Question

Determine the impact of tariffs on the textiles industry and how it affects retail prices.

Answer 1

ANSWER-

The textile and clothing industry is an important sector because of its contribution to the economy. It becomes an important industry which absorbs most workers, especially in the low labor-cost countries. The United States (U.S.) is the biggest market for textile and clothing products worldwide. Distorted by some protections, the trend in the U.S. textile and clothing market changes rapidly. One of the most influential agreements was The Multi-Fiber Agreement (MFA) with its quota restriction from 1974 to 1994. After the end of MFA, The Agreement on Textile and Clothing (ATC) toke into effect. This agreement set by the World Trade Organization (WTO) to eliminate the quota restriction gradually within 10 years (1995-2005) and use the tariff restriction. After the end of the ATC, the trade in textile and clothing becomes governed by the general rules and the multilateral trading system. Meanwhile, the tariff still becomes a burden for some countries, especially the ones which do not get a special tariff rate because of the lack of trade agreement with the U.S. Another challenge is the use of imported raw materials as the main input of production. This makes the cost of production sensitive to international price volatility. According to that, this study examines the impact of tariff and imported raw material on the export of textile and clothing to the U.S. market. Data from 23 exporters of textile and clothing products to the U.S. are analyzed using the gravity model with The Poisson Pseudo-Maximum Likelihood (PPML) estimator. The result shows that the higher tariff reduces the amount of textile and clothing export to the U.S. Market. Moreover, imported raw materials still become an important source of input in this industry.

Tariff

Tariffs are set by the importers to protect their domestic market. The tariff could increase the price of imported goods, thus the domestic product can be relatively more competitive in price. Chen, Keung, Lau, Boansi, & Bilgin (2017) study the effects of trade cost on the textile and apparel market using a panel data of Asian Countries. Using the gravity model with a trade cost function, they found that applied tariffs and most favored nations' tariffs significantly reduced the trade between countries. There are three kinds of tariffs according to the World Bank. First, Most Favored Nation (MFN) tariff which is set for import products between members. For non-member countries, the tariff can be higher. Second, Bound Tariff (BND) which defined as the maximum MFN tariff level for a given commodity line. The last one is the Effectively Applied (AHS) tariff. This tariff rate is the one that that is practically used in real transactions between countries. Most of the WTO members join at least one Free Trade Agreement (FTA) which sets the tariff under the MFN tariff. This kind of agreement gives mutual benefits between members. Since this tariff is the lowest one, they prefer to use this rate for international trade. For example, Canada, Mexico, and the United States are members of NAFTA which was formed in 1994. Trade-in of all industrial goods between them become duty-free since January 1, 2008 (Department of Commerce, USA 2019). Viet Nam also gets preferential tariffs for its textile and clothing products. After applied on December 10, 2001, the Bilateral Trade Agreement (BTA) between Viet Nam and the U.S. gives benefits for Viet Nam export products which get tariff reduction from about 40% to only 3%. The impact of this lower tariff is highly significant. After experiencing only the slightly different export value of textile and clothing products from 1999 to 2001, the export value jumped very significantly in 2002 and continued to increase until the recent year.

A tariff is a trade burden for exporters, especially for countries that do not have any trade agreements with the U.S. With a higher tariff rate, their products become relatively more expensive and then less competitive. For example, Indonesia, Malaysia, and the Philippines should pay normally applied tariffs, approximately 10-13%, while the other countries get the preference of lower or even zero tariffs. For instance, Viet Nam received a tariff cut after the Bilateral Trade Agreement (BTA) while Canada and Mexico as members of NAFTA get preferential zero tariffs to enter the U.S. market. Another challenge for exporter countries is from the internal side. Imported raw materials still become the main source of input in this industry. This means that the production cost is sensitive to import prices. For example, almost all of the cotton input for production in Indonesia textiles and clothing industry is imported with the United States, Brazil, and Australia as the biggest suppliers. One of the causes is that although cotton can grow in Indonesia, the quality is not good enough because of the rainfall. Indonesia only produces 0.3 % of its total domestic cotton demand, and this production continues to decrease by 24.79 % annually since 2008. With its high rainfall intensity, cotton growers face a high risk of harvest failures and high production costs. These costs, coupled with better profits from alternate crops, have led to cotton cultivation being marginalized to intercropping systems or marginal lands, mostly found in South Sulawesi, East Java, West Nusa Tenggara, and Central Java. Increased land conversion to nonagricultural uses also reduces the area dedicated to cotton. Farmers have very limited access to high yielding varieties and efficient cultivation practices due to financial constraints (Wright & Meylinah, 2014). This research investigates the impact of tariff and imported raw materials on textile and clothing export to the U.S. market. First, the impact tariff on exports between the U.S. and major exporters will be analyzed. Second, the impact of the import of cotton as raw materials will also be investigated. It is predicted that tariff has a negative impact on exports of textile and clothing products from major exporters to the U.S. market. Moreover, the import of cotton as raw materials has a positive impact on exports of textile and clothing products from major exporters to the U.S. market. This study thus will be helpful for trade policymakers to design efficient strategies related to the textile industry, especially for improving its competitiveness in the U.S. market.

A tariff is a trade burden for exporters, especially for countries that do not have any trade agreements with the U.S. With a higher tariff rate, their products become relatively more expensive and then less competitive. For example, Indonesia, Malaysia, and the Philippines should pay normally applied tariffs, approximately 10-13%, while the other countries get the preference of lower or even zero tariffs. For instance, Viet Nam received a tariff cut after the Bilateral Trade Agreement (BTA) while Canada and Mexico as members of NAFTA get preferential zero tariffs to enter the U.S. market

The tariff which represents trade cost has a negative impact on export. It confirms our hypothesis that higher tariffs will reduce the export of textiles and clothing. Between 23 countries, 7 countries get the benefits of tariff reduction. This study shows that the import of total textile and clothing will decrease by 0.02 % when there is a 1% tariff increase. The impact of the separated product is also below 1%. It means that although the United States try to protect its domestic market by applying certain tariff, the abundant import still enters the market. The end of the Multi-Fiber Agreement (MFA), which protects the U.S. market by quota, might be one of the reasons for the increase of textile and clothing import. Starting in 2015, the end of this non-tariff barrier became a good opportunity for huge importers like China to sell more products without any quota. Chen et al. (2017) found the higher impact of the tariff on textile and clothing products in the evidence of Asian Countries in the world market. The study revealed that increasing tariff by 1% leads to a 1.41% reduction in textile export.

There are some challenges for exporter of textile and clothing in the United States as the biggest market in the world : First, some countries do not have any trade agreements with the U.S. As a consequence, they have to pay a normal tariff rate to enter the market. Another challenge is the dependence of raw input materials, especially cotton. Another fact is that the U.S. is the biggest exporter of this raw material. This research investigates the impact of tariffs and the U.S. of imported raw materials in textile and clothing trade on the U.S. market. It uses the unbalanced panel data of 23 countries from 1995 to 2017. The independent variables are exporter GDP, importer GDP, tariff, a dummy of the common language, import of cotton as proxy of raw material, Real Effective Exchange Rate (REER), and Consumer Price Index. There are three parts of estimation: (1) textile, (2) clothing, and (3) total of textile and clothing products