Preferential outward processing trade in apparel between the United States and the Caribbean
Abstract
The US and the EU use outward processing arrangements to shift labor intensive apparel operations to neighboring countries who have significantly lower labor costs, to promote demand for their capital-intensive textiles, and to provide economic assistance to the developing countries. They stimulate foreign investment, which, in turn, determines trade flows. The investment response to preferences is gradual because there are costs associated with capital stock adjustment. This study focuses mostly on US outward processing trade in apparel and textiles with the Caribbean. Preferential treatment of US outward processing trade has been expanded recently by the Trade and Development Act of 2000 (TDA2000). Tariffs were previously exempted only on the value of imported intermediates, and became zero afterwards. To study outward processing trade and the effects of trade policies in the long and short runs, a dynamic model with adjustment costs of investment is specified. The hypothesis of capital stock being the key determinant of outward processing trade flows in the short run and tariff changes having limited short-run effect on outward processing trade is tested, using US data. Statistical tests support that hypothesis. The model is then used to simulate long-run outcomes of the introduction of TDA2000 and the elimination of Multi-Fiber Agreement on US outward processing trade in the Caribbean Basin since the latter has the potential to have significant impact on the US demand for outward processing apparel. The costs and benefits of these trade policy changes are evaluated. Simulations of the effects of TDA2000 for Dominican Republic, El Salvador, Guatemala, and Costa Rica showed that most of the adjustment of capital and trade would occur over 5 years, increasing trade by 12% to 24%. The elimination of MFA quotas, depending on the magnitude of its impact on US outward processing (OP) demand, has the potential to eliminate the gains resulting from the adoption of TDA2000. A 10% negative MFA demand shock in 2000 decreased OP trade by 6% and investment expenditures by 53% on average as compared to the benchmark projections. A 30% negative demand shock would bring disinvestments in all countries.
Degree
Ph.D.
Advisors
Abbott, Purdue University.
Subject Area
Economics|Agricultural economics
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