The Intended and Unintended Consequences of Special Fabric Provisions
Lesotho and other least developed African countries responded to preferences granted under the African Growth and Opportunities Act with an increase in clothing exports to the US. But the dynamic growth benefits some hoped for did not materialize. We demonstrate that these outcomes are the predictable consequences of the specific preferences. The MFA (Multi-fiber Arrangement) quotas on US imports of textiles created a favorable environment for low value-added, fabric-intensive clothing production in countries with unused quotas by inducing constrained countries to make higher quality products. By allowing the least developed African countries to use third country fabrics in their US exports, AGOA provided additional implicit effective subsidies to clothing that were multiples of the US tariffs on clothing imports. These policies account for the program’s success and demonstrate the importance of other rules of origin in preventing poor countries from using other preference programs. But the preferences discouraged value-addition in assembly and stimulated the use of expensive fabrics unlikely to be produced locally. When the MFA was removed, constrained countries moved into the markets in which AGOA countries had specialized. Preference erosion due to MFN reductions in US clothing tariffs could similarly have particularly severe adverse effects on these countries.
Keywords: trade preferences, rules of origin, development impact of trade, incentives for value-addition