Rent-sharing in the multi-fibre arrangement : the case of Mexico

The author investigates market power and the distribution of rents in the market for Mexico's exports of apparel tothe United States under the Multi - Fibre Arrangement (MFA). Conventional wisdom holds that voluntary restraints, such as those under the MFA, are superior to other kinds of trade barriers because they allow developing countries to receive the scarcity rents from quantity restriction. Recently a number of studies have questioned this orthodoxy. Erzan, Krishna, and Tan (1991), in particular, have pointed out that if market power exists only on the side of the importers, they can acquire some of the fixed rents resulting from quotas, in a form of"rent-sharing". In Mexico's case, rents resulting from MFA restrictions are probably small, since few of the quotas imposed are binding. And other institutional arrangements - such as production sharing under HTS 9802 and a liberal quota regime for goods made with U.S. inputs - further mitigate the MFA's restrictiveness. Mexican exporters probably receive only a fraction of available rents, says the author. The welfare implications of MFA restrictions, and of market imperfections that might lead to rent-sharing, are thus not as significant in Mexico as they might be in countries for which conditions are more restrictive. But even for the few rents generated in Mexico's case, some rent-sharing is taking place. The author tests the existence of perfect markets and rent-sharing for six groups of Mexican apparel exports to the United States between 1981 and 1990; sweaters, trousers, men's coats, women's coats, woven shirts, and underwear. There are consistent differences between the unit value of U.S. production and the Mexico export f.o.b. price of apparel in the U.S. market adjusted for tariffs and transport costs. The adjusted price of Mexican exports is consistently below the price for U.S. production, which suggests that rent-sharing may be taking place. Using modifications of the methods of Erzan, Krishna, and Tan (1991), the author tests alternative explanations for the price difference - differences in composition of Mexican exports and U.S. production, and differences in the quality of Mexican exports and U.S. products. The existence of differences in composition between Mexican exports and U.S. production is rejected for three of the six groups. The author also controls for the existence of significant quality differences. The results indicate that rent- sharing may exist for woven shirts and underwear (two of the three groups in the sample that are consistently quota bound). U.S. importers may receive up to 49 percent of available rents.