How Different are Safeguards from Antidumping? Evidence from US Trade Policies Toward Steel Chad P. Bown†,‡ Department of Economics and International Business School Brandeis University July 2004 Abstract How do the trade impacts of a safeguard measure - which is statutorily designed to follow the most-favored-nation (MFN) principle of equal treatment - compare to explicitly discriminatory measures such as antidumping? We address this question empirically by ex- amining the trade effects of the 2002 US safeguard on steel imports and comparing this with the impact of other US trade remedies on steel imports in the 1990s. We first estimate a fixed-effects model on a dynamic panel of product-level US steel imports over 1989-2003 and examine the potential discriminatory impact on foreign-produced steel of the 2002 “MFN” safeguard that used relatively new tools from the policymakers’ arsenal: country and prod- uct exclusions. A unique data set on the excluded products allows us to document the sizable impact on trade of both forms of preferential treatment. We also exploit higher- frequency (i.e., quarterly) data to examine potential differences in the timing of the foreign export response to policies of differential treatment. With respect to safeguard exclusions, we find that while developed country exporters have a quicker response to an exclusion, the developing-country export response is more persistent. Finally, relative to antidumping measures, country and product exclusions from a safeguard allow the protection-imposing country to target preferential treatment more effectively toward specific foreign countries, much like a preferential trade agreement, or even more narrowly toward a specific foreign firm. Thus costly trade diversion could be an even greater concern with a safeguard than with explicitly discriminatory protection such as antidumping. JEL No. F13 Keywords: MFN, Product Exclusions, Country Exclusions, Safeguards, Antidumping, Trade Diversion † correspondence: Department of Economics, MS 021, Brandeis University, Waltham, MA 02454-9110 USA tel: 781-736-4823, fax: 781-736-2269, email: [email protected], web: http://www.brandeis.edu/˜cbown/ ‡ I gratefully acknowledge financial support from a Brandeis University Perlmutter Fellow- ship and Mazer Award. Thanks to Tom Prusa, Robert Staiger, Pravin Krishna, Michael Moore, Rachel McCulloch, Meredith Crowley, James Durling, Jeff Campbell and seminar participants at Brandeis, Brown, the Federal Reserve Bank of Chicago, LSE, Rutgers and the 2004 NASMES for helpful comments. Gloria Sheu, Teresa Power and Renee Bowen provided outstanding research assistance. All remaining errors are my own. 1 Introduction In March 2002, the United States government implemented a politically controversial “safeguard” policy under Section 201 of the US trade law. The policy of import tariffs and quotas was designed to shield the domestic steel industry from injurious foreign-produced steel. Conservative estimates presented in table 1 put the aggregate trade impact as a 13.5% reduction in the value of US steel imports in the year following the safeguard in the product categories targeted by the policy, eliminating close to $683 million worth of trade relative to the previous year. While the aggregate trade impact of the massive 2002 steel safeguard is impressive in its own right, the actual impact on imports within the affected categories is perhaps masked by the perception that a safeguard (SG) policy is automatically applied so as to follow the GATT/WTO’s most-favored-nation (MFN) principle. One important way through which the SG policy tool is statutorily distinct and per- haps economically preferable from other trade remedies - the antidumping (AD) or countervailing duty (CVD) laws that are historically more popular with domestic petitioners seeking import protection - is that these “unfair trade” laws apply protection to imports from only one country per petition, thus allowing for the substantial differential and discriminatory treatment across trading partners. On the other hand, the safeguard law is supposed to result in protection being applied through nondiscrimina- tory tariffs on imports, irrespective of the source country.1 From a second-best perspective that takes the implementation of some import protection as given, this is one reason why economists frequently argue that an MFN safeguard may be preferable. The alternative use of AD and CVD measures allows for discrimination across export sources which can lead to trade diversion, or to importers switching to the sourcing of products to higher cost (but non-targeted) foreign producers, thus inducing the welfare losses to the domestic economy initially identified by Viner (1950). Nevertheless, while the US’s Section 201 safeguard statute has the economic appeal of requiring less discrimination than these other forms of import protection, how nondiscriminatory was the implemen- tation of the actual safeguard in the 2002 steel case? Anecdotally, the 2002 application of tariffs and quotas appears to have allowed for substantial discrimination. First, the US exempted steel imports from several important exporting countries from the safeguard altogether. Second, the US exempted over a thousand firm-specific products from the safeguard after soliciting requests for such product ex- clusions from domestic steel-consuming industries and foreign exporting firms. Therefore, while overall imports of steel products in affected categories decreased by 13.5% in the twelve months following the safeguard, the magnitude of the import reduction was likely to be far from uniform across export sources and product categories. Indeed, as table 1 indicates, foreign steel exempted in the March 2002 steel safeguard announcement deriving from excluded preferential trade agreement (PTA) countries such as 1This is not the only distinction between SG and AD/CVD. In addition to issue of “fair” versus “unfair” trade, the AD/CVD process is bureaucratic while safeguards allow for Presidential discretion, the injury threshold is higher for SG cases, the duration of safeguards is shorter than AD/CVD, and the use of SG can require compensation to affected countries while AD/CVD does not. For a discussion, see Bown (2002). 1 Canada and Mexico ($16 million), from excluded developing countries ($424 million) or from excluded firm-specific product exemptions ($77 million) actually saw the value of their exports to the US increase in the aftermath of the safeguard, as they continued to face low rates of import protection and now less fierce competition from other foreign rivals.2 One implication is that foreign sources that were not exempted and thus which faced the tariffs and quotas of the March 2002 safeguard saw a much larger reduction in exports than would be expected from looking at the aggregated data. As table 1 confirms, US imports of safeguarded products from producers that did not receive exclusions fell by 30%, or roughly $1.2 billion, from the level of imports received from those same producers in the twelve months prior to the safeguard. In the aftermath of the safeguard, these foreign sources not only faced a competitive disadvantage relative to US steel producers but also relative to other foreign producers that received implicit preferential treatment through exclusions. This paper is the first to econometrically investigate the size and nature of discriminatory treatment across export sources both within and across the steel product categories affected and unaffected by the 2002 safeguard. We use a panel of product-level US steel import data from 1989-2003 to investigate whether the implementation of the safeguard had a discriminatory impact, i.e., whether the suggestive evidence provided in table 1 holds up to a formal econometric analysis. We combine the trade data with detailed information on the products affected by the safeguard, as well as the country exclusions and a unique data set of excluded products derived directly from firm-specific petitions filed with the US Department of Commerce. We then compare the pattern of discrimination across countries and products associated with the 2002 safeguard to the explicitly discriminatory earlier acts of protection that the US steel industry received in the 1990s through its appeal to ADDs, CVDs, suspension agreements, and other trade restricting measures. One goal is to investigate whether the 2002 use of an “MFN” trade policy was any more or less discriminatory than these earlier acts of import protection. This research also contributes to the literature on discrimination versus nondiscrimination in trade policy, initiated by the pioneering work of Viner (1950). More recently, a substantial theoretical literature (including Bagwell and Staiger, 1997, 1999, 2004; Levy, 1997; and Ethier, 2004) examines the role of preferential policy exceptions in multilateral trade agreements.3 On the other hand, empirical papers such as Prusa (1997, 2001) and Konings, Vandenbussche and Springael (2001) examine related questions of discriminatory treatment by investigating the trade effects and potential trade diversion of earlier use of antidumping in the US and EU, respectively. Furthermore, Bown and Crowley (2004) propose and examine an alternative way through which antidumping and safeguards may have a differential trade impact by considering the effects of examples of such US trade policies on Japanese export flows to third country markets, a phenomenon they term “trade deflection.” None of these papers, however, examines 2The data in table 1 underestimates