The WTO annually publishes the World Trade Report. The goal of the publication is to provide a broad understanding of trends in trade, trade policy, and the multilateral trading system. The theme of this year's report is ‘trade policy commitments and contingent protection’. While the topic of the report varies from year to year, the quality of the analysis is consistently high. In my view, the 2009 report sets a new standard for excellence. This study is the single best overview of legal and economic issues surrounding contingent protection currently available. It does a superb job, providing both a broad perspective of the topic and also a detailed discussion of findings. The report will be a valuable read for anyone – trade policy makers, aspiring academics, legal professionals – trying to get a handle on the reasons for and the effects of contingent trade measures. I recommend it without reservation.
In this review I will summarize some of the main arguments in the report and highlight some of the key policies discussed. I want to stress the comprehensive nature of the report: it discusses legal theories and WTO Appellate Body decisions regarding policy flexibility, reviews theoretical justifications for commitments and flexibility, and examines the extensive empirical literature on the consequences of contingent protection. My review will not and cannot do justice to any single part of the report.
The report begins by giving some perspective on how economists view trade agreements and the need for policy flexibility in trade agreements. Economists offer two main reasons why countries sign trade agreements. First, trade agreements restrict governments' ability to engage in welfare reducing beggar thy neighbor behavior. Second, they give credibility to trade policies. Yet, circumstances often develop that make the treaty's commitments more difficult to maintain than was anticipated during negotiations. Without some built-in flexibility, members would likely find themselves in regular non-compliance – a situation which would weaken the authority of all aspects of the agreement.
As a result, trade agreements need to balance the desire for commitments with the need for flexibility. An agreement with too much flexibility will undermine the value of commitments. An agreement with too little flexibility will likely make its rules unsustainable and, consequently, may make a treaty impossible to enact.
In the trade policy context, ‘flexibility’ refers to the wide variety of mechanisms available to WTO members to reduce to the cost of maintaining commitments in the midst of difficult economic situations. Contingent measures such as safeguards, antidumping, and countervailing duties are the most prominent examples of policy flexibility. Other examples of policy flexibility include renegotiations of tariff commitments, export taxes, and increases in applied tariffs (when below their bound levels).
Economic theory justifies including policy flexibility in agreements. First, flexibility allows countries to accept greater liberalization. If the political and/or economic environment does change, then flexibilities serve as a safety valve or insurance mechanism to maintain domestic political support for the agreement. Second, trade agreements are extraordinarily complex contracts. Nonetheless, even as complicated as they are, trade agreements do not specify each member's rights and responsibilities for all possible future states of the world. Policy flexibility can thus be interpreted as a by-product of the incompleteness of an agreement.
Flexibilities can take many forms. The safeguard provision is the classic form of policy flexibility and has been part of every GATT/WTO agreement since 1947. The WTO Safeguard Agreement (SGA) allows a member country to temporarily escape from its obligations under a certain set of defined circumstances. In particular, the domestic industry seeking trade restrictions must show that it is experiencing serious injury as a result of increased imports that are a result of unforeseen developments. Moreover, a causal link must be shown between the injury and the increased imports. In the course of a series of disputes, the Appellate Body has clarified what the SGA's broad language means and it is clear that the statute requires real evidence to justify safeguard action. As of the time of this writing, no challenged safeguard action has been found consistent with the SGA. The report does a particularly fine job of detailing both the legal and economic implications of each requirement. The report also does an excellent job explaining the economic importance played by the time limited application of safeguards and the role of compensation. While the report does not opine on the implementation problems of the current SGA, the discussion does suggest that the WTO agreement would be well served if members negotiated a more usable safeguard mechanism.
Over the past several decades, antidumping has emerged as the most commonly used mechanism to escape tariff commitments. Dumping refers to the practice of exporting goods at less than their normal price; antidumping allows member countries to levy offsetting tariffs when the dumped imports are shown to have caused, or threaten to cause, material injury to the domestic industry. The report includes a fine discussion of nearly all economic issues related to dumping and antidumping. It reviews theories of why firms dump and the welfare consequences of dumping and discusses the large literature on the costs and benefits of antidumping actions. The report does not just focus on economic issues, it also includes a very fine overview of the legal and statutory requirements for a member country to use antidumping protection. The report also reviews how domestic industries have been able to ‘capture’ antidumping law and use it as a collusive device. The report does a very good job of conveying not only that antidumping is the most frequently used contingent measure, but also that there is a large academic literature that offers many interesting perspectives on its use and abuse. As with the SGA, the report is careful not to take any policy position vis-à-vis antidumping. Nevertheless, it is difficult to read the report's review of the literature on antidumping and not conclude that the statute seriously needs some amended rules.
The report also devotes considerable attention to the legal and economic issues surrounding countervailing duties. Of particular interest is the report's discussion of the legal parallels between antidumping and countervailing duty laws, despite the vast differences in economic impact of dumping and subsidies. Dumping impacts only a single export market, while a government subsidy will affect sales in all export markets. While one would think countervailing duty law would have more parallels with safeguard rules, that is not the case. The report clarifies why the standard economic perspective on foreign subsidies (‘they are a gift’) is not the only economic consideration.
The discussion of the other measures of flexibilities is also quite interesting. One fascinating issue is tariff overhang. WTO member countries commit to tariff bindings, which are the maximum tariff it can levy for each given product. These tariff ceilings usually vary from product to product (i.e., vary by tariff line). The actual applied tariff, however, can be set anywhere between zero and the bound tariff.
For many countries and literally thousands of products, the applied tariff is set far below the bound level. This is sometimes referred to as having ‘water’ in the tariff or ‘tariff overhang’. Tariff overhang introduces a form of flexibility in WTO commitments. The report gives economic and political reasons why governments do not negotiate precise tariff levels and instead set tariff bindings that define upper bounds and why these same governments sometimes set their tariffs at levels significantly below their bindings. In simplest terms, governments do not have perfect foresight and value the flexibility. At the same time, the existence of bound rates gives some rigidity to the agreement.
Whether the agreement is more about flexibility or rigidity is an empirical question. The report accurately assesses the evidence in both directions. On the one hand, the report shows that for developed countries virtually all tariff lines are bound and most of these lines have relatively modest overhang. On the other hand, the report paints a very different picture for developing countries. Evidence is shown that for developing countries many tariff lines are unbound and those that are bound often have large overhang. In fact, it appears that in most of the developing world 70–90% of the tariffs could be raised by at least 15 percentage points, without violating WTO commitments. From my perspective, this is a lot of water, but the report offers reason to believe that this extent of flexibility might not be excessive.
The report concludes with an excellent and comprehensive discussion of the use of the various measures since the end of the Tokyo Round. The evidence is that flexibilities are generally correlated with the business cycle. This is most apparent in the use of the measures that require proof of injury (e.g., global safeguards, antidumping, countervailing duty), but is also seen in request for GATT Article XXVIII tariff renegotiations and increases in applied rates (for those with water). As far as how much of the tariff overhang is utilized, the report presents mixed results. It appears that about 80% of the increases are fairly ‘small’, which the report defines as an increase of less than 10 percentage points. On the other hand, 5–10% of the tariff increases exceed 20 percentage points. As compared with the amount of empirical work on the prominent contingent measures such as antidumping and global safeguards, there is little empirical work on tariff overhang outside that done by the WTO Secretariat. This is certainly an area that deserves more study.
All things considered, this report will earn a prime spot on my bookshelf. Not only do I foresee myself consulting it when I need a clear explanation of a contingent measure or a summary of the literature on the effects of these policies, but I also plan on making it mandatory reading for all of my graduate students who are searching for a research topic. This report is a great guide for those empirical questions that are in need of answers.
