Garment Quota

1
Garment Quota

• Discussion of past-paper

• 1996 C6

2

• Beginning in the early 70s, countries in Asia
  have all been enforced to meet quota requirements
  when they export garments to the United States.
  This export quota is imposed on a unit basis,
  that is, the garments exported are counted by
  unit, not by their quality or market value.
• For many years after the introduction of this
  system, the quotas held by Hong Kong garment
  manufacturers were freely transferable (saleable)
  at uncontrolled market prices indeed, for many
  years Hong Kong was the only place in Asia which
  allowed a free market for quota transactions.

3

• Use the law of demand to explain
• (a) why there had been a significant improvement
  in the quality of Hong Kong garments exported to
  the United States under the quota system and (6
  marks)
• (b) why this improvement in garment quality was
  far more significant in Hong Kong than in other
  Asian countries. (4 marks)

4

• (a)

quota value

• Suppose without any export quotas, the market
  price and quantity of garment exported to the US
  are P and Q respectively.

• When an effective export quota is imposed at Qq,
  the market price of garment would increase to P1.

• The persons who hold quotas on hand could earn a
  large amount of non-exclusive income, as the
  maximum price willingly paid by garment buyers
  (P1) is greater than the marginal cost of
  production (P2).

5

• (a)

• The quota-holder could be the US government, the
  local government, or local large garment
  producers.

• Since the quotas in HK are freely transferable,
  there will be a market price of each quota.

• Because one unit of quota must be used for one
  unit of garment regardless of garment quality,
  and because the quota has a positive value, the
  price of higher quality garment fell relative to
  lower quality garments under the quota system.
  (The Alchian Generalization)

• Hence according to the law of demand the quantity
  of higher quality garments demanded by the US
  rose relative to that of lower quality garments.

6

• Use the law of demand to explain
• (b) why this improvement in garment quality was
  far more significant in Hong Kong than in other
  Asian countries. (4 marks)

7

• (b)

• Because HK had long been the only place in Asia
  to allow a free market for quota transactions,
  the value of the quota was higher and therefore
  the relative price of higher quality garments
  fell further.
• This explains why HK became the leading exporter
  of higher quality garments and why the quota
  system, designed to protect the garment industry
  in the US, ended up hurting that industry far
  more than without the quota system.
• HK garments before the quota were generally of
  such low qualities that they competed with those
  produced in Mexico or the Philippines, but hardly
  competed with those produced in the US.