ABSTRACT

The 2005 Textile and Clothing import quota elimination will have important impacts on world cotton trade. Since the European Union is the world largest importer of cotton, evaluation of the 2005 quota liberalization requires appropriate and accurate EU cotton demand parameter estimation. This paper explores the cotton demand parameters of the aggregated European Union and some EU members at home consumption levels and calculates own and cross price elasticities and expenditure elasticities. Unlike previous studies, this research uses available for home use data and a demand system approach including wool as a cotton’s competitive commodity. One of the advantages of a demand system approach is that it has proven to better capture the strong interrelationship between commodities, providing more accurate parameter estimates. The study concentrates on a pooled Almost Ideal Demand System model estimated over time series using country disaggregated annual data. Country differences in fiber consumption are separated from the error term by introducing dummy variables into the model. These dummy variables capture country differences in demographic and geographic characteristics and are incorporated into the model by using translating techniques. Results suggest that European Union cotton fiber demands are no homogeneous across the board and might need to be treated separately.