The rules-based World Trade Organization (WTO) system has no externally binding enforcement mechanism. There are no prison sentences, coordinated boycotts, or fines that outsiders can impose so as to discourage countries from engaging in bad trade policy behaviour. If one country violates the agreement that promises (relatively) free trade, the adversely affected trading partner is responsible for enforcement (Bagwell and Staiger 1990). Enforcement only takes place when a trading partner initiates formal dispute settlement proceedings and receives permission from the WTO to retaliate unilaterally, usually through selected tariff increases. Thus the WTO agreement has each country enforce its trading partners’ promises to maintain low tariffs.
Influential game-theoretic models of trade agreements focus on the implications of this self-enforcement requirement.1 Higher global welfare can be achieved if participating countries lower their import tariffs to what are defined as ‘cooperative’ levels. A vital empirical implication of such models is that, when trade volumes fluctuate in response to economic shocks, the most cooperative tariffs fluctuate accordingly. Put differently, economic shocks that raise trade volumes necessitate that governments increase their cooperative tariffs in order for the trade agreement to hold together.
Is antidumping (or something like it) necessary in a liberal trade agreement?
Many economists consider antidumping as little more than “ordinary protection with a good public relations program” (Finger 1992). Economic research in general regards antidumping policy as an illiberal, politically-biased, and misguided exception to the relatively pro-free-trade WTO system. A substantial literature has explored implications of antidumping law on questions ranging from political economy to the strategic behaviour of firms; an excellent survey is Blonigen and Prusa (2003).
Bown and Crowley (forthcoming) recasts antidumping in a different light; the new evidence suggests some antidumping use is the type of retrenchment to higher tariffs expected to occur when trade volumes rise under a self-enforcing trade agreement. Such an interpretation frames antidumping law as an economic contingency clause that is an integral part of an overarching liberal trade agreement.
Motivation and approach
The novelty of the Bown and Crowley approach arises from attempts to treat seriously the theory of self-enforcing trade agreements. The influential model of Bagwell and Staiger (1990) guides the estimation choice regarding how economic shocks trigger increases in cooperative tariffs. The empirical approach examines whether United States’ antidumping and safeguard policies can be interpreted as cooperative tariff increases; for data availability reasons, the estimation focuses on a panel of 283 industries and 49 trading partners over 1997-2006.
Specifically, the Bagwell and Staiger theory generates cross-sectional and inter-temporal predictions to take to the data. Inter-temporally, increases in the cooperative import tariff are more likely when import volumes increase. Cross-sectionally, the likelihood of a cooperative tariff increase is rising in the inverse of the sum of the export supply and import demand elasticities. Thus a tariff increase is more likely for an import surge of a given size for industries with import demand and export supply that are more inelastic. Intuitively, applying a tariff to a more inelastic sector is associated with smaller deadweight (efficiency) losses and larger terms-of-trade gains. Finally, cooperative tariff increases are also more likely for industries with a smaller variance of imports.
To be clear, a search of relevant WTO legal provisions will not find language describing the mathematical results proposed by the theoretical literature on self-enforcing trade agreements. Neither antidumping nor any other trade policy exception states that WTO members can raise their tariffs based on export supply and import demand elasticities, unexpected surges in trade volumes, or the variance of trade volume. Instead, as Grossman and Sykes (2006) put it in a related context, “antidumping laws make so little economic sense in general that it is difficult to offer any guidance as to their ‘proper’ administration.”
Nevertheless, a sizeable empirical literature has attempted – with only limited success – to explain the use of antidumping and related policies.2 A typical paper either exclusively emphasises political-economy or redistributive determinants of policy or it loosely introduces explanatory variables that do not derive from any formal economic theory. In contrast, the new approach begins with an estimating equation derived from the Bagwell and Staiger (1990) model and assesses whether US imposition of antidumping is consistent with the cooperative tariff increases expected under a self-enforcing trade agreement.
Antidumping and safeguards are some of the only policies industrialised economies have available to increase their tariffs under WTO rules; as such, understanding determinants of their use is important.3 Moreover, the antidumping and safeguards in effect cover a significant share of imports. For example, over the relevant sample period, the US subjected each year an average of 1% of imports (at the 6-digit Harmonized System level) to new policy activity; furthermore, in any given year, 4%-6% of US imports were already subject to one or more of these import-restricting policies that had been imposed in prior years (Bown 2011a, Prusa 2011).
Empirical results confirm the main theoretical predictions from the economic theory on self-enforcing trade agreements. Bilateral import surges in industries with a higher value to the inverse of the sum of the import demand and export supply elasticities – the variable formally derived from the theory – increase the probability of antidumping and safeguard use. Furthermore, industries with more variable import growth are less likely to face new antidumping and safeguard tariffs.
These results are statistically significant and economically important. For example, when conducting robustness tests, determinants generated by the Bagwell and Staiger theory are at least as economically sizeable as other political-economy determinants traditionally used in the literature to explain antidumping and safeguards. The findings also relate to recent evidence on market power and optimal tariffs found in Broda et al. (2008) and Bagwell and Staiger (2011).
Policy implications and lingering questions
What really drives antidumping use is vital for understanding trade agreements. However, given a body of well-thought out criticism of the rules laid out in the WTO’s Agreement on Antidumping (e.g. Janow and Staiger 2003; Horn and Mavroidis 2006), research proposing antidumping use is consistent with a rational economic model can expect to be treated with circumspection. Here, the evidence raises a number of important questions, such as:
Do these results suggest that antidumping should be given a free pass when it comes to WTO negotiations and reform?
- Just the opposite. If future research shows that trade volume shocks in sectors with relatively inelastic import demand and export supply are an important determinant of antidumping use for a large set of countries, the current WTO rules – which are not written so as to be sympathetic to economic logic – might be re-examined. Recognition that unexpected events in the turbulent global economy trigger tariff hikes might result in a more informed set of negotiations over what constitutes an appropriate versus inappropriate use of the exceptions to the liberal trade policy rules of the WTO. This could better inform the discussion about potential limits and boundaries to cooperation in the WTO system.
Can this approach potentially explain the use of antidumping by countries like India, China, Brazil, Turkey, Indonesia and Argentina, i.e., economies that are now amongst the heaviest users of antidumping and related policies (Bown 2011a, 2011b)?
- Possibly. However, the policy environment for many emerging markets is quite different from that of the US. Emerging economies frequently have applied tariff rates that are much lower than their bindings, many can (and do) implement changes to applied import tariffs in addition to using antidumping and safeguards. Understanding the relative substitutability of these different policy instruments in the case of emerging markets seems important.
Bagwell, Kyle and Robert W Staiger (1990), “A Theory of Managed Trade”, American Economic Review, 80(4):779-795.
Bagwell, Kyle and Robert W Staiger (2002), The Economics of the World Trading System, The MIT Press.
Bagwell, Kyle and Robert W Staiger (2011), “What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization”, American Economic Review 101(4):1238-1273.
Blonigen, Bruce A and Thomas J Prusa (2003), “Antidumping”, in E Kwan Choi and James Harrigan (eds.), Handbook of International Trade, Blackwell Publishers: 251-284.
Bown, Chad P (2011a), "Taking Stock of Antidumping, Safeguards and Countervailing Duties, 1990-2009", The World Economy, 34(12):1955-1998.
Bown, Chad P (ed.) (2011b) The Great Recession and Import Protection: The Role of Temporary Trade Barriers. London, UK: CEPR and World Bank.
Bown, Chad P and Meredith A Crowley (forthcoming) “Self-Enforcing Trade Agreements: Evidence from Time-Varying Trade Policy,” American Economic Review.
Broda, Christian, Nuno Limão, and David Weinstein (2008) “Optimal Tariffs and Market Power: The Evidence”, American Economic Review, 98(5):2032-2065.
Finger, J Michael (1992) “Dumping and Antidumping: The Rhetoric and the Reality of Protection in Industrial Countries”, World Bank Research Observer 7(2): 121-144.
Grossman, Gene M and Alan O Sykes (2006) “European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India: Recourse to Article 21.5 of the DSU by India”, World Trade Review 5(1):133-148.
Horn, Henrik and Petros C Mavroidis (2006), “European Communities – Anti-Dumping Duties on Malleable Cast Iron Tube or Pipe Fittings from Brazil”, in Henrik Horn and Petros C. Mavroidis (eds.), The WTO Case Law of 2003, Cambridge University Press,
Janow, Merit E and Robert W Staiger (2003), “EC-Bed Linen: European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India”, in Henrik Horn and Petros C Mavroidis (eds.), The WTO Case Law of 2001, Cambridge University Press.
Prusa, Thomas J (2011), "United States: Evolving Trends in Temporary Trade Barriers", in Chad P Bown (ed.), The Great Recession and Import Protection: The Role of Temporary Trade Barriers, CEPR and World Bank, pp. 53-83.
1 Bagwell and Staiger (2002) provide a more complete treatment of the core theories of international trade agreements.
2 Depending on perspective, this could be viewed as partial success despite or because of the economic nonsensicalness of how the antidumping legal texts are written.
3 Most industrialised economies have applied MFN tariff rates that are quite close to their legal WTO tariff bindings and thus cannot raise their applied MFN tariffs without violating WTO rules.