Determinants of U.S. Textile and Apparel Import Trade

General equilibrium conditions require demand to equal supply. Therefore:

X_i^d_j=X_i^s_j=X_ij                                                 (7)

where Xij is the equilibrium or actual quantity of the commodity traded from country i to country
j. By equating equation 3 to equation 6, the commodity specific gravity equation is derived as
follows:

Yj           σj            Yiσj          Yi^σj          Yiσj     N         _{η -}  ^σj     N     _ ^1-σj  _-  ^γi

Xjj = Y Y T^σ+γi C,^j Ejj^σj^+γ (∑ Pj^Yi)  ^γ (∑ Pj ) ^jγ (8)

ij

The gravity model incorporates three variable components: (1) economic factors affecting
trade flows in the origin country; (2) economic factors affecting trade flows in the destination
country; and (3) natural or artificial factors enhancing or restricting trade flows. Bergstrand
argues that since the reduced form of the generalized gravity equation eliminates all endogenous
variables out of the explanatory part of each equation, income and prices can also be used as
explanatory variables of bilateral trade. With N countries, one aggregate tradable good, one
domestic good and one internationally immobile factor of production in each country,
Bergstrand’s (1985) model represents a general equilibrium model of world trade.

As previously noted, the major trade policies that have affected textile and apparel trade
are the multilateral WTO’s MFA and regional/bilateral NAFTA’s yarn forward rule. Consistent
with MacDonald et al (2001), we distinguish countries by whether or not trade in textiles and
apparel was restrained by the MFA. We recognize that the use of a qualitative variable to
represent the key trade policies leads to capturing average effects that may not track variations
during the phase-out process of the MFA. However, in this case, it provides more coherent
results. Therefore, consistent with Koo and Karemera (1991), we use dummy variables to

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