China in the World Market

DEVELOPING COUNTRY STRATEGIES FOR COPING WITH THE MFA

The experiences of other developing countries suggest several ways that exporters can adapt to restrictions under the MFA: product upgrading to achieve higher unit values for goods subject to quotas; product diversification toward unrestricted goods; increased exports to countries that do not impose quotas under the MFA; improved utilization of existing quotas; moving production abroad legally via foreign investment to avoid quotas; and illegal transshipments of domestic production through third countries to avoid quotas.

First, with regard to product upgrading, there is a strong incentive under the MFA for exporters to trade up into higher-end goods since the quantity of their sales is strictly limited. If a specific product (e.g., men's cotton dress shirts) becomes subject to quotas, one strategy is to move upmarket from cheaper shirts sold at discount department stores to more expensive shirts sold at upscale department stores. Second, the imposition of quotas in one product line (e.g., women's cotton sweaters) frequently results in greater exports of unrestricted products (e.g., women's ramie sweaters). Third, the presence of quotas in one export market (e.g., the United States) often leads to increased exports to unrestricted markets (e.g., Japan). Fourth, another common response to the MFA is to ensure that quota allocations are fully utilized, a strategy that often requires both improved administrative coordination and adjustments to the product mix. Finally, the impact of restrictions can also be mitigated by avoiding quotas altogether, either by moving production overseas or through customs fraud.