The Quality of Production of Textiles and Clothing and the Completion of the Internal Market

We evaluate the quality differentials between developing and developed countries' textiles and clothing exports. Theoretical analyses often conclude that protection leads to quality upgrading (downgrading) of imports (domestic production), while recent empirical work suggests that it shifts the quality of foreign and domestic goods in the same direction. Using a simple duopoly model, in which average production costs decline more rapidly (or increase less sharply) for higher quality goods, we find that protection enables domestic producers to increase their share of the higher quality market segment. We compute multilateral Fisher Ideal price and quality indices for imports into the four major EC countries and find that quality differences explain about half the differences among the unit values of exporters to each market. There are also substantial quality differentials between developed and developing countries for textiles, but not for clothing products. Finally, even after controlling for quality effects, we find large price differentials across EC markets, particularly for developing countries' exports, which the completion of the internal market in 1992 should help to compress.