Quantity Restrictions and Price Adjustment of Chinese Textile Exports to the U.S.

The elimination of the Multifibre Arrangement (MFA) in 2005 provides an unusual opportunity to examine the effects of a trade policy shock on export prices and firm behaviour. It was massive in scale, discrete in timing and exogenous to firms and consumers in the textile industry. Since the MFA quota removal did not affect all textile products at the same time, we are able to use a difference-in-difference approach to estimate the causal effects of the MFA. Using transaction-level data from the Chinese Customs Trade Statistics over the period 2000-2006, we find that the MFA removal reduced average export prices by about 25%. This fall was mainly caused by a combination of the entry of new low-price exporters and new low-price products, rather than a fall in prices of existing firm-product combinations. We also find that price reductions are twice as large for heterogeneous than for homogeneous products.