Trade Remedies and Tariff Overhang at the WTO Marc L. Busch, Georgetown Krzysztof J. Pelc, Princeton and McGill

Summary With nearly all tariffs bound under WTO obligation, Members use other protectionism With nearly all tariffs bound under WTO obligation, Members use other protectionism The most popular protectionist tools are so-called trade remedies: ADs, CVDs, and safeguards The most popular protectionist tools are so-called trade remedies: ADs, CVDs, and safeguards But in fact, many countries have tariff overhang, and this influences their use of trade remedies But in fact, many countries have tariff overhang, 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 Flexibility

Why Trade Remedies? There is evidence that flexibility allows Members to make deeper commitments to liberalization There is evidence that flexibility allows Members to make deeper commitments to liberalization Trade remedies may also lower the barriers to joining trade institutions, increasing membership Trade remedies may also lower the barriers to joining trade institutions, increasing membership This is because ADs, CVDs and safeguards help ease the political cost of adjusting to free trade This is because ADs, CVDs and safeguards help ease the political cost of adjusting to free trade

Yet Flexibility Comes at a Cost Trade remedies create uncertainty and thus can reduce international commerce Trade remedies create uncertainty and thus can reduce international commerce The easier it is to use trade remedies, the more likely they are to be abused The easier it is to use trade remedies, the more likely they are to be abused Trade remedies may thus simply substitute for tariff liberalization: law of constant protection

How do Trade Remedies Work? AD: Tariff applied to imported products thought to be priced lower than fair market value AD: Tariff applied to imported products thought to be priced lower than fair market value CVD: Tariff levied to offset a perceived subsidy by a foreign government CVD: Tariff levied to offset a perceived subsidy by a foreign government Safeguard: Duty on import that has experienced an unexpected surge, causing injury domestically Safeguard: Duty on import that has experienced an unexpected surge, causing injury domestically

Comparative Use of Trade Remedies Source: WTO Secretariat AD investigations since Safeguard investigations since CVD investigations since 1995

Antidumping 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.

Antidumping The most used trade remedy is antidumping: targeted, easily extendable, no stringent criteria The most used trade remedy is antidumping: targeted, easily extendable, no stringent criteria Mostly used by developing countries (two thirds of AD measures): India is by far the top user. Mostly used by developing countries (two thirds of AD measures): India is by far the top user. Also sparks greatest number of WTO complaints: 60 since 1995, vs. 20 on CVD, 34 on safeguards Also sparks greatest number of WTO complaints: 60 since 1995, vs. 20 on CVD, 34 on safeguards

AD Initiations, ADs versus China in first 6 months of Q 2009, trade remedies up 18.8%, duties up 15.4% Source: Global Trade Protection Report 2008

AD Initiations by Industry, Source: Global Trade Protection Report 2008

Main Targets of AD Filing Source: Global Trade Protection Report 2008 Country China37640 Korea4247 US2183 Taiwan4182 Japan0142 Indonesia5140 Thailand7136 India2133 Russia0107

Countervailing Duties Like AD, countervailing duties offset perceived unfair measures Like AD, countervailing duties offset perceived unfair measures Used by developed countries (86% of measures) against developing countries (61% of targets) Used by developed countries (86% of measures) against developing countries (61% of targets) The amount of the duty is limited to the amount of the alleged subsidy The amount of the duty is limited to the amount of the alleged subsidy

CVD Investigations, Source: Global Trade Protection Report 2008

Main Targets of CVD Filing Source: Global Trade Protection Report 2008 Country India45 China19 Korea16 Italy13 Indonesia11 EC10 Thailand9 Canada8 Brazil7 Chinese Taipei7

Safeguards Contingent on import increase, injury, and unforeseen developments Contingent on import increase, injury, and unforeseen developments Most frequent users are developing countries (representing 89% of measures) Most frequent users are developing countries (representing 89% of measures) Not targeted at a specific country, as opposed to either an AD or CVD Not targeted at a specific country, as opposed to either an AD or CVD

Safeguard Usage Source: Global Trade Protection Report 2008 Safeguard Investigations by WTO Members

Safeguards and Compensation Already under the GATT, Article XIX saw decreasing rates of compensation Already under the GATT, Article XIX saw decreasing rates of compensation Under the WTO, no compensation has ever been offered to affected parties Under the WTO, no compensation has ever been offered to affected parties The greater point: there is no efficient breach or buy-out option at the WTO The greater point: there is no efficient breach or buy-out option at the WTO

Tariff Cuts and the WTO BeforeAfter Developed Countries7899 Developing Countries2173 Transition Economies7398 Percentage of Tariffs Bound Before and After the 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 Protection

Tariff Overhang and Unpredictability Exploiting tariff overhang is cheap, since there is no legal check Exploiting tariff overhang is cheap, since there is no legal check This ease of use leads to unpredictability, which acts as a tax on trade This ease of use leads to unpredictability, which acts as a tax on trade Increasing overhang on a product by one standard deviation decreases imports by 18%, on average Increasing overhang on a product by one standard deviation decreases imports by 18%, on average

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

Conclusion Some built in flexibility is a necessary element of trade agreements Some built in flexibility is a necessary element of trade agreements Reliance on flexibility increases in tough times, or in reaction to increased commitments Reliance on flexibility increases in tough times, or in reaction to increased commitments Trade remedies limit unpredictability through legal checks; tariff overhang does not Trade remedies limit unpredictability through legal checks; tariff overhang does not The inability to use one type of flexibility may increase reliance on other devices The inability to use one type of flexibility may increase reliance on other devices