with respect to customs duties and charges of any kind imposed on or in connection with importation...

International Economics

With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation..., any advantage, favour, privilege or immunity granted to any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.

(Article I of the GATT, 1947)

Chapter 9

Discriminatory Trade Policies: Free Trade Areas and Antidumping Protection


The Goals of This Chapter

• Show that there are contradictory clauses in the GATT, the most glaring of which are the exceptions to the most favored nation clause.

• Explain how trade creation and trade diversion make the welfare effects of a trade bloc theoretically ambiguous.

• Familiarize the student with several recent regional integration schemes, including the EU and NAFTA.

• Discuss whether regional economic integration is a step on the way to full multilateral free trade or whether it creates permanent discriminatory regional economic groups.

• Explain that GATT/WTO rules on antidumping procedures are often abused in order to protect special interests against specific foreign competitors.


Defining Regional Economic Integration

• Under a preferential trade area (PTA) member countries agree to lower trade barriers within the group to levels below those erected against outside economies.

• A free trade area (FTA) eliminates all trade restrictions between members of the trade bloc, but each member maintains its own restrictions on trade with third countries.

• A customs union (CU) is a trade bloc whose members agree on common tariffs against nonmember countries.

• A common market (CM) allows for the free trade of goods among members sets common tariffs against outside countries, and permits the free movement of factors of production among members.

• An economic union (EU) has all the characteristics of a CM plus members agree to a uniform set of macroeconomic and microeconomic policies.


Figure 9.1Levels of Regional Economic Integration

Level ofIntegration +

PreferentialTrade Area

FreeTrade Area

Customs Union

Common Market

Economic Union

Lower Trade Barriers to Regional Partners

Free Trade among Regional Partners

Common External Trade Barriers

Free Movement of Factorsof Production within Region

Coordination of EconomicPolicies

PTA

FTA

CU

CM

EU


Trade Creation versus Trade Diversion: The Ambiguous Welfare Effects of a Trade Bloc

• A free trade area creates additional trade.• But a free trade area is also likely to divert trade

by inducing importers to buy from a higher cost producer in a free trade area country rather than from the world’s true lowest-cost suppliers.

• In the general case of a world with some trade and some trade restrictions, the formation of a trade bloc has ambiguous welfare effects.


A tariff raises the domestic price from Pw to Pt, causes domestic deadweight losses of b+d, and gains the domestic government tariff revenue f paid by foreign suppliers:

0 a b c d 0 e f

Homeland International Market Abroad

SW

SH

Dt

DTDH

P P P

Q Q

ST

pw

pt

a b c d cf


If a trade bloc is formed with a neighboring country whose producers have higher costs, as given by higher supply curve SN, then the domestic price will fall to Pf and trade will expand to ad = 0f > bc = 0e.

0 a b c d 0 e f g h i j


SW

SH

Dt

DTDH

P P P

Q Q

ST

SN

pw

ptpf


The trade bloc reduces deadweight losses by g+h, but tariff revenue f is no longer paid by foreigners and the price paid to foreigners is slightly higher, which causes an additional loss equal to j. Is g+h > f+j?

0 a b c d 0 e f g h i j


SW

SH

Dt

DTDH

P P P

Q Q

ST

SN

pw

pt

pf

j

g h

f


Active Regional Trade Blocs European Union: Currently a common market, in the

process of becoming an economic union. Also expected to increase its membership by as many a ten Eastern European countries

Austria Germany Netherlands

Belgium Greece Portugal

Denmark Ireland Spain

Finland Italy Sweden

France Luxembourg United Kingdom


Active Regional Trade Blocs The Southern Common Market (MERCOSUR): Expected

to become a tariff union first, then a common market

Full Members: Associate Members:

Argentina Bolivia

Brazil Chile

Paraguay

Uruguay


Active Regional Trade Blocs The Association of Southeast Asian Nations (ASEAN):

Attempting to establish a free trade area.

Brunei Laos Philippines Vietnam

Cambodia Malaysia Singapore

Indonesia Myanmar Thailand


Active Regional Trade Blocs Central American Common Market (CACM): A common

market, established in 1965, it is now being revived after years of civil war and strife in several member countries.

Costa Rica Guatemala Nicaragua El Salvador Honduras

Associate member: Panama


Active Regional Trade Blocs The Caribbean Community (CARICOM): Moving toward

a full common market, but behind schedule.

Antigua and Barbuda Montserrat Bahamas St. Vincent & GrenadinesBarbados St. Kitts & Nevis Belize St. LuciaDominica SurinamGrenada Trinidad & TobagoGuyana

Jamaica


Active Regional Trade Blocs The North American Free Trade Area (NAFTA): a free

trade area only, with no provisions for further integration at this time.

• Canada

• Mexico

• United States


The North American Free Trade Area

• The NAFTA agreement consists of nearly two thousand pages divided into twenty-two chapters.

• The document provides for a gradual transition to freer, but not completely free, trade.

• The Agreement furthermore calls for the harmonization of policies on fair competition, trade in services, government procurement, and intellectual property rights.

• Several so-called side agreements were added at the last moment to cover the concerns of environmentalists and labor unions.

• With NAFTA, Mexico sought to solidify its shift to free trade by guaranteeing access to its greatest potential foreign market, the United States.


The Details of NAFTA

• NAFTA provided for the progressive elimination of all tariffs, many immediately and most within five years.

• Agricultural tariffs are to be eliminated entirely by 2009.• The Mexican oil industry is to remain under state

ownership, an important issue in Mexico.• A common set of rules for patents and copyrights was

established, and each nation’s patents and copyrights must be be respected throughout the trade bloc.

• The agreement does not cover immigration.• Binational panels were established to rule on trade disputes.• To prevent non-NAFTA countries from establishing mere

assembly operations in one NAFTA country in order to gain duty-free access to the remaining countries, strict local-content requirements were established.


The Major Regional Trade Blocs

MERCOSUR

Andean Group

CACM CARICOM

NAFTA

ASEAN

European Union

COMESA


Trade Blocs as a Step Toward Multilateral Free Trade

• Multilateral free trade can be reached by two different paths, (1) directly through multilateral negotiations and (2) indirectly through the two-step procedure of regional integration followed by negotiations among the regional groups.

• The second indirect route might be more productive if, as suggested above, regional FTAs are easier to negotiate.

• However, once free trade areas are established and trade is diverted, vested interests who gain from the trade diversion will tend to resist multilateral free trade that would wipe out their regional advantage.

• It is not entirely clear whether trade blocs are “building blocs” or “stumbling blocs” toward worldwide free trade.


Dumping

Article VI(1) of the GATT says dumping occurs when:

(a) the price of the foreign product is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country,

(b) or, in the absence of such domestic price, the price of the foreign product is less than either ( i ) the highest comparable price for the like

product for export to any third country in the ordinary course of trade, or(ii) the cost of production of the product in the

country of origin plus a reasonable addition for selling costs and profit.


Dumping

The margin of dumping is defined as:

• The difference between the selling price in the foreign market and the average production cost plus transport, selling costs, and “reasonable” profit, or

• The difference between the foreign price and a home price or third-country market price.

If either definition of dumping is satisfied, the WTOpermits countries to levy a tariff to exactly offset thesupposed degree of dumping.


Dumping

• Dumping is detrimental to a country’s economic welfare only if it is predatory.

• The United States under the Sherman Antitrust Act requires proof that (1) the alleged predator had the intent to drive out the competition in order to monopolize the market, (2) the predator had a reasonable chance of succeeding in its attempt to drive out the competition, and (3) that the loss of competition would cause actual damage to the economy.

• These are much tougher criteria than those of the GATT/WTO.

• Why does U.S. legislation on foreign dumping differ so radically from its legislation on domestic dumping?


Anti-Dumping Procedures in the U.S.

• A producer in the United States seeking protection from alleged dumping must first petition the United States Department of Commerce for a ruling on whether or not there is dumping.

• If the Department of Commerce confirms dumping, the International Trade Commission (ITC), a separate office of the U.S. government, then decides whether the dumping has a “material” affect on the U.S. industry.

• If both the Department of Commerce and the ITC rule in favor of the petitioner’s request for protection, the matter is referred to the President of the United States, who then decides whether or not to impose the antidumping tariffs.


Anti-Dumping Procedures in the U.S.

• This three-step procedure seems to provide ample protection against phony claims of dumping.

• But, in recent years and in many other countries with similar procedures, anti-dumping tariffs have been increasingly applied.

• Actually, the procedure is biased in favor of the petitioning firm.

• The accuser’s government presents the evidence, and it is the accuser’s government that then also does the judging.

• Predatory dumping does not have to be proven; only one of the two definitions of dumping in the GATT needs to be satisfied.


Price Discrimination Does Not Imply Dumping

• Price differences across different markets are common.• In most cases, these price differences are driven by the

different demands in each market.• The more elastic the demand curve, the lower the profit-

maximizing price set by suppliers.• Hence, suppliers will set lower prices in the more

competitive markets.• Figure 9.5 in the textbook presents the interesting case

where foreign suppliers would not even be able to enter the more competitive market if they set the same price there that they set in their less competitive home market.

• The bets solution to price discrimination is more market integration, which requires more trade, not protectionist policies.


Figure 9.5

Price of Autos with Inelastic and Elastic Demand

P P

Autos

S S

D

D

MR MR

pI

pE

Inelastica Elastica

Autos


Table 9.2Anti-Dumping Investigations Initiated: 1980-2001

Year Investigations Year Investigations

1980 76 1991 221981 64 1992 3001982 193 1993 2421983 189 1994 2151984 153 1995 156

1985 195 1996 2211986 160 1997 2421987 125 1998 2321988 132 1999 3391989 101 2000 2511990 152 2001 348

Source: Cliff Stevenson (2002), Global Trade Protection Report 2002, Mayer, Brown, Rowe & Maw, [email protected].


Table 9-4Anti-Dumping Investigations: 2001

Main Initiators: Cases: Principal Targets: Cases:

United States 79 China 48India 75 Korea 21Argentina 28 Taiwan 20European Community 27 Thailand 16Canada 25 Indonesia 15Australia 23 United States 15Brazil 17 Japan 14Turkey 13 Brazil 13China 12 India 12

Source: Cliff Stevenson (2002), Global Trade Protection Report 2002, Mayer, Brown, Rowe & Maw, [email protected].

with respect to customs duties and charges of any kind imposed on or in connection with importation...

Documents