Trade Remedies and “Tariff Overhang” at the WTO

Marc L. Busch, Georgetown

Krzysztof J. Pelc, Princeton and McGill

SummarySummary

• With nearly all tariffs bound under WTO With nearly all tariffs bound under WTO obligation, Members use other protectionismobligation, Members use other protectionism

• The most popular protectionist tools are so-called The most popular protectionist tools are so-called trade remedies: ADs, CVDs, and safeguardstrade remedies: ADs, CVDs, and safeguards

• But in fact, many countries have tariff overhang, But in fact, many countries have tariff overhang, and this influences their use of trade remedies and this influences their use of trade remedies

• WTO builds in flexibility, allowing Members to temporarily abrogate obligations in hard times.

• Trade remedies serve this purpose, but Members can also exploit tariff overhang, which averages 18%

• Each of these measures entails different costs and benefits to the user, and to the institution

Trade Rules and FlexibilityTrade Rules and Flexibility

Why Trade Remedies?Why Trade Remedies?

• There is evidence that flexibility allows Members There is evidence that flexibility allows Members to make deeper commitments to liberalizationto make deeper commitments to liberalization

• Trade remedies may also lower the barriers to Trade remedies may also lower the barriers to joining trade institutions, increasing membership joining trade institutions, increasing membership

• This is because ADs, CVDs and safeguards help This is because ADs, CVDs and safeguards help ease the political cost of adjusting to free tradeease the political cost of adjusting to free trade

Yet Flexibility Comes at a CostYet Flexibility Comes at a Cost

• Trade remedies create Trade remedies create uncertainty uncertainty and thus can and thus can reduce international commercereduce international commerce

• The easier it is to use trade remedies, the more The easier it is to use trade remedies, the more likely they are to be abusedlikely they are to be abused

• Trade remedies may thus simply substitute for tariff liberalization: law of constant protection

How do Trade Remedies Work?How do Trade Remedies Work?

• ADAD: Tariff applied to imported products thought : Tariff applied to imported products thought to be priced lower than fair market value to be priced lower than fair market value

• CVD: CVD: Tariff levied to offset a perceived subsidy Tariff levied to offset a perceived subsidy by a foreign governmentby a foreign government

• SafeguardSafeguard: Duty on import that has experienced : Duty on import that has experienced an unexpected surge, causing injury domesticallyan unexpected surge, causing injury domestically

Comparative Use of Trade RemediesComparative Use of Trade Remedies

Source: WTO Secretariat 2009

• 3220 AD investigations since 1995

• 83 Safeguard investigations since 1995

• 96 CVD investigations since 1995

Antidumping in Hard TimesAntidumping in Hard Times

Source: WTO Secretariat 2009

• In tough economic times, the pressure for import relief rises.In tough economic times, the pressure for import relief rises.

AntidumpingAntidumping

• The most used trade remedy is antidumping: The most used trade remedy is antidumping: targeted, easily extendable, no stringent criteria targeted, easily extendable, no stringent criteria

• Mostly used by developing countries (two thirds Mostly used by developing countries (two thirds of AD measures): India is by far the top user. of AD measures): India is by far the top user.

• Also sparks greatest number of WTO complaints: Also sparks greatest number of WTO complaints: 60 since 1995, vs. 20 on CVD, 34 on safeguards60 since 1995, vs. 20 on CVD, 34 on safeguards

AD Initiations, 1995-2008AD Initiations, 1995-2008

37 ADs versus China in first 6 months of 2008

1Q 2009, trade remedies up 18.8%, duties up 15.4%

Source: Global Trade Protection Report 2008

AD Initiations by Industry, 1995-2008AD Initiations by Industry, 1995-2008

Source: Global Trade Protection Report 2008

Main Targets of AD FilingMain Targets of AD Filing

Source: Global Trade Protection Report 2008

Country 2008 1995-2008

China 37 640

Korea 4 247

US 2 183

Taiwan 4 182

Japan 0 142

Indonesia 5 140

Thailand 7 136

India 2 133

Russia 0 107

Countervailing DutiesCountervailing Duties

• Like AD, countervailing duties offset perceived Like AD, countervailing duties offset perceived “unfair” measures “unfair” measures

• Used by developed countries (86% of measures) Used by developed countries (86% of measures) against developing countries (61% of targets) against developing countries (61% of targets)

• The amount of the duty is limited to the amount of The amount of the duty is limited to the amount of the alleged subsidy the alleged subsidy

CVD Investigations, 1995-2008CVD Investigations, 1995-2008

Source: Global Trade Protection Report 2008

Main Targets of CVD FilingMain Targets of CVD Filing

Source: Global Trade Protection Report 2008

Country 1995-2008

India 45

China 19

Korea 16

Italy 13

Indonesia 11

EC 10

Thailand 9

Canada 8

Brazil 7

Chinese Taipei 7

SafeguardsSafeguards

• Contingent on import increase, injury, and Contingent on import increase, injury, and “unforeseen developments”“unforeseen developments”

• Most frequent users are developing countries Most frequent users are developing countries (representing 89% of measures)(representing 89% of measures)

• Not targeted at a specific country, as opposed to Not targeted at a specific country, as opposed to either an AD or CVDeither an AD or CVD

Safeguard UsageSafeguard Usage

Source: Global Trade Protection Report 2008

Safeguard Investigations by WTO Members

Safeguards and CompensationSafeguards and Compensation

• Already under the GATT, Article XIX saw Already under the GATT, Article XIX saw decreasing rates of compensation decreasing rates of compensation

• Under the WTO, Under the WTO, no compensation no compensation has ever has ever been offered to affected parties been offered to affected parties

• The greater point: there is no “efficient The greater point: there is no “efficient breach” or “buy-out” option at the WTO breach” or “buy-out” option at the WTO

Tariff Cuts and the WTOTariff Cuts and the WTO

Before After

Developed Countries 78 99

Developing Countries 21 73

Transition Economies 73 98

Percentage of Tariffs Bound Before and After the 1986-94 Talks

• The Uruguay Round increased bindings…The Uruguay Round increased bindings…

Source: WTO

• Bound rates are the legal ceiling of protection

• Applied rates are the duties actually levied

• Bound rates are often set much higher than past or current applied duties, leaving considerable tariff overhang

Bound and Applied Agricultural Tariffs

Tariff Overhang as Contingent ProtectionTariff Overhang as Contingent Protection

Tariff Overhang and UnpredictabilityTariff Overhang and Unpredictability

• Exploiting tariff overhang is cheap, since there is Exploiting tariff overhang is cheap, since there is no legal check no legal check

• This ease of use leads to unpredictability, which This ease of use leads to unpredictability, which acts as a tax on tradeacts as a tax on trade

• Increasing overhang on a product by one standard Increasing overhang on a product by one standard deviation decreases imports by deviation decreases imports by 18%18%, on average , on average

Tariff OverhangTariff Overhang

• Many applied tariffs are up against the bound rate

• Governments have to be creative to be protectionist

Applied Tariff

Bound Tariff

Tariff Overhang

Source: WTO Document TN/MA/M/7

Tariff Binding and Trade RemediesTariff Binding and Trade Remedies

• Once a binding on a product takes effect, it is more likely to be targeted for trade remedies

• Past that binding point, the amount of tariff overhang influences use of trade remedies

• Thus, tariff overhang and trade remedies are inextricably linked

The Law of Constant Protection?The Law of Constant Protection?

• Increasing overhang by one standard deviation cuts the odds of trade remedies by 48%

ConclusionConclusion

• Some built in flexibility is a necessary element of Some built in flexibility is a necessary element of trade agreementstrade agreements

• Reliance on flexibility increases in tough times, or Reliance on flexibility increases in tough times, or in reaction to increased commitmentsin reaction to increased commitments

• Trade remedies limit unpredictability through Trade remedies limit unpredictability through legal checks; tariff overhang does not legal checks; tariff overhang does not

• The inability to use one type of flexibility may The inability to use one type of flexibility may increase reliance on other devices increase reliance on other devices