Although textile and apparel imports from most countries entered the United States quota-free after the expiration of the Agreement on Textiles and Clothing on January 1, 2005, substantial restraints remain on U. S. trade in these sectors, including high tariffs, quantitative restraints on China and Vietnam, and preferential rules of origin. While there is a substantial literature on liberalization of quotas and tariffs in these sectors, this paper provides a new and detailed examination of the effects of rule-based foreign demand for U. S. textile and apparel inputs. This paper uses the USAGE-ITC general equilibrium model to estimate the effects of removing textile and apparel restraints in 2005. Full liberalization is estimated to increase U. S. welfare by $2.0 billion (net) while decreasing U. S. textile and apparel output by 9.0 percent. Quantitative restraints continue to have considerable effects on U. S. welfare: their elimination provides over half of the welfare gain. However, rules of origin have by far the largest effect on production and employment. Elimination of preferential rules of origin accounts for 82 percent of the overall output reduction, because these rules currently generate nearly half of the foreign demand for U. S. textile and apparel exports. A similarly large output loss would also be part of any tariff liberalization that encouraged preferential trade partners to reduce purchases of U. S. inputs as their preference margins eroded. This is the first study in the literature to quantify this effect, which is sufficient to eliminate four-fifths of the welfare gains from tariff liberalization in these sectors.

JEL classification: C68, D58, F13, F14, F17