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GATT and the New Protectionism

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GATT and the New Protectionism David M. Gould William C. Gruben Senior Economist Research Officer Federal Reserve Bank of Dallas Federal Reserve Bank of Dallas GATT and the New Protectionism he successful completion of the Uruguay Round What these barriers imply for free trade are T of the General Agreement on Tariffs and sometimes difficult to understand because often Trade (GATT) has generated much optimism they have touched on fairness issues. In many about the future of world trade, and with good countries policymakers—and their supporters in reason. If ratified, the accord will not only eliminate industries that face foreign competition—have tariffs on many goods, but will be the first GATT- devoted much effort to counteract what they round accord to address intellectual property define as unfair trade practices by foreign coun- rights, trade in services, and agricultural subsidies. tries. Unfair trade practices are typically thought to An important question, however, is how much include: 1) subsidies on exports by foreign gov- this new accord can limit future protectionism. ernments and 2) dumping, which is the act of When trade liberalization curtails one form of selling goods for a lower price abroad than in the protectionism, new forms appear almost routinely. home or other markets. To offset foreign subsidies While GATT agreements steadily reduced tariffs to exports the government of the importing coun- on manufactures (from an average of 40 percent in try sometimes erects special tariffs to raise the 1947 to about 5 percent now, as shown in Figure artificially low prices of these goods. These tariff 1), the United States and many other countries barriers are referred to as countervailing duties. were developing other, more arcane administra- Antidumping duties are typically imposed when tive and legal barriers. the government of an importing country suspects that the exporting country is dumping goods on its markets. Figure 1 The particular circumstances under which Tariffs in Industrial Countries countervailing and antidumping actions are used— and the procedures developed to assess the “un- Average tariff rates fairness” of others’ trade practices—have raised (Percent) suspicions about policymakers’ motivations. Per- 50 haps, some have argued, these “fairness” doctrines are vehicles for disguised protectionism. Allegations of disguised protectionism have 40 become more common as efforts to preserve “fair” trade have multiplied. During the 1960s, 30 GATT member countries initiated fewer than 20 10 Ken Emery offered extremely helpful comments as the reviewer for this article. We also benefited from the discus- 0 sion and comments of Steve Brown, Michael Finger, Seth 1940 1950 1960 1970 1980 1990 Kaplan, David Mueller, Tracy Murray, and Lori Taylor. All SOURCE: Stoeckel, Pearce, and Banks (1990). remaining errors are solely our responsibility. Economic Review — Third Quarter 1994 29 30 Table 1 Number of Antidumping and Countervailing Duty Cases Initiated, January 1980– June 1989 Jan. ’80 Jul. ’80 Jul. ’81 Jul. ’82 Jul. ’83 Jul. ’84 Jul. ’85 Jul. ’86 Jul. ’87 Jul. ’88 Jan. ’80 Country/Group Jun. ’80 Jun. ’81 Jun. ’82 Jun. ’83 Jun. ’84 Jun. ’85 Jun. ’86 Jun. ’87 Jun. ’88 Jun. ’89 Jun. ’89 Antidumping cases Australia 36 61 54 71 70 63 54 40 20 19 488 Canada 26 48 64 34 26 35 27 24 20 14 318 European Community 17 37 39 26 33 34 23 17 30 29 285 United States 37 24 51 19 46 61 63 41 31 25 398 Other developed countries 13201 025 91235 Developing countries 00000 034131434 All countries 117 173 210 150 176 193 172 131 123 113 1,558 Countervailing duty cases Australia NA NA NA 6 3 5 3 3 0 2 22 Canada 3 3 0 2 3 2 1 4 0 1 19 European Community 10131 000 006 United States 32 17 75 35 22 60 43 11 13 8 316 Chile 0 0 61 33 20 10 11 0 0 0 135 Other countries 0 0 0 1 1 0 0 1 4 0 7 All countries 36 20 137 80 50 77 58 19 17 11 505 Antidumping plus countervailing duty cases Australia NA NA NA 77 73 68 57 43 20 21 359 Canada 29 51 64 36 29 37 28 28 20 15 337 European Community 18 37 40 29 34 34 23 17 30 29 291 United States 69 41 126 54 68 121 106 52 44 33 714 Other developed countries 13212 026131242 Federal ReserveBankofDallas Developing countries 0 0 61 33 20 10 14 1 3 14 156 All countries 117 132 293 230 226 270 230 147 130 124 1,899 SOURCE: Finger 1993. twelve antidumping actions per year. By the States than at home, or if foreign governments second half of the 1970s, the United States alone subsidize exports to the United States, U.S. laws averaged more than thirty-five per year. As Table and rules accommodate U.S. efforts at retaliation. 1 shows, in the 1980s the total of cases initiated But is unfair trade really unfair? by GATT signatory countries exceeded one hun- Economists often deny that below-cost prices dred per year. or foreign export subsidies mean unfair trade. Concerns that “fair” trade laws are vehicles for After all, if foreign firms want to sell cheaply in the protectionism have become even more acute with United States, why should U.S. consumers not be the advent of the Uruguay Round. While rough allowed the obvious benefit? While this argument guidelines for using antidumping and counter- recognizes the benefits to consumers, it dismisses vailing duties have appeared in past GATT agree- the effects of unfair trading on some domestic ments, the Uruguay Round accord has introduced producers and ignores other arguments against much more formalization and detail to accommo- unfair trading practices. Moreover, as Bhagwati date and codify such retaliation. Moreover, these (1988) notes, “a free trade regime that does not rein codifications greatly resemble those of the United in or seek to regulate artificial subventions will States, a principal exponent of antidumping and likely help trigger its own demise.” countervailing measures. Conversely, in the more concrete world of The Uruguay Round’s various approaches government policy, both arguments and govern- to addressing government trade policy—lower- ment policies in support of antidumping and ing tariffs here, sanctioning some types of anti- countervailing duties typically place the interests dumping actions and countervailing duties there— of import-competing industries over the interests raise questions about the accord’s overall implica- of consumers and also over those of producers tions for free trade. The related central question who use imported inputs. (See the box entitled addressed in this article is whether the recent “Do Fair Trade Laws Protect the Economy?”) An changes in GATT will discourage the most pro- analysis of eight antidumping duties imposed by tectionist aspects of these administered trade regu- the United States between 1989 and 1990 showed lations. Because the accord adopts many aspects that for each $1 gained by the protected indus- of U.S. laws and administrative procedures con- tries, the U.S. economy as a whole lost $3.60, on cerning antidumping and countervailing duties, average (Anderson 1993). Moreover, according to we use the U.S. experience of recent years to the same study, the cost per job created in the assess what may be in store for the world trading protected industries was $113,800, which is sub- environment under the new GATT. stantially higher than the $14,300 average salary We begin by examining what has been seen paid for these jobs. The extra cost comes from as unfair trade, and we discuss the economic argu- the higher price consumers must pay for these ments for imposing antidumping and countervail- domestic goods and the less efficient use of ing duties. We then outline how fair trade laws domestic resources. have been applied in the United States and discuss Another argument against unfair trade is that why some analysts have claimed that these laws foreign nations can act predatorily to capture are biased toward protectionism. Finally, we domestic markets. But this argument is also sub- assess the impact of the Uruguay Round of GATT ject to criticism. The argument is based on the on the application of fair trade laws. We conclude assumption that once foreign producers capture with an outlook for the future of the world trading domestic markets, competitors will not re-enter environment. domestic markets when prices begin to rise. But if foreign producers cannot block domestic pro- When is trade unfair? ducers from re-entering a market after it is cap- tured, they will have to keep their prices at a The express intention of fair trade laws is to competitive level to maintain their market share. prevent foreign sellers from pricing and selling Some analysts claim that certain high-tech anticompetitively or predatorily in your country. industries can develop natural barriers to entry If foreign exporters sell for less in the United that allow them to capture a particular market and Economic Review — Third Quarter 1994 31 Do Fair Trade Laws Protect the Economy? While antidumping and countervailing laws may pro- tition that lies behind the classical arguments for free trade. tect particular industries from foreign competition, broader In a real world environment, some have argued, other arguments based on the benefits of these measures to countries might subsidize their industries and capture U.S. the whole economy are typically ill founded. There are markets at the expense of future U.S. income. basically three arguments for antidumping and counter- Although economists have long recognized the impor- vailing duties. The first is simply that subsidized or tance of economies of scale, innovation, and international dumped imports of textiles, consumer electronics, and oligopolies, countries have rarely, if ever, been able to automobiles cost domestic textile workers, electronics capture excess profits from other markets for long.
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