j. m. finger the political economy public disclosure ......imports restricted, and domestic...

World Bank Reprint Series: Number 246

J. M. Finger

The Political Economyof Administered Protection(with H. Keith Hall and Douglas R. Nelson)

The Industry-Country Incidenceof "Less than Fair Value" Casesin U.S. Import Trade

Reprinted with permission from Thze Americatn Econiomic Review), vol. 72, no. 3 (June1982), pp. 452-66; and Quarterly Rez'icw of Econiomnics antd Business, vol. 21, no. 2(Summer 1981), pp. 260-79.

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THE AMERICAN ECONOMIC REVIEW

© The American Economic Association

The Political Economy of Administered Protection

By J. M. FINGER, H. KEITH HALL, AND DOUGLAS R. NELSON*

'Trade restrictions are hardly ever voted not "decided," according to criteria estab-directly by Congress. Though the threat of lished by law, administrative regulations anddirect congressional action is frequently pres.. precedent. Higher-track decisions are lessent, pressure for protection is usually applied circumscribed by rules and regulations, andthrough the major instruments for the ad- require considerable attention by govern-ministrative regulation of imports: the ment officials entrusted with discretionaryantidumping and countervailing duty proce- authority and subject to political accounta-dures and the escape clause mechanism. bility. Political influence is applied directly

In this paper, we will examine these instru- in high-track cases, but comes to bear onments for the administrative regulation of low-track cases only indirectly, through theimports. The form of the paper is not novel shaping of the laws and regulations which-a theory of how these mechanisms work is define their technocratic nature.developed, then operational implications of The highest, most open, decision mecha-this theory are deduced and tested over the nism in trade matters is, of course, Congress.record of countervailing duty, antidumping, Here decisions are made in the light of pub-and escape clause cases decided from 1975 lic awareness by decision makers directlythrough 1979. This is the period over which responsible to the voters. At this level, deci-the Trade Act of 1974 was in force. Because sion criteria are very open-any industrythe nature of these mechanisms is relatiNJly seeking protection may present any reasonsunfamiliar, a relatively large amount of in- which it feels will be convincing.stitutional information is provided.' Both the escape clause and the less-than-

fair value mechanism are delegations of Con-I. Administrative Mechianisms gress' authority to regulate trade. One might

assume that the samc forces which wouldThe distinction between "high" and "low" have come to bear on Congress will influence

policy tracks is one which Richard Cooper the delegated decision. We will, however,has used in the international relations lit- argue that the delegation of such decisions toerature. The low, or technical, track is the a technical track will significantly affect their"rules" track. Cases here are "determined," substance.

A. The Escape Clause*World Bank, University of Rochester, and Rutgers

University, respectively. The original draft of this paper The more political of the administrativewas completed while we were with the U.S. Treasury tracks created by Congress is the escapeDepartment, Office of Trade Research. The positions ctaken and opinions expressed in this paper are our sole clause (Secton 201 of the 1974 Trade Act).responsibility. Under this clause, an industry may petition

i 'arious sorts of information have gone into the the International Trade Commission (ITC)development of this theory, much of it derived from to conduct an investigation of "injury" fromfirsthand observation of how things are done. The reac-tion of several readers to earlier drafts suggests that imports. The ITC's investigation iS limited totrained economists find "institutional information" whether or not there has been or iS likely to(such as what the antidumping law actually says) repug- be injury to "the domestic i!idustry produc-nant, and that they are u6willing to admit such informa- ing an article like or directly competitivetion as evidence in the testing of theories. Their position, with the importe,d article." The ITC reportsit would seem, is that reading what the law says will not ithelp one understand what it means. This meaning they S findigs to the president, and if injury toseem to assume can only be grasped by interpreting the domestic industry has been found, theregression results. repor, includes the ITC's recommendation as

452

VOL. 72 NO. 3 FINGER ETA L.: POLITICALLYADMINISTERED PROTECTION 453

to the import :striction and/or adjustment regulations. In contrast, the only criterionassistance necessary to prevent or remedy the the Trade Act of 1974 imposed on the presi-injury. The president, however, is not legally dent's escape clause decisions was " the na-constrained by the ITC's recommendation. tional economic interest of the UnitedHe may, if the ITC determines injury, de- States," and the criteria by which the 1974cline to provide import relief or adjustment Trade Act charged the ITC with judgingassistance, may decide to provide one when injury take up only 35 lines.the other was recommended, or may negoti- Further, the injury criteria are illustrative,ate orderly marketing agreements with ex- while the dumping criteria are limiting. Theporting countries. Thus, the ITC's function is Trade Act tells the ITC to take into accountlike that of a grand jury, the commissioners "all economic factors which it considers rele-being charged with examining only one side vant, including (but not limited to)... [A listof the issue which the president must decide. follows]." The antidumping act, in definingThe ITC decides not the outcome of the case, foreign value, specifies, for example, thatbut whether or not the case should be taken "the amount for general expenses shall notup by the president. be less than 10 percentum of the cost as

defined in paragraph..., and the amount ofB. Less-than-Fair Value Cases profit shall not be less than 8 percentum of

the sum of such general expenses andCountervailing duty cases are concerned cost... ."

with the sale of subsidized exports in the That the technical criteria are followed isU.S. market, and antidumping cases with assured by the right of appeal. Any inter-sales in the United States at a price below ested party can appeal a LFV determinationthe foreign producer's long-run costs, or be- into the federal courts. This right of courtlow his home-market price. Such cases are appeal does not apply to escape clause find-described as "less-than-fair value (LFV) ings.cases," because the trade practices they areintended to control involve, in legal terms, II. Nature of the Technical Trackthe sale of products at less than their "fairvalue." The imposition of dumping duties A technical track is cheaper to operaterequires both a determination of LFV pric- than a political process. Discretion must being and a determination of resulting injury to vested in relatively senior government offi-domestic producers. Over the period covered cials, while a more tightly constrained pro-by this study, a countervailing duty case cess can be administered by a technicallyincluded an injury test only if the product trained, as opposed to a broadly educatedinvolved was duty free in the U.S. tariff and politically astute, staff which could workschedule. During this period, LFV investiga- out a political solution for their superior'stions were the responsibility of the Treasury signature.Department and injury investigations were A much more important characteristic ofthe responsibility of ITC.2 the technical track relates to the minimiza-

The LFV criteria are, by law, more techni- tion of the political costs of making a deci-cally precise than escape clause criteria. sion. Protection involves large transfers ofDumping, for example, is defined by 300 income-those from consumers to producerslines of text in the antidumping act plus are typically eight to ten times the net costs1,000 Federal Register lines of administrative of protection (Dale Larson). As Lester

Thurow has pointed out, it is very difficultfor democratic political systems to make such2Since January 1, 1980, LFV investigations (in dump- nearly zero-sum transfer decisions. Losses

ing and in countervailing duty cases) are done by the seem always to be more identifiable thanTommerce Department, and all countervailing duty cases

include an injury test. Injury tests remain the responsi- gains; hence the optimal outcome is often tobility of the ITC. avoid a political decision.

454 THE AMERICAN ECONOMIC REVIEW JUNE 1982

A. Positive-Sum Decision Misdirection has to do with the differencebetween the LFV mechanism's legal purpose

When protection is the issue, the opposed and its economic function. In law, the mech-interests are domestic producers, who Want anism is designed to impose import restric-imports restricted, and domestic consumers tions only in instances of "unfair" foreignor users, who want access to foreign sources pricing, for example, subsidized exportsof supply.3 By specifying precisely how the thereby priced below cost. (The LFV dutiesinterests of one group are to be taken into offset, in theory, the effects on import pricesaccount, legal or technical criteria spare of unfair foreign practices.) But, as will bepolicy level officials from having to decide explained below, the economics of suchwhose interests will be taken into account, mechanisms suggests that they will go "tooand from having to expiain why to those far" and protect domestic producers fromwhose interests are left out. They provide "fair" foreign competition as well.solid reasons for the government's decision, As misdirection is the basis for establish-and hence allow the government to point out ing such mechanisms, obfuscation is whatto the losing side that no other decision was keeps them going. The LFV mechanism is anlegally possible. This justification helps to outlet for complaints by domestic producers,diffuse the political costs of the decision not domestic users or buyers, and hence atwithout preventing the government from the initiation of each case, those who benefitharvesting the gratitude of the winners. from the possible import restriction will be

In short, the technical track provides a better prepared than those who will lose. It isway to decide between the courses of action not likely that this discrepancy will disap-which would be advocated by two directly pear during the course of a case investiga-opposed interest groups without facing up to tion. Lower-track procedures are technical,the issue which divides them, that is, without and thus incomprehensible without lengthyweighing in comparable terms one side's in- training. This means that such material is notterests against the other's. In terms of the likely to attract news media attention, andinterests effectively represented, the technical certainly not the attention which the moretrack turns a zero-sum situation into a posi- comprehensible political track events will re-tive-sum decision. ceive. Thus technical procedures, whatever

their purpose, tend to be obscure and theB. Role of Misdirection and Obfuscation obfuscation they create allows the govern-

ment to serve the advantaged interest groupThe key to the effectiveness of a technical without being called to task by the dis-

track is that it disenfranchises one "side" advantaged.with major interest in the decisions it makes.But the mechanism itself is established C. Nature of the Biases in thethrough democratic processes, hence, the dis- LFVMechanismenfranchised "losers" from the decisions havethe same right to shape its mechanisms as Our argument suggests that a low trackthe "winners" do. That they do not is a will not function unless it is biased in favorreflection of their unawareness of what is of one or the other interest group in conflict.going on. This unawareness in turn depends The direction of the bias in the LFV mecha-on two elements critical to an effective nism does not follow from the fact that it isdemocratic decision mechanism-misdirec- technical, but simply from the fact that it is ation and obfuscation. channel for complaints about a surfeit of

import competition, not a lack. Thus by de-sign, it weighs domestic producers' interests

3 . .. ,more heavily than domestic users-it has theThis exposition assumes that the foreign exporter cand/or government is not a major initerest effectively capacity to impose trade restrictions but notinvolved in such decision mechanisms. This hypothesis to remove them (other than those it imposeswill be tested below. itself).

VOL. 72 NO. 3 FINGER ETA L.: POLITICALLYADMINISTERED PROTECTION 455

The characteristics of the LFV decision More than that, this approach suggestsprocess come together in such a way as tc that protectionist pressure will bring aboutsuggest that the mechanism will be pro- qualitative changes in the LFV mechanismtectionist in more than the obvious sense just and bring it to focus more on the question ofdescribed. Control of the technocratic ap- comparative costs between, domestic andparatus is ultinmately political; hence the foreign competitors for sales in the U.S.overall bias in the mechanism depends on market than on the fairness of the foreigner'show the political impacts of the disad- trade practices:vantaged interest's losses and of the ad- This argument is based on two proposi-vantaged interest's gains balance each other tions from social anthropology. The first ofwithin it. these is that the institutionalization of a so-

The existence itself of the mechanism cial issue will attract, or cause to form, inter-demonstrates that one side has the ad- est groups which stand to gain from thatvantage, and the obscure nature of its pro- mechanism. The second is that institutionalceedings assures that that advantage can (to systems change over time, and that thissome degree) be exploited without generating change is significantly influenced by the in-opposition. Thus along whatever scale the terests of those groups which come to focusLFV mechanism operates, it will be, as a on it (Shmuel Eisenstadt, pp. 419-20; Waltoncentral tendency, on the advantaged group's Hamilton).side of zero.' The legal objective of the LFV mechanism

The scale along which the LFV mechanism is to police the fairness of trade practices,operates is the nature of the pricing practices and it pursues that objective by restrictingwhich foreign sellers are allowed to employ imports (in design, from unfair exportersin the U.S. market. Zero on this scale-the only). It is therefore an economic instrumentposition accepted (as fair) by both conflict- with the power to restrict imports, and it willing interests, domestic producers and domes- attract those with an interest in having im-tic consumers-is when foreign sellers are ports restricted. This will include not onlylimited to the same pricing practices avail- firms and industries beset by unfair competi-able to domestic sellers.' On the side of zero tion, but more generally, those least favor-advantageous to domestic producers, for- ably situated vis-a-vis their foreign competi-eigners will be more tightly restricted than tors' costs. They will, the logic of socialU.S. sellers, that is, the LFV laws and mech- anthropology suggests, attempt to make theiranism wull take pricing practices away from needs fit its scope, and its scope fit theirforeign sellers which the equivalent "domes- needs. These tendencies, particularly thetic" law (for example, antitrust law) does not latter, cuggest a convergence of the economictake away from domestic sellers. Thus our subject matter of LFV and escape clausemodel predicts that the LFV mechanism im- (EC) cases-suggest that the LFV rules willposes constraints on foreign sellers not im- tend toward protecting against the sort ofposed on domestic ones by equivalent injury from import competition which thedomestic laws. escape clause goes at "officially."

III. Empirical Examination of4The logic of this paragraph applies to any delega- LFV Determinationstion of authority to an administering agency. HenceOSHA is a good idea but we get too much of it.Likewise for Ralph Nader and factor-proportions model A. Empirical Questionstrade papers in this Review.

5The antitrust laws and enforcement mechanisms In the most general sense, the purpose oftake up the general question of what trade practices are our empirical examination of LFV and ECfair. Against this background, the LFV mechanisms deal decisions is to demonstrate that the LFVonly with the trade practices in the U.S. market offoreign .llers. The institutional basis for this separation system displays the characteristics of a tech-may be that the mechanisms used to enforce the anti- nical track, anid the EC mechanism those oftrust laws cannot be applied to foreign firms. a more political track. Several questions

456 THE AMERICAN ECONOMIC RE'I'[W JUNE 1982

derived from the high-track, low-track model the case decision (affirmative or negative).will be evaluated. The first and most obvious The LEV pricing tests covered every caseof these is that technical, not political. fac- decided during 1975-79 for which we couldtors determine the outcome of cases on the develop values for the independent variableslower track, and vice versa on the higher -183 of 208 cases, or 96 percent of thetrack. value of imports covered by the 208 cases.6

The second point we want to make is that Analysis of LFV injury determinations cov-it is the relaxing of technical criteria rather ered 57 cases of 68 decided-again, all thethan the direct specification of political cases for which we could assemble the rele-criteria which allows political factors to in- vant data.fluence a case outcome.

The difference between the LFV pricing C. Independent Variablesand LFV injury determinations provide al-most a controlled experiment for testing this Political Influences: International. Twohypothesis. Under the 1974 Trade Act, each variables in our model represent interna-dumping case and each countervailing duty tional political influences. The first of thesecase involving a duty-free product on which measures the proportion of total U.S. ex-the Treasury Department's preliminary de- ports (1976) which are imported by the coun-termination was affirmative then went to the try against which the LTFV case was filed.ITC for an injury investigation. The decision The hypothesis which this variable tests isenvironment of an injury investigation dif- that nations with which we experience a highfered from that of a pricing deterrmination in level of economic interdependence exercisetwo important respects. First (as explained greater influence on LF outcomes than na-above), the technical criteria defining injury tions with which we are less interdependent.are much less precise than those defining The second international political variableLFV pricing. Second, the pricing, but not the is a dichotomous variable which identifiesinjury determination, could be appealed in those cases brought against less-developedfederal court-the pricing, but not the injury countries (LDCs). The hypothesis here isdecision, is subject to a technical review that the LFV decision process is prejudicedwhich has the force of law behind it. against the LDCs. The basis for this hy-

There is no formal political review of either pothesis is the argument by some proponentsdetermination. In form, the only difference is of "dependency" analysis that the institu-the relativelv ambiguous technical definition tional ald legal structure in the advancedof injury. capitalist countries is rigged against LDCs.7

The third area we will examine is the A less conspiratorial way of viewing such annature of the bias in the LFV mechanism. expectation is that the LDCs are simply notWe will take up two overlapping hypotheses. as well equipped to apply political pressureThe first is that the technical rules which on their own behalf as other more developedcalibrate the mechanism not only prevent countries.foreign sellers from using practices consid- Political Influences: Domestic. Our modelered unfair (for all sellers) in the U.S. market, will test two hypotheses that relate to domes-but spill over to protect U.S. producers tic political influence:against fair competition from foreigners. Thesecond is that comparative costs have a major HYPOTHESIS 1: Industry size is positivelyinfluence on L FV pricing decisions. related to success in the LFV mechanism.

B. Statistical Model6 The product coverage of each case is defined in

The statistical objective of our data analy- terms of the TSUSA seven-digit import categories

sis is to determine the influence of political covered by the petition. The industrcF affected by a case

and economic variables on the likelihood of is the four-digit SIC category into which the relevantaffimatve eterinaionin a LE' cse. TSUSA categories are mapped by the U.S. Bureau of

an affirmative determination in an LFV case. the Census classifications.

The dependent variable in this analysis was 7See, for example, Andre Frank.

VOL. 72 NO. 3 FINGER ETAL: POLITICALLYADMINISTERED PROTECTION 457

HYPOTHESIS 2: Industrial concentration is empirical work argue are the determinants ofpositively rclated to success in the LFV mecha- comparative costs, as an indirect measure.nism. The variables employed are the industry

physical capital-labor ratio;8 industry aver-Both of these hypotheses are based on the age wage per worker, as a proxy for human

assumption that, at least on economic issue, capital intensity; and the extent of econo-industry . structure translates directly into mies of scale in the industry.9 If our hy-political power. pothesis about the bias in the mechanism is

In our statistical model, we have used three valid, then LFV decisions will be influencedalternative measures of industry size: total toward the affirmative by the existence of aemployment, the value of the physical capital cost disadvantage for the American industry.stock, and value-added in the industry. We In addition to supporting our hypothesishave also included "case size"-the value of about the protectionist bias of the mecha-1978 imports of products covered by the case nissm, a significant influence for factor pro--as an inaicator of the political influence of portions on LFV decisions would be con-size. sistent with our general hypothesis that the

The widely suggested relationship between LFV mechanism is a technical, not a politi-industry concentration and political influ- cal, track.ence is rooted in the theory of collective This interpretation is supported by logicgoods. This theory suggests that decision- and by fact. As to logic, the advantagedmaking costs are low in groups with one or a interest has two ways to get what it wants:few dominant actors, allowing relatively ef- 1) to have the rules changed (further) in itsfective political action. favor; 2) to have the rules relaxed, so as to

A final hypothesis about political in- allow a more open, more expensive politicalfluence refers to the administrator's instinct track procedure. The former is the morefor self-preservation. On January 1, 1980, direct, less risky, and less expensive alterna-responsibility for enforcement of the dump- tive. As to fact, we will cite below examplesing and countervailing duty laws was shifted of specific rules which bring comparativefrom the Treasury to the Commerce Depart- costs into the LFV pricing determination.ment. According to government officials di- Precision. Our remaining technical vari-rectly affected by this transfer, the move- able measures the number of different prod-ment for trade reorganization began in ucts covered by the case-in operationalearnest in January 1979, as markup of the terms, the number of 7-digit TSUSA lines.Trrade Agreements Act of 1979 was com- The logic behind this variable is that lesspleted. Behind this shift of responsibility was than fair value is a pricing concept, and thusthe presumption that the Commerce Depart- more appropriately applied to individualment would find affirmatively more often products than to large aggregates. Becausethan the Treasury Department. If the fre- the rules specify precisely what LFV pricingquently expressed assumption that defense is, our hypothesis is that determinations willand expansion of "turf' are important argu- tend toward the status quo (negative) whenments in the objective function of bureaucrats the teclnical criteria for a decision are lessand of bureaucratic agencies, and if the LFV clearly met. Thus the technical track hy-decision mechanism allowed for discretion-ary response to political pressure, then there 8 The physical capital stock was estimated, for 1975,should have been a detectable shift in 1979 by the Branson-Monoyios method; as the gross bookof the LFV decision function toward the value of plant and equipment, plus the capitalized valueaffirmative. We test this hypothesis by intro- of supply and materials inventories. Data for all in-dustry variables are from the U.S. Census of Manufac-ducing a dummy variable which identifies all tures.cases decided in 1979. 9 Estimated by Hufbauer's method. His measure of

Comparative Costs. Comparative costs co onomies of scale is the coefficient a in the regressionare virtually impossible to measure directly equation log v =k + a times log n + e, where v is theare irtully mpo "facetor pesropoiretios, ratio between value-added per man in plants employingWe have used instead "persons and value-added per man for the entire four-which an extensive body of theoretical and digit industry, and k is a constant. We used 1972 data.

458 THE ,MERICAN ECONOMIC R t 'JE II' JUNE 1982

TABLE I-LOGIT ANALYSIS OF INFLUENCES ON LESS-THAN-FAIR VALUE PRICING DETERMINATIONS, 1975-79

Hypothe- Results-Estimated Coefficient (t-Statistic)Hypothesis and sizedVariable Sign (1) (2) (3) (4) (5) (6)

Political Track HypothesisInternational Political Influences

Proportion of U.S. Exports to Country - -9.1 76.2(-0.03) (0.25)

Against a Developing Country + -28, -. 30(-.61) (-0.66)

Do'mestic Political InfluencesAdministrative Reorganization Threat + .69 .81 .80 .80

(1.27) (1.53) (1.52) (1.52)Industry Concentration + - 1.8 -2.3 -2.4 -2.4 -2.3

(-2.28) (-3.07) (-3.14) (-3.16) (-3.08)Case size + -. 13

(-0.71)Industry Size

Employment + 2.9 -. 13 -0.4

(1.05) (-0.14) (-0.04)Capital Stock + -0.3

(0.52)Value-Added + - .11

(-0.80)Technical Track Hypothesis

Comparative CostsCapital-Labor Ratio + 1.8 1.8 1.7 1.7 1.8 1.6

(2.20)a ( 2 . 3 6 )b (2 .3 3 )b (2 .3 7 )b (2 .3 9 )b ( 2 . 2 8 )b

Average Wage - -. 19 -. 29 -. 28 -. 28 -. 28 -. 31

(- 1.g0)' (- 3.56)b (-3.53)b (- 3.77)b (- 3.77)b (-4.47)b

Scale Economies - -4.6 -5.2 -5.1 -5.1 -4.8 -3.5(- 2 . 6 7 )b (-3

0 5 )b ( 3 1 1 )b (-3.1 2 )b (-3.0 0 )b (-2. 4 0 )b

Technical PrecisionNumber of Products . - -. 90 -. 88 -1.0 -1.0 -1.0 -- 0.8

(-1.54) (-2.1I)a (-2.3 9 )b (-2,9 9 )b (- 3 1 1)b (-2. 7 4 )bConstant 2.8 4.1 3.9 3.9 4.0 3.2

(2 .7 5 )b (4 .5 7 )b (4 .9 7 )b (5.1 i)b (5 .2 0 )b (4 .75)bProportion of Outcomes Successfully

Predicted 69 71 71 71 71 68Chi-Squared 1 6 8 b 17 2 b 17 lb 17 lb 17 2 b 17 8 b

Number of Observations 183 183 183 183 183 183

aIndicates rejection of the null hypothesis that the sign is not the expected one, at the 95 percent level of confidence(one-tail test).

bSame as fn. a, but at the 99 percent level of confidence (one-tail test).

pothesis suggests a negative relation between rectly illustrated by the language of the lawthe number of products covered by a case and the related administrative regulations-and the likelihood of an affirmative de- the sort of information presented in Section Itermination. above. Our statistical results, presented in

Table 1, are also consistent with this hy-D. Evaluation of Results pothesis. In our examination of the in-

fluences on LFV pricing determinations, weLFV Pricing. The technical nature of found each technical factor to be statistically

the LFV pricing determinations is most di- influential. And as we hypothesized, the sig-

VOL. 72 NO. 3 FINGER ETAL.: POLITICALLYADMINISTERED PROTECTION 459

nificant test on each political variable is in- of administrative reorganization is supportedconsistent with the political track hypothesis. by our data, as is the hypothesized influence

Most soundly rejected is the hypothesis of of the size of the petitioning industry's laborinternational political influence. The t-statis- force.tics on these two variables are much below International political influences again areunity (in absolute value) and the coefficient not significant-it is domestic politics whichon the LDC variable has the wrong sign. counts.Further, when these variables are removed John Odell obtained similar results in afrom the equation (from col. 2 to col. 3), the study of twenty-five bilateral trade disputescoefficients and the t-statistics on the signifi- between the United States and Latincant variables are virtually unaffected. American countries. He found that when the

The domestic political influence variables foreign country worked with common eco-fare only slightly better. Of the four size nomic interests witifin the United States, thevariables, only employment has the expected proportion of outcomes favorable to thesign, and even it is a long way from statisti- foreign country was h;gher. But mobilizingcally significant. The closest thing to a valid the State Department or the National Secur-domestic political influence hypothesis seems ity Council staff to make "foreign policy"to be the " turf defending" hypothesis about arguments was not effective. Thus he foundthe administering agency. The coefficient on that foreign interests, to get what they wantthe administrative reorganization threat vari- must work through allied domestic interests.able has the hypothesized sign, and though Protectionist Bias and Comparativeinsignificant at the 95 percent confidence Costs. In form, a LFV pricing investigationlevel, has a larger t-statistic than the other consists of observing the prices a foreigndomestic political influence variables. firm charges on home market sales and on

On the technical track side, there is not sales in the United States, and then com-much to add to the miessage in the table. paring the two. The details of the law and ofEach technical track variable has the ex- the administrative regulations specify howpected sign and is significant, at the 99 per- the observations are to be made, and howcent level of confidence, one or the other is to be adjusted for differ-

LFV Injury. When we deal with injury, ent terms of sale (for example, lot size, pay-where the technical rules are less precise, we ment terms, etc.), so as to make them com-expect political factors to be more influen- parable. William Dickey explains severaltial. As tests of the impacts of the various ways in which these rules are more restrictivefactors, we expect the same signs on the of foreign firms' than is comparable "domes-coefficients as in the analysis of the LFV tic" law of domestic firms' sales practices indecision, with one exception. An affirmative the U.S. market. For example, sales belowLFV injury determination will become more full cost during periods of slack demand (i.e.,likely as the number of products covered by sales which cover only variable costs) arethe case increases. While price is a concept normally not considered an unfair trademost readily made operational on an individ- practice under the antitrust laws. But theual product basis, injury is more appropri- antidumping law specifies that in determin-ately (for example, in the Escape Clause of ing the home market price charged by athe Trade Act) expressed in terms of capac- foreign firm, observations of home marketity utilization, employment, or profits-con- sales below cost must be disregarded."0cepts more readily made operational at the There are other, more direct illustrationsfirm or industry level. that the LFV process now compares foreign

The results (Table 2) are consistent with and domestic costs. The administrative regu-our expectations. The political variables are lations for antidumping cases state that "Pe-much more significant here than they were inTable 1, and the technical variables much 1'See Dickey, p. 245. He provides several other, moreless. The hypothesized influence of the threat complicated, examples.


TABLE 2-LOGIT ANALYSIS OF INFLUENCES ON ITC INJURY DETERMINATIONS IN LESS-THAN-FAIR VALUE CASES

Hypothesis and Expected Results-Estimatcd Coefficient (t-statistic)Variable Sign (1) (2) (3) (4) (5) (6) (7)

Political Track HypothesisInternational Political Influences

Proportion of U.S. Exports to Country - -1276 -1205 -967 -922 -604(-1.64) (-1.57) (-1.41) (-1.44) (-0.96)

Against a Developing Country + -. 5(-0.44)

Domestic Political InfluencesAdministrative Reorganization Threat + 2.5 2.6 2.8 2.7 3.0 2.9

(1.90) (2.07)' (2.30)a (2.20)a (2.49)b (2 .4 3 )bIndustry Concentration + -5.9 -6.1 -5.6 -3.9 -5.5 - 5.6 -5.6

(-2.22) (-2.44) (-2.39) (-2.05) (- 2.34) (-2.35) (-2.34)Case Size + 2.3 2.5 2.2 1.7 1.0

(1.25) (1.37) (1.29) (1.17) (0.87)Industry Size

Employment + 36.1 36.0 27.5 22.3 27.9 27.9 28.4(I.85)a (1.98)a (2.22)a (2.00)' (2.22)a (2.07)a (2.14)a

Capital Stock + -. 57 -. 60 -. 47 -. 37 -. 42 -. 45 -. 43(-1.87) 1-2.10) (-2.45) (-2.19) (-2.27) (-2.24) (-2.19)

Value-Added + -0.7(-0.12)

Technical Track HypothesisComparative Costs

Capital-Labor Ratio + 1.5 1.5(0.73) (0.78)

Average Wage - .35 .34 .39 .24 .38 .37 .37(1.25) (1.48) (1.83) (1.39) (1.75) (1.67) (1.68)

Scale Economies - -2.2 -2.2(-0.64) (0.73)

Technical PrecisionNumber of Products + -55.6 -54.3 -49.8 -46.7 -50.0 -48.3

(- 1.86) (-- 1.82) (-1.84) (1.73) (1.80) (-1.76)Constant -.75 -.71 -1.2 -1.2 -1.2 -1.4 -1.4

(-0.28) (-0.34) (-0.61) (-0.67) (-0.63) (-0.70) (-0.72)Proportion of Outcomes

Successfully Predicted 84 81 81 79 79 83 83Chi-Squared 127 126 130 84 129 149 145Number of Observations 57 57 57 57 57 57 57

a. bSee Table 1.

titioners unable to furnish information on parative advantage has the hypothesized signforeign sales or costs may present informa- and is significant at the 99 percent level oftion concerning US domestic producers' costs confidence. 12

adjusted for differences in the foreign coun-try in question... ." " 12 We assume that scale economies and human capital

Our own analysis provides corroborating intensity are positively related and physical capital in-evidence. Each of the determinants of com- tensity negatively related to U.S. comparative ad-

vantage. Virtually all relevant empirical work supportsthe assumed signs on the first two variables, As to our

'iFederal Register, No. 26, p. 8199, col. 1. This "Leontief paradox" assumption on the third variable,evolution continues. Matthew Marks (p. 432) points out Robert Stern (pp. 86-90), reviewing recent cross-sectionthat the shorter time limits put into effect by the Trade studies of the trade position of U.S. industries, indicatesAgreements Act of 1979 will make the administering that in each of them only when "resource intensive"agency more dependent on such cost information sup- industries are excluded does the relation between physi-plied by the petitioner. cal capital intensity and U.S. comparative advantage


E. Anomalies Several readers have suggested that thestatistical significance of the wage variable

The coefficients on several variables do might also be interpreted as evidence ofnot have the signs we 'xpected. For example, political influence on LFV pricing decisions.we interpreted the / tcentration ratio as a One such interpretation is simply that thereflection of politica_ .afluence, and expected decision makers have sympathy for poorit to have a positive coefficient in Tables 1 people, and will use the discretion the techni-and 2. It is, however, negative in both cases. cal rules allow to protect them. A more

This result might be consistent with a tech- cynical interpretation is that the politicallynical interpretation of the variable. Accord- sensitive decision makers "buy them off" bying to the technical track hypothesis, the providing trade protection.outcome of a case, once it is filed, depends Serious questions can be raised about theon techiiical factors not affected by the peti- analytical soundness of the latter propositiontioner's lobbying. Protection, from a success- and about the validity of both.ful petition, will add to the profitability of If we accept the buy-them-off interpreta-each domestic sale by the industry-not just tion, then we are assuming that it is the votesto those sales by the petitioning firm or of the poor, not their well-being, which is thefirms. But in a concentrated industry, a larger politician's concern. If so, the critical vari-share of the benefits from a successful peti- able is how many there are, not how poortion will be captured by the petitioner and a they are. If so, the number of workers, notsmaller share will spill over to firms which their wage rate, is the better representation.did not help finance it. Hence, a firm's filing Furthermore, higher-wage workers willa petition will make economic sense at a more likely be able to afford political actionlower likelihood of success if the industry is and are more likely to be organized in such aconicentrated. way as to be politically effective. This would

As this paper examines influences on the make the political association between af-outcomes of LFV cases (once they are filed), firmative decisions and the wage rate posi-the negative coefficient on concentration can tive, not negative.be consistent with the positive (but insignifi- As to the evidence, if one looks at thecent) cross-section relation Finger (forthcom- entire pattern of statistical results, and noting) found between concentration and the just at one t.-statistic, a political interpreta-industry incidence of LFV complaints, and tion of the average wage variable becomesRobert Baldwin (1980) found between con- untenable. All three comparative cost proxiescentration and the depth of the tariff cut are significant, and it is difficult to explainmade by the United States at the Tokyo the other two in political terms. Economiesround. The Finger and the Baldwin results of scale might lead to size and/or concentra-may indicate that the concentration ratio is tion, which would produce political power,not a reliable indicator of how well an in- but scale economies itself is not a politicaldustry is organized to take advantage of the influence. Similarly, the number of workersavenues the government provides. And if the in an industry or the industry's wealthfirms in concentrated industries tend to be (capital stock) might measure political power,multinational in scope, this weak result may but not the ratio of one to the other.simply indicate that restrictions on imports Even more to the point, the political inter-are not what they want from the govern- pretation of the average wage variable can-ment. not assume that the law or the administrative

regulations specify that the income or needof the affected workers be taken into account.

become positive. Our analysis included the resource They simply do not. Political influence slipsintensive industries, and in this analysis, capital inten- in (if it slips in) because the technical specifi-sity is used only as a forecaster of comparative ad- cations are ambiguous and allow it. If so, thevantage. Correlatio'i between physical capital and natu- mr biu n ietpltclifuneral resource intensity, which muddles the analysis of more obvious and direct political ifluencescause of comparative advantage, is of no consequence to represented by our list of political variablesour analysis. should be significant. They are not.

462 THEAMERICAN ECONOMIC REVIEW JUNE 1982

TABLE 3-CHARACTERISTICS OF HIGH AND Low ADMINISTRATIVE DECISION TRACKS

Scope of Decision DccisionTrack Functional Criterion Decision Criteria Type

Low Public Unawareness Parochial- Precise and Positive(political insignificance) Petitioner's Limiting Sum (easy)

InterestsHigh Public Awareness National Open Zero Sum

(political significance) Interest (hard)

Finally, the technical criteria for injury are the d',gree of public awareness of the casesless precise than those of LFV pricing. The being processed. If the public is unaware of ahypothesized influence of sympathy for the petition to the government for protection,poor should therefore have a stronger in- then (as outlined in Table 3) the scope of thefluence on the injury determination. This is decision on the case can be limited to thenot the case. Results in Table 2 show that the interests of the petitioner, and a decision candomestic political factors are significant in- be reached with dispatch. The technicalfluences in LFV injury determinations, but criteria of the lower track will serve both tothe average wage variable's coefficient does control the decision process and to keep itnot even have the sign which a political from becoming a public issue. They caninfluences interpretation suggests. therefore be designed to evaluate only the

petitioner's interests. The decision then isIV. The Escape Clause (EC) Decision easy. Those who will lose are not aware that

the decision is being made.A. Determinants of where Cases A high degree of public awareness changes

will be Resolved the game. It is impossible, in a democraticcountry, to define out of a public decision

From the petitioner's point of view, the parties who are aware that their interests aredistinction between a LFV case and an EC at stake. Thus such a decision cannot becase is not a technical one. The technical bounded by technical constraints, and it can-criteria for demonstrating injury are not pre- not be limited to considerations only of thecise, hence a petitioner who feels that he has petitioner's interests. Among the participantssufficient political influence to win has con- in such a decision, there will be losers as wellsiderable latitude in putting together his sup- as winners and, as Lester Thurow suggests,porting case. The technical criteria on LFV such decisi ins will be hard to achieve.pricing are much. more precise, but as our Within limits, the high track can createmodel suggests a.-d our data demonstrate, public awareness and the low track obscurethey overlap considerably with comparative it, but public awareness is more an exog-disadvantage, or the likelihood of injury from enous factor than an endogeneous one. Thisimport competition. The other part of an factor has no obvious quantitive measure,LFV case is the ITC injury test, hence the but is likely closely related to case size. Casetechnical criteria for good LFV cases and for size thus should serve to distinguish betweengood escape clause cases are much the same cases which the low track can and cannotand do not serve to restrict a complaint to process effectively. Table 4 shows that theone track or t1he other. average case filed in the EC mechanism was

The functional characteristic which sep- three times as large as the average LFV case.arates the low from the high track is the If we exclude antidumping petitions for steelpolitical significance of the cases it handles. and autos (disputes which we shall argueThis characteristic will be closely related to below did not "belong" in this mechanism

VOL. 72 NO. 3 FINGER ETAL.: POLITICALLYADMINISTERED PROTECTION 463

TABLE 4- LFV AND EC MECHANISMS: NUMBER OF CASES, 1975-79 AND IMPORT COVERAGE

LFV Cases EC Cases

Excluding ITC PresidentialAll Cases Steel land Autos Decision Decision

Number of casesFiled 245 214 43Decided 208 177 40 25

Affirmative 73 73 25 8(Percent of Decided) 35 41 62 32Orderly Marketing Arrangements - - - 3

(Percent of Affirmative) - - - 38Import Coverage of Cases ($ million)a

Filed $25,948 $5,991 $14,224 -Decided $25,085 $5,079 $13,016 $8,968

Affirmative $2,860 $2,860 $8,968 $4,992(Percent of Decided) I1 56 69 56Orderly Marketing Arrangements - - - $3,888

(Percent of Affirmative) - - - 78Average Case Size ($ million)a

Filed $106 $28 $331Decided $121 $29 $325 $359

Affirmative $39 $39 $359 $624Orderly Marketing Arrangements - - - $1,296

aIn terms of 1978 import values.

and were not resolved there), EC cases were The details of an OMA can be made quitemore than eleven times as large as LFV complex, or put off to be worked out in thecases. future, when they will be announced at a

high, but lower than presidential level (forB. The Presidential Decision example, the Special Trade Representative).

The other affirmative options give consumerProtection cases decided in the spotlight of interests a more precise dimension on which

national attention are close to zero-sum deci- to focus-several percentage points added tosions. The political net gain (or minimal net price by a tariff, or taken away from supplyloss) is not on either side of such decisions, by a quota, or the budgetary cost of adjust-but in avoiding them. This has two implica- ment assistance. As Table 4 shows, the threetions for the presidential decision. First, it EC cases in which the president recom-will push the president toward saying no. mended an orderly marketing arrangementNegative decisions will discourage further covered 78 percent of the imports on whichpetitions and hence reduce the number of affirmative decisions were returned.'3 In ef-times the president will have to say anything. fect, ordering the negotiation of an OMA is aA minimal political gain from saying yes on step toward disenfranchising domestic con-one case may be undone by the loss from sumers, and hence a movement toward ahaving to decide the four others this yesencourages. Second, it will push a presiden-tial affirmative decision as far toward a non- '3Virtually every line in the U.S. tariff has beendecision as his legally defined options allow. "conceded" under the GATT. Import relief wouldThe president cannot avoid public scrutiny therefore involve nullification or impairment of a GATTor political accountability by ordering the concession for which the countries to whom the conces-of a ordrly arktingarrage- sion had been made could demand compensation.negotiation of an orderly marketing arrange- Negotiation of an OMA with these trading partnersment (OMA), but he can cloud the public's would incorporate the question of compensation andview and diffuse accountability somewhat. thus avoid its becoming a separate issue.


positive-sum decision environment. If do- The ITC's findings will not be deffifitive.mestic and foreign producers are the only Their role in the decision process will beinfluences at play, a minimal amount of more political than technical or economic,political craft should be needed to induce the and more facilitating than decisive. Theircompeting producers to do what the antitrust major functions are to make sure a politi-laws attempt to prevent them from doing cally significant petitioner gets his day beforevoluntarily. the president; to occupy time during which

On the high track, the clearest pressures resolution of the case may be achieved byare away from a decision, not toward either a less focused means than a presidential deci-yes or a no. Accepting this, and looking sion; to provide a focal point so that thedceper for some political or economic basis president may observe how the sides areof forecasting the president's decision when drawn before the mechanism focuses on him.he must make one, we note that both the We thus find it difficult to say what willdegree of injury to the domestic producer of define operationally the "clout" needed toimport replacements and the "gains from win an affirmative decision from the presi-trade" to domestic consumers will con- dent. Baldwin, as we predict, did not find thecentrate on those sectors in which the United ITC decision a significant factor. Our ownStates has comparative disadvantage. Hence, Logit analysis was plagued by convergencenet losses to the national economic interest problems, due in part, we suspect, to theshould not vary much between industries smallness of the number of presidential deci-(see Larson, Table 1), and in cases which are sions-this smallness being consistent withbig enough to overcome the relative disper- our predictions. The obvious, though gross,sion of consumers and/or public enough so measure of political clout behaved in thethat consumers as well as producers will be obvious way. On eight "Big Cases" (overaware of their stake in them, there is no basis $400 million of imports), the president saidfor predicting that comparative costs will yes five times (three OMAs). On seventeenconsistently push the decision in one direc- "Small Cases," he said yes only three timestion or the other. As protection, except in (no OMAs).unlikely "optimum tariff" situations, is a Our and Baldwin's generally poor resultsnegative sum proposition, the "national eco- with statistical decision rules illustrate per-nomic interest" will always push toward a haps the nature of the presidency. Thosenegative decision. But as this net loss to the things which can be reduced to rules will beeconomy comes to only 10 percent of the decided at a lower level.gross gain for protected producers (see Lar-son, Table 1), the net national interest is not V. Conclusionslikely to be a powerful influence.

The president's decision is made, there- We have presented and tested an interpre-fore, at the razor's edge. The economic gains tation of how the administrative import re-to those who want protection are only mar- straint mechanisms function. This interpreta-ginally smaller than its costs to those who tion differs in some respects from more oroppose it, and this margin will not vary less "official" interpretations, but this dif-much from case to case. Because of the level ference is not an indictment of the mecha-at which the decision is made, consumers nisms. Their function is to resolve or diffuse(potential losers from protection) will not be complaints about import competition, andin the dark, but if there is a marginal dif- all in all they seem to serve this functionference in the degree of public awareness of efficiently.a case and of its implications, it should favor A major difference between our view andthe producer's side. Thus, the economics and others' has to do with what the LFV and ECthe politics of the decision will each favor mechanisms actually do. In law, the escapeone side or the other only marginally, with clause deals with injury to U.S. producerseconomics tipped toward one side and from import competition and the LFV mech-politics toward the other. anism with the fairness of business practices


TABLE 5-PERCENTAGE OF IMPORTS OF MANUFACTURED Goo.SCOVERED BY LFVAND EC CASES, 1975-79

Antidumping and CountervailingDuty Cases Escape Clause Cases

Yeara Filed Affirmative Filed Affirmative

1975 15.4 0.3 4.1 0.01976 0.8 0.9 2.3 0.51977 4.1 0.6 2.6 2.81978 0.6 0.4 1.0 0.41979 0,4 0.1 0.5 0.01975-79 21.3 2.2 10.4 3.8

aThe trade coverage of each case v;as measured by 1978 imports of the product-covered by the case, for example, LFV cases filed in 1975 covered products which in1978 accounted for 15.4 percent of manufactured imports. The 1975-79 figures measurethe percentage of 1978 manufactured imports covered by cases filed (or affirmativelydecided) in the five-year period.

used in the U.S. market by foreigners. But in hence such cases will escalate into politicaleconomics we find that they both deal with issues.the same thing-injury from imports and the The antidumping mechanism did not re-associated gains from trade. The functional solve the steel and auto cases. Though thesedifference between the cases which belong on antidumping cases were terminated, the con-one track or the other is the size and perhaps flicts they represented went on-autos be-the degree of public awareness of the inter- came an escape clause case and finally anests at stake, not the nature of those inter- OMA with Japan, and the steel issue hasests. Antidumping and countervailing duties led to high level administrative protectionare, functionally, the poor (or small) man's through the Trigger Price Mechanism. This isescape clause.'4 not to argue that the petitioner will not gain

The administrative mechanism is in part from such a filing. He will, through the newsself-policing, but its effective, function de- generated by such a petition and the oppor-pends in part on the good citizenship of its tunities it will create to complain about theusers. It is not likely that a politically ob- ineffectiveness of the government and thescure case will be filed on the high track. It is bureaucracy, publicize his complaints aboutless costly to provide data for technocrats to the " unfairness" of foreign competition. Infit into their formulae than to establish the so doing, he will be building the broad basepolitical basis for a presidential decision. Be- of public support needed to win a favorablesides, the lower-track decision weighs the political decision at the national level."petitioner's interests more heavily than does But using the mechanism to publicize athe higher. In short, if you are politically particular case will create public awarenessobscure, the lower track will work for you. of the mechanism, and hence reduce itsBut if you are politically prominent, the lower capacity to process efficiently those cases fortrack will not work. Highly visible petitions which it would have been appropriate. Thewill attract political opposition which the recent trade reorganization act not onlytechnical rules of the track will not be able to transferred administration of LFV cases fromdepose, or even effectively express. Because Treasury to Commerce, but made its pro-they have no technical outlet, buyers must cedures considerably more Byzantine-sopress their interests at the political level,

"The uncertainty of the case outcome might slow14And seems, in a way, to define having comparative foreign development of a market in the United States.

advantage as an unfair trade practice. For details and empirical tests, see Finger.

466 THE A MERICA N ECONOMIC RE VIEW JUNE 1982

much so that its drafters describe it as a Trade Law, May-June 1979, 13, 238-56."Lawyer's Relief Act." The motive behind Eisenstadt, Shmuel N., "Social Institutions" inthis might have been protectionist, but it International Encyclopedia of the Socialmay also have been to restore the degree of Sciences, New York: Macmillan and theobscurity (and therefore effectiveness)"6 Free Press, 1968, 14, 409-29.which use of the mechanism by the steel and Finger, J. M., "The Industry-Country Inci-auto industries took away. dence of 'Less Than Fair Value' Cases in

Table 5 is presented to assure the reader the United States Import Trade," inthat a cynical or despondent interpretation Malcolm Gillis and Werner Baer, eds., Ex-of the institutions we have described is not port Diversification and the New Protection-warranted. We have argued that in their ism, National Bureau of Economic Re-central tendency these mechanisms are bi- search, forthcoming.ased toward protectionism. But this bias is Frank, Andre G., Capitalism and Underdevel-not large. In the five years, 1975-79, only 2.2 opment in Latin America, New York:percent of U.S. manufactured imports have Monthly Review Press, 1967.been granted relief under the LFV statutes, Hamilton, Walton H., "Institution" in En-and only 3.8 percent under the escape cyclopedia of the Social Sciences, Vol. 8,clause.' 7 The costs of gathering and dissemi- New York: Macmillan, 1937, 84-89.nating information needed to reduce this bias Hufbauer, Gary C., "The Impact of Nationalwould probably exceed the benefits. The dark Characteristics and Technology on theside of the force is more protectionist than Comnmodity Composition of Trade inthe light, that is, it is the openness of the Manufactured Goods," in Raymondsystem which keeps the bias as small as it is. Vernon, ed., The Technology Factor in In-

ternational Trade, National Bureau of Eco-16Which suggests that the social value of lawyers lies nomic Research, New York: Columbia

in the confusion they create, not in that they dissolve. University Press, 1970.17Of the imports subject to relief under the escape Larson, Dale W., "The Cost of Import Protec-

clause, 68 percent are covered by the OMAs for footwear tion in the United States," U.S. Treasuryand television receivers. Larson argues that these OMAs Department, processed, 1979.have had no effect on the trends of U.S. imports of M ar mew, "Reent Cags.footwear and television sets. Marks, Mathew J., "Recent Changes in

American Law on Regulatory Trade Mea-sures," The World Economy, July 1980, 2,

REFERENCES 427-40.Odell, John S., "Latin American Trade

Baldwin, Robert E., "U.S. Political Pressures Negotiations with the United States," In-Against Adjustment to Greater Imports," ternational. Organization, Spring 1980, 34,paper presented at the Eleventh Pacific 207-28.Trade and Development Conference, Ko- Stern, Robert M., "Changes in U.S. Compara-rean Development Institute, Seoul, Sep- tive Advantage: Issues for Research andtember 1-5, 1980. Policy" in National Science Foundation,

Branson, William H. and Monoyios, Nikolaos International Economic Policy Research,"Factor Inputs in U.S. Trade," Journal of papers and proceedings of a colloquiumInternational Economics, 7, May 1977, held in Washington, D.C., October 3 and111-31. 4, 1980.

Cooper, Richard N., "Trade Policy is Foreign Thurow, Lester C., The Zero Sum Society, NewPolicy," Foreign Policy, No. 9, Winter York: Basic Books, 1980.1972-73, 18-36. Federal Registet, No. 26, Vol. 45.

Dickey, William L., "The Pricing of Imports U.S. Bureau of the Census, Census of Manufac-into the United States," Journal of World tures, Washington, various years.

Quarterly Review of Economics and BusinessVol. 21, No. 2 (Summer 1981)a 1981 Board of Truslees of ih* University of Illinois

The Industry-Country Incidence of "Less than FairValue" Cases in US Import Trade

J. M. Finger

World trade, particularly trade in manufactured goods, has, for the last twodecades grown more rapidly than output. The growth of manufactured exportsfrom developing countries has been particularly notable. Over the past decadedeveloping country exports of manufactured goods have increased morerapidly than developed country exports and manufactured output and alsomore rapidly than output of developed countries.

This extension of international specialization has made a significant con-tribution to productivity growth, and hence to the growth of per capita output.Movement, however, generates friction, and there are signs that this expansionof international specialization and commerce is beginning to test the capacityof the political-legal institutional mechanisms which have, to now, controlledand directed this expansion of the world economy.

These new problems tend to have at their core questions of distribution.Specialization affects the distribution of a country's income between differenteconomic classes and different factors of production. At the same time, West-ern societies have displayed increasing concern with issues of equity. Because"losers" are often a more identifiable and vocal constituency than "winners,"there is more political pressure to resist the growth of international specializa-tion than to accommodate it. As LDC export expansion is often based on rela-tively abundant unskilled labor, the expansion of trade tends to put LDCinterests in direct conflict with those of lower-income groups in the DCs, and tocreate the impression that the "new protectionism" in the industrial countriesis aimed primarily at imports from developing countries.

Moving from impressions to facts is difficult. The "old" form of protection,tariffs, has a natural quantitative dimension, and thus one can measure di-rectly changes in the overall level of tariff protection. But the "new" protec-tion takes a multitude of forms, many of which seem to defy quantification.

LESS THAN FAIR VALUE 261

Studies of the "new protectionism" have tended in methodology to be tabu-

lations of policy actions which affect imports.' But even the development of

these information systems is a multidimensional problem. First, informationsources must be sought out, and this is made difficult by importing countries'

reluctance to reveal the details (or sometimes even the existence) of arrange-

ments to impede imports. At the conceptual level, it is difficult to quantify

the various forms of administrative protection, or even to decide which ad-

ministrative action actually constitutes protection. An IMF study [13], for ex-

ample, included countervailing duty and dumping cases in the tabulation of

protective actions, while a World Bank tabulation [15] excluded them.

PURPOSE C)F THE PAPER

This paper is an attempt to analyze the incidence of "less than fair value"(LFV) complaints and cases.2 Included under tV label are the subsidy and

countervailing duty cases. They are referred to as less than fair value cases be-

cause the trade practices they are intended to control involve, in legal terms,

the sale of products in the US market as less than their "fair value" -by vir-

tue of a government export subsidy in countervailing duty cases, or of a

"private export subsidy" in a dumping case.In the past several years, the less than fair value procedures have grown in

importance relative to escape clause procedures - since January 1975 over 225

less than fair value petitions but only 40 escape clause cases. The increasedresort to such mnechanisms has led to a growing concern that protectionist

interests within industrial countries will exploit such administrative practices so

as to restrict significantly the expansion of world trade, particularly the ex-

pansion of manufactured exports by the developed countries (see, for example,

[12]). The number of LFV cases involving Latin-American exports has not

been large. These cases have, however, received considerable political and

news media attention -the recent "Mexican winter vegetables" antidumpingcase is a good example.

LESS THAN FAIR VALUE CASES AND PROTECTION

As already noted, lists of recent protectionist measures sometimes include

and sometimes exclude LFV cases. Hence there is disagreement as to whether

or not they constitute protectionism.

Nature of the Cases

Dumping

The legal purpose of the antidumping act3 is to prevent foreign firms and

individuals from selling in the US at prices lower than those they charge in

their home market. The US law provides that if home market sales are too

small to provide a basis for comparison with prices charged in the US market,

262 QUARTERLY REVIEW OF ECONOMICS AND BUSINESS

sales in a third-country market may be used. It also provides that if it is de-termined that the price charged in the home and in the US market is belowthe firm's long-run cost of production, then in the dumping determination, thatis, the determination of the difference between the price charged in the USand the "foreign market value," the administering US government agency mayuse "constructed value" (estimated cost), to determine foreign market value.If the administering agency4 determines that the product in question is beingsold in the US at less than its foreign market value, the case is referred to theInternational Trade Commission (ITC). The ITC then investigates whethera domestic industry is being or is likely to be injured, or is prevented from beingestablished by reason of the importation of such merchandise.

Subsidy/Countervalling Duties

The idea behind a "countervailing duty" is to protect a country's producersfrom having to compete with subsidized production abroad. To this effect, theUS countervailing duty law states thatWhenever any country ... shall pay or bestow ... any bounty or grant upon the manu-facture or production or export of any article .. ., then upon the importation of sucharticle into the United States ... there shall be levied ... in addition to any dutiesotherwise imposed, a duty equal to the net amount of such bounty or grant. . .5During the period covered by this study the US countervailing duty statuteprescribed an "injury test" only if the goods in question were duty-free.6

Response to Foreign Action

In the most immediate sense, LFV actions, particularly countervailing duties,are responses to policy actions taken by an exporting country. The purpose ofan LFV investigation is to determine whether the allegation of foreign exportsubsidization or dumping is true. If so, the US response is automatic; if a for-eign government subsidizes exports to the US, then the US Government im-poses a countervailing duty equal to the subsidy.

When the political-economic process is viewed this way, it is the foreigngovernment's policy action which is the exogenous factor. Furthermore, theeffect of the countervailing duty is to offset the trade effect of the export sub-sidy. If each foreign export subsidy is countervailed, the effect on trade (andon the economy of the country which countervails) would be zero.

It is, however, arguable that the LFV laws, and particularly the administra-tive rules which govern their implementation, proscribe actions in internationalcommerce which are allowed by the equivalent legislation governing domestictrade practices.? If so, the LFV mechanisms neutralize or discourage actions byforeigners selling in the US market, even though domestic sellers are notprevented from taking such actions, and the mechanisms can reasonably bedescribed as protectionist.

CLESS THAN FAR VALUE" 263

Dissatisfaction with the recent pattern of enforcement of the countervailingduty and antidumping laws is evident. Domestic interests argued that theTreasury Department had been overly sensitive to the interests of US im-porters-consumers and to "internationalist" interests generally. This, in part,was responsible for transferring the enforcement of these laws out of theTreasury Department.

It is, however, not difficult to find the opposite opinions - that the LFVlaws and the associated administrative processes are being used to restrict im-ports, and not simply to offset the trade-increasing effects of foreign actions.For example, a recent articie, "The Profits of Harassment," [18] listed 35administrative complaints or court suits filed by US electronic appliance andcomponent manufacturers against Japanese competitors. It concluded that"Even where actions do not succeed directly, they entail lengthy and costlydelays to Japanese market penetration, and the protectionist end result is oftenachieved indirectly" [10, p. 74].

LFV Administration as Protection

A practical man would propose that whether or not LFV cases are morethan an offsetting response to foreign trade-increasing actions be answered inthe obvious way -by determining if the government imposes LFV duties (orother trade restraints) when there is no trade-increasing foreign action moreor less often than it fails to respond to foreign trade-increasing actions, that is,by comparing the facts of the cases with their legal outcomes. Practical as thisapproach might be, it is, unfortunately, impossible. The purpose of the gov-ernment's investigation of a petition is to determine the facts of the case, andthis is a time-consuming, expensive, and contentious process. Simply put, thereis no observation on the facts of a case other than its legal outcome. But be-cause the antidumping and countervailing duty statutes allow either party toan LFV petition to appeal the administering agency's decision to the federalcourts, there is incentive for the administering agency to get its facts straightso as to avoid the embarrassment of having its decision overturned in court.8

Possible Sources of Protectionist Bias In LFV Administration

Structural Bias

The infrequency with which LFV findings have been successfully challengedin court suggests that any possible protectionist bias in the administration of theLFV laws does not result from carelessness or dishonesty on the part of theadministering officials. There are, however, other possible sources of bias. If, asis often asserted, producers who compete with imports are usually a moreidentifiable, concentrated, and (therefore) vocal group than consumers, theirinfluence would be a factor swinging the net result toward protection.


Such influence might affect itself in several ways. One possible avenue isthrough the provision of information. Those individuals with a large stake in

the matter will be more strongly moved to make available informnation whichsupports their case than will those whose stake is small. In addition, politicalinfluence might affect the structure of the administering agency's decisionprocess. There are, of course, two alternative hypotheses, "Yes, dumping (ora countervailable subsidy) is taking place," or "No, it is not," and the adminis-tering agency has some diNcretion to structure its investigation so as to makeone or the other of these the "null" hypothesis, that is, the position to be takenunless the available evidence is cause to reject it.

Harassment

The allegation that the process of LFV investigation serves as an importbarrier opens several questions. From the point of view of the foreign firm in-

terested in developing a market for its product in the US, the threat of an

LFV petition by its US competitors will

(1) Increase the cost of a project to develop a US market. Legal and ad-

ministrative expenses to respond to the LFV petition must be factored in.(2) An additional element of risk is added to the project -the possibility

of an LFV petition and its anticipated outcome.(3) The expected revenue the project will generate will be affected by the

anticipated outcome of the LFV investigation.

It is not immediately apparent that the cost increase will put the foreign firmat a disadvantage relative to US firms. The latter will incur legal and adminis-trative expenses in preparing and advancing their LFV petitions. There are,

however, more subtle ways in which this mutual increase of costs might be to

the advantage of domestic firms. First, imports account for much less thanhalf of sales in US markets, hence the foreign firm's additional expense will be

distributed over fewer units than will those of the US firms. Second, there maybe economies of scale or economies of learning-by-doing in filing and in re-

sponding to such petitions, and these economies are more likely to be capturedby a domestic firm or industry group which files petitions against exports from

several different countries than by firms or groups in each of the foreign

countries.Two factors have a bearing on whether or not the threat of an LFV com-

plaint will change the expected revenue generated by a foreign firm's project

to develop a US market. Whether or not the foreign firm plans to dump and/or benefit from an export subsidy is one factor, and the other is whether or notthe foreign firm views the LFV case decision process in the US as biased (in

the sense already discussed).Suppose the foreign firm views the LFV decision process as unbiased -

it expects that LFV duties will just offset each export subsidy and each instance

ccLESS THAN FAR VALUE" 265

of dumping. If the foreign firm's plan does not include dumping or the receiptof an export subsidy, the possibility of an LFV complaint will not affect theexpected receipts the project will generate. That poss;bility will, however, addto the riskiness of the project.

If the foreign firm views the LFV decision process as biased toward protec-tionism, the LFV complaint factor will tend to reduce expected returns.

In sum, it is not necessary to assume that the LFV decision process is biasedin order to argue that the overall LFV complaint response-decision mechanismtends to be protectionist. Per unit costs of filing and response to LFV complaintsare likely to be higher on imports than on domestic import replacermients. Fur-ther, the mechanism adds to the riskiness of the expected revenue to a foreip.1firm from selling in the US market, and this would, other things being constant,tend to reduce such sales.

Building a Case for Protection

Finally, the LFV mechanisms may be used by a domestic industry to builda public case for protection. Filing an LFV petition is a more newsworthy eventthan presenting evidence of import competition, and Congress is not likelyto act to protect an industry or to apply pressure on the administration to pro-tect it unless all "ordinary" or "routine" means have been exhausted. In prac-tice, administrative mechanisms are the "outer office" through which complaintsmust pass if they are to gain access to the ultimate political authority behindthem.

THE INCIDENCE OF LFV CASES: THE DATA

The tabulation of LFV incidence covers the period January 1975 throughDecember 1979, and is based on tabulation prepared by the staff of the USSpecial Representative for Trade Negotiations. These data cover the "life" ofof the Trade Act of 1974, which came into effect in January of 1979 and wassuperseded by the Trade Agreements Act of 1979 in January of 1980.

Data

The data on LFV cases are summarized in Tables 1, 2, and 3. In constructingthese tables, we began with the STR listing, which included some 230 cases, 111countervailing duty cases, and 119 antidumping cases. We then determinedthe 1976 import value coverage of each case. This includes only imports of theproducts (defined at the TSUSA 7-digit level of detail) and from the countryor countries named in the petition.9

The data in Table 2 are aggregates of the "case" data into 2-digit SIC cate-gories, cornbined with SIC-based import data. These tables present two mea-sures of "LFV incidence," the percentage of imports covered by all affirmativecases, and the percentage of imports covered by all cases - which includes af-


Table 1

SECTOR INCIDENCE OF ANTIDUMPING AND COUNTERVAILING DUTIES CASES COMBINED (January 1975-December 1979)AGAINST IMPOPTS FROM ALL COUNTRIES (import figures as of 1976)

sic Description Imports under less than fair value cases

All cases Affirmative casesTotal Value Percent Value Percent Percent

imports (millions) of (millions) of of(millions) total total all LFV

imports imports imports

Agricultural productionI Crops 4,472.6 192.0 4.3 0.0 0.0 0.02 Livestock 427.5 0.0 0.0 0.0 0.0 *8 Forestry 618.8 0.0 0.0 0.0 0.0 *9 Fishing and hunting 1,603.3 156.8 9.8 156.8 9.8 100.0

Mining and extraction10 Metal 1,974.8 0.0 0.0 0.0 0.0 *12 Bituminous and lignite coal 17.7 0.0 0.0 0.0 0.0 *13 Oil and gas 27,067.8 0.0 0.0 0.0 0.0 *14 Nonmetalic, except fuels 1,270.6 0.0 0.0 0.0 0.0 *

Manufacturting20 Food and kindred products 6,284.9 399.6 6.4 356.5 5.7 89.221 Tobacco manufactures 46.7 0.0 0.0 0.0 0.0 *22 Textile mill products 1,410.6 174.6 12.4 6.4 0,5 3.723 Apparel, other fabric

products 3,890.3 92.9 2.4 10.1 0.3 10.924 Lumber and wood products 2,313.0 12.0 0.5 11.3 0,5 94.225 Furniture and fixtures 527.0 0.0 0.0 0.0 0.0 *26 Paper and allied products 3,285.9 109.4 3.3 3.4 0,1 3.127 Printing and allied products 343.7 1.2 0.3 0.9 0,3 78.328 Chemicals and allied products 3,924.9 219.8 5.6 19.1 0,5 8.729 Petroleum refining industries 6,911.8 0.0 0.0 0.0 0.0 *30 Rubber, miscellaneous

plastics 2,032.7 143.1 7.0 119.8 5.9 83.831 Leather products 1,719.6 458.9 26.7 432.4 25.1 94.232 Stone, clay, glass, concrete 1,092.6 53.3 4.9 0.2 0.0 0.433 Primary metal industries 8,374.1 5,140.5 61.4 273.1 3.3 5.334 Fabricated metal products 2,241.5 258.4 11.5 199.7 8.9 77.335 Machinery, except electrical 6,157.1 80.2 1.3 32.9 0.5 41.036 Electronic machinery 8,406.6 1,513.5 18.0 0.0 0.0 0.037 Transportation equipment 16,564.4 10,047.1 60.7 2.4 0.0 0.038 Measuring, controlling

products 2,241.1 63.8 2.8 7.8 0.3 12.239 Miscellaneous 2,557.5 84.5 3.3 7.1 0.3 8.4

Total manufacturing 80,326.0 18,852.8 23.5 1,483.2 1.8 7.9

Nonclassified imports91 Scrap and waste 246.0 0-0 0.0 0.0 0.0 *92 Used autos, tractors, tires 34.4 0.0 0.0 0.0 0.0 *98 Goods returned, a,.

reimported 1,994.5 0.0 0.0 0.0 0.0 *99 Miscellan',ous commodities 1,066.0 0.0 0.0 0.0 0.0 *

0-9 Totals 121,120.1 19,201.6 15.9 1,640.0 1.4 8.5

firmative, pending, and negative or terminated cases. These series will be calledthe "LFV affirmative cases incidence," and the "LFV complaints incidence,"respectively.

While these incidence figures are intended as general measures of the "pro-tectionist" impact of the LFV cases, care should be taken in interpreting them.The complaints measure includes cases which were denied or withdrawn. Evenso, the filing of some such petitions and their investigation may have imposedcosts on foreign exporters or otherwise tended to retard imports, or may havehelped build the case for protection by some other means.

Table 2

INCIDENCE OF LESS THAN FAIR VALUE CASES ON IMPORTS OF MANUFACTURED GOODS,a

BY COUNTRY GROUP (based on 1976 import figures)

Country group Imports covered by all cases Imports covered by affirmative cases Affirmative cases as percent

as percent of total imports as percent of total imports of all cases

Anti- Countervailing Both Anti- Countervailing Both Anti- Countervailing Both

dumping duties dumping duties dumping duties

All countries

All mfg. goods 16.4 7.1 23.5 0.5 1.4 1.8 2.7 19.7 7.9

excludingtransport.equipment (4.9)c (8.9) (13.8) (0.6) (1.8) (2.3) (11.5) (19.8) (16.8)

Developedcountries

All mfgd. goods 23.0 8.5 31.5 0.6 1.1 1.7 2.6 12.3 5.2

excludingtransport.equipment (7,5) (12.0) (19.4) (0.8) (1.5) (2.3) (11.2) (12.3) (11.9) ;

Develo ping i

countries (allmanufactures) 0.4 3.6 4.0 0.1 2.3 2.4 21.0 63.6 59.7 p-

Latin-American >

countries (allmanufactures) 0.1 0.8 0.8 0.0 0.4 0.4 0.0 46.2 42.8

agbSIC 20-39.Includes pending, affirmative, and negative or terminated cases.

CSIC 20-39 less 37.

a)3

268 QJUARTERLY REVIEW OF ECONOMICS AND BUSINESS

Table 3

COUNTRY INCIDENCE OF ANTIDUMPING AND COUNTERVAILINGDUTY CASES CO1MINED (January 1975-December 1979)

Code Country Imports under less than fair value casesAll cases Affirmative cases

Total Value Percent Value Percent Percentimpc.rts (millions) of (millions) of of

(millions) total total all LFVimports imports imports

423 Belgium-Luxembourg 1,131.1 795.6 70.3 13.6 1.2 1.7535 Pakistan 70.0 44.0 62.8 0.0 0.0 0.0428 Germnany (Fed Rep) 5,700.1 3,508.8 61.6 66.5 1.2 1.9427 France 2,540.6 1,123.3 44.2 21.8 0,9 1.9588 Japan 15,683.1 6,176.8 39.4 422.0 2.7 6.8421 Netherlands 1,094.3 420.6 38.4 75.4 6.9 17.9401 Sweden 925.6 291.9 31.5 3.1 0.3 1,1355 Uruguay 62.4 19.6 31.5 19.6 31.5 100.0475 Italy 2,543.7 621.9 24.4 30.9 1.2 5.0433 Austria 241.8 54.5 22.6 15.2 6.3 27.9533 India 710.2 121.9 17.2 0.0 0.0 0.0122 Canada 26,826.8 4,217.2 15.7 196.7 0.7 4.7405 Finland 190.1 28.2 14.8 26.2 13.8 92.9583 China (Formosa) 2,999.3 437.6 14.6 372.1 12.4 85.0412 United Kingdom 4,288.9 601.0 14.0 44.3 1.0 7.4409 Denmark 564.6 77.5 13.7 77.1 13.6 99,4469 Spain 928.2 113.4 12.2 72.7 7.8 64.1580 South Korea 2,440.0 211.4 8.7 131.6 5.4 62.3357 Argentina 309.9 22.2 7.2 3.3 1.1 14.8201 Mexico 3,606.3 202.3 5.6 1.3 0.0 0.6791 South Africa 995.6 34.4 3.5 0.0 0,0 0.0437 Hungary 49.0 1.1 2.3 0.0 0.0 0.0403 Norway 646.8 14.3 2.2 14.3 2.2 100.0485 Romania 198.7 3.8 1.9 0.0 0.0 0.0441 Switzerland 1,041.4 16.5 1.6 15.2 1.5 92.3351 Brazil 1,739.9 26.4 1.5 8.0 0.5 30.2419 Ireland 206.4 2.1 1.0 2.1 1.0 100.0455 Poland 318.8 2.4 0.8 2.4 0.8 100.0301 Colon.bia 657.4 3.7 0.6 3.7 0.6 100.0508 Israel 424.2 2.3 0.5 0.0 0.0 0.0565 Philippines 887.6 3.2 0.4 0.0 0.0 0.0479 Yugoslavia 387.2 0.8 0.2 0.8 0.2 100.0602 Australia 1,214.0 0.7 0.1 0.0 0.0 0.0

In a number of cases, the initially imposed LFV penalty duties have sincebeen lifted, and the case has been moved into the "negative and/or terminated"section of the STR listing. We, however, classified cases by their initial out-come, since this was the better measure of the advantage the LFV mechanismgave the domestic petitioner over the foreign seller. Often LFV penalties aresuspended only after the foreign sellers (or government) has agreed to dis-continue the pricing practice which led to the LFV petition.

Incidence Pattern

As the data reported have not been previously available, they are shown insome detail. Table 1 presents, by 2-digit SIC category, incidence measures ofthe combined incidence of antidumping and countervailing duty cases. Table

"LESS THIAN FAIR VALUE" 269

2 compares, for all manufactured goods, the iricidences of the LFV cases onmajor country groups - developed, developing, and Latin-American countries.Among the major characteristics of the incidence patterns are the following:

- During the period covered, LFV petitions (dumping and countervailingduty combined) were filed against 1/6 of all UJS imports, and 1/4 of manufacturedimports.

- Over half of the imports against which LFV petitions were filed were inone industry, automobiles. With automobiles excluded, LFV petitions covered/12 of total imports and 1/7 of manufactured imports.

- Virtually all of the petitions involved manufactured goods.- Within manufacturing, $15 million of the $19 million of imports covered

by LFV petitions were in two industries, steel and automobiles.- Dumping cases covered more than twice the value of imports covered by

countervailing duty cases but the difference is more than accounted for by oneindustry, automobiles.

- The incidence of complaints was only one-eighth as high against importsfrom developing countries as against imports from developed countries.

- The incidences of LFV complaints against imports from LDCs andagainst imnports from DCs have different sectorial patterns - for imports fromLDCs the LFV complaint incidence is highest in the textiles, rubber andplastics products, and leather products sectors, while the incidence of LFVcomplaints against imports from DCs is concentrated on steel and steel prod-ucts, electronic machinery, automobiles, and food products.

- Over the January 1975-December 1979 period covered, LFV complaintswere filed against 30 countries, of which 18 were developed. Affirmative deter-minations were made concerning imports from 15 developed and from 7 devel-oping countries.

- Complaints were filed against only 0.8 percent of manufactured importsfrom Latin-American countries.

- The incidence of affirmative cases was higher against developing thanagainst developed countries. Of manufactured imports, 2.4 percent from LDCsand 1.7 percent from DCs were subject to affirmative LFV findings over theperiod.

- Against manufactured imports from Latin-American countries, the inci-dence of affirmative findings was 0.4 percent, considerably lower than the inci-dence against developed countries.

REGRESSION ANALYSIS

This section presents the results of statistical analyses of the industry inci-dences of LFV complaints, and of the LFV affirmative cases. The data for thiscross-section analysis were arranged by 3-digit SITC commodity groups.' 0


Table 4

EXPLANATION OF LESS THAN FAIR VALUE COMPLAINTS INCIDENCE SIGNIFICANCE LEVELSOF INDEPENDENT VARIABLES IN MULTIPLE REGRESSION EQUATIONS

Independent variable Sign of coefficient and significance level in equationa

(1) (2) (3) (4) (5) (6)

Growth rate of domestic shipments -, N

Import growth rate , N

Import penetratian ratio +, 05 +, 05 +, 05 A-, 05 +, 05 +, 01

Physical capital stock +, 01 + 01 +, 01 +, 01 , 01 +, 01

Human capital stock +, N

Employment , 05 - 05 -, 05 -, 01 -, t1l -, 05

Concentration ratio (4-firm) +, N +, N +, N

Consumer goods ratio -, N -, N -, N

Product differentiation -, N -, N -, N -, N

Nominal tariff rate +, N +, N +, N +, N +, N

R-Bar squareda .17, 01 .18, 01 .18, 01 .19, 01 .20, 01 .18, 01

01, 05, 10 designated significance at the 99 percent, 95 percent, ar.d 90 percent confi-dence levels, respectively. N designates not significant at the 90 percent confidencelevel .

bThe first value given in each column is the value of R-Bar squared and the second is thesignificance level.

Questions Posed

If the "harassment thesis" is true, the relationship between LFV complaintsand import competition is a two-way relationship. On the one hand, the moreintense is import competition, the more one would expect domestic firms andindustries to file LFV complaints. But if such complaints tend to impose largercosts .and uncertainties on foreigners who sell in the US market than on thelocal firms who file the complaints, there will be a simultaneous negative rela-tion between import growth and LFV complaints. Thus, the regression analysisreported in Table 4 is aimed at the question, "What is behind the pattern ofLFV complaints, and what are the effects of these complaints?" The ordinary-least-squares analysis reported here amounts to a look at a reduced formcombination of both questions, but the pattern of results is nevertheless re-vealing. (A more detailed attempt to identify the effect of LFV complaints onimport growth is presented in Table 5.)

Table 6 presents results of an ordinary-least-squares regression analysis of theLFV aflirmative cases index. In this instance the questions at hand are "Whatis behind the pattern of foreign LFV pricing, what are its effects, and theeffects of the LFV penalties which result from the affirmative cases?" It isnot possible to clarify all these questions from the results of one reduced formregression equation, but answers are suggested for several important aspects ofthe general issues.

"LESS THAN FAIR VALUE" 271

rable 5

EXPLANATION OF INDUSTRY IMPORT GROWTH RATE, 1974-77 SIGNIFICANCE LEVELS'OF INDEPENDENT VARIABLES IN MJLTIPLE REGRESSION EQUATIONS

Independent Two-stage Two-stage Ordinary

variables model Ab model Ba leastsquares

(1) (2) (3) (4) (5) (6) (7)

LFV complaints indexFitted values -,10 -,05 -,10 -, -, 05 -,10Observed values -, N

LFV affirmative casesindex

Fitted values -,N -,N -,NObserved values -, -, 10

Growth rate of domesticshipments +,10 +,N +, N +,10 +, N +,N +1 05

Consumer goods ratio +, 10 +, 10 +, 10 +, 10 +, 10 +, 05

Value of domesticshipments +,N +,N +,N +,10 -,N N

Rate of product turnover -, 10 -, 10 -, 05

aol, 05, 10 designated significance at the 99 percent, 95 percent, and 90 percent confidence levels,

respectively. N designates not significant at the 90 percent confidence level.

bSee text for explanation.

Table 6

EXPLANATION OF LESS THAN FAIR VALUE AFFIRMATIVE CASES INCIDENCE SIGNIFICANCE

LEVELS OF INDEPENDENT VARIABLES IN MULTIPLE REGRESSION EQUATIONS

Sign of coefficient and significance levelain equation

Import variable (1) (2) (3) (4) (5) (6)

Import growth rate -, N -, N -, N -, 10 05

Import penetration rat.io +, N +, N +, 10 +, 05

JFV comp1 aints index +, 01 01 01 +01 + 01

Value of domesticshipments -, 10 -, 10 -, 10 -, 05 -, 10 -, N

Human capital intensity -, N -, N

Product differentiation +, 01 +, 01 +, 01 +, 01 +, 01 +, 05

Concentration ratio(4-firm) - N

Consumer goods ratio +, N

R-Bar squared .22, 01 .22, 01 .22, 01 .21, 01 .20, 01 .08, 05

a01, 05, 10 designated significance at the 99 percent, 95 percent, and 90 percent

confidence levels, respectively. N designates not significant at the 90 percent

confidence level.

bThe first value given in each column is the value of R-Bar squared and the second

is the significance level.


Data sources for and exact definitions of explanatory variables included in theanalysis are given in the Appendix.

LFV Complaints Index

Table 4 indicates that the LFV complaints index is related to two major fac-tors: (1) the degree of import penetration (imports/domestic shipments); and(2) the size of the industry, that is, the potential payoff from complaining,in terms of annual output or of assets protected. The size of the physical capitalstock and value of shipments (not included in the table) are both significantlycorrelated with the LFV complaints index. Among measures of import com-petition, the import penetration ratio is significantly correlated with the LFVcomplaints index, but the import growth rate is not.

The negative sign on the growth rate of domestic shipments is what onewould expect -the better an industry is doing the less likely it is that it willpetition for protection.

The observed positive relation between LFV complaints and tariff ratessuggests that industries which have filed petitions for import relief throughthe LFV mechanisms have also applied pressure to prevent their tariff ratesfrom being negotiated away at the GATT rounds. (Using effective rates ofprotection produces the same result.)

LFV Affirmative Cases Index

We began our approach to the question of what lies behind the coverage ofLFV affirmative findings by looking at the determinants of US comparativeadvantage, measured by the US share, in 1976, of OECD countries' exports. Thelist of statistically significant factors included labor intensity, physical capitalintensity (both negatively related), human capital intensity (positively related),and two "product cycle" variables, Hufbauer's measure of product differentia-tion, and a previously developed measure of the rate of development of newproducts. Of these, only the degree of product differentiation is significantlyrelated to the LFV affirmative cases index. Possible interpretations of the corre-lation results, presented in Table 6, will be discussed along with the analysis ofthe effects of LFV cases on import growth.

Complaints and Affirmative Case Indexes as Determinants of Import Growth Rates

The negative correlations observed in Tables 4 and 6 between import growthand the incidences of both LFV complaints and of LFV affirmnative cases sug-gest that the observed relation is the effect of LFV cases on import growthrather than the effect of import growth on LFV cases. This information sug-gests a model along the following lines. Letting C and A represent the LFVcomplaints and affirmative cases indexes, and G the import growth rate, theequations of the model would be

CCLESS THAN FAIR VALUE" 273

(1) a-f(G,MP,K,L).(2) A=h (C, MP, PD, V).

(3) G = g(C, A, SG, F).

The first equation states that complaints arise from import growth and other(exogenous) factors, the second that the incidence of affirmative findings isinfluenced by the incidence of complaints, and the third that the growth rate ofimports is influenced by complaints and by affirmative findings, plus exogenousfactors. Analysis reports in Table 4 indicate that the exogenous factors whichshould be included in Equation (1) are the import penetration ratio (MP), thesize of the physical capital stock (K), and the labor employment level (L).Exogenous factors which apparently influence the affirmative findings indexA, include import penetration, the degree of product differentiation (PD), andthe size of the industry, as measured by the value of domestic shipments (V).Finally, the exogenous variables included as determinants of the import growthrate include the rate of growth of domestic shipments (SG) and the sort of"factor proportions" variables which trade theory suggests will influence theindustry pattern of US comparative advantage.

A previous analysis of the import position of US industries [7] suggested thelist of exogenous factors used in the equation for the import growth rate. In-cluded were the growth rate of domestic shipments, to reflect relative rates ofexpansion of demand, and three "product cycle" variables. Among these, therate of product turnover reflects conceptually the intensity of competition byproduct development, and was quantified by tabulating the number of 7-digititems which appeared, disappeared, or changed definition in each 3-digit SITCcategory in the US export schedule (see [7] for details). The negative sign onthis term reflects the basic product cycle proposition that close contact wvith themarket is important in those industries in which competition for market sharetakes the form of offering a newer, more attractive product variety rather thanthe form of offering a lower price on a standardized product.

As an independent variable in this equation, the value of domestic ship-ments represents the size of the market, which, to a foreign supplier, is an indi-cator of potential economies of scale in production and in market development.

The consumer goods ratio measures the percentage of industry' output pur-chased for final consumption rather than for use as inputs in other industries,and is based on the 1972 US input-output table. Tile positive sign on this termreflects the growing internationalization of US markets for consumer goods.

Model A

Results in the first three columns (labeled Model A) of Table 5 are threeversions of the second-stage equation in the simultaneous model already de-scribed. The first-stage, reduced form equations for C and A are not shown,but are very similar to the equations shown in Tables 4 and 6.


These findings indicate, as the harassment thesis asserts, that there is asignificant, negative impact of LFV complaints on import growth rates. Themagnitude of this parameter is approximately -0.2, indicating that a 1 per-centage point increase of the LFV complaint index brings approximately a 0.2percentage point reduction of the industry import growth rate.

A somewhat surprising finding is the insignificant relationship between theLFV affirmative cases index and the import growth rate. A possible explanationis that the LFV penalties (antidumping, countervailing duties) imposed inaffirmative cases just offset (as is intended) the trade effects of the pricingactions which trigger these penalties. Thus, with the trade effects of LFV pric-ing and of LFV penalties just offsetting each other, there remains only the back-ground, or factor proportions determinants of import growth.

Another interesting result is that although complaints and affirmative findingsmove in strongly parallel tracks (their correlation in Table 6 is highly signifi-cant), when structural Equation (2) is estimated by two-stage least-squares, thecomplaints index is not a significant determinant of the affirmative cases index.(This result is not shown in the tables.) Why, if the incidence of complaintshas no influence on the incidence of affirmative findings, do they track soclosely? Perhaps import penetration, as an indicator of injury, is the key to theexplanation. Import penetration triggers complaints (as shown in Table 4),and the decision mechanism tends to produce affirmative findings when thelevels of import penetration is high.

Thus the ordinary-least-squares results might be a false indicator of the powerof political pressure to achieve an affirmative LFV decision. These results (inTable 6) suggest that the LFV decision mechanism responds to pressure - thehigher the intensity of complaints, the higher the intensity of affirmative findings.But the two-stage result suggests that the LFV decision process is more ob-jective. Import penetration affects both the level of complaints and of affirma-tive findings, and when this colinear result is adjusted for, there appears to beno causal link between the intensities of complaints and of affirmative findings.The LFV decision process may have been more objective than the ordinary-least-squares results would suggest.

Model B

Because these results suggest that C might not be a significant variable inEquation (2), an alternative model of the simultaneous relationship betweenC and A was examined. This model is composed of Equations (1) and (3)already given - the equation for A being eliminated, and A treated as an exo-genous element in the equation for import growth. As the results in columns 4,5, and 6 of Table 5 indicate, this does not change the findings as to the deter-minants of import growth. Correlation between the fitted values of the LFVcomplaint index and the import growth rates indicate again that the harass-

"LESS THAN FAI VALUE" 275

ment thesis is valid. When the observed values of the affirmative cases indexare introduced as an explanatory variable along with the fitted values of thecomplaints index, and it is found again that affirmative findings is not sig-nificantly correlated with import growth.

FURTHER IMPLICATIONS AND UNANSWERED QUESTIONS

Concentration and Size

One of the more frequently encountered hypotheses is that concentrated in-terests will have a louder and more influential voice than diffused interests. Thisidea is usually encountered as an explanation for the relative strengths ofproducer and consumer interests, but it also suggests that a firm in an uncon-centrated industry might be reluctant to finance an LFV petition, whose benefitswould mostly spill over to other firms. As a test of this hypothesis, we foundthat the industry concentration ratio is positively, but not significantly relatedto the LFV complaints index. The stronger correlations on measures of in-dustry size indicate that it is the size, not the concentration of the potentialgain which is a determining factor.1"

The correlation between industry concentration and the LFV affirmativecases index is negative, and hence inconsistent with the hypothesis that con-centrated economic interests have a more pronounced impact than diffusedones.

Comparing results in Tables 4 and 6, we see that while LFV complaints arepositively related to industry size (measured by capital stock or by annual ship-ments), the LFV affirmative cases index is negatively related to measures ofindustry size. Keeping in mind that an LFV complaint will not lead to anaffirmative finding if an alternative political remedy is provided, this observationis consistent with the hypothesis that the trade problems of big industries willbe worked out through a more political mechanism than the technical LFVcomplaint-response-decision procedure. Political influence may not get one anaffirmative finding from the LFV technocrats as much as it gets one access tomore political mechanisms.

An alternative interpretation is that in large cases, where much is at stake,groups of users or consumers find it in their interest to organize to resist theprotectionist pressures of the domestic producers who have filed LFV petitionsfor protection. Thus the larger the case, the more likely it may be that the out-come will be a political standoff, with no clear outcome at either a technical ora political level.

Discrimination Against Consumers

A possible explanation for the absence of correlation between industry con-centration and the LFV complaints and LFV affirmative cases indexes is thatmany industries sell their output to other industries, with offsetting political


influence. If, as is often surmised, producer interests are more powerful thanconsumer interests, one might expect the LFV indexes to be relatively highin industries which produce consumer goods. We found no such relation,Against the LFV complaints and the LFV affirmative cases index, the t-statisticson the consumer goods ratio (as an independent variable) are virtually zero.A possible explanation is that the rise of consumer groups has provided a coun-tervailing influence against producer groups, but whatever the explanation, thedata reveal no tendency for the LFV mechanism to come down harder onconsumer goods than on other industries.

Political Dependency

An extreme version of the dependency thesis might suggest that in trade dis-putes such as LFV cases the US "ernjoys such an overall disparity of interna-tional power and relative invulnerability that it is able to achieve its objectivesin virtually every case."12 If every complaint against LDC exporters was vir-tually assured of success, and those against exporters of politically more power-ful countries were more risky, the incidence of LFV complaints and of LFVaffirmative decisions should be higher.

While Table 2 shows that the incidence of LFV complaints against LDCs ismuch lower than against DCs, it also shows that the incidence of affirmativefindings is slightly higher against LDCs. 13 These data neither constitute strongevidence in support of the dependency thesis, nor are they clear grounds forrejecting it.

CONCLUSIONS

Less than fair value cases arise when a buyer in the US finds it to his ad-vantage to purchase from a foreign rather than from a domestic source. Fromthe point of view of the US political structure, the major actors in an LFVcase or in any issue concerning protection from foreign competition are theconflicting domestic interests. Thus exporting countries can exercise onlyminimal influence on the incidence of LFV complaints.,4

The current US countervailing duty and antidumping laws are not the oneswhich were in effect for the period covered by the data, and the administrationof these laws has been shifted from the US Treasury Department to the USDepartment of Commerce. The effects these changes will have on the inci-dence and effects of LFV cases is a better topic for debate than for analysis.Newspaper stories report a widespread concern that these changes may repre-sent an overall shift toward domestic interests. Analysis has shown, however,that the LFV mechanisms have, in the past, responded primarily to domesticinterests, and hence such a shift is not necessarily a shift toward protectionism.There will likely be a bulge in 1980 in the number of LFV petitions filed,but old hands at this business report that such a bulge follows every change oflegislation or of administration.

'LE;SS THAN FAIR VALUE" 277

APPENDIX

Data Sources and Definitions of Explanatory Variables

Physical capital, human capital, and labor intensit:,. Measures of these vari-ables are based on data from the US Bureau of the Census, US Census ofManufactures and Annual Survey of Manufactures. Conversion from 4-digitSIC to 3-digit SITC followed Hufbauer's concordance [19, Table A-1] updatedto 1975. We then followed Branson and Monoyious [2] in calculating variables.

Data from which we calculated the consumer goods ratio were taken fromthe 85-sector version of the 1972 US input-output tables [16] and were trans-ferred into SITC categories by our "home-made" concordance. The consumergoods ratio, by sector, is defined as the ratio of personal consumption expendi-tures to "domestic supply," that is, total commodity output plus imports minusexports. As measured, it is a "direct," not a "total," coefficient.

The "product differentiation" series was taken from Hufbauer's Table A-2[11]. Empirica,iy, it is the coefficient of variation in unit values of 1965 USexports destined to different countries, aggregated from the seven- to the three-digit level using simple averages.

NOTES

1. While the conclusions of these studies are more impressionistic than precise,informed opinion at the moment [1 and 15] seems to be that protection is not in-creasing rapidly - at least not as rapidly as was feared several years ago. Worldtrade in manufactured goods continues to increase relative to output, and while suchfigures do not exclude the possibility that protection is increasing, they do indicatethat the trade-destroying forces at play are outweighed by the trade-creating forces.

2. It is tempting for an economist working on such a subject to "read the law,"and spend much time "discovering" concepts (implicit in the law journals) which aremost likely covered in the first week of law school. Having, with some effort, justloosened myself from that tarbaby, I may have moved farther toward a strictly eco-nomic point of view than is optimal.

3. Antidumping Act, 1921, as Amended (19 U.S.C. 160-178).4. Beginning January 1980, the Department of Commerce. Before then the act

was enforced by the Treasury Department.5. 19 U.S.C. 1303.6. The absence of an injury provision predates the GATT. Because of the "grand-

father rights," preserved by the US in its accession to the GATT, the US law wasnot in violation of the subsequently conceived GATT standard. The Trade Agree-ments Act of 1979 had added an injury test, but it will be applicable only in casesinvolving countries which are signatories to the New Agreement Relating to Sub-sidies and Countervailing Measures.

7. William L. Dickey [4 and 5] argues this point.8. According to Treasury Department officials familiar with these matters, such

appeals have been infrequent, and have almost always been challenges to the Trea-sury Department's interpretation of the law rather than challenges to the facts orevidence on which the Treasury Department based its decision. The Zenith case, forexample, challenged the Treasury Department's longstanding policy of not consideringthe rebate on exported goods of a direct tax as a countervailable action.


9. The STR list provided the 7-digit Tariff Schedule of the US Annotated (TSUSA)category or categories for about half of the cases. For each other case we contactedthe Customs Bureau personnel who had investigated the case, and with them workedout the TSUSA coverage of the case. For cases filed in 1976 and defined in terms ofthe 1976 TSUSA, the import figures were taken directly from 1976 TSUSA-by-country-of-origin data tapes. For cases filed in other years the "filing year" value ofimports was discounted backward or forward to 1976, using the 1970-77 annualgrowth rate of imports of the corresponding 4-digit SITC category from the affectedcountry or countries. Data availability dictated this approach.

10. The numerator for this series was obtained by re-summing the "case data"(described in the section entitled "The Incidence of LFV Cases") into SITC cate-gories, while the denominator (all, that is, LFV plus non-LFV imports) were ob-tained fromn OECD Series C as maintained in the Data Resources, Inc. computerizeddata file. SITC rather than SIC categories were chosen because our "industry char-acteristics" data base already existed in SITC terms.

11. Thirty percent of the antidumping and 65 percent of the countervailing dutycomplaints tabulated were filed by industry groups (producer groups or labor unions)or by individuals of government agencies on behalf of the entire industry. The logicbehind the concentration, political influence hypothesis suggests that industry groupsshould be more cohesive and effective in concentrated industries, and hence whetherpetitions are filed by firms or by industry groups the concentration, political influencerelationship "should" hoid.

12. John S. Odell [14, p. 8]. Odell is summarizing this position as a hypothesis tobe tested, not advocating its validity.

13. As already discussed, we have classified a case as affirmative if the initial USgovernment decision was affirmative, whereas the "STR list" would describe a caseas negative if the LFV penalties have subsequently been suspended. Had we followedSTR's convention, affirmative cases would cover slightly less than 1 percent of manu-factured imports from LDCs, and the incidence against DC would be the same asreported in Table 2. In other words, whether or not the affirmative case incidence ishigher on imports from LDCs or on imports from DCs depends on whether onefollows STRs or our convention for designating a case as affirmative.

14. Obviously, the avoidance of pricing practices which by US law trigger LFVpenalties will reduce the incidence of LFV complaints. A legal-economic explanationof import pricing practices proscribed by US law is given by Dickey [8].

REFERENCES

1. Bela Balassa, "The 'New Protectionism' and the International Economy," Jour-nal of World Trade Law, Vol. 15 (September-October, 1978), pp. 409-36.

2. W. H. Branson and N. Monoyios, "Factor Inputs in US Trade," Journal ofInternational Economics, Vol. 7 (May 1977), pp. 111-32.

3. Dean A. DeRosa, J. M. Finger, Stephen S. Golub, and William W. Nye, "Whatthe 'Zenith Case' Might Have Meant," Journal of World Trade Law, Vol. 13 (Janu-ary/February 1979), pp. 47-54.

4. William L. Dickey, "The Pricing of Imports into the United States," Journalof World Trade Law, Vol. 13 (May-June 1979), pp. 238-56.

5. , "Prevalent 'Myth' of Unfair Dumping Practices Challenged," Journalof Commerce, 1 February 1979, p. 4.

6. Dorothy Dwoskin, Trade Actions Monitoring System: Fourth Quarterly Report(Washington: US Office of the Special Representative for Trade Negotiations (pro-cessed) 15 June 1979, 16 January 1980).

"LESS THAN FAI VALUE" 279

7. J. M. Finger, "A New View of the Product Cycle Theory," WeltwirtschaftlichesArchiv, Vol. 111 (1975), pp. 79-99.

8. , "Trade Liberalization: A Public Choice Perspective," in Challenges toa Liberal International Economic Order (Washington: American Enterprise Insti-tute, 1980).

9. and Dean A. DeRosa, "Trade Overlap, Comparative Advantage andProtection," in Herbert Giersch, ed., On the Economics of Intra-Industry Trade(Tilbingen: Mohr, 1979), pp. 213-40.

10. Gene Gregory, "The Profits of Harassment," Far Eastern Economic Review,Vol. 106 (26 October 1979), pp. 74-79.

11. Gary C. Hufbauer, "The Impact of National Characteristics and Technologyon the Commodity Composition of Trade in Manufactured Goods," in RaymondVernon, ed., The Technology Factor in International Trade (New York: NationalBureau of Economic Research, 1970).

12. Robert S. McNamara, "Address to the United Nations Conference on Tradeand Development," Manila, Philippines, 10 May 1979.

13. Bharam Nowzad, "The Rise in Protectionism," Pamphlet Series No. 24 (Wash-ington: International Monetary Fund, 1978).

14. John S. Odell, "Latin American Industrial Exports and Trade Negotiationswith the United States," Working Paper No. 41 (Washington: Wilson Center, 1979).

No. 228. Guy P. Pfeffermann, "Latin Amei.:ca anc& the Caribbean: EconomicPerformance and Policies," Southwestern Revi4ew of Manaagemenlt andEconIo??iics

No. 229. Avishay Braverman and Joseph E. Stiglitz, "Sharecropping and theInterlinking of Agrarian Markets," American? Econiomic Review

No. 230. Abdun Noor, "Managing Adult Literacy Training," ProspectsNo. 231. Bela Balassa, "Shifting Patterns of World Trade and Competition,"

Grow?th an7d Enitreprenleurshlip7: Opportunlities an?d Chlalletnges in a ClhanlginlgWorld

No. 232. Johannes Bisschop, Wilfred Candler, John H. Duloy, and Gerald T.O'Mara, "The Indus Basin Model: A Special Application of Two-LevelLinear Programming," Mathemnatical Programnmning Study

No. 233. Keith Bradley and Alan Gelb, "Motivation and Control in theMondragon Experiment," and "The Replication and Sustainability ofthe Mondragon Experiment," Britishl Journial of Iniduistrial Relationls

No. 234. Gary P. Kutcher and Roger D. Norton, "Operations Research Methlodsin Agricultural Policy Analysis," Europeani Jouirnial of OperationalResearchl

No. 235. Bela Balassa, "Economic Reform in China," Banca Nazioinale del LaZ7oroQ uarterly/ ReViewt'

No. 236. S. van Wijnbergen, "Stagflationary Effects of Monetary StabilizationPolicies: A Quantitative Analysis of South Korea," Journial of Dezvelop-1?nenit Econ?1io?ics

No. 237. Gershon Feder, Richard Just, and Knud Ross, "Projecting DebtServicing Capacity of Developing Countries," Journzal of Finlanlcial anldQuantitative Analysis

No. 238. Richard H. Goldman and Lyn Squire, "Technical Change, Labor Use,and Income Distribution in the Muda Irrigation Project," EconomicDlez',lopnicnt anid Cuiltutral Claniige

No. 239. J. Michael Finger, "Trade and the Structure of American Industry,"Annlals of thle Amtiericani Academtiy of Political anid Social Scienlce

No. 240. David M.G. Newbery and Joseph E. Stiglitz, "Optimal CommodityStock-piling Rules," Oxford EconZomnic Papers

No. 241. Bela Balassa, "Disequilibrium Analysis in Developing Economies: AnOverview," World Dezvelopmnent

No. 242. T.N. Srinivasan, "General Equilibrium Theory, Project Evaluation,and Economic Development," The Theory anid Experienzce of EconomicDez)elopinent

No. 243. Emmanuel Jimenez, "The Value of Squatter Dwellings inDeveloping Economies," Econ1om?ic Dev)elopmient an?d Cultural Chanlge

No. 244. Boris Pleskovic and Marjan Dolenc, "Regional Development in aSocialist, Developing, and Multinational Country: The Case of Yugo-slavia," Initernzationzal Regionial Scienice Reviewl

No. 245. Mieko Nishimizu and John M. Page, Jr., "Total Factor ProductivityGrowth, Technological Progress, and Technical Efficiency Change:Dimensions of Productivity Change in Yugoslavia, 1965-78," TheEcon1o0nZic Journal

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