Transcript U.S. Trade Politics After the Congressional Elections

Trade Remedies and “Tariff
Overhang” at the WTO
Marc L. Busch, Georgetown
Krzysztof J. Pelc, Princeton and McGill
Summary
• With nearly all tariffs bound under WTO
obligation, Members use other protectionism
• The most popular protectionist tools are so-called
trade remedies: ADs, CVDs, and safeguards
• But in fact, many countries have tariff overhang,
and this influences their use of trade remedies
Trade Rules and Flexibility
• WTO builds in flexibility, allowing Members to
temporarily abrogate obligations in hard times.
• Trade remedies serve this purpose, but Members can
also exploit tariff overhang, which averages 18%
• Each of these measures entails different costs and
benefits to the user, and to the institution
Why Trade Remedies?
• There is evidence that flexibility allows Members
to make deeper commitments to liberalization
• Trade remedies may also lower the barriers to
joining trade institutions, increasing membership
• This is because ADs, CVDs and safeguards help
ease the political cost of adjusting to free trade
Yet Flexibility Comes at a Cost
• Trade remedies create uncertainty and thus can
reduce international commerce
• The easier it is to use trade remedies, the more
likely they are to be abused
• Trade remedies may thus simply substitute for
tariff liberalization: law of constant protection
How do Trade Remedies Work?
• AD: Tariff applied to imported products thought
to be priced lower than fair market value
• CVD: Tariff levied to offset a perceived subsidy
by a foreign government
• Safeguard: Duty on import that has experienced
an unexpected surge, causing injury domestically
Comparative Use of Trade Remedies
• 3220 AD
investigations
since 1995
• 96 CVD
investigations
since 1995
• 83 Safeguard
investigations
since 1995
Source: WTO Secretariat 2009
Antidumping in Hard Times
• In tough economic times, the pressure for import relief rises.
Source: WTO Secretariat 2009
Antidumping
• The most used trade remedy is antidumping:
targeted, easily extendable, no stringent criteria
• Mostly used by developing countries (two thirds
of AD measures): India is by far the top user.
• Also sparks greatest number of WTO complaints:
60 since 1995, vs. 20 on CVD, 34 on safeguards
AD Initiations, 1995-2008
37 ADs versus China in first
6 months of 2008
1Q 2009, trade remedies up
18.8%, duties up 15.4%
Source: Global Trade Protection Report 2008
AD Initiations by Industry, 1995-2008
Source: Global Trade Protection Report 2008
Main Targets of AD Filing
Country
2008
1995-2008
China
37
640
Korea
4
247
US
2
183
Taiwan
4
182
Japan
0
142
Indonesia
5
140
Thailand
7
136
India
2
133
Russia
0
107
Source: Global Trade Protection Report 2008
Countervailing Duties
• Like AD, countervailing duties offset perceived
“unfair” measures
• Used by developed countries (86% of measures)
against developing countries (61% of targets)
• The amount of the duty is limited to the amount of
the alleged subsidy
CVD Investigations, 1995-2008
Source: Global Trade Protection Report 2008
Main Targets of CVD Filing
Country
1995-2008
India
45
China
19
Korea
16
Italy
13
Indonesia
11
EC
10
Thailand
9
Canada
8
Brazil
7
Chinese Taipei
7
Source: Global Trade Protection Report 2008
Safeguards
• Contingent on import increase, injury, and
“unforeseen developments”
• Most frequent users are developing countries
(representing 89% of measures)
• Not targeted at a specific country, as opposed to
either an AD or CVD
Safeguard Usage
Safeguard Investigations by WTO Members
Source: Global Trade Protection Report 2008
Safeguards and Compensation
• Already under the GATT, Article XIX saw
decreasing rates of compensation
• Under the WTO, no compensation has ever
been offered to affected parties
• The greater point: there is no “efficient
breach” or “buy-out” option at the WTO
Tariff Cuts and the WTO
• The Uruguay Round increased bindings…
Percentage of Tariffs Bound Before and After the 1986-94 Talks
Developed Countries
Developing Countries
Transition Economies
Source: WTO
Before
78
21
73
After
99
73
98
Tariff Overhang as Contingent Protection
Bound and Applied Agricultural Tariffs
120
100
80
60
Bound
Applied
• Bound rates are the legal
ceiling of protection
• Applied rates are the
duties actually levied
40
• Bound rates are often set
20
much higher than past or
current applied duties,
leaving considerable
tariff overhang
0
Tariff Overhang and Unpredictability
• Exploiting tariff overhang is cheap, since there is
no legal check
• This ease of use leads to unpredictability, which
acts as a tax on trade
• Increasing overhang on a product by one standard
deviation decreases imports by 18%, on average
Tariff Overhang
Bound Tariff
Tariff
Overhang
• Many applied tariffs are up
against the bound rate
Applied
Tariff
Source: WTO Document TN/MA/M/7
• Governments have to be
creative to be protectionist
Tariff Binding and Trade Remedies
• Once a binding on a product takes effect, it is
more likely to be targeted for trade remedies
• Past that binding point, the amount of tariff
overhang influences use of trade remedies
• Thus, tariff overhang and trade remedies are
inextricably linked
The Law of Constant Protection?
• Increasing overhang by one standard deviation cuts the
odds of trade remedies by 48%
Conclusion
• Some built in flexibility is a necessary element of
trade agreements
• Reliance on flexibility increases in tough times, or
in reaction to increased commitments
• Trade remedies limit unpredictability through
legal checks; tariff overhang does not
• The inability to use one type of flexibility may
increase reliance on other devices