Import-competing Industries Research Articles

How does import market power matter for trade agreements?

How does import market power matter for trade agreements?

Handwringing over how to slice the pie when USTR should be focused on growing it

The U.S. International Trade Commission (ITC) recently released its report on the distributional effects of trade and trade policy on U.S. workers and “underrepresented and underserved communities.” The report catalogs a host of information gathered from a literature review and several roundtables on the adverse effects of U.S. manufacturing imports. But the report’s laser focus on manufacturing imports leaves a huge gap for readers interested in the distributional effects of trade. Manufacturing imports are an important part of trade, but they aren’t all of trade. Trade is imports and exports, goods and services, inputs and final goods. Trade is manufacturing, but it’s also agriculture and services. And you need to look at the full picture to understand the distributional impacts of trade and trade policy. While trade can mean wage or job loss for a worker with skills specific to an import-competing industry, it can mean other things, too. Trade can be the average American household’s budget going further at Christmastime. Trade can be importing the widgets that used to be made here and exporting new high-tech manufacturing goods that use those imported widgets. Trade is what has helped one mom from Lithonia, Georgia, start her own online accessory and consignment store. Trade is the lifeline for much of U.S. agriculture. But the ITC report focused narrowly on the workers competing with manufacturing imports.

Labor Market Volatility, Gender, and Trade Preferences

Abstract What explains divides in the public’s support for trade protection? Traditional economic arguments primarily focus on individuals’ expectations for increased or decreased wages in the face of greater economic openness, yet studies testing such wage-based concerns identify a different divide as well: even after accounting for wage effects, women are typically more supportive of trade protection. We argue that trade-induced employment volatility and the resulting concerns for employment stability are overlooked factors that help explain the gender divide in attitudes. Due to both structural discrimination and societal norms, we theorize that working women are more responsive to the threat of trade-related employment instability than male counterparts. Using an experiment fielded on national samples in the USA and Canada, we find that most respondents have weak reactions to volatility, but volatility has a significant effect on women who are the most vulnerable to trade’s disruptive effects – those working in import-competing industries and those with limited education.

Challenged in Geneva: WTO Litigation Experience and the Design of Preferential Trade Agreements

Abstract What explains the design of international institutions? Existing research has largely neglected how experience in cooperation in one set of international institutions impacts on design choices made by states in other globally-oriented institutions. We contribute to this evolving debate by analyzing spillovers in experience in international trade. We argue that countries' track record of interaction in multilateral trade disputes affects the design of their preferential trade agreements (PTAs). If a country participates in a complaint against a prospective PTA partner at the World Trade Organization (WTO), the challenge in Geneva alerts the defendant's import-competing industries with respect to potential challenges under the planned PTA. As a result, these industries exert pressure on their government to preserve leeway under the future treaty, leading to increased flexibility and a lower level of enforcement in the PTA. We find support for our hypotheses in an empirical analysis of 347 PTAs concluded post 1990.

The trade policy effect in international trade: case of Pakistan

The debate on free trade and protectionism is ravaging in recent years. The industrialized countries are losing more and more market to the benefit of emerging countries. Liberals worry about new tariff barriers, while protectionists fear that unevenly distributed losses and gains will lead to significant economic dislocation of workers in import-competing industries. The economic policy of restricting imports and the economic policy of opening exports remain two critical measures of international trade. This study uses the gravity model to investigate the impacts of trade policy measures on trade flows between Pakistan and its dominant trading pattern for the period 2006 to 2015. The findings revealed the statistically significant correlation of trade policy variables on exports and imports. The study extended the analysis by examining four specificities groups of trade policy and continuing the analysis by estimating different country groups according to geographical or organizational clusters. The findings indicated that the specificities of trade policy have a statistically significant effect on exports and imports. Moreover, the signs of the coefficients are opposite in both models. The main political implication is that the proliferation of free trade agreements can have a positive impact on international trade.

Localized Effects of the China Trade Shock: Is There an Effect on Consumer Expenditure?

The paper contributes to a vast literature on the effects of recent rise in Chinese import competition on the U.S. local labor markets. The previous literature has shown that higher imports cause higher unemployment and reduced wages in local labor markets that house import-competing manufacturing industries. This paper revisits these findings and examines whether the exposure of local labor markets to increased import competition has an impact on local consumer expenditure. Using household scanner data, I show that the effect of the China trade shock on changes in local non-durable consumer expenditure in nominal and real terms are not distinguishable from zero. Moreover, I show that, in the period of 2000 to 2007, the localized China trade shock had a weak effect on average wages and median household income at the commuting zone level, which may explain why I observe no effect on household non-durable expenditure.

Lobbying Is a Biologically Necessary Transaction Cost in a Democracy

We explain why lobbying is a biologically necessary transaction cost in a democracy. We use lobbying for trade protection to illustrate because we have controls for other effects by using the Young and Magee [2] general equilibrium international trade model with 2 goods, 2 factors, 2 lobbies and 2 political parties, all maximizing in a game theoretic equilibrium. Our empirical estimates show that protectionist lobbying costs are low: 0.8 of one percent in our advanced countries and 0.2 of one percent for the US. There are political economy explanations for lobbying and corruption: money creates power and power creates money. There are biological explanations for lobbying: humans are carnivores and compete for power like animals in dominance hierarchies. Using both explanations, competitive lobbying is an equilibrium outcome. Our data focus on capital intensive exports compared to import-competing industries in 8 non-EC OECD countries in 1965 and 1986 and factor intensities of production from wage and capital earnings in 3-digit level ISIC data.

The Elusive Quest for Reducing Complexity Causation in the WTO Agreement on Safeguards

The WTO Agreement on Safeguards/SGA (besides other Agreements, which are not the focus of this paper) requires the presence of developments on the import side that cause – and not only coincide with – adverse effects (“injury”) to the import-competing industry in order to introduce trade remedies. The element of causation is of key importance since it establishes an economic relationship between trade flows and a corresponding domestic development which eventually justifies the introduction of a protective measure. However, causation has emerged as an unclear and controversial element of pertinent case law because language in all three Agreements is not very precise on the standards required to prove causation, and there are significant problems, both on the conceptual and operational level, to apply the requirement to concrete cases in a meaningful way. Much of the hitherto – economic as well as legal - discussion has been characterized by the implicit assumption that there is a “correct” way of conceptualizing causation in the SGA and, based on this, definitive results ultimately depend on improved methodology, more accurate models, and the generation of better data. The paper argues that this assumption is misguided since the complexity of the underlying relationships implies that (i) results will always depend on the (inter alia, econometric) methodology used; and (ii) underlying model parameters are bound to be unstable due to the inherent relation between the observer and the observed object, i.e. the possibility of behavioral adaptation to anticipated jurispudence that is based on a certain causality model. De lege ferenda, the paper proposes to explicitly acknowledge econom(etri)c modelling as a communicative device of conflict resolution on which parties can eventually agree, or to replace the SGA by a broader authorization for short-term supportive measures.

Rio Tinto's Ore Mining: Making Hay from Water

When the Rio Tinto mining company decided to increase its output of iron ore by 25% in its Marandoo location, it had to deal with an unexpected problem: an excess of water in the deep reaches of the mine. Because freshwater is a scarce resource in this region of Australia, Rio Tinto's challenge was to come up with a comprehensive water strategy for the region. This case is used in Darden's Economics of course elective. Excerpt UVA-GEM-0130 Rev. Aug. 17, 2016 Rio Tinto's Ore Mining: Making Hay from Water When contemplating Rio Tinto's phase-two plans for the Marandoo mine in Western Australia, one could only be reminded of Tom Albanese, former CEO of Rio Tinto, and his outspoken view that for Rio Tinto, water was a strategic issue and first and foremost an enabler for mining. In one of the driest places on Earth, the second-largest iron ore producer was grappling with a major water problem: an excess of water. In an aggressive effort to increase output and ride the wave of China's appetite for raw materials, Rio Tinto had chosen, among others, the Marandoo mine in remote Pilbara to increase its overall capacity to 360 million tons, up from 290million tons (see Exhibit 1). Considering the ever-decreasing amount of readily accessible iron ore, Rio Tinto wanted to drill deeper and was aiming for the vast stores of ore underneath the water table, which were often hundreds of meters below the earth's surface. The ambitious undertaking came, however, with particular challenges. Being able to operate the mine under such circumstances meant being able to dispose of the surplus water, a process often referred to as dewatering. It was an open question whether Rio Tinto was developing a template for iron ore mining in the 21st century by its approach to the Marandoo expansion project. The Changing Mining Landscape The mining industry had been booming in Australia and elsewhere since early 2000. Commodity prices were rising higher and for a more extended period of time than during the previous boom period of the 1970s. Rapid growth in Asia and especially in China was driving demand for commodities, particularly in steel and energy generation. The landscape was very different from that of the lackluster 1980s and 1990s with Japan's “lost decade” and the Asian Financial Crisis. The rise in commodity prices this time was accompanied by a shift in resources toward mining, which triggered a large increase in the real exchange rate of the Australian dollar. The latter challenged the competitiveness of both the export- and import-competing industries, to such an extent that some economists started talking about “Dutch Disease” in the context of Australia. Rio Tinto expected continued strong fundamentals, especially in iron ore demand, despite some slowdown in Chinese economic growth (see Exhibit2). . . .

International trade and economic insecurity

Whether or not international trade exposes workers to economic insecurity depends on the nature of the trade exposure of the firm, or industry, in which the worker is employed. Import-competing industries experience higher levels of risk to workers’ incomes and employment, while firms that import intermediate production stages (“offshoring”) display bigger employment responses to small changes in workers’ wages, and are more likely to shut down home factories. But offshoring also helps firms weather economic shocks. Offshoring firms are more likely to survive and provide greater employment stability to their workers.

Effects of the Great Recession on American Attitudes Toward Trade

Did the American public become more protectionist during the Great Recession of 2007–09? If so, why? During this period, many observers expressed concern that rising unemployment would stimulate protectionist pressures. The results of this study indicate that although increased unemployment did not affect the trade preferences of most Americans, individuals working in import-competing industries who lost their jobs during the Great Recession did grow more hostile to trade. However, even greater hostility to trade stemmed from a variety of non-material factors. Increasing ethnocentrism and opposition to involvement in world affairs between 2007 and 2009 help account for growing antipathy toward trade. But most importantly, increasing anxiety that foreign commerce would harm people in the future, even if it had not done so thus far, contributed to mounting opposition to trade among the American public.

Circumvention and Anti-Circumvention: Rising Protectionism in Australia

Abstract The article discusses circumvention and anti-circumvention in international trade with a focus on Australia's anti-circumvention mechanism and in particular the first anti-circumvention investigation in Australia. It identifies the major issues relating to circumvention and anti-circumvention in the GATT/WTO negotiations which have led to the failure of WTO members to conclude uniform rules on anti-circumvention. The article argues that multilateral anti-circumvention rules are necessary to standardize national anti-circumvention laws and practice and discipline unilateral use of anti-circumvention measures. The article further argues that Australia's anti-circumvention law and practice, as reflected in its first anti-circumvention investigation, may have violated WTO rules and is likely to lead to increasing protectionism to cost of WTO members and Australia's FTA trading partners. Australia's unjustified use of anti-circumvention measures is unlikely to foster the development of its import-competing industries and may provoke retaliation by other countries.

Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

We study whether R&D-intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax-induced changes to R&D cost. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (by about half when moving from the bottom quartile to the top quartile of R&D). As a result, while firms in import-competing industries cut capital expenditures and employment, R&D-intensive firms downsize considerably less. Finally, we provide evidence that these effects are explained by R&D allowing firms to increase product differentiation.

The Limited Economic Case for Subsidies Regulation

The International Centre for Trade and Sustainable Development has assembled a task force on Rethinking International Subsidy Disciplines. This paper, prepared for the task force, considers the economic case for general disciplines on subsidies by WTO member states. It considers the two principal economic arguments for such disciplines – the possibility that subsidies create negative international externalities for other nations, and the possibility that subsidies disciplines can tie the hands of member governments in a manner that discourages government waste. It concludes that a compelling case can be made for prohibiting new subsidies to import-competing industries that undermine negotiated market access concessions. The economic case for disciplines that go beyond this principle is weak for a variety of theoretical and practical reasons, although industry or sector-specific limits on subsidies may be useful in some instances.

THE RISE OF THE EAST AND THE FAR EAST: GERMAN LABOR MARKETS AND TRADE INTEGRATION

We analyze the effects of the unprecedented rise in trade between Germany and “the East” ‐ China and Eastern Europe ‐ in the period 1988‐2008 on German local labor markets. Using detailed administrative data, we exploit the cross-regional variation in initial industry structures and use trade flows of other high-income countries as instruments for regional import and export exposure. We find that the rise of “the East” in the world economy caused substantial job losses in German regions specialized in import-competing industries, both in manufacturing and beyond. Regions specialized in export-oriented industries, however, experienced even stronger employment gains and lower unemployment. In the aggregate, we estimate that this trade integration has caused some 493,000 additional jobs in the economy and contributed to retaining the manufacturing sector in Germany. We also conduct our analysis at the individual worker level, and find that trade had a stabilizing overall effect on employment relationships.

Free trade and the greening of domestic industry

Abstract In this paper we present an example where a domestic import-competing industry can benefit from a pollution tax borne by its consumers. We show that this pollution tax can be similar to a traditional trade barrier (such as a tariff) and can raise the price received by the domestic industry. Given an open economy, we highlight conditions under which domestic producers prefer a higher consumption-based pollution tax than is socially optimal. In contrast, when the economy is closed, we find that producers prefer a pollution tax that is lower than socially optimal. Domestic producers turn ‘green’ only when faced with import competition.

Anti-Dumping Duty and Firm Heterogeneity: Evidence from Korea

In general, AD policy is known to protect domestic producers from dumped products. In terms of “protection,” government implements AD policy by expecting domestic firms to gain competitiveness through increased productivity. Using Korean firm data, this paper analyzed the effects of AD protection on changed firm-level productivity before and after the imposition of AD duties.In contrast to results from recent AD research, we show a negative effect of AD protection on estimated productivity of protected firms during the AD protection period. Estimating the productivity of protected firms by comparison of various types of firms confirms the robustness of our results that AD protected firms experience productivity losses during the imposition of AD duties.Investigating the channels behind our results, we consider two factors; internal firm structure and external market conditions. We first examine the changes of company account variables that influence firm productivity during AD protection period. Using DID specifications, we find that AD protection do not have significant effects on average protected firms’ wages and investments in capital and R&D, implying that firms have no significant movements towards production shift during the protection period. On the other hand, examining the effects of domestic competition in protected industries on firm productivity, we find that firms have different productivity changes depending on the level of concentration intensity among import-competing industries. In particular, concentration reduces firm productivity in highly-concentrated industry clusters, while concentration has an ambiguous effect on firm productivity in moderately-concentrated industry clusters. These results provide evidence that the imposition of AD duties has heterogeneous effects on firm productivity depending on the market structures. All of our analysis implies that the effects of AD policy may lead to different consequences depending on the country characteristics. In particular, we show that if a country is not yet industrialized, such that its economy is affected by small number of large firms, AD policy will not likely be effective in gaining competitiveness among protected domestic firms.

Antidumping Petition, Foreign Direct Investment, and Strategic Exports

We examine how the protection-seeking effort of an import-competing industry, in the form of an antidumping petition, is affected by the foreign firm’s FDI opportunity. In equilibrium, the protection-seeking effort is either blockading, deterring, or accommodating FDI. When FDI is deterred, the protection-seeking effort decreases as the antidumping duty increases, and the foreign firm can benefit from an increase in the duty. Therefore, when the future duty depends on current exports, the foreign firm may increase its exports in order to dampen protection seeking. Namely, antidumping policy can induce more “dumping” when the foreign firm has an FDI opportunity.

The Rise of the East and the Far East: German Labor Markets and Trade Integration

We analyze effects of unprecedented rise in trade between Germany and the East – China and Eastern Europe – in period 1988-2008 on German local labor markets. Using detailed administrative data, we exploit cross-regional variation in initial industry structures and use trade flows of other high-income countries as instruments for regional import and export exposure. We find that rise of the East in world economy caused substantial job losses in German regions specialized in import-competing industries, both in manufacturing and beyond. Regions specialized in export-oriented industries, however, experienced even stronger employment gains and lower unemployment. In aggregate, we estimate that this trade integration has caused some 493,000 additional jobs in economy and contributed to retaining manufacturing sector in Germany. We also conduct our analysis at individual worker level, and find that trade had a stabilizing overall effect on employment relationships.

Dutch Disease in Australia: Policy Options for a Three‐Speed Economy

Abstract‘Dutch Disease’ refers to the adverse effects through real exchange rate appreciation that the mining boom can have on various export‐ and import‐competing industries. The distinction is made between the booming sector (mining), the lagging sector (exports not part of the booming sector and import‐competing goods and services) and the non‐tradeable sector. What should the government do to reduce this Dutch ‘disease’? The principal options are: do nothing, piecemeal protectionism, moderate exchange rate effects by running a fiscal surplus, combined with lowering the interest rate, and possibly establishing a sovereign wealth fund. The costs of the latter measures may be considerable.