Textile Trade Liberalization and its Welfare Implications for US Cotton Producers

This study analyses the impact on the US cotton industry of removal of the Multi-Fibre Arrangement (MFA) using a multimarket displacement equilibrium model. The model captures the basic linkages of textile products and cotton markets in the USA and in non-US markets. Different textile trade policy reforms are simulated. Results suggest that removal of textile trade restrictions in the OECD countries induces a decrease and structural change in the total demand for US cotton towards a larger dependency on the world market. The decrease in total demand for US cotton has negative welfare effects on the US cotton industry. However, the welfare loss depends on how non-US cotton exporters respond to changes in OECD trade policy. The largest estimated loss is about $200 million. Ignoring agricultural linkages of the textile industry in the analysis of textile trade liberalization would induce an upward bias in estimated welfare gains for the US economy. The results suggest the likely formation of a coalition of US cotton-textile-apparel producers to generate political pressure for more trade protection.