Association for Public Policy Analysis & Management

This query empirically examines the unintended consequences of trade liberalization policies from two legal focal points that define the asset allocation incentives of global apparel producers.  They are a) the Product Sharing Rule (PSR) system of the US Import Code and b) the removal of the Multi Fiber Agreement (MFA) in the international trade of apparel and textiles.  PSR rules give preferential treatment to products that derive most of their retail value from American inputs.  In apparel goods, at large, that value-adding link is US cotton.  Therefore, preferential trade agreements with countries dependent on textile exports to the US market create incentives to export American cotton to those nations.  The outcome is a legal system of double subsidy for American cotton.  One subsidy is applied at the agrarian stage and the other is implemented at the trade stage of textiles made from American fibers. 

For decades, under the now defunct MFA system, strict “rules of origin” clauses set up quotas for the imports of apparel into the United States from certain countries.  Those policies defined location of textile and apparel firms because they chased available quotas.  Foreign direct investment (FDI) was directed toward nations that had preferential trade agreements with the US, which allowed for maximum quota benefits.  The end of the MFA opened global textile firms to more choice in location.  The panel data analysis presented here of the nations most dependent on textile production shows that FDI increased in nations with permissive environmental policies.

The result of the still active PSR rules and the end of the MFA is an incentive system in which over 80% of exported American cotton ends up returning to the United States in the form of ready-made garments.   It is processed into fabric in nations with lax ecological regulatory systems that are heavily dependent on structural adjustment loans.  Such nations' economies depend on attracting FDI and their ability to do so is the metric of successful in industrial upgrading.  In textile-export dependent nations high concentration of FDI is noted in the countries with a) high structural adjustment loan debt and b) high and rising levels of water pollution associated with textile manufacturing.  The panel data results of 33 such economies analyzed in the decade before and after the dismantling of the MFA quota system indicate that the end of the quota system, which in effect is an example of a successful outcome of trade liberalization, led to an increase of FDI in the nations with the highest levels of pollution.  This fact suggests that in the integrated trade of apparel components perverse incentives exist that reward the externalization of environmentally damaging industrial processes, providing support for the theory of unequal ecological exchange.