Trade Policy, Agreements and Taxation of Multinationals

Transcription

1 Trade Policy, Agreements and Taxation of Multinationals Tariffs under imperfect competition and dumping Lecture 5 Meredith Crowley University of Cambridge July 2014 MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

2 Lecture 5: Trade policy under imperfect competition In the last lecture, we examined why governments set positive tariffs in competitive markets. In the first part of this lecture, we will look at the use of tariffs and quotas in imperfectly competitive markets. A case study of the US automobile VER (voluntary export restraint), a type of quota used in Different models of market competition that might fit observations on auto trade from the 1980s. In the second part of this lecture, we will study dumping and antidumping policy. International price discrimination Cyclical dumping Empirical evidence on cyclical dumping We will wrap up with a discussion of antidumping policy - is it fair? MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

3 The US Auto VER A case study of Reagan-era auto protectionism 1970 s: US auto industry in trouble; stiff competition from imported Japanese cars. 1981: US and Japanese governments agreed on a VER for autos, which restricted exports by all Japanese producers to the US till Interestingly, when the VER was announced, the stock prices of Japanese automakers shot up. The market seems to have believed that these restrictions would raise their profits. What model could be consistent with this? Cournot oligopoly Bertrand oligopoly MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

4 Import tariff under Cournot Duopoly Specific import tariff Assumptions: Two firms, a home firm (GM) and a foreign firm (Toyota) with variables denoted Both firms sell their output in the US. The product produced by GM is a perfect substitute for the product produced by Toyota. For simplicity, think of GM and Toyota producing identical cars. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

5 Import tariffs under Cournot Duopoly The problem of the home firm: The firm s first order condition is: max π = p(x, x )x c(x) x (1) π x = p(x, x ) + xp (x, x ) c (x) = 0 where p(x, x ) is the inverse demand function in the US x is sales of the home firm x is exports of the foreign firm to the home country c(x) is the home firm s cost function. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

6 Import tariffs under Cournot Duopoly Similarly, the problem of the foreign firm is : The foreign firm s first order condition is: max x π = p(x, x )x c (x ) (2) π x = p(x, x ) + x p (x, x ) c (x ) = 0 where p(x, x ) is theinverse demand function in the home country x is sales of the home firm x is exports of the foreign firm to the home country c (x ) is the foreign firm s cost function. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

7 Import tariffs under Cournot Duopoly Reaction Curves The first order conditions (1) and (2) are a system of two equations in two unknowns (x, x ). Solving simultaneously yields the reactions curves of home and foreign: (3) (4) x = r(x ) x = r(x) Because the goods are substitutes, the reaction curves are downward sloping in x x space. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

8 Import tariff under Cournot Duopoly Reaction curves under free trade x r(x ) r (x) x MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

9 Import tariff under Cournot Duopoly Reaction curves and Nash equilibrium under free trade x r(x ) x N r (x) x N x MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

10 Import tariff under Cournot Duopoly Suppose that the home country s government decides to charge a specific tariff on imports. This means that p(x, x ) τ is the price the foreign firm will receive for its exports. The foreign firm s problem is now: max x π = [p(x, x ) τ]x c (x ) The foreign firm s first order condition becomes: (5) π x = p(x, x ) τ + x p (x, x ) c (x ) = 0 Solving (5) simultaneously with the home firm s first order condition (1) gives the foreign firm s new reaction curve, x = r (x, τ). MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

11 Import tariff under Cournot Duopoly Reaction curves under a tariff x r(x ) x N r (x) r (x, τ) x N x MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

12 Import tariff under Cournot Duopoly Reaction curves and Nash equilibrium under a tariff x r(x ) x N x N (τ) r (x) r (x, τ) x N x N (τ) x MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

13 Import tariff under Cournot Duopoly Social Welfare in the home country under a tariff Social welfare is equal to consumer s surplus plus the firm s profits plus the tariff revenue. W = CS(x, x ) + [p(x, x )]x c(x) + τx Welfare increases under the tariff because the tariff strategically shifts equilibrium output away from the foreign firm and toward the home firm. x N (τ) > x N and x N (τ) < x N Because there are rents associated with sales in this model, the tariff is called a rent-shifting tariff. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

14 Import tariffs under Cournot Duopoly A specific application to GM and Toyota Assumptions: Car consumption in the US: Q = q T + q GM q GM is sales of GM q T is exports of Toyota to the US Demand for cars in the US: Q = 20, 000, 000 2, 000P Both firms have the cost function c(q) = $5000q. Suppose that the US government imposes an import tariff against Toyota of $1000 per car. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

15 Import tariffs under Cournot Duopoly GM and Toyota: Nash equilibrium under free trade MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

16 Import tariffs under Cournot Duopoly GM and Toyota: Toyota s reaction curve under a tariff MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

17 Import tariffs under Cournot Duopoly GM and Toyota: Nash equilibrium under a tariff MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

18 Import tariffs under Cournot Duopoly A specific application to GM and Toyota Summary Rent shifting: The tariff transfers some oligopolistic profits from foreign oligopolist to a domestic one. Rent shifting does not exist in a world of perfect competition. US consumers do see higher prices ($7000, versus $6667). Also, take into account the tariff revenue. Overall, US welfare can rise (as it does in the example in Fig 10.4). The tariff can raise US welfare by inducing Toyota to cede market share to GM. Clearly, Toyota is worse off under a tariff, so modeling the VER as a tariff under Cournot competition is not right. What if we model the VER as a quantitative restriction? Graphical analysis. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

19 Quotas under Cournot Duopoly GM and Toyota: Nash equilibrium under free trade MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

20 Quotas under Cournot Duopoly GM and Toyota: VER is a quota of size OT MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

21 Quotas under Cournot Duopoly GM and Toyota: New equilibrium under VER MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

22 Quotas under Cournot Duopoly A specific application to GM and Toyota Summary Rent shifting: The quota transfers some oligopolistic profits from foreign oligopolist to a domestic one. The tariff can raise US welfare by inducing Toyota to cede market share to GM. Note that Toyotas profits must go down: GM s US sales go up. Toyota is not able to choose its own quantity optimally in response. Thus, Toyota s profits cannot increase. Clearly, Toyota is worse off under a quota, so modeling the VER as a quota under Cournot competition is not right. What if we consider a different type of competition? Bertrand or price competition. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

23 Bertrand Duopoly Three approaches: 1 Krishna simultaneous-moves interpretation. 2 Harris Stackelberg leader interpretation. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

24 Bertrand Duopoly: Krishna simultaneous-moves Assume that GM and Toyota compete as Bertrand. Identical cars (for simplicity). No transport costs. Both have a marginal cost of $5,000. Free trade: Both price at $5,000 and split both markets. For concreteness, suppose that the demand curve is Q = 20,000,000-2,000P per year for each country. Then each firm sells 5 million cars in each market under free trade. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

25 Bertrand Duopoly: Krishna simultaneous-moves Now, add a VER that restricts Toyotas US sales to exactly 5,000,000 cars per year. Now, if Toyota still charges $5,000, GM will raise its price. If GM is expected to charge more than $5,000, Toyota will do so as well. There is no Nash equilibrium (outcome will be random). But we know that both firms will charge more than $5,000. In Krishna s phrase, trade restrictions are a facilitating device. They facilitate cartel-like behavior. Both firms make zero profits under free trade, but positive expected profits under the VER. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

26 Bertrand Duopoly: Harris Stackelberg model In this interpretation of the VER, GM is the Stackelberg leader. Toyota must wait to see what price GM will charge before setting its own price. Toyota sets the highest price consistent with being able to sell its full 5 million units. This generally means slightly undercutting GMs price. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

27 Bertrand Duopoly: Harris Stackelberg model Market Demand for Autos MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

28 Bertrand Duopoly: Harris Stackelberg model GM s Residual Demand under the VER MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

29 Bertrand Duopoly: Harris Stackelberg model GM acts as a monopolist with a constant marginal cost curve MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

30 Bertrand Duopoly: Harris Stackelberg model GM chooses the quantity where MR = MC MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

31 Bertrand Duopoly: Harris Stackelberg model Summary Similar to the Krishna model, both firms make positive profits under the VER, compared with zero profits under free trade. Both firms produce a smaller quantity for the US market under the VER (or no greater than they used to, for Toyota in the Harris Stackelberg case) than under trade. Thus, both Bertrand models, Krishna s and the Harris, fit the GM and Toyota case. But, Toyota and GM make different kinds of cars, is there a model that can capture this feature? MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

32 Dumping and Antidumping Policy Outline Motivation: Data about antidumping duties around the world. Dumping - definitions and associated models International price discrimination Cyclical dumping: temporary pricing below long run average cost What is dumping? Dumping is selling a product abroad at a price below normal value. Normal value is a legal term that is meant to convey the notion of a fair price. Under the international trade rules of the World Trade Organization (WTO), an importing country can impose an import tariff - an antidumping duty - if there is sufficient legal evidence that exporters are selling increased imports at dumped prices. Accusations of dumping and the antidumping duties that follow are frequently in the news. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

33 Dumping cases in the news: Chinese Solar Panels in the EU Europe Imposes a Tariff on Chinese Solar Panels, for Less Than Expected Solar panels at Yingli Solar in Baoding, China; the country is a major exporter of solar panels. Pillar Lee/Reuters By JAMES KANTER and KEITH BRADSHER Published: June 4, 2013 BRUSSELS The European Union s trade chief on Tuesday carried out his threat to impose tariffs on solar panels from China. But in a significant concession to Chinese lobbying and after opposition from some European leaders and industry executives, he significantly watered down the penalties. Karel De Gucht, the bloc s trade commissioner, said the tariffs would initially be 11.8 percent about a quarter of the amount he had been threatening to levy. But he said the tariffs would rise to 47.6 percent in August if the Beijing government did not remedy what he has claimed is a systematic effort by Chinese companies to sell solar panels in Europe below the cost of making them, a practice known as dumping. FACEBOOK TWITTER GOOGLE+ SAVE SHARE PRINT SINGLE PAGE REPRINTS The ball is in China s court, Mr. De Gucht said in a Brussels news conference Tuesday, referring to negotiations expected over the next two months. The MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

34 What is dumping? 1 International price discrimination dumping (rare today) occurs if p h > p f because demand is more elastic in foreign markets. 2 Cyclical dumping (more common today) occurs p f < LRATC temporarily. 3 Predatory dumping, a temporary price cut by a foreign producer intended to drive its competitors out of business, does not appear to occur anymore. However, the fear of a firm or industry being driven out of business by foreign competition is frequently raised as an important motivation for antidumping policy. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

35 How does antidumping policy work? The original idea was, if an import-competing sector was the target of predatory pricing by a foreign rival, the importing country would impose an offsetting antidumping duty to counteract the anticompetitive behavior. Little or no evidence of this. Today, an antidumping duty is an import tariff that is meant to raise the price of an imported good up to the level of a fair price. The magnitude of an antidumping duty is equal to the margin of dumping, i.e., some normal price minus the dumped price. Corrections are made to adjust for exchange rate fluctuations and net out transport costs before comparing the prices. Who benefits from an antidumping duty? Domestic producers who face less foreign competition. Who is hurt? Domestic consumers who must pay higher prices for goods. Why is this ironic? Antidumping policy was originally conceived as a form of consumer protection against anti-competitive practices like predatory pricing. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

36 What about the WTO? Doesn t it promote trade? Exceptions to the rule: Temporary Trade Barriers under the WTO The WTO Agreement restricts the use of import tariffs, but... a member of the WTO can raise import tariffs under: 1 The Agreement on Antidumping (AD) 2 The Agreement on Safeguards (SG) 3 The Agreement on Subsidies and Countervailing Measures (CVD), and 4 The transitional safeguard allowed under China s Accession Agreement to the WTO. (CSG) Quantitatively, antidumping duties are the most important of all of these Temporary Trade Barriers. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

37 What about the WTO? Exceptions to the rule: Temporary Trade Barriers under the WTO 1 An AD is a product-specific tariff used against one or a few countries when (a) the price of the product is unfair, (b) imports have increased dramatically, and (c) the domestic industry is performing poorly. 2 An SG is a (non-discriminatory) product-specific tariff used against all countries when (a) imports have increased unexpectedly and (b) the domestic industry is performing poorly. 3 A CVD is a product-specific tariff used against one or a few countries when (a) the firm receives government subsidies, (b) these subsidies distort trade and (c) the domestic industry is performing poorly. 4 A CSG is a transitional tariff against China used if Chinese imports increase dramatically. This policy ends in MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

38 What about the WTO? Tariffs and Temporary Trade Barriers under the WTO (Source: Bown and Crowley, 2014) MFN tariff binding coverage Economy (1) Emerging economy G20 members Average bound MFN tariff rate (2) Average applied MFN tariff rate in 1995* (3) Average applied MFN tariff rate in 2010 (4) TTB import product coverage in 1995 (5) TTB import product coverage in 2010 (6) Argentina Brazil China India Indonesia Mexico South Africa Turkey Emerging economy non-g20 members Colombia Malaysia Peru Philippines Thailand Industrialized economies as comparison United States European Union MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

39 What about the WTO? Manufacturing industries impacted by Temporary Trade Barriers HS code products prepared food, alcohol, tobacco 28 inorganic chemicals 29 organic chemicals 39 plastics 48 paper textiles and fabrics apparel 72 iron and stell 85 electrical machinery MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

40 What about the WTO? Temporary Trade Barriers by HS02 Products, China Rest of World Density Temporary Trade Barriers by HS02 Graphs by Target MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

41 What about the WTO? Magnitude of Antidumping Duties imposed by Brazil, EU, Korea, Turkey & USA, by Origin China Rest of World Density Antidumping Duty (%) Graphs by Target MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

42 What about the WTO? Why would a welfare maximizing government want to impose antidumping duties? It is not entirely clear and is an area of active research. Answers include the following: 1 The government is not maximizing welfare, it is maximizing the profits of domestic firms that are politically powerful. 2 In imperfectly competitive markets, antidumping duties can improve welfare by shifting rents from foreign firms to the importing country. 3 Antidmping duties are optimal tariffs. Large countries impose antidumping duties in sectors in which they have a lot of market power (the export supply elasticity they face is relatively inelastic. (Bown and Crowley, American Economic Review, 2013). MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

43 International Price Discrimination by a Monopolist Under some form of international market segmentation (no international arbitrage), firms can charge different prices across countries and will do so whenever it is profitable. Not only can firms charge a price higher than MC, but they can also charge different prices in their domestic market as compared to their export market. This is price discrimination. The firm is able to choose how much different groups of customers pay. There must be some reason that consumers in the high-price market cannot import directly from the low-cost market. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

44 International Price Discrimination by a Monopolist Assumptions: A foreign monopolist sells both to its local market and exports to Home. International arbitrage is not allowed. The monopolist is able to charge different prices in the two markets. The firm s demand in the export market is more elastic than in its home market. We assume that this occurs because there is more competition in the export market. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

45 International Price Discrimination by a Monopolist Monopolist s pricing in its local market Price The monopolist sells Q 1 to its local market. Local Price, P* C Local Marginal Revenue, MR* Local Demand, D* Q 1 Foreign Quantity Local Sales MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

46 International Price Discrimination by a Monopolist Monopolist s pricing in the Home market Price The monopolist sells Q x to its foreign market. Export Price, Px C Foreign Marginal Revenue, MR ForeignDemand, D Q x Foreign Quantity Exports MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

47 International Price Discrimination by a Monopolist Summary: The foreign monopolist is maximizing profits in both markets by charging the highest price that it can. There s nothing particularly predatory going on here. The foreign monopolist has a lot of monopoly power in its own market and charges a high price because demand is relatively inelastic. Why is demand relatively inelastic? We might think this is because there aren t any close substitutes for its output. However, in the importing country, demand is more elastic. Domestic firms in the importing country sell things that are close substitutes to the foreign monopolist s output. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

48 Cyclical Dumping by a Monopolist Most dumping cases today are cost-based dumping. The exporting firm is pricing below its long run ATC. In a cyclical dumping model, the firm prices at ATC or above ATC most of the time, but sometimes P < ATC. Why would a firm price below cost? Model Assumptions: A monopolist sells both to its local market and exports to a foreign country (denoted ). International arbitrage is not allowed. The monopolist is able to charge different prices in the two markets. The foreign market is perfectly competitive so that D = MR We revisit the monopolist s problem, but this time we focus on costs. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

49 Cyclical Dumping by a Monopolist The monopolist s problem in its domestic market P MC AT C MR D Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

50 Cyclical Dumping by a Monopolist The equilibrium monopoly price and quantity in the monopolist s domestic market P MC P m AT C MR D Q m Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

51 Cyclical Dumping by a Monopolist The monopolist s profits in its domestic market P MC P m AT C AT C m MR D Q m Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

52 Cyclical Dumping by a Monopolist The monopolist s problem it its foreign, competitive export market P MC AT C Dx = MRx Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

53 Cyclical Dumping by a Monopolist The monopolist s total quantity if it only serves the export market P MC AT C Dx = MRx QT Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

54 Cyclical Dumping by a Monopolist The monopolist s profits in the export market if it only serves that market P MC AT C Dx = MRx AT C T MR QT Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

55 Cyclical Dumping by a Monopolist The monopolist s optimal quantities for both markets P MC P m Dx = MRx AT C T MR D Qx Q m QT Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

56 Cyclical Dumping by a Monopolist The monopolist s profits from serving its domestic and the foreign export market P MC P m AT C Dx = MRx AT C T MR D Qx Q m QT Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

57 Cyclical Dumping by a Monopolist Summary of the monopolist s strategy under normal demand. The price-discriminating monopolist is charging different prices in two markets. Price-discrimination is a profit-maximizing strategy. The price in both locations is above ATC. This seems fair (it is not anti-competitive). Consider what happens when foreign demand fluctuates; perhaps for idiosyncratic reasons or perhaps in line with the business cycle. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

58 Cyclical Dumping by a Monopolist The monopolist s problem in the export market with normal demand P MC AT C Dx normal = MRx normal AV C Qnormal Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

59 Cyclical Dumping by a Monopolist The monopolist s problem when export demand is weak due to cyclical fluctuations P MC AT C Dx normal = MRx normal AV C Dx weak = MRx weak Qnormal Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

60 Cyclical Dumping by a Monopolist The monopolist s output choice under weak demand P MC AT C Dx normal = MRx normal AV C Dx weak = MRx weak Qweak Qnormal Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

61 Cyclical Dumping by a Monopolist The monopolist s economic losses when export demand is weak P MC AT C Dx normal = MRx normal AT C weak AV C Losses under weak export demand Dx weak = MRx weak Qshutdown Qweak Qnormal Q MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

62 Cyclical Dumping by a Monopolist Summary: For sufficiently large demand shifts and high fixed costs, the optimal price can fall below ATC The firm is still maximizing profits (in this case, that amounts to minimizing losses), but this type of price fluctuation is subject to sanctions under the rules of the WTO. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

63 Cyclical Dumping: Empirical Evidence Bown and Crowley, JIE, 2013 For the United States, European Union, South Korea, Australia, Canada... 1 Historically, what has been the relationship between macro shocks and import barriers? 2 What did this relationship predict for the Great Recession? 3 What actually happened to trade policy during the Great Recession? Analysis: 1 Estimate models of import protection as a function of macroeconomic fluctuations prior to the crisis (1988:Q1-2008:Q3) 2 Ese those models to predict out-of-sample import protection for 2008:Q4-2010:Q4, which we compared to realized import protection 3 Re-estimate the models on the longer sample (through 2010:Q4) and test for changes in the responsiveness of import protection to macroeconomic shocks across the two periods MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

64 Cyclical Dumping: Empirical Evidence Bown and Crowley, JIE, 2013 Between 1988:Q1 2008:Q3, more temporary trade barriers (TTBs) arise from... Rising domestic unemployment A one s.d. increase (0.86 percent pts) leads to a 52% increase in TTBs. Real appreciations in bilateral exchange rates A one s.d. increase (15 percent apprec.) leads to a 33% increase in TTBs. Weak GDP growth in a foreign trading partner A one s.d. decrease (3.5 percent pts) leads to a 60% increase in TTBs. For the Great Recession period... Pre-Great Recession models predict 15.4 percent of US non-oil imports would face new TTBs 14.0 percent of EU non-oil import would face new TTBs. Realized trade policy was 0.9 percent of US non-oil imports subject to new TTBs. 1.9 percent of EU non-oil imports subject to new TTBs. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

65 Cyclical Dumping: Empirical Evidence Bown and Crowley, JIE, 2013 What happened to trade policy during the Great Recession? Importing economies stopped targeting weak trading partners Policy-imposing economies refrained from imposing new import barriers against trading partners with weak or negative GDP growth during the Great Recession. Exchange rate depreciations Both the US dollar and Euro experienced sharp and persistent real depreciations; this relieved economic pressure for new US and EU TTBs. The fact that all countries imposed TTBs in the pre-great Recession period when GDP growth was weak is evidence in favor of the Cyclical Dumping model. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

66 Cyclical Dumping: Empirical Evidence Bown and Crowley (JDE, 2014) Examines 13 major emerging economies over : Argentina, Brazil, China, Colombia, India, Indonesia, Malaysia, Mexico, Peru, Philippines, South Africa, Thailand, and Turkey Collectively by 2010, 21 percent of world merchandise imports and 22 percent of world GDP Finds that TTBs in emerging economies are generally counter-cyclical. Import restrictions arise from... Weak domestic GDP growth - A one s.d. decrease led to a 32% increase in TTBs. Weak foreign GDP growth - A one s.d. decline led to a 16% increase in TTBs. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

67 Cyclical Dumping: Empirical Evidence Bown and Crowley (JDE, 2014) Percent change in HS-06 products subject to new import protection in response to one s.d. shock Real appreciation of bilateral exchange rate Negative shock to domestic economy Decline in foreign real GDP Increase in bilateral import growth Baseline (1) Substitute domestic unemployment (2) AD only (5) All TTB investigations (6) G20 only (7) Fig. 2. Temporary trade barrier responsiveness to macroeconomic shocks, Notes: PercentchangeinHS-06products subjectto new importprotection peryearper tradingpartner. BasedonTable3 modelestimates with specificationsgiven inparen one standarddeviation change ineachexplanatoryvariableawayfromthesamplemean, holding allothervariablesconstant. Models (1), (5), (6), and (7) areestimatedusin domestic realgdp growth rate as thenegative shockto thedomesticeconomy, whereasmodel (2) isestimatedusing the laggedchange inthelevel ofthe domesticunempl MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

68 Discussion Questions Both high-income and middle-income countries use antidumping duties and other temporary trade barriers when their domestic economy is performing poorly. Do you think this is fair? Who benefits from these policies? Who is hurt by them? Why do you think the WTO allows the use of antidumping duties and other temporary trade barriers? The antidumping duties that are imposed against China are much higher than the antidumping duties imposed against other countries. Explain why the countries that impose high antidumping duties on Chinese goods think this is fair. Explain why the Chinese firms that face these duties think that they are unfair. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

69 Summary In the first part of this lecture, we learned... under imperfect quantity competition, tariffs and quotas raise the welfare of the domestic producer. under imperfect price competition, tariffs and quotas raise the welfare of both domestic AND foreign producers. In the second part of this lecturie, we learned... Antidumping duties can be used when firms price discriminate in different markets if demand in their domestic market is relatively inelastic. Antidumpind duties can be used when an importing country experiences a cyclical downturn or weak GDP growth. MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70

70 Readings McLaren, International Trade, Chapter 10. Feenstra, Advanced International Trade, pp MC (University of Cambridge ) Trade Policy, Agreements and Taxation of Multinationals July / 70