Questionable trade quotas

By , John A. Mathieson is a senior fellow at the Overseas Development Council, a private nonprofit research organization in Washington.

Last fall, while the public eye was turned on President Reagan and his performance at the Cancun ''North-South'' summit, the real action in relations between the developed and developing countries took place quietly in Geneva and in national capitals. The renegotiation of the Multifiber Arrangement (MFA), the complex set of quantitative controls (quotas) that regulate industrial-country imports of textiles and clothing manufactured in the third world, was completed shortly before Christmas, and was far from a gift to third world exporters.

The MFA is perhaps the worst departure from the post-World War II trend toward more liberalized trade, not only because it deviates from the principle of most-favored-nation treatment in trade matters, but more so because it explicitly discriminates against the nations of the third world. To add injury to insult, while the MFA may be prudent politics, it makes little if any long-term economic sense. Nevertheless, the recently negotiated agreement could turn out to be even more restrictive than its predecessors.

The MFA dates back to 1962, when it was felt that imports of cotton goods (primarily from Japan) were seriously injuring domestic textile industries in the United States and Europe. The first formal MFA was entered into in 1974 and included products made of wool and synthetic fibers as well as cotton. The basic objective of the MFA was to provide the world economy with an orderly trade framework which permitted growth in developing-country exports while avoiding the disruptive effects of sharp rises in imports in the developed countries. Hence, while it represented a compromise between producers in developed and developing countries, the MFA amounted to nothing more than negotiated protectionism.

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The MFA was intended to be temporary in duration, to give industrial-country producers ''time to adjust'' to international competition. It limited imports of affected items to a 6 percent annual growth rate. This is on top of an already high tariff -- US tariff on imports of apparel are about 25 percent (compared with the average US tariff of about 8 percent).

In practice, protectionism tends to breed even more protectionism. When the MFA was renegotiated in 1977 (instead of phased out as originally planned), the developing countries were forced to accept the doctrine of ''reasonable departures'' from previously agreed-upon rules. This permitted the industrial countries to adopt more restrictive policies on ''sensitive'' categories of textiles as they saw fit. The European nations quickly became more protectionist , and the US eventually followed suit. In its efforts to secure congressional passage of the Tokyo Round trade bill, the administration tightened up US controls on textile imports.

The basic cost of import restrictions is inflation and loss of efficiency. A study conducted by the now-defunct Council on Wage and Price Stability found that quotas and tariffs on textile and apparel goods cost US consumers about $2. 7 billion per year. Moreover, the cost to consumers of saving jobs in the apparel industry by reducing the rate of growth in imports to 3 percent could be as high as $81,000 per job. This is not an efficient way to run the economy.

An important additional cost is the potential reduction in US exports. If developing countries cannot earn foreign exchange by exporting, then they cannot afford to puchase many of the goods and services that employ our factories and labor force in export industries.

The textile industry and its exports are of critical importance to many developing countries. Exports of textiles and clothing accounted for more than one-third of total third-world manufactured exports in 1976. This sector also employs some 28 percent of their manufacturing output.

President Reagan has emphasized free enterprise and ''the magic of the marketplace'' as fundamental components of his policy toward the developing countries. If policy is in fact to be built around this principle, then perhaps the single most important step the President could have taken, consistent both with the needs of the developing countries and with his own philosophy, would have been to press for freer trade in textiles and clothing. Then the developing countries could earn their own way by producing those things that they are capable of producing efficiently, and American consumers, especially those with lower incomes, could moderate their costs of living by purchasing these items freely.

No one expected that the new MFA would further liberalize trade in textiles, but consumers in industrial countries and producers in developing countries had hoped that the agreement would not include language that condones additional restrictions. These hopes were dashed when the European Community, which has consistently sought to legalize reductions in quotas, prevailed in the 11th hour of the negotiations. The new MFA includes sections on an ''anti-surge'' mechanism and ''exceptional circumstances,'' both of which permit departures from agreed bilateral quotas.

On the positive side, references are made to ''equitable and quantifiable compensation'' for cutbacks in quotas, as well as to the requirement to establish that ''serious and palpable damage'' is being caused by imports. In practice, however, these side conditions tend to be ignored when restrictions are implemented.

Initially, the US sided with the developing countries in a effort to negotiate a more liberalized MFA. In his Philadelphia speech on North-South issues, President Reagan said, ''it's time for all of us to live up to our principles by concrete actions to open markets and liberalize trade. . . . This will benefit developing countries more than any other single step.''

As always, actions speak louder than words, and the US eventually concluded that the European Community formulation was better than no agreement at all. This position was reinforced by strong pressures for more protection from textile-producing states whose representatives and senators supported the President's budget initiatives.

It is important to note that the new MFA, which will be in force for the next four and a half years, is only an ''umbrella'' framework within which bilateral agreements are negotiated. Like all compacts, the MFA's impact will ultimately depend on the actions of its participants rather than on the precise wording of the agreement.

Moving toward freer trade in textiles and clothing need not ignore the legitimate needs of the US industry and workers. The new MFA will continue to limit imports. The developing countries themselves do not want to engender the kind of market disruptions that would result in greater protectionism in the future. The US industry has been given time to adjust, and some sectors are flourishing, even to the extent that they are expanding exports rapidly. Other parts of the industry should not be exempt indefinitely from the forces of competition.

If the new MFA were a test of the Reagan administration's ability to abide by its own words and philosophy, then the administration did not pass with flying colors, but at best should receive a mark of ''incomplete.''

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