No Chinese Jackets Required: Clothing Quotas, Consumer Prices and Import Quality in South Africa

Mauritius - 23 November 2012

In January 2007 South Africa placed quantitative restrictions (quotas) on a number of Chinese clothing and textile product lines. Trade theory predicts that the imposition of binding quotas on a set of goods will result in a price increase for these goods. In a perfectly competitive market, these price increases will be passed onto domestic consumers. This paper uses a unique dataset of consumer prices to investigate whether this happened in South Africa. Using a difference-in-differences methodology we find no evidence that the prices that South African consumers paid for products in the restricted lines changed relative to non-restricted product lines. One explanation for this, for which we find evidence, was that South African importers substituted towards other low cost producers (including those in the SADC region) thus leaving prices unchanged. Furthermore, we find that there was quality upgrading, as measured by higher per-unit prices, in imports of Chinese products in the restricted lines, and quality downgrading in imports from other SADC countries and other competing countries. There is also evidence that trade values from SADC countries increased after the quota was scrapped indicating that the quota may have allowed these countries to gain a foothold in the South African market. The analysis of this natural experiment demonstrates that quotas are ineffectual in restricting import competition if other close substitutes, produced in non-quota constrained countries, exist.