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WORLD TRADE AND PAYMENTS
Richard E. Caves
Jeffrey A. Frankel
Ronald W. Jones
University of Rochester
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Editor-in-Chief: Denise Clinton Associate Editor: Roxanne Hoch Senior Production Supervisor: Nancy H. Fenton Marketing Manager: Adrienne D'Ambrosio Design Manager: Regina Hagen Cover and Text Designer: Leslie Haimes Senior Manufacturing Buyer: Hugh Crawford Publishing Services: Thompson Steele, Inc. World Trade and Payments: An Introduction, Ninth Edition Copyright ©2002 by Richard E. Caves, Jeffrey A. Frankel, and Ronald W. Jones All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States. For information on obtaining permission for the use of material from this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 75 Arlington Street, Suite 300, Boston, MA 02116 or fax your request to (617) 848-7047. Library of Congress Cataloging-in-Publication Data
Caves, Richard E. World trade and payments: an introduction / Richard E. Caves, Jeffrey A. Frankel, Ronald W. Jones. - 9th ed. p. cm. Includes bibliographical references and index. ISBN 0-321-08904-9 1. International trade. 2 Balance of payments. 3. Commercial policy. I. Frankel, Jeffrey A. n. Jones, Ronald Winthrop III. Title. HF1379.C8 382-dc21 2001 20010333326
However. TARIFFS: LEVELS AND TRENDS Without doubt. The decreased reliance on tariffs as a source of federal governmental revenue was striking. then it began a substantial decline that was due in part to American participation in the multinational tariff reductions. Makers of public policy in the United States were little impressed with the virtues of international trade until the last six decades. As Figure 13. that regions of the United States. America became a high- IJohn McCallum. the American tariff through much of the nineteenth century averaged 40 percent or more on dutiable imports.TRADE CONTROLS IN PRACTICE H ow prevalent are government restrictions on international trade? How have these restrictions evolved over time? Why do they change when they do? In Chapter 11 we suggested that trade controls should be considered an act of public choice." American Economic Review. The average duty paid on total imports declined even more than did customs revenue on dutiable imports. were 89 percent in 1821 (when they were the only tax that was easy to collect).S. 235 . It reached its high point in 1932 as a result of the SmootHawley Act of 1930. are far more specialized in production than independent industrial nations of comparable size. the very success of this process bred a reactive swing toward managed trade. in which lowered tariffs are replaced by other types of restrictions to shelter important (and politically powerful) industries. Early in the nineteenth century. Actually. then refer briefly to broader patterns.' We consider the long-run pattern in the United States. make that downs and ups. 85 (June 1995): 615-623. for example. now less than 1 percent of the federal government's budget receipts.1 shows. The history of tariff legislation is fascinating for its insights into the process of public decision making. trading freely with one another. Regional Trade Patterns. It is known. collaborative effort to lower the general level of restrictions. as duty-free imports (often raw materials) became more important. Here we explore the ups and downs of actual trade restrictions in the United States. Customs revenues. tariffs and other governmental restraints on trade have curbed international specialization and reduced world economic welfare. "National Borders Matter: Canada-U. The United States and its major trading partners have undertaken a long.
. This pattern is close to the one seen in U. notably imported British goods. The Civil War swung the power balance decisively toward the manufacturers and enshrined a high tariff for the rest of the century. --. . and highest for labor-intensive products and some processed natural resources.. agricultural produce is not so lucky... One was acceptance of the infant-industry argument that tariffs actually would raise real income by promoting economic development.. I I' I' \ 10 \I '... .. The process that brought this drastic reduction of average tariffs for the United States has worked for other industrial countries as well..I \ \ ... . it seems common to most of the industrial countries. I.. .. r Long-Run Trend in U.. The other reason was nationalism and a collective distaste for things British.236 CHAPTER 13 * TRADE CONTROLS IN PRACTICE Figure r 3.. . Average duty on total imports has fallen more. 1960 1980 2000 1821 1840 1860 1880 1900 1920 1940 tariff country mainly for two reasons. 20 "~ .. ~ .. The following data show the size of the ad- . Tariffs Average duty collected on dutiable imports was high until the 1930s. Throughout the nineteenth century changes in the tariff reflected shifts in regional political strength-the manufacturing states in the Northeast benefited from tariffs while the primary-product exporters of the South suffered. Whatever the political mechanism that has produced this sectoral pattern.. because a larger proportion of imports has become duty-free.. then fell sharply. tariffs. I ..S.. Industrial countries' average tariffs on manufactures are now typically around 5 percent.-. higher and more variable in mass production industries.. If many manufactures coast past the tariff collectors in industrial countries. .-.. They tend to be very low for differentiated goods and for the products of science-based industries.S.. Tariff (percentage) 70 ___ Average duty on dutiable imports Average duty on total imports 60 ---- 50 40 30 '--" I . which was analyzed in Chapter 11.
1993).7% 99. and the less-developed countries. Japan. eds.S.S. tariffs between the early 1930s and the present day? The answer to this question lies in the policy change that accounted for half of the dec1ine-a program initiated by the United States. as international trade shriveled in the face of the Great Depression of the 1930s.7 31.4% 69. They estimated that a change to worldwide free trade would at least double the volume of trade between these groups of countries. 100 (December 1990): 1206-1215. Department of Agriculture estimates for 1982-1987.2 MULTILATERAL TARIFF REDUCTION What accounts for the 90 percent drop in U. Trade and Protectionism (Chicago: University of Chicago Press. The president could offer to cut the rates of duty set by the SmootHawley Act up to 50 percent." Economic Journal.S. Congress authorized the president to negotiate agreements with foreign trading partners to lower tariffs hampering American exports.8 Beef 9. pp.13. which have strongly protected their import-competing manufacturing sectors. plus subsidies given to domestic farmers. "Explaining the Volume of North-South Trade. 3James R. and most European countries (members of the European Union): Wheat United States Japan European Union 40. which strongly protect their importcompeting agricultural sectors. Summarized by Joachim Zietz and Alberto Valdes.0 Sugar 68. Markusen and Randall M. "The Growth of Agricultural Protection. The world total also declined. Evolution of the Trade Agreements Program In the face of mountainous tariff rates imposed by the Smoot-Hawley Act of 1930. Krueger..7 32. whereby nations join in simultaneous reductions of their tariffs.2 MULTILATERAL TARIFF REDUCTION 237 vantages over foreign producers conferred on domestic farmers by the United States. despite the low tariffs on manufactures in industrial countries.9 43. The combined effect on U.? There is little doubt that world trade patterns and volumes are strongly affected by these and other governmental restrictions. thereby establishing a ritual for these accords. 2U. and trade among the less-developed countries themselves would increase by 246 percent! 3 13. U. 115-143. it was no wonder that the U. Wigle. tariffs would be cut on selected goods exported by the partner. exports of the depression and of retaliatory increases in other countries' tariffs prompted a major shift in trade policy in 1934.S. Markusen and Wigle used an empirical general-equilibrium model of the world economy to show the extensive distortion of trade between the industrial countries. In return. By 1940 the United States had entered into bilateral trade agreements with 20 partners. share of world trade dropped from 16 to 11 percent in the next five years.S.0% 61.5 These figures encompass the combined effect of tariffs and other direct restrictions on imports." in Takatoshi Ito and Anne O. .
Ultimately. . the result of the political processes described in Chapter 11. The importer might not gain from cutting a single tariff (even though the world does).S. In the so-called Kennedy Round of multilateral tariff bargaining. the reciprocal trade agreements make some sense. rather than reduced prices (including tariff) to domestic consumers. it proposes a broad tariff-cutting agreement with its trading partners. The bilateral trade agreements program was running out of steam by the end of the 1930s. Each country could propose to except some of its tariffs from the cut. Kreinin." American Economic Review. A study of U. A tariff reduction now raises the world price of the imported good to the exporter's benefit. it would like to reduce the tariffs and raise national welfare. "Effect of Tariff Changes on the Prices and Volume of Imports. Therefore. the chief industrial countries agreed on a target of a 50 percent across-the-board cut in all tariff rates. It was replaced in the postwar period by a process of multilateral bargaining in which countries increasingly bundled together their offers to reduce tariffs.238 CHAPTER 13 • TRADE CONTROLS IN PRACTICE If the tariffs reduced by the agreement were not offsetting some specific failure of the market. rather than over the 50 percent cut itself. these gains and losses are more likely to cancel each other out if each party cuts tariffs on the same initial volume of trade. See M. The government knows that national economic welfare has been impaired. In addition. the cuts took the form of consent on a common. but the importer's terms-of-trade loss on one product can be offset by its gain as an exporter when a reciprocal agreement is signed. but cannot get rid of tariffs one at a time. The participants agreed to +Elemenrs of monopoly and product differentiation in individual product markets probably contribute to causing the prices of a country's imports net of tariff to rise when a tariff is reduced. across-theboard reduction in all tariffs. tariff reductions in the 1950s found that nearly half of the price effects took the form of increased external prices. 51 (June 1961): 310-324. This terms-of-trade gain to the exporter is a loss to the importer unless its tariff was higher than optimal. Did they also increase the welfare of each participating country? How were they consistent with the setting of tariffs through a process of political choice? One possible answer comes from the role of tariffs in extracting monopoly profits from international trade (the optimal tariff). Enough voters might perceive that they benefit significantly from the package that a majority coalition forms in favor of it. E. their reductions should have increased world welfare. If the tariff-cutting importer is large enough to influence its terms of trade. Bargaining proceeded over the size of the exceptions lists. Both this process of forming coalitions in favor of freer trade and the monopoly-tariff story probably help explain the success of reciprocal trade agreements. completed in 1967. which will benefit most of its export producers as well as consumers generally. presumably where unacceptable injury to domestic industries would result. The size of this benefit depends on the initial volume of trade (as well as on the size of the tariff concession). Suppose that a country has high tariffs in place. or if it merely thinks it gives benefits to foreigners by reducing its tariff." That all parties might gain through reciprocal tariff-cutting agreements is consistent with the political economy of tariffs.
4. Other countries have previously served their own national interests by letting their citizens freely copy foreigners' intellectual properties. furniture. Most of the major countries lowered individual tariffs by a formula that shaves more off those tariffs that were higher initially. The accused still has discretion about conforming to the finding of a dispute-settlement panel.13. In the tariff-cutting part of the agreement the industrial countries agreed to reduce their tariffs. in the manner of previous rounds of bargaining. 3. Under GATT a country charged with violating its own commitment could readily stalemate the proceeding against it. and steel. by another third over an eight-year period. and certain other sectors. WTO largely removes that option. It appeared to accomplish far more than its predecessors. textiles and apparel. only to resolve disputes over agreements reached in the tariff-bargaining rounds. books. recordings. although its implementation remains a question. copyrights. it can retain that policy and sacrifice 2. their incentive to invest in developing these products is greatly reduced. Neither organization was empowered to make rules. including construction equipment. A start was made on the mutual reduction of the heavy protection given in forms other than tariffs to agriculture. . farm machinery. The agreement of all countries to recognize intellectual property rights is a major gain for the United States and other industrial countries that are major producers of inventions. and other goods easily imitated. medical equipment. Uruguay Round and the World Trade Organization The latest event in this series of trade agreements was the Uruguay Round. on average. begun in 1986 but completed only in 1993. paper. A 40 percent general reduction in tariffs. These property rights avert an important market failure: If the pharmaceutical firm's new wonder drug or the writer's literary creation can be freely copied by others. making the Kennedy Round the most sweeping tariff reduction since these rounds began. Most observers agree that the WTO is a modest but useful advance on its predecessor. 1. Uniform national laws protecting intellectual property-patents. a patchwork apparatus that had been in place since 1947-1948 to monitor promised tariff reductions. The Tokyo Round (1973-1979) continued the procedure of the Kennedy Round but also tackled the thorny problem of nontariff barriers to trade. and trademarks.2 MULTILATERAL TARIFF REDUCTION 239 weighted-average tariff cuts of around 35 percent. When one of its trade policies is found in violation. These are to be converted to tariffs-which makes the severity of the restrictions plain to hapless consumers-and are then supposed to undergo reduction at targeted rates. The World Trade Organization (WTO) was created to replace the General Agreement on Tariffs and Trade (GATT). but also an agreement among the industrialized nations to eliminate tariffs among themselves on products of ten important industries. pharmaceuticals.
1996)." in Susan M. exports. Schott. 5Anne O.7 to 1. Bosworth. the proportional increase in trade (5 to 20 percent expected) is larger than the expected increase in welfare.240 CHAPTER 13' TRADE CONTROLS IN PRACTICE others as compensation to the plaintiff. and sometimes a defendant as well. these are permanent gains expected to be realized by the time the changes are fully phased in. Although not every country necessarily gains (there can be terms-of-trade losses from reducing tariffs for countries that exploited monopoly power).3 THE TREND TOWARD "MANAGED" TRADE The undeniable success of multinational tariff reduction has occurred against a counterpoint of the replacement of tariffs by other forms of trade restrictions. The WTO as an International Organization (Chicago: University of Chicago Press. along with some reimposition of tariffs that had been negotiated downward. no losers are identified.S. As we expect from Figure 10. eds. 7-27.> The United States has been a fairly active plaintiff before the WTO.3 percent.1.s The estimated increases in world gross domestic product range from 0. Jeffrey J. some observers have begun to wonder whether the real welfare gains warrant the political effort involved. Deardorff. when the WTO was expected to rule on this new arrangement.. Krueger. 1998). "Economic Effects of Quota and Tariff Reductions.: Institute for International Economics. economists commonly rely on the partial-equilibrium analysis that was displayed in Figure 10. To discuss this and other problems of quantifying the welfare effects of trade controls. although the gains range from 0. Or it can tough out the adverse finding and endure the retaliation that the WTO then may authorize. A number of economists have estimated the deadweight losses that are expected to be recovered from the Uruguay Round. 6Summarized by Alan V. D. 13. ed. pp. The New GATT: Implications for the United States (Washington: Brookings Institution. With the United States facing WTO-authorized sanctions on $4 billion of U. . Congress passed a bill ending the FSC arrangementbut recasting the tax benefit in another form.6 percent for the least developed countries to 2. Gains from Trade Liberalization Trade liberalization is always controversial. In 2000 the United States was charged by the European Union (EU) with maintaining an illegal export-subsidy arrangement in the form of a tax exemption for income from export sales booked through an organization called a Foreign Sales Corporation (FSC).-owned plantations in Central America. The United States imposed 100-percent tariffs on $300 million a year of European products (mostly luxury goods) until the dispute was resolved (2001).. The United States in 1999 had assailed EU policies that favored bananas imported from the Caribbean over imports from U. The EU agreed to withhold retaliation until 2001. With the progressive reduction of tariffs by the industrial countries. Collins and Barry P.1.1 percent for some European countries which are not yet members of the European Union.S. 1994).C. WTO 2000: Setting the Course for World Trade (Washington.
Given domestic demand and supply and the world price P u» a tariff of P. "Trends in Nontariff Barriers of Developed 1966-1986. United States tariff-equivalents for these products are 93 and 92 percent.3 THE TREND TOWARD "MANAGED" TRADE 241 While GATT sought to install a stable regime of trade policy subject to simple and predictable rules. 126.I 3. however. This outcome could equally well be obtained by the government's allowing only MN imports to enter the market. imposed by the government will shrink the volume of imports from KL to MN. Nontariff barriers are defined to include both nontariff measures specifically intended to restrict trade and various domestic policies (technical or health and safety standards. The following section reviews some theories of nontariff barriers to trade. One study? estimated that the proportion of countries' trade subject to nontariff barriers had risen as follows: 1966 1986 (%) 45 54 43 48 (12) (19) (14) (16) (%) United States European Union Japan All developed countries 36 21 31 25 Although the increase shown here is evident on any reckoning. Some of these depend on what happens to the revenue representing the 7Sam Laird and Alexander Yeats. Theory of Quantitative Restrictions A quantitative restriction (QR) has basically the same effect as a tariff. this volume of imports will allow the market to clear only at the price Pt. tariffs and quotas can have important differences in practice. If only the former restrictions are considered. The Uruguay Round obligated countries to perform this calculation and reveal to consumers the tariffequivalents of the highly restrictive quotas in use for agricultural products. then turns to important real-life forms of these barriers. The Uruguay Round marks a serious international effort to stop this process. . etc. These are still high. The similarity is shown when we turn back to Figure 10. governments have chosen to intervene more and more closely in many important international markets. Given this basic equivalence." Weltwirtschaftliches Archiv. 152 percent on sugar. Countries. With the market purely competitive. Japan imposes a tariff-equivalent of 326 percent on dairy products and 152 percent on wheat. EU quotas have the effect of tariffs of 178 percent on dairy products.2 (1990): 299-326. yet its incidental differences are important.1. border tax adjustments. using non tariff controls and tariffs tailormade to the perceived needs of protected domestic industries. the figures shown in parentheses for 1986 apply. but its success is not assured.) that incidentally impose extra costs on foreign suppliers. the levels may prompt an over-pessimistic interpretation. respectively. and they have increased greatly.
The tariff. considerably exceeds Pt. When imports are limited by quota. A quota of Z causes the monopoly to select its most profitable output by ceding this much of the market and maximizing its profit on the residual demand of D . The tariff generates government revenue equal to area 3 in Figure 10. If that price were Pt. their country gains the scarcity rent.2. because a tariff and quota that let in the same volume of imports have different effects on the domestic price. P. Now we must find the tariff that makes Z the equilibrium volume of imports. . Competitive bidding by would-be importers would wipe out this potential profit and hand the government the same revenue as if it levied the tariff equivalent. The VERs began with an informal agreement SAt one time the Japanese government was financing its entire international commercial intelligence network (JETRO) from its cut of the profits of importers licensed to bring quota-restricted bananas into Japan. We will speculate on why the choice of VERs has been so popular among importing-country governments. A VER obviously maximizes the cost to the importing country's real income of restricting imports. but it has used VERs extensively to regulate the quantities of goods that exporters ship to the United States. Note that the world welfare cost of the restriction is the same in each case. the government might give away import licenses to the domestic importers.Z. however. If the government awards the licenses to foreign exporters. yet the privilege of buying abroad at Pwand selling domestically at P. The method of administering a quota only redistributes income. The country (and the monopoly) are price-takers on the world market. which is therefore an equilibrium price. who are expected to charge the price that clears the market for the restricted volume of sales. monopolistic domestic seller. shown in Figure 13. Management through VERs The United States seldom imposed quotas unilaterally on imports of manufactured products. whereby the importing nation induces the exporting countries to curtail their shipments. allows the quantity of imports to expand when the monopoly raises its price. which equates MC to the constant marginal revenue indicated by the tariffridden world price Pt. ordinarily no tariff is collected.1.242 CHAPTER 13 • TRADE CONTROLS IN PRACTICE gap between the foreign and the domestic price. The world price is P w' the monopoly's marginal cost is MC. The intuition behind this difference is that the quota caps the amount of imports and leaves the monopoly facing a (net) domestic demand that is imperfectly elastic." A special type of quantitative restriction now in widespread use is the so-called voluntary export restraint (VER). is obviously valuable. On the other hand. The government might auction off licenses to import to the highest bidder. and domestic demand is D. so that a tariff raises the world price inside the country but still leaves the monopoly facing an exogenous price. We consider the case of a single. in which case they capture the proceeds. This device simply hands over area 3 to the exporters. Another difference between tariffs and quotas arises if the domestic industry is not perfectly competitive. MR is marginal revenue corresponding to this residual demand. the monopoly would select output Qt. Qt and Z satisfy domestic demand at Pt. The monopoly selects a quantity of output Qz that equates marginal revenue to marginal cost and commands a price of P z.
2 Tariffs and Quotas with Monopoly The same quantities of imports Z would enter with an import quota of Z and a tariff of PI . at least... As a result. leading eventually to the Multifiber Arrangement. garment industry lacked access to cheap textile inputs available to its foreign competitors). however. most textile quotas negotiated by the United States limited foreign suppliers not to fixed quantities but rather to maximum rates of growth of their shipments or of their market shares. and so the restraints were expanded to them. markets. however.S.3 THE TREND TOWARD "MANAGED" TRADE 243 Figure 13. Much of present-day governmental management of international trade aims to limit the rate of expansion of imports or the rate of contraction of the domestic industry.. Therefore. merely created exporting opportunities for other overseas textile producers. used the even more direct method of obtaining data from Hong Kong on the market values of quota allocations. an umbrella agreement covering bilateral quotas negotiated among a number of exporting and importing countries. and not necessarily to guarantee the domestic industry's market share in perpetuity. with the domestic price raised to Pz.S. higher than the tariff that would let in the equilibrium volume of imports Z.. the negotiated restraints on textile exporters spread inexorably. import competition increased in other textile lines and also in finished garments (because the U. like the import-tax equivalent of a quota administered by the importing country.II I I I I I I I I I MR o-z o o Qt Quantity with Japan in 1957 to limit exports of cotton textiles in order to protect that U. That is.Pw' However. Initially. Price --------. the fixed quota gives the monopoly more power.13. Hamilton. industry. Textile industries forbidden to export cotton textiles to the United States could expand production and exports of other types of textiles. The restrictiveness of VERs can be assessed by calculating export-tax equivalents of these quotas. what competitive Hong Kong producers will pay for the privilege of exporting a given lot to a particular destination should equal the difference between their costs . Curbing Japanese exports. Such agreements were supposed to limit "disruption" of U. and they are sometimes called orderly marketing agreements.S.
footwear.S. including national security. antidumping rules. usually. 2. "An Assessment of Voluntary Restraints on Hong Kong Exports to Europe and the USA. the combined trade barriers are 56 percent for the United States. 53 (August 1986): 339-350. though not all. of these devices have been used for relatively short-run interventions to manage international trade on behalf of industries that have shown reduced profits or employment due (or allegedly due) to increased import competition. quotas are imposed. Therefore. industries have obtained special protection through channels other than VERs. Industries that seek special protection usually flaunt scars that can be blamed on import competition. following a bout of stiffened import competition. countervailing duties. They have advanced their interests through the following legal or political channels: 1. it is necessary to observe how the patterns of special protection relate to adjustments by import-competing industries. Escape-clause relief (currently under Section 201 of the Trade Act of 1974) for industries that can blame their suffering on GATT-round tariff reductions. Besides the thicket surrounding the Multifiber Arrangement. 4. Preservation of longstanding high rates of statutory protection from reduction in the GATT rounds. . When a large customer such as the United States raises its trade barriers. Many. Management by Special Protection: Delaying Adjustment Important U. it should be reasonably short-lived. although "Carl Hamilton. transportation equipment). and special regulations covering agriculture. If special protection aims only to smooth the process of adjustment.S. such as restricting imports from the United States." Economica. Exporting countries often have ways of retaliating. added to the conventional tariffs that continue to apply to these imports.244 CHAPTER 13 • TRADE CONTROLS IN PRACTICE and the goods' sale value at the destination. Why their popularity? The answer probably lies in the bargaining power possessed by foreign exporters. In addition. He found tariff equivalents of 27 percent for the United States and 14 percent for the European Union. 3. it certainly inflicts short-run losses on foreign exporters and may permanently worsen their terms of trade. 33 percent for the Union. and policymakers often rationalize special protection to assist an industry's adjustment to increased import competition. The one objective that most commonly leads to the management of trade is delaying or retarding a domestic industry's contraction. Special protection (including VERs) obtained by going around these standard escape routes and appealing directly to the president and Congress. the United States may appear to be less protective if foreigners "voluntarily" restrain their exports than if U. Industries that received escape-clause relief during 1950-1983 indeed had shelter for a median duration of only four years. Relief under various other statutory provisions." VERs have been very popular with the United States and other developedcountry governments. electronics. but not always. by 1986 at least 99 additional VERs covered other exports (steel.
labor-intensive industries. it is probably not the best remedy. and Robert Z. discussed in Section 11.000 and $100. Therefore. . 1986). and to limit involuntary losses of jobs.3 THE TREND TOWARD "MANAGED" TRADE 245 industries protected under other prOVISIOnshave enjoyed prolonged assistance.000. Such recoveries rarely happen. A lOSee Gary Clyde Hufbauer and Howard F. for the good reason that any available efficiency raising investments would be undertaken by profit-seeking firms without the spur of import competition. and the arrival of an external competitive threat if anything reduces their expected payout. Trade Policy for Troubled Industries (Washington: Institute for International Economics. in that one-third of all U.2)-in this case by directly assisting the factors of production under pressure to adjust. Management by Special Protection: Raising Rivals' Prices Special protection to preserve declining industries.S. adjustment-assistance policies in the United States have not worked well in practice. Rosen.2 percent annually.8 percent annually) despite the restrictions. protection has clearly not served to smooth the orderly exit of factors of production from this industry. or were bailed out by demand shifts (motorcycles).13. while the market share held by imports continued to grow a bit (0. is a widespread practice consistent with the political economy of the conservative social welfare function. thus costing the original workers their jobs anyway (bicycles). A more meaningful figure is the annual cost to consumers of each job preserved by special protection. Litan. Because any industry experiences a significant amount of natural turnover in its work force (retirement. Saving Free Trade: A Pragmatic Approach (Washington: Brookings Institution. but in four cases exceeding $500.000 annually for most of Hufbauer and Rosen's industries. The cost is usually more than the average worker's annual earnings-between $20.3. the effect of special protection was really to slow the growth of competing imports and thus the contraction of these industries. How costly has special protection been? Hufbauer and Rosen calculated that in 1984 special protection for 31 industries cost consumers $53 billion. job change). In general. 1986). and that society as a whole lost $8 billion. this rate of decline of employment means that in the typical case few workers actually lost their jobs. Economists argue for addressing such market failures by the most direct route possible (see Section 11. Lawrence and Robert E. The industries that have successfully adjusted to imports either moved to lower-cost locations in the United States. However. The textile and apparel sectors have been protected since 1957.10 Even if special protection holds some value for offsetting inefficiencies in the adjustment process. How much adjustment actually takes place during these periods of special protection? Hufbauer and Rosen's study of 31 troubled industries that received special protection found that the median industry lost employment at a rate of 2. textile and apparel firms were less than six years old in 1982. like protection of low-skill. Policy makers awarding protection routinely urge the favored industry not to contract but to increase its efficiency and to stand up to the cheaper imports.
S.S. 51-103. and tariffs were already high but capped by commitments under GATT.246 CHAPTER I3 TRADE CONTROLS IN PRACTICE study of nontariff barriers in 41 countries found them higher where real wages per worker were low and declining. fair-trade policies in practice aim at preserving oligopoly profits and staving off competition.S. However. a policy harmful to national welfare. The negative welfare evaluation for U. 12Data from Table 2-2 in Pietro S. 1993)." Review of Economics and Statistics.lThese perceived unfair prices generally do not correspond to economic inefficiency. a good general source on this subject. revealed in the regulation of "unfair trade. regardless of the final decision) imports decline and the complaining domestic producers' outputs increase. "Trade Barriers and Trade Flows across Countries and Industries. pp. import competition was extensive. ." Brookings Papers on Economic Activity: Microeconomics 1994.1l Burgeoning special protection also has other roots. It does not support fairness in the sense that the less efficient or higher cost market participant should be protected from competition from a stronger rival. foreign firms charge prices that are unfairly below their costs. even if we exclude the blizzard of actions brought by the steel industry. foreign firms "dump" when they charge less for the goods they sell in the United States than those they sell to their home customers.3 that dumping and subsidized exports generally benefit the importing country. 13Robert W.S. in early 1993 Canada and the United States each issued antidumping rulings against the other country's steel producers. 79 (August 1997): 372-382. I1Jong-Wha Lee and Phillip Swagel. "Measuring Industry-Specific Protection: Antidumping in the United States. United States legislation gives domestic producers several grounds for crying unfair treatment: Foreign rivals are subsidized by their governments.3: It is better for national welfare to have profits captured by an entrenched domestic than an entrenched foreign oligopolist. Regulating Unfair Trade (Washington: Brookings Institution. We saw in Section 12. Staiger and Frank A. Unfortunately. especially when the government errs on the generous side (as it usually does) in estimating the foreign rival's full costs. It thus becomes a device for a domestic oligopolist to force a foreign rival to raise its price. Wolak. law: During the 1980s they accounted for 95 percent of U. trade regulation cases. although the exporter might be worse off. A study of U. In a telling illustration of antidumping policy's role in suppressing competition. In an industry with few sellers worldwide such an outcome clearly harms welfare. however. policy becomes even clearer when we note that it permits domestic producers to bring a charge of dumping not because foreign producers set higher prices elsewhere but because their price is low relative to their alleged costs.U One cannot be entirely certain about the effect on welfare of policies that raise the prices charged by foreign rivals." Economic analysis supports fairness in the marketplace in the sense that all would-be sellers (and buyers) should have equally free access to most markets. antidumping proceedings found that during the proceeding itself (that is. Domestic producers increasingly invoke the unfair-trade provisions of U. for the reason developed in Section 12. and restricting imports to achieve fairness typically extracts an economic cost. Nivola. demands for fair trade usually take the latter form: Producers claim that their rivals charge unfairly low prices.
Steel is a large industry with considerable political clout. the United States developed a program of loan guarantees for the weaker American producers. steel industry's prices had been high. Therefore. pp. which helped to restrain imports' share of the U. and the steel industry teaches several lessons concerning the political economy of protection. recent technical improvements in steelmaking are not easily incorporated into old facilities. market. but usually not against the many adverse disturbances of domestic origin that can strike an industry.!" The first significant lesson from steel's experience concerns the form of the protection it has received. the U.S. After the Asian financial crisis deeply depressed the world prices of steel and other primary commodities. Through the 1980s and 1990s steel received varying forms and amounts of protection. AI. steel threatened to use the statutory machinery for special protection at times when a victory would prove embarrassing to U.3 THE TREND TOWARD "MANAGED" TRADE 247 How Special Protection Works: The Steel Industry The major integrated steel producers of the United States have been important beneficiaries of protection since 1969. Import competition became significant in the 1960s. Also. the efficient choice was to run existing facilities until they could no longer cover their variable costs. The loans kept these firms open-their outputs depressing the profits of other.S. The second lesson pertains to the adjustment process in an industry that is losing its comparative advantage. January 9. The government responded with a series of special deals that would never have been available to a small industry. foreign steel-producing countries (Western Europe and Japan). Furthermore. then close them down.S. More importantly." Wall Street Journal. investments to raise productivity can pay only if the industry has access to new technology that will not only lower the industry's costs. with imports' share rising to 17 percent of domestic steel consumption in 1968. Formerly. 2001. it had earned some monopoly profits. These included several rounds of voluntary export restraints. Therefore. The industry was losing its comparative advantage because the prime sources of ore and energy inputs. steelmakers had no such magic bullets. manufacturing. an industry has an incentive to blame its troubles on imports even 14Robert Guy Matthews. but lower them more than it lowers overseas competitors' costs. The U. substantial rents were captured by its unionized work force: In 1982 a steelworker's compensation was double the average for production workers in U. and new steel mills (mainly in Japan and the developing countries) are much lower-cost simply because they embody the latest technology from the ground up. . Repeatedly.S. diplomatic relations with major. Outsiders typically urge such industries to hang tough and raise their productivity levels. Public policy offers special protection against import competition.S. "Steelrnaker-Aid Plan Draws Industry Flak As Market Softens. once abundant in interior North America. The third lesson concerns the source of the major steel producers' difficulties. shifted overseas.13. producers. The government will almost surely have to make good on the loans to these bankruptcy-bound firrns. more viable u.s. However. AS.
but they lost nearly as much business to domestic mini-mills. Trade Policy. Several other forces contributed to swelling the demand in industrial countries to manage international trade.. The U. The U." that competitive markets are. integrated steel producers indeed lost markets to imports. so their rent-seeking (or rent-preserving) efforts were devoted instead to beating off the imports.248 CHAPTER 13 • TRADE CONTROLS IN PRACTICE if they are a minor source. "Steel Imports: Dumping or Competition?" Regulation.S. the best way to organize economic activity. Crandall. . New countries moving up in 15See Robert W." in Anne O. with all countries cutting tariffs at the same time. Probably the Uruguay Round's success is owed to an important new factor: The increasing conviction of many developing countries. ed. 1996). simply because public policy will respond. Krueger. The United States' hegemonic position has suffered a long-term decline (other countries' more rapid economic growth is a sufficient explanation) that reduced the momentum of trade liberalization. Also. and they bring us back to the political economy of trade policy introduced in Chapter 11. 4 (April 1982): 17-24. in general. However. the very success in lowering conventional tariffs to modest levels increased the demand for special protection and the pressure on political leaders to accommodate it.l- Managed Trade: The Prospects This section will conclude by considering the prospects for managed trade. integrated producers could not hope to persuade the government to hobble the minis. From that perspective. Michael O. The Uruguay Round nearly foundered. The Political Economy of Trade Protection (Chicago: University of Chicago Press.S. and its successful completion must be counted as good fortune for efficient national policies toward trade. the Uruguay Round and its predecessors represent a continuing effort of national policy makers to pursue efficient and unrestricted international trade. The mini-mills operate efficiently at much smaller scales than traditional integrated facilities and at much lower costs.S. expected benefits could lead export producers to mobilize and oppose the interests of import-competing producers.S. companies utilizing electric furnaces charged with steel scrap. which from the days of the Cold War linked U. Moore. or will nations succeed in restoring the regime of progressive liberalization and stable rules fostered under GATT and now the WTO? These questions pertain not just to the United States but to the major industrial countries in general. "The Rise and Fall of Big Steel's Influence on U. A liberal trade regime could be sustained and promoted because it was placed on the high ground of defense and international cooperation with allies. Will the management of international trade continue to proliferate. Chapter 2. as well as the Eastern European "economies in transition. security interests to the economic unity and welfare of the nations outside the Communist blocespecially the industrial nations that were the main supporters of GATT. The United States long played a major leadership role in this campaign. and the evaporation of the Communist bloc as a unified military threat undermined the tactic of bundling a liberal trading regime with defense and security considerations.
rather than some deeper and more general policy.S.s. ed.S. One was bringing the Uruguay Round to completion.S.. exports. The Effects of Trade Protection and Promotion Policies (Chicago: University of Chicago Press. but to turn it into a demand for access by U.w In terms of the political economy of trade policy. Under the 1988 Act's mandate the administration indeed brought broad charges of unfair trade practices against Japan. policy makers to these demands for protection has not been to embrace an overall policy of offering protection. thus if our side lost. leaving in place a lower-voltage version enacted in 1974. but do not believe it can be 16Kimberly Ann Elliott and J.S.S. exporters to foreign markets rather than a demand for protection of U. "Determinants and Effectiveness of 'Aggressively Unilateral' U. starting with textiles and apparel and moving into more sophisticated assembled products (consumer electronics) and industrial materials (steel). The reaction of U. importers. producers as competing unfairly: "export targeting. As we saw in Chapter 12. The United States was more often successful in this dubious "reform" campaign when it had the leverage of large imports from the target country and when a trade control was at issue. the fight must have been unfair. the public perception is easily fostered that American producers could never lose a fair fight to foreign exporters. and Brazil. Nonetheless." in Robert C. The newly industrialized countries of Asia have been disproportionate targets of special protection. Rather. or even the toleration of perceived anticompetitive practices among the foreign country's producers. Paradoxically. the ratio of rhetorical smoke to economic fire has been very high when it comes to any positive role of public policy in promoting economic welfare through manipulating exports. Congress pressed the executive branch to "get tough" with exporting countries perceived to employ unfair trading practices. political leaders apparently decided to offer the electorate the policy of fair trade sought by protectionist interests. U.S.S. u. with the assumption that U. Another factor is the widespread perception that the successful expansion of industrial exports to the United States results from conspiratorial industrial policies and associated subsidies in other countries (especially Japan). David Richardson. . Such a maneuver is consistent. The other is to co-opt the issue of fair trade by demanding changes in selected policies of other countries that could be portrayed as unfair to U. many of these "aggressively unilateral" actions by the United States probably benefited the target nation by pressing it to alter a policy not in its own national interest. Unfairness could rest not just on violations of GATT or commitments under bilateral treaties but on any policy perceived by U. it could seize on either adjustment costs or fairness as a banner under which to seek special protection. 215-243." denial of workers' rights. 1997). pp. political leaders believe in the substantive merit of unrestricted trade. In the Omnibus Trade and Competitiveness Act of 1988.S. but that particular authority expired in 1991. the effort has been to defuse the issue by means of general policies that run in other directions.13. Trade Actions. THE TREND TOWARD "MANAGED" TRADE 249 the scale of economic development came to be successful producers and exporters of many manufactured goods.3 "'. Feenstra. India. as Destler argued. As each established industry in the industrial countries came to face more than its accustomed level of international competition.
One use of special protection is to delay adjustment in troubled industries that face increasing competition from imports. American Economics. the exchange of primary products for manufactures between the industrial and less-developed countries).I? 13.250 CHAPTER 13 TRADE CONTROLS IN PRACTICE offered to the electorate as a broad issue. Another use of special protection (under the banner of fair trade) is to force foreign rivals to raise their prices. These are comparable to tariffs but generally impose on the importing nation higher welfare costs than do tariffs having equal incidence. and improving the governance of international trading relations. and that leaves the fairness issue open for capture. Management often involves the use of quotas or voluntary export restraints. 3rd ed. it must rest on the imperfection of short-run adjustment processes in the factor markets (better tackled by improving the adjustment process). seeking to curb special protection. but governmental restrictions still substantially restrict world trade (for example.S. Little of the remaining protection has any obvious justification in terms of economic models of national welfare. Quotas give domestic monopolies rich opportunities to distort output levels.4 SUMMARY Over the last 50 years tariffs imposed on manufactured goods by the United States and other industrial countries have been reduced greatly. it broadly favors fairness in trade. The industrial countries' success in reducing tariffs carne through a series of reciprocal reductions initiated by the United States in the 1930s. 171. in order to stop dumping or simply reduce the competitiveness of an international market. The most recent (Uruguay) round went far. Running counter to the multilateral reduction of tariffs has been the increased tendency for countries to "manage" international trade in pursuit of objectives related to particular problem industries. Two interpretations are offered of how multilateral tariff reductions were able to raise world economic welfare. not only in lowering tariffs but also in protecting intellectual property rights. however. (Washington: Institute for International . Trade Politics. If such delays have a welfare justification. is somewhat opposed to international competition but not deeply concerned with the issue. The U. Or the multilateral reductions might have aided domestic political alliances able to defeat protectionist interests in import-competing industries. Destler. he suggested. steel industry illustrates how a declining sector uses public policy to its advantage. The electorate. M. These reductions were broadened into multilateral and increasingly across-the-board reductions. The reductions might have effected a truce in nations' mutually destructive efforts to improve their terms of trade. 1995).
At the time. What difference does it make for national welfare whether the subsidy applies to domestic sales. Governments in some European countries are believed to make substantial use of industrial subsidies to avert the contraction of some industrial sectors. or both? Governments do not find it easy to raise tax revenues to finance such subsidies. Detailed study of political mechanism of import restriction. 7. You can secure either a 20 percent tariff or a fixed quota that is equivalent to it.s. Explain why chip prices in Japan plummeted and why third-country chip buyers started to obtain their supplies from intermediaries and brokers in Japan. Press. What should be the consequences of this policy for the home industry's quantity and profits if (a) markets are purely competitive and both countries are small. You are told that imports were $100 million before the tariff and $50 million (valued at world prices) after it was imposed. You expect the market to grow in real terms. export sales. In 1986 the United States and Japan reached an agreement setting minimum prices on Japanese semiconductor chips sold by Japanese manufacturers not just directly to the United States but also to all other export markets. Does that fact help explain why such governments would rather subsidize an industry's export sales than its sales in the domestic market? 6. and (c) markets are not purely competitive (oligopoly. the tariff rate is 20 percent. producers in both countries had considerable excess capacity because demand was unexpectedly low. Robert E. (b) markets are competitive but both are large. 1985). .SUGGESTIONS FOR FURTHER READING 251 CHAPTER PROBLEMS 1. Suppose the trade restriction described in the preceding problem were due not to a tariff but to a voluntary export restraint. Will that fact affect whether you choose the tariff and the quota? 5. Can you estimate the approximate loss in national welfare due to the tariff? 2.S. MA: M. Import Policy (Cambridge. and that the shirts have a world market value of $60. What conclusions can you draw about the tariff equivalent of the export restraint? 4. which domestic manufacturers can trade among themselves. product differentiation)? SUGGESTIONS FOR FURTHER READING Baldwin. Producer groups sometimes urge that fair trade requires that Japan's tariff on goods that they export be no higher than the tariff protecting their home (U.) market.LT. Then what would the welfare loss be? 3. Suppose you learn that Hong Kong shirtmakers pay $20 for the privilege of exporting a dozen shirts to the United States. Exporting countries sometimes administer export restraints by creating transferable rights to export to the restricted market. The Political Economy of u.1. You are asked to estimate the welfare cost of a tariff imposed in a market like that depicted in Figure 10. You are a domestic manufacturer persuading the government to protect your industry.
Sylvia. Long view of policy development in the international trading system. 1997). Early evaluation of WTO's performance. 1990). Robert c. ___ . 1996). trade and aid policies affect the LDCs. eds. The Political Economy of American Trade Policy (Chicago: University of Chicago Press.S. Aggressive Unilateralism (Ann Arbor: University of Michigan Press.. ___ . and Hugh T.S. Patrick. The Post-Cold War Trading System (Chicago: University of Chicago Press. Anne O. Essays on policy issues related to WTO. Economic Policies at Cross-Purposes: The United States and the Developing Countries (Washington: Brookings Institution. WTO 2000: Setting the Course for World Trade (Washington: Institute for International Economics. ed. Extensive studies of protection in eight U. The Effects of u.s. Reviews of the many ways in which U. 1996). Sophisticated studies of various specific sectors and issues involved in U. The WTO as an International Organization (Chicago: University of Chicago Press. trade policy. industries.S. campaign to force other countries to reduce trade barriers in the name of fairness. 1998). Jeffrey J.252 CHAPTER 13 'i. ed. 1997). Jagdish. Ostry. . Krueger. Feenstra. Papers on the U. TRADE CONTROLS IN PRACTICE Bhagwati.S. Trade Protection and Promotion Policies (Chicago: University of Chicago Press. 1993). Schott.
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