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World Trade Organization sanctions, implementation, and retaliation

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Abstract

This is the first empirical paper to investigate the response of shareholders to the application of WTO-authorized trade retaliation. We compare shareholder gains stemming from illegal trade subsidies with the losses generated by subsequent WTO-authorized retaliatory measures. Results indicate that the average increase in share returns of U.S. firms receiving subsidies provided by the “Byrd Amendment” exceeded the share declines experienced by firms targeted with associated retaliatory tariffs. Our results also suggest that retaliatory threats have a smaller impact on targeted firms when there is less certainty that protection will actually be implemented. In general, we believe that the relatively subdued response toward retaliation diminished pressure on U.S. policymakers to strike down the Byrd Amendment, as was mandated by the WTO. Apathy toward retaliation along with associated delays in WTO compliance by the U.S. may reflect a potential weakness on the part of WTO-authorized retaliation in serving as an effective political counterweight to pro-antidumping forces in the U.S.

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Notes

  1. See the appendix for a description of this multi-stage legal process. From an economic perspective, the theoretical advantages of unilateral free trade are so sound that economists have had difficulty providing a justification for why countries should require reciprocity, a cornerstone of the GATT/WTO. Bagwell and Staiger (1999, 2002), however, show that reciprocal trade agreements (i.e., a “balance of concessions”) can increase economic welfare by neutralizing negative terms-of-trade externalities that arise under unilateral liberalization. Thus, retaliation, which keeps concessions (access to markets) balanced, also neutralizes the terms-of-trade externalities caused by the protectionist policies which have been implemented by defendant countries. For this reason, the level of authorized sanctions should be commensurate with the loss of trade caused by the defendant country’s contested policy. According to the WTO legislation, “The level of the suspension of concessions or other obligations authorized...shall be equivalent to the level of the nullification or impairment.” See DSU Article 22.4.

  2. The Trade Act of 1974 and its extensions outline rules regarding the implementation of antidumping and countervailing duties. Antidumping duties protect domestic firms from “less-than-fair-value” pricing, while countervailing duties target imports that have benefited from subsidization by foreign governments.

  3. A substantial portion of this protection has been directed toward producers of steel and steel-containing products. Antidumping and countervailing duty caseload data from the USITC website indicate that around 43 % of the cases cover steel products, including steel mill products, pipes and tubes, and steel bearings. These same industries have also captured more than half of all Byrd disbursements.

  4. One source of controversy surrounding the Byrd Amendment was the stealthy manner in which the legislation was enacted. Although the CDSOA was first introduced to the U.S. House and Senate in 1999 by Ohio Republicans Rep. Ralph Regula and Senator Michael DeWine, the bill remained tied up in congressional trade oversight committees for almost two years, until Senator Robert Byrd (D-WV) proposed including it in the nearly completed agricultural appropriations bill of 2001. Prior to its passage, Senator Don Nickles (R-OK), asked, “...how many colleagues are even aware that this is in the bill?” (Congressional Record, 2000, 106th Cong., 2nd session, Vol. 146, pt. 126)

  5. See http://www.ebearing.com/legislation/agri-statement-2000.htm.

  6. These included Australia, Brazil, Canada, Chile, the European Union, India, Indonesia, Japan, Korea, Mexico, and Thailand.

  7. This figure was generated by modeling the adverse impact of Byrd disbursements on U.S. trade partners, which involved accounting for the value of disbursements, pass-through effects, and elasticities of substitution. For a complete description, see http://www.wto.org/english/tratop_e/dispu_e/217arb_a_e.pdf.

  8. The Japan , E.U., Mexico, and Canada were granted permission to apply tariffs that would lead to the collection of duties not to exceed 52, 28, 20.9, and 14 million, respectively. Allowances in subsequent years would adjust based on the value of disbursements distributed by U.S. Customs during the prior year.

  9. On September 28th, 2006, U.S. Customs and Border Protection formally announced that it would no longer distribute Byrd disbursements collected from Mexican and Canadian AD and CVD cases. This action followed a ruling by the Court of International Trade on July 14, 2006 (U.S. Trade October 6, 2006—Vol. 24 No. 40).

  10. The repeal of the CDSOA was part of the Deficit Reduction Omnibus Reconciliation Act of 2005.

  11. See CBP FY 2011 CDSOA Annual Disbursement Report: http://www.cbp.gov/xp/cgov/trade/priority_trade/add_cvd/cont_dump/cdsoa_11/

  12. See http://www.joc.com/trade/japan-extends-punitive-tarriffs-against-us and http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:086:0051:0052:EN:PDF.

    Table 2 Largest beneficiaries of the CDSOA
    Full size table

  13. See Tower (1975) for an analysis of retaliation under quantitative restrictions. Other studies have examined how these results are impacted by different preference structures or by the type of protective measure (Gorman 1958).

  14. Nevertheless, some critics claim that asymmetric bargaining power across member countries (especially between developed and developing countries) results in an inherently flawed WTO-dispute settlement system. Bagwell et al. (2004) investigate the possibility of using a system of Tradable Remedies, whereby countries that have won the right to impose retaliatory measures through WTO court ruling can auction off these rights when it believes that it is incapable of generating compliance through retaliatory measures on its own. Anderson (2002) and Ginsburgh and Weber (1997) also study problematic aspects of the retaliatory mechanism established in the WTO-dispute settlement process.

  15. The WTO Appellate ruling was in January 2003, while collection of duties to be disbursed continued until October 2007. E.U. and Japanese retaliation began in 2005 and is expected to continue until disbursements, which have declined dramatically, totally cease.

  16. This result is consistent with Ginsburgh and Weber (1997), which presents a model showing that the GATT/WTO retaliation mechanism prevents trade wars, although it does not necessarily result in free trade. In a related stream of the literature, Feinberg and Reynolds (2006, 2010) show that tit-for-tat retaliatory antidumping filings help explain the recent widening of countries involved in antidumping petitions.

  17. The threat of retaliation is measured by the degree to which the plaintiff’s market serves as an export destination from the defendant country. In cases where the developing country is the plaintiff, empirical results indicate that if the defendant country’s share of exports to the plaintiff’s market increases by 1 %, then the plaintiff’s import share in the defendant’s market increases by 4.9 % during the three years following the case. A consistent finding is reached with regard to cases in which the developing country serves as the defendant in a GATT/WTO dispute.

  18. Cross-retaliation would allow plaintiff countries to retaliate by suspending commitments held under other WTO agreements, such as those involving intellectual property rights protected under the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement.

  19. A 2004 non-technical Congressional Budget Office (CBO) study suggested that the CDSOA would have a number of adverse effects on the U.S. economy. These included an increase in AD petitions, encouragement of inefficient production (since the Byrd Amendment only rewards protection-seeking firms), and retaliation by U.S. trade partners.

  20. See Schmitz et al. (2006, 2009) for further discussion of optimal tariffs under the Byrd Amendment in the context of vertical markets.

  21. The mean duty rate during 1979-1999 was 45.4 %, with 12.7 % of the caseload (42 out of 331 total cases) with duty rates equal to or greater than 100 %. See https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/28xx/doc2895/antidumping.pdf.

  22. Annual dollar disbursement figures for each firm are posted on the U.S. Customs website.

  23. While antidumping and countervailing duties are used to protect industries from the “material injury” caused by “unfair” trade, safeguards protect domestic industries from the “serious injury” caused by fair trade. Thus, successful safeguard petitions do not require proof of unfair trade (i.e., dumping or illegal subsidization), but must show evidence that imports have caused or threaten serious injury to the domestic industry. In contrast, successful AD and CVD petitions only require evidence that unfair trade has caused or threaten “material” injury, a lower injury standard than what is required for safeguard protection. For a description of U.S. trade remedies, see http://www.usitc.gov/trade_remedy/index.htm.

  24. See Hartigan et al. (1989) for an event study of market reactions to non-steel U.S. antidumping petitions of the early 1980s. Their results show that firms that were found to be injured by dumping did not respond favorably to receiving antidumping protection, while firms that were only threatened with injury (as opposed to actual injury) did respond favorably to protection. Apparently, shareholders are more focused on the existence of injury rather than the benefit that protection might provide. In contrast, news of the threat of industry are less concerning to shareholders, and are overwhelmed by the positive effects that protection may provide.

  25. Interestingly, Rehbein and Starks (1995), who use event study methodology to study the impact of steel protection against Japan, do not find evidence that Japanese steel firms were able to capture a share of the economic rents generated by U.S. protectionist policies. However, the authors find that wealth effects vary depending on the particular form of protection and the individual firm. For example, changes in the Trigger Price Mechanism, a price control policy used from 1977–1982, had no discernable wealth effect on Japanese steel firms. Quantitative restrictions, in the form of voluntary export restraints (VERs), negatively impacted small Japanese firms in 1982 and again in 1984 (when the policy was expanded), while share returns of large firms experienced negative abnormal returns only in response to the 1984 VER.

  26. Mahdavi and Bhagwati (1994) also use event study methodology to analyze the consequences of trade protection in the U.S. semiconductor industry. They find that shareholders reacted negatively to AD investigations and positively to the Semiconductor Agreement of 1986.

  27. This could be an indication that downstream consumers of traditional commodities like steel focus more on rising input costs produced by upstream protection than on the dynamic economies of scale benefits that may stem from a healthier upstream industry.

  28. From 1977–1982, price floors were used in the form of the “Trigger Price Mechanism,” which required import prices to remain at par or above those offered by low-cost producer Japan. The penalty for undercutting Japanese import prices was to automatically face antidumping duties. From 1982–1984, a voluntary export restraint (VER) against EC steel exporters was used. Comprehensive VERs with all major foreign competitors except Canada were imposed between 1984 and 1992.

  29. Herander and Pupp (1991) also study lobbying in the steel industry. Their results indicate that that the cost of pursuing protection and the distribution of rewards serve as better determinants of firm participation compared to variables measuring the industry’s economic health. Furthermore, while free riding dampens participation, it is less severe in segments of the steel industry that has trade associations which help police member firms, and/or where benefits from protection are concentrated among only a few firms.

  30. The policy, known as the Foreign Sales Corporation (FSC), allows U.S. firms to exempt a fraction of export profits from taxation. Results from Desai and Hines (2008) showed that export-intensive firms forced to rely on the FSC (rather than another heavily used tax reduction policy) and those with higher profit margins, showed the greatest negative reaction to the initiation of the case. This latter finding is consistent with strategic trade models in which export subsidies enhance market power of a country’s oligopolistic competitors.

  31. The repeal of the CDSOA was included in the Deficit Reduction Omnibus Reconciliation Act of 2005, which President Bush signed into law on February 8, 2006. While President Bush’s support for the CDSOA’s repeal was clear, the outcome of the Senate’s vote remained uncertain until the end, ultimately requiring a tie-breaking vote by Vice President Dick Cheney.

  32. We initially ran the SUR specification to obtain the cumulative abnormal returns; however, specification tests favor the traditional OLS parameter method. We run the conventional method as described above. Karafiath (1988) notes that in many instances the dummy variable approach (OLS parameter method) yields similar results as the conventional method.

  33. \(Z\)-statistics are constructed to analyze the statistical significance of our CAR’s. The \(Z\)-statistic is distributed as a normal variable with a variance equal to the number of observations and has the formula: \(Z=\frac{\sum _{\mathrm{n}=1}^\mathrm{N} {\frac{\hbox {CAR}_\mathrm{n} }{\sqrt{\hbox {VAR}(\hbox {CAR}_\mathrm{n})}}} }{\sqrt{\hbox {N}}}\) where \(\hbox {CAR}_\mathrm{n}\) is the cumulative abnormal return for event (n), VAR indicates “variance,” and N is the number of events. This method controls for observations with high standard errors and get less weight in the \(Z\)-statistic.

  34. We also include a column displaying results for the generalized sign test, which controls for the normal asymmetry of positive and negative abnormal returns in the estimation period and identifies whether or not outliers are driving the results. Statistically significant results for a generalized test sign test indicate that estimated CARs are not due to outlier responses from particular firms.

  35. Reynolds (2008) analyzes this topic in greater detail.

  36. We also try weighting the Byrd disbursement variable by firm sales, since firms receiving larger disbursements relative to their size might be expected to show greater response to policy announcements. The results, however, change very little with this alternate specification, with the exception that the disbursements variable is now no longer significant on the “threat of retaliation” 11/11/04 event, although the sign of the CAR is still negative.

  37. New products were added because the amount of disbursements by the US increased, leading to an increase in the amount WTO-sanctioned retaliation. The EU wanted to keep the duty rate at 15 %, so it needed to add additional products to allow for the increase in the amount of retaliation. A lesser reason is that Bulgaria and Romania had just joined the EU, and disbursements connected to a single case involving steel pipes from Romania increased the amount of allowable retaliation. See http://webarchive.nationalarchives.gov.uk/+http://www.dti.gov.uk/europeandtrade/key-trade-issues/wto-disputes/page22747.html.

  38. Canada’s lag was four days, while the EU and Japan were both about one month.

  39. We also note that the U.S. firms targeted by India and Korea were conglomerates and/or had subsidiaries experiencing profits that may explain the observed positive CARs around the time of the retaliation announcement. For example, U.S. producers of goods targeted by India (including nuts, apples, and wheat) include makers of biodiesel and ethanol, which were highly profitable during this period. Moreover, firms facing Korean retaliation on washing preparations and glass products include multinational corporations such as Proctor & Gamble and Colgate-Palmolive, are multi-good suppliers. The positive CARs observed during the retaliation announcement may be due to the release of positive news concerning product lines unrelated to goods slated for retaliation.

  40. Removing the first announcement for Japan (which was likely affected by confounding announcements regarding the steel industry) produces a larger negative response to retaliation for all three-event windows now ranging from \(-\)3.58 to \(-\)0.69 %.

  41. In Liebman and Tomlin (2008), CARs ranged from \(-1.92\) to 3.9 % in the first announcement regarding the threat of retaliation.

  42. There have been reports of a “sequencing problem” as there have been issues with determining whether there has been less than full compliance to the DSB ruling. In this case, the DSU provides for a special procedure referred to as implementation or compliance panel.

  43. “Detailed information can be found at the WTO website under” Understanding the WTO: Settling Disputes - A unique Contribution. See http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm.

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Authors and Affiliations

  1. St. Joseph’s University, 5600 City Ave., Philadelphia, PA , 19131, USA

    Benjamin H. Liebman

  2. School of Business Administration, Oakland University, 355 Elliot Hall, Rochester, MI , 48309, USA

    Kasaundra Tomlin

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  1. Benjamin H. Liebman
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  2. Kasaundra Tomlin
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Correspondence to Benjamin H. Liebman.

Appendix A: Retaliation and the WTO

Appendix A: Retaliation and the WTO

Settling disputes is handled under the auspices of the Dispute Settlement Body (DSB), which consists of all WTO members. Disputes are governed by the Dispute Settlement Understanding (DSU) which delineates the rules and procedures for settling disputes in the WTO. A dispute arises when one country adopts a trade policy measure or takes some action that one or more WTO members consider to be breaking WTO agreements. The WTO cites three stages, which are target timelines and flexible in nature. Moreover, countries can settle their disputes on their own at any stage in the process. The first two stages may take up to a year, and an additional three months if an appeal is involved.

In the first stage, consultations and mediations between the governments occur. Essentially, both countries attempt to talk to each other to see if they can resolve their conflict independent of the dispute process. If consultations fail, the WTO director-general will attempt to mediate between the two countries. They have 60 days to reach a mutually agreed settlement. If a settlement is not reached, the complainant can move the dispute to stage two, where the case is evaluated by an appointed, independent panel of three legal/technical experts. The panel aids the DSB by making rulings or recommendations. The panel has six to nine months to complete its examination and produce a report containing its findings and written and oral statements by the governments involved in the dispute. Either side can appeal a panel’s ruling.

The Appellate Body (AB) is made up of three members of a permanent seven-member AB set up by DSB and broadly represents the range of WTO membership. The AB has between two to three months to review the appeal and produce a detailed report with its findings. The appeal can uphold, modify, or reverse the panel’s legal findings and conclusions. The DSB decides whether or not to adopt the initial panel and appellate body reports. The reports can only be rejected by consensus. If the DSB finds that the accused country (the respondent) is innocent, the case ends. However, if the accused country is found to have violated the agreement or commitment, the dispute moves to the third and final stage.

In the third stage, the implementation stage, the respondent government has a reasonable period of time to implement the DSB ruling. If at the end of this period of time the DSB ruling has not been put into practice by the respondent country, or instead compliance is “controversial” between the two governments, then: (1) the guilty party (government) may offer trade compensation, or (2) if compensation is unacceptable, the complainant government may request authorization to retaliate.Footnote 42 In principle, if the DSB imposes limited trade sanctions due to the inability to agree on compensation, the sanctions should be imposed in the same sector as the dispute. If this is impractical or ineffective, the sanctions can be imposed in a different sectors of the same agreement.Footnote 43

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Liebman, B.H., Tomlin, K. World Trade Organization sanctions, implementation, and retaliation. Empir Econ 48, 715–745 (2015). https://doi.org/10.1007/s00181-013-0794-2

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