Rent-sharing in the multi-fibre arrangement : evidence from U.S. - Hong Kong trade in apparel

The Multi-Fibre Arrangement (MFA) restricts the access of developing country exporters to developed country markets. It is usually assumed that the exporting countries receive all of the economic rents that result from these import restrictions - making it unclear whether the developing countries gain or lose as a result of the MFA. Recent theoretical work on trade policy under imperfect competition casts doubt on whether exporting countries receive all of the quota rents arising from voluntary export restraints such as those applied by the MFA. Drawing on this theoretical literature, Erzan, Krishna, and Tan (1991) tested and rejected the hypothesis that MFA quota rents on exports from Hong Kong to the United States accrued in full to the Hong Kong exporters. The results in this paper build on that hypothesis-testing analysis and assess its implications for the returns to Hong Kong producers. Their results suggest that rent sharing is an extremely important feature of the market for apparel exports from Hong Kong. U.S. importers were estimated to receive rents that were about 62 percent of the landed price of the imports. The authors conclude that the total potential rents arising from the MFA were split unevenly between the U.S. and Hong Kong - with the U.S. share ranging from 47 percent for skirts to 94 percent for playsuits. If the results of this study are corroborated for other developing countries, the implications of the MFA for developing countries are considerably worse than has typically been assumed.