provided by Research Papers in Economics
Western Economics Forum, April 2004
THE UNCERTAIN FUTURE OF THE MEXICAN MARKET FOR U.S. COTTON: IMPACT OF
THE ELIMINATION OF TEXTILE AND CLOTHING QUOTAS
By
José Enrique Lopez1 and Jaime E. Malaga2
1Department of Applied Economics and Management, Cornell University
2Department of Agricultural and Applied Economics, Texas Tech University
Abstract
Accounting for about 20% of U.S. total cotton exports in recent years, the Mexican market has become
a key destination for U.S. cotton production. Simultaneously, the U.S. market is critical for the Mexican
textile/clothing sector absorbing almost 50% of its total output. This strong North American integration
process, in part a result of NAFTA, might be jeopardized by the approaching implementation of the
Agreement on Textiles and Clothing (ATC) in 2005. This paper presents the results of an econometric
and simulation model that allows for the assessment of potential implications of the ATC’s quota
elimination on Mexico’s cotton consumption and U.S. cotton exports to Mexico. It incorporates the
growing interdependence between the U.S. and Mexico’s cotton and textile industries and summarizes
some plausible scenarios for the impact of the 2005 textile and clothing final quota elimination on U.S.
markets.
Introduction
During the past 40 years, world textile trade has been in large part governed by the Multi Fiber
Agreement (MFA) and its predecessor agreements. However, starting in 2005, in accordance with
World Trade Organization (WTO) obligations and the Agreement on Textile and Clothing (ATC), the
restrictions imposed by these previous agreements must finally end. The new global trade rules that
WTO members agreed to follow, specifically the elimination of quotas in the textile and clothing (T&C)
industry, are certainly going to have important implications for world textile and cotton trade.
In order to have a comprehensive understanding of the far-reaching consequences and policy
implications of this change in the T&C industry (i.e. at the aggregate level), individual structural
relationships for the main market participants need to be examined and updated. In the late nineties
Mexico became the number one supplier of T&C to the U.S. market. In fact, Mexico currently exports
between 44% and 50% of its textile and apparel products, and about 95% of them are exported to the
United States (INEGI). Furthermore, in recent years, Mexico ranked as the world’s 4th largest exporter
of clothing (Mexican Ministry of Economy).
As a member of NAFTA, Mexico is now a privileged supplier of clothing to the United States and
Canada where most of Mexican shipments are already duty-free. However, with the forthcoming final
elimination of the T&C quotas, other big exporters currently bounded by those quotas, such as China or
Pakistan, could easily challenge Mexico’s privileged position due to the NAFTA agreement.
Accordingly, Mexico’s competitiveness in the cotton T&C industry could be jeopardized by the lower
costs of many Asian countries. For example, Chinese textile wage rates are reported to be one tenth of
their Mexican counterparts.
Imposing quotas to textile imports creates price gaps between importing and exporting prices
constraining the free market level of trade. Therefore, trade theory implies that if quotas were the only
binding constraint, liberalization of trade, (i.e., elimination of quotas) would cause the importing country
(e.g., the United States) to increase its imports of textiles while exporting countries, formerly limited by
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