Western Economics Forum, April 2004
quotas, would increase their exports. Another implication of the textile quota elimination would be that
the import price of textile products will certainly decline. In fact, empirical evidence suggests that the
average “tariff equivalent” (i.e., import-export price gap) of the U.S. quotas for Chinese T&C imports
could be as high as 40%. Since the average U.S. tariff for T&C items is between 12% and 15% (and
will remain in place after the quota elimination), it is likely that U.S. average prices for T&C imports from
China will decline a 20% or 25% as consequence of the 2005 final ATC quota elimination (Malaga and
Mohanty, 2003).
Conversely, Mexico, which currently has a free trade agreement with the United States, is taking
advantage of not being subject to quotas or U.S. tariffs. However, as suggested above, the 2005 ATC
final elimination of quotas will likely cause U.S. imports of textiles from China and other Asian countries
to increase while imports from Mexico will likely decline. Therefore, this reorganization is expected to
reduce not only Mexico’s exports of textiles and clothing but also the export-import price of textiles
between Mexico and the United States.
Similarly, and mainly because of NAFTA, Mexico has recently become the largest market for U.S.
cotton exports. For instance, during, 2000, 25.3% of U.S. total cotton exports went to Mexico (FATUS).
Moreover, around 94% to 97% of cotton imports demanded by the Mexican textile industry come from
the United States (INEGI). Consequently, it should not be difficult to argue that Mexico’s demand for
U.S. cotton is highly dependent upon Mexico’s ability to export textiles and clothing. Understanding the
impact of the ATC quota elimination on Mexico’s competitive position in the U.S. market becomes a
critical component to forecast future U.S. cotton exports to that key cotton market.
Methods
The Mexican model equations were estimated using time series data and Ordinary Least Squares. The
regression period was 1964-2001 (Lopez, 2003). On the supply side, cotton production was isolated
into separate behavioral equations for cotton area harvested and cotton yields. On the demand side, a
two-stage procedure was implemented where the first stage consists of total fiber consumption, and the
second stage was delineated by the cotton share of total fiber consumed. Subsequently, the estimation
of an ending stock behavioral equation allowed for the computation of the change in cotton stocks.
Finally, the closing of the model was achieved through the calculation of net cotton trade. Net cotton
trade was determined by the difference between cotton production and cotton consumption plus or
minus the change in cotton stocks.
Price transmission relations were additionally built for farm cotton prices, mill cotton prices, and
soybean prices in Mexico. These transmission relations are primarily used in the model to forecast
domestic prices in Mexico, and to incorporate the international market effect into the model. Linkages
between Mexico and the U.S. cotton industries were established based on their trade patterns. The
effects of the ATC textile quota elimination were incorporated through the “total fiber consumption”
behavioral equation and a textile and apparel price index in the United States. For a more
comprehensive description of the model refer to Figure 1.
The projections on international commodity prices are taken from FAPRI. FAPRI’s compilation of
variable projections such as income, price indexes, and exchange rates are also utilized. The historical
patterns of the series are also considered to compute compound growth rates for the remaining
exogenous variables.
Results and Discussions
Estimated own and cross price elasticities of supply and demand variables are summarized in Table 1.
On the supply side, cotton yield elasticity estimates with respect to fertilizer use and pesticide prices are
provided. On the demand side, it is interesting to notice how income dominates fiber consumption over