Abstract
The Bagwell and Staiger (1990) theory of cooperative trade agreements predicts new tariffs (i) increase with imports, (ii) increase with the inverse of the sum of the import demand and export supply elasticities, and (iii) decrease with the variance of imports. The authors find US import policy during 1997-2006 to be consistent with this theory. A one standard deviation increase in import growth, the inverse of the sum of the import demand and export supply elasticity, and the standard deviation of import growth changes the probability that the US imposes an antidumping tariff by 35 percent, by 88 percent, and by -76 percent, respectively.
Highlights
The Bagwell and Staiger (1990) theory of cooperative trade agreements predicts new tariffs (i) increase with imports, (ii) increase with the inverse of the sum of the import demand and export supply elasticities, and (iii) decrease with the variance of imports
We estimate the empirical model of US antidumping and safeguard tariff formation on a panel dataset constructed from several primary data sources: (1) trade policy data for the US come from the World Bank’s Temporary Trade Barriers Database (Bown, 2010b), (2) US bilateral imports at the industry level come from the US International Trade Commission’s DataWeb, (3) industry-level foreign export supply elasticities facing the US come from Broda, Limao, and Weinstein (2008), (4) industry-level US import demand elasticities come from Broda, Greenfield, and Weinstein (2006), (5) variables describing the characteristics of US domestic industries come from the US Census Bureau, and (6) annual bilateral real exchange rates in foreign currency per US dollar come from the USDA Economic Research Service
We examine 49 of the US’s trading partners and find that the likelihood of an antidumping tariff rises by 35% (22%) in response to a one standard deviation increase in bilateral import growth, rises by 88% (106%) in response to a one standard deviation increase in the inverse sum of the elasticities of export supply and import demand, and falls by 76% (75%) in response to a one standard deviation increase in a measure of the variance of import growth
Summary
Bagwell and Staiger characterize the most cooperative trade policy equilibrium in a two country partial equilibrium model of trade. Bagwell and Staiger have shown, by direct calculation, that the incentive to defect from a cooperative free trade equilibrium is increasing in positive shocks to trade volume if and only if the efficiency loss of the tariff policy is sufficiently small: dΩ∗(·) dk∗. If the most cooperative tariff fails to rise, the importing country will defect because the within-period gain from defecting exceeds the discounted present value of infinite reversion to the Nash equilibrium This expression provides our first set of testable empirical predictions. We consider the special case of the Bagwell and Staiger model with linear import demand and export supply, 8Because trade volume shocks are assumed to be i.i.d., expected welfare is timeinvariant. This assumption seems reasonable because governments incur non-trivial administrative costs in order to change tariffs and most retaliation threats made under the WTO system have been limited to small sets of goods.
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