The EU market for apparel exports, China's cotton imports, and the end of the ATC

The expiration of the WTO Agreement on Textiles and Clothing (ATC) in January 2005 coincided with surges of China's apparel exports and apparent increases in China's cotton imports, the former of which has led to trade conflicts between China and its main trading partners, and the latter of which has seemingly prompted China to relax its restrictions on cotton imports. Using monthly trade data, this study employs a vector autoregression model to investigate the interlinkages between China's and its competitors’ apparel exports to the EU and between China's apparel exports and its cotton imports. Our analysis shows that (1) there appears to be a downward-sloping and elastic demand curve for China's apparel products by the EU; (2) China's and its competitors’ apparel exports to the EU are imperfect substitutes and the “crowding out” effects of Chinese apparel exports seem to be modest in the EU market; (3) the interrelationship between China's apparel exports and its demand for imported cotton is found to be statistically significant. However, increased apparel exports from China induce proportionally larger increases in its cotton imports. In particular, the end of the ATC is shown to boost China's apparel exports by nearly 16%. This increase “magnifies” China's demand for imported cotton by 75%. This discrepancy is possibly due to the relaxation of China's import restrictions on cotton following the end of the ATC which led to the extra boost in China's cotton imports.