Did the Multi-fiber Agreement Make the NAFTA Politically More Acceptable? A Theoretical Analysis.

Abstract

The central question addressed in this paper is whether the presence of the MFA made the NAFTA politically more acceptable. Assuming that the government maximizes a weighted sum of welfare and producer profits, we derive four key results. First, taking the initial level of trade restriction as exogenously given, it is possible for an FTA to be endorsed by both parties under the MFA-like quota in one country though it is unambiguously rejected under a tariff that provides equal protection. Second, if the initial MFA quota is itself chosen endogenously, as long as all quota rents accrue to exporting countries, the quota is set so as to yield either autarky or free trade. Third, an intermediate outcome can obtain if quota rents are shared between the trading partners as is true, for example, under a tariff quota. Depending on the degree of the government’s bias in favor of producers, this outcome may be more or less restrictive than that obtained under a tariff. Finally, assuming parameter values that give rise to the intermediate outcome initially, it remains possible for an FTA to be endorsed under the MFA-type quota when it is turned down by one of the potential partners under a tariff. But it is now also possible for the opposite to happen: an FTA that is endorsed under a tariff may be turned down under the MFA-type quota.