Stanford Center for International Development Quantitative Restrictions and Quality Upgrading: The Case of the Multi-Fibre Agreement

The thesis uses the end of the Multi-Fibre Agreement to test the theory of quality-upgrading, which states that firms facing quotas will export higher-quality products to generate the greatest economic rent from each individual exported good. The Multi-Fibre Agreement (MFA) is a set of quantitative restrictions placed by the US on textile exports from Asian nations that began in 1974 and ended January 1, 2005. The thesis constructs a hedonic regression to isolate the quality and price characteristics of goods exported from China, and it creates a fixed effects regression to estimate the impact of quotas on the quality and price of goods exported. The study finds that the end of the MFA led to a 9 percent decrease in the quality of goods exported in previously restricted groups and a 26 percent decrease in the price of goods exported from China. Furthermore, it is the first study to evaluate how the reinstatement of ex ante textile quotas in 2006 impacted the price and quality of Chinese goods exported and found the resulting increase in quality to be 19 percent and the increase in price to be 21 percent (all statistically significant at the 1 percent level). The thesis also generates a theory for how quotas on Chinese textiles lead to a decrease in quality of goods produced by firms in nations that do not themselves face quotas on exports (specifically Canada, Mexico, Italy, El Salvador, and Honduras). It tests this theory using a control and a treatment group based on the groups of Chinese exports that face quotas. The study uses a similar hedonic regression and fixed effects regression analysis to evaluate the impact of Chinese quotas on other countries’ exports. The study finds a statistically significant increase in the price of exported goods after the MFA, ranging from a 4 percent to a 34 percent. Furthermore, it finds a statistically significant increase in the quality of exported goods after the MFA, ranging from 3 percent to 33 percent, for Canada, El Salvador, Mexico, and Italy. This confirms the hypothesis that firms in these countries underwent quality downgrading as a result of quotas on Chinese goods.