Textile export quotas: Pricing, management and allocation. The experience of Taiwan

Voluntary Export Restraints (VER), usually the results of bilateral trade negotiations, have become everincreasingly popular in international trade since early 1980's. Traded goods ranging from cars and steel to textile and shoes are subject to VER to a certain extent. The management and allocation of import/export quotas has become one of the most important jobs of the restraining countries accordingly.;The export quotas give the exporters the right (but not the obligation) to export the underlying product within a certain time limit, therefore have all the characteristics of options. Three basic quota pricing models are proposed according to the volatilities of the product's cost and price. More complicated models are also developed to accommodate various allocation rules such as penalties on failure to export and compensation for early surrender of quotas. It is shown that quotas may have negative prices under the allocation rules, which is actually observed in the quota market.;Starting 1987, the transfer of export quotas among exporters has been legalized. There are two ways to transfer quotas. One is called annual transfer in which the buyer gets the right to export but the seller keeps the right to future quota allotment. The other is called permanent transfer in which the buyer gets both rights. Models that evaluate quotas under both types of transfers are developed.;This thesis also discusses models that can help exporters to make better production and financing decisions in the presence of quota market. Finally, the government is suggested to cooperate with other restraining countries to increase total exports without breaking the restrictions. All countries subject to similar restrictions can exchange quotas among one another using the relative price as a guide in setting exchange ratios. Welfare will increase without harming the importing country.;This thesis begins with a brief discussion of the effects of quota restrictions on the welfare of both the importing and exporting countries. The current textile trade agreements between Taiwan and its major trading partners are also briefly described along with the way Taiwan allocates textile export quotas among exporters.