Class 122: Relief from Foreign Competition

1
Class 12/2 Relief from Foreign Competition

• Irwin, Chapter 4

2
The Escape Clause

• A U.S. domestic industry may claim to be hurt by
  imports
• Industry need not prove anything unfair, just
  that imports are main source of injury
• Section 201 of the Trade Act of 1974 industry
  can petition to International Trade Commission
  (ITC) for temporary relief
• If ITC reaches affirmative finding it recommends
  remedy to the President, who then decides whether
  to impose temporary tariff

3
Pros and Cons

• Pros
• Escape clause may help gain political support for
  free trade
• At least it is only temporary relief rather than
  a permanent tariff
• Cons
• Little evidence that it helps the industry
  perform better in the future
• Harley-Davidson example of success, may not be
  due to temporary relief

4
Example of Escape Clause

• Recent U.S. Steel Tariff of up to 30
• World Trade Organization (WTO) ruled the Steel
  Tariff illegal
• Europe threatened a trade war
• Bush is now likely to remove the tariffs a year
  early
• Turns out steel industry has continually asked
  for (and often gotten) protection from imports
  since 1969

5
Fair Trade Law

• Unfair trade Subsidizing exports
• Remedy impose countervailing duties on imports
  from countries subsidizing exports
• Unfair trade Dumping exports
• Remedy impose antidumping duties on imports from
  countries dumping exports

6
Countervailing Duties

• Uruguay round (which formed WTO) Agreement on
  Subsidies and Countervailing Measures, export
  subsidies prohibited
• Domestic firms petition the U.S. Department of
  Commerce (Commerce) and International Trade
  Commission (ITC)
• If Commerce finds export subsidy and ITC finds
  injury to domestic firm
• Impose CVD equal to subsidy margin

7
Dumping

• Dumping means selling abroad at a price below the
  domestic price
• Dumping could, in principle, indicate Predatory
  Pricing
• Predatory Pricing means selling at a price below
  your costs to permanently put competitors out of
  business.
• No evidence that predatory pricing is ever
  actually the motive of foreign firms.
• Nonetheless, Antidumping law is most popular form
  of trade protection.

8
Antidumping Law

• Firm that claims foreign competitors are dumping,
  petitions Commerce and ITC
• Commerce determines if dumping occurred, and if
  so, the dumping margin
• Dumping margin is often very large (over 50),
  particularly when there is no evidence.
• Problem is that Commerce is an advocate for U.S.
  industry but not U.S. consumers

9
Antidumping (cont.)

• In 93 of cases, Commerce ruled that dumping did
  occur
• ITC determines whether U.S. industry (or firm)
  suffered from less-than-fair-value imports.
• ITC finds injury in 66 of cases
• If so, antidumping duty is imposed, equal to the
  dumping margin.

10
Antidumping (cont.)

• In 2000, about 40 new antidumping investigations
• In 2000, about 300 antidumping orders in effect
• Sometimes small industries preserved mushrooms,
  fresh salmon, cut flowers from Colombia
• Cover less than 2 of imports
• Loss in welfare of 4 billion