 1 January 1995, when the 10-year transitional program of the WTO’s Agreement on Textiles and Clothing (ATC) was agreed, trade in international textiles and clothing has been going through fundamental change. Before the Agreement took effect, a large portion of textiles and clothing exports from developing countries to the industrial countries was subject to quotas under a special regime outside normal GATT rules.

2 . Whether the exporting country will gain or lose from quota liberalization depends on the magnitude of the price changes (or price elasticity) in the restricted and unrestricted markets, and also on the share of each market for the exporting country. If the exporter faces a high elasticity of demand in the restricted market, it will gain from the import quota removal through an increase in the quantity of exports. If the exporter has a small quota relative to its supply potential, and hence currently sells a low proportion of its exports in the restricted markets, it will also gain from the quota removal, through an increased market price relative to the previous average market price. In other words, the share of exports to the restricted market is pertinent when assessing the impact of liberalization on the exporting country.The partial equilibrium model reveals that in the previously restricted market, the price falls when the import quota is removed. The theoretical prediction though points to the fact that that the overall impact of quota removal on the value (defined as quantity times price) of exports to both the previously restricted and unrestricted markets is ambiguous, depending on how large the price decrease or increase is relative to quantity increase or decrease, respectively. If the direction of import value is identified, then the proportion of the textile-producing country’s export to the restricted and unrestricted countries becomes of fundamental concern when considering the overall change in exports from the producing country. For instance, if the value of exports to the trade-restricted country is to increase and the value of export to trade-unrestricted country is to decrease, then the overall change obviously depends on how much the quantity ir raised