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International institutions and market expectations: Stock price responses to the WTO ruling on the 2002 U.S. steel tariffs


Many scholars assert that international institutions have little power to enforce laws, punish offenders, or force compliance. Others stress that international institutions are important actors, specifically in the regulation of international trade. In this paper, I show that the recent trade dispute over U.S. steel protection provides us with a critical case to evaluate the role of the World Trade Organization in settling trade disputes and specifically stabilizing expectations of market actors over future steel policy. I argue that stock prices can serve as an important tool in answering these questions. In an empirical analysis using daily steel stock prices, I find that during the 2002 WTO steel case, the WTO dispute mechanism helped market actors stabilize expectations of future trade policy.

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Fig. 1


  1. “U.S. Steel Tariffs Ruled Illegal, Sparking Potential Trade War.” Wall Street Journal 11/11/03, A1.

  2. Moore (2003: 109).

  3. The legal justification for these tariffs was done through Section 201 of U.S. Trade Law.

  4. The classic works are Waltz (1959, 1979) and Mearsheimer (1994). This is counter to former Director-General of the WTO Mike Moore’s (2003: 101) claim, “For what makes the WTO unique in the international architecture is the binding nature of its dispute mechanism.”

  5. See Martin and Simmons (1998) for a review of the literature.

  6. Many of these scholars argue that international institutions are strengthened when institutions are flexible enough via escape clauses to allow states to temporarily break agreements. See Downs and Rocke (1995), Korenmenos (2001, 2005), Rosendorff and Milner (2001), and Rosendorff (2005).

  7. Ideally, the WTO punishment mechanism would deter countries from violating multilateral trade laws.

  8. For example see Busch and Reinhardt (2004).

  9. For an interesting discussion of the impact of further legalization within the GATT/WTO framework see Goldstein and Martin (2000). For a formal treatment of the benefits of WTO membership see Bagwell and Staiger (2004). For an empirical test of the impact of the WTO on trade policy see Rose (2004). For an excellent overview of the WTO dispute mechanism see Lawrence (2003).

  10. See Jackson (1997) and Garrett and Smith (2004).

  11. Only WTO member governments may file complaints.

  12. Busch and Reinhardt (2004).

  13. World Trade Organization (2003).

  14. In practice major reversals by the AB are quite rare.

  15. Busch and Reinhardt (2002).

  16. Busch and Reinhardt (2003a).

  17. See Rosendorff (2005) for an argument on the value of the DSB for providing flexibility in the international trading system.

  18. See Elms (2004) for a discussion of the psychological aspects of trade disputes.

  19. See Chorev (2006) for U.S. trade policy in historical perspective.

  20. The United States International Trade Commission’s hearings on steel tariff policy provide further evidence of the companies and states involved. For example, on Oct 1, 2001 the USITC hearings included politicians from Michigan, Pennsylvania, West Virginia, and Ohio. See for witness lists and Senators present at the hearings.

  21. The analysis and recommendations for this tariff policy were solicited from the United States International Trade Commission.

  22. See See also Hufbauer and Goodrich (2003b).

  23. Under the WTO’s Dispute Understanding Article 22, all retaliatory measures have to be approved by an Article 22 arbitration panel.

  24. See Hufbauer and Goodrich (2003a) for on details on the case.

  25. Interview with WTO Legal Affairs (January 13, 2005).

  26. Neil King Jr. and Scott Miller. Wall Street Journal Update November 10 2003: “WTO Ruling Pressures Bush on U.S. Steel Tariffs.”

  27. Adam Entous and Doug Palmer Reuters Update 3 December 3, 2003: “Bush expected to lift steel tariffs on Thursday.”

  28. Wayne Washington, The Boston Globe Dec 5, 2003 page A1. “Bush Lifts Steel Import Tariffs.”

  29. For further treatment of the formulas for calculating stock prices, see Brealey and Myers (1991).

  30. The efficient market hypothesis suggests that current asset prices (stock price) are the best predictor of the future asset price.

  31. Freeman et al. (2000) argue that political institutions mitigate the impact of political information on financial markets. They argue that complex coalition politics and weak central banks limit the financial markets’ ability to react and adjust to political events. This argument is supported by the empirical analysis of Pantzalis et al. (2000). My argument is that the Freeman et al. (2000) critique strengthens the argument for using equity indexes as a proxy for expectations of future economic performance. That is, political events that have a positive impact on stock markets are events that should have a positive long run impact on the economy. In the case of WTO compliance, one could argue that the value of future economic cooperation can be measured in stock prices. Countries that lose WTO cases and refuse to comply will experience overall lower stock market returns. I leave these tests for future research.

  32. See Malkiel (2003) for an excellent review.

  33. All three of these indexes are price weighted indexes of a basket of steel stocks, the U.S. total market (highly correlated with the S&P 500), or a world market index.

  34. Author interview with WTO Legal Affairs (January 13, 2005).

  35. Author interview with WTO Legal Affairs (January 13, 2005).

  36. Author interview with WTO legal affairs (January 13, 2005). See WTO (1994) for information on the formal procedures governing information on panel hearings.

  37. They used the Iowa Political Stock Market as a proxy for expectations of the presidential election.

  38. See Dyckman et al. (1984) and Prabhala (1997) for a comparison of different event study analyses.

  39. I construct an unweighted index of steel company stocks that were most affected by the steel tariffs. Of the 19 publicly listed U.S. steel producers, seven firms both produce steel products covered by the steel tariffs and are major, traditional steel manufacturers. I provide more details on the coding of this variable in the Appendix.

  40. I thank an anonymous reviewer for this suggestion.

  41. For all regressions I use a 2 day window starting on the date of the announcement as the first trading day when traders could buy or sell stocks on the news of the WTO ruling or the Bush repeal of the tariffs.

  42. Formally, the conditional mean of the GARCH (1,1) model is: \( \begin{array}{*{20}c} {\log R_{t} }{ = \beta _{1} \log M_{t} + \beta _{2} W_{t} + \varepsilon _{t} } \\ {}{\varepsilon _{t} \sim N{\left( {0,\sigma ^{2} } \right)}.} \\ \end{array} \) LogR is defined as the log difference in the daily steel stock prices, ë is the constant, logM is the log difference of the U.S. total market index, W is a period dummy for different WTO ruling periods, and Ɛt is the error term distributed normally with a mean of zero. I model the conditional variance as:

    \( \sigma ^{2} = \omega + \alpha \varepsilon ^{2}_{{t - 1}} + \beta \sigma ^{2}_{{t - 1}} . \)

  43. Results available from the author.

  44. For all regressions, I use the date of the announcement as the first trading day when traders could buy or sell stocks on the news of the WTO ruling or the Bush repeal of the tariffs.

  45. I investigated all major newspapers in the Lexis–Nexis academic database.

  46. Other major steel producers include Bethlehem Steel (Chapter 11, purchased by International Steel Group), LTV (Chapter 11, purchased by International Steel Group), National Steel (Chapter 11), and North Star (owned by the private firm Cargill).

  47. Thomas Gnau. “AK Steel’s Acting Chief Executive Signals Change in Position on Tariffs.” Middletown Journal Oct 10, 2003 For a letter from CEO Wainsdrop to the House Ways and Means Committee on related tariffs in January of 2005 see


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Thanks to Nitsan Chorev, Robert Connolly, David Leblang, Quan Li, Andy Mertha, Layna Mosley, Bumba Mukherjee, Dan O’Neill, Eric Reinhardt, Katie Ridgeway, Peter Rosendorff, Matthew Slaughter, Andy Sobel, participants of the 2004 Midwest Political Science Association annual meeting and the 2004 Duke Summer Institute on Globalization, and Equity for comments and suggestions. Thanks to Natsuki Yamada for excellent data work. Funding for data collection and interviews with WTO legal affairs staff was provided by the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University, and other financial support by the UCLA International Institute.

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Correspondence to Nathan M. Jensen.



1.1 US Steel Companies and Affected US Steel Companies

Below is a list of all publicly listed U.S. steel firms available from DATASTREAM. I identify the more efficient mini mills from the older traditional U.S. steel producers (*) by utilizing public information from corporate reports and company analysis on the production technologies utilized by all firms. I construct an unweighted index of the affected U.S. steel companies used in Table 2.

AK Steel*

Allegheny Tech*

AM Castle

Carpenter Tech*

Commercial Mtls*




Olympic Steel

Oregon Steel





Steel Dynamics*

US Steel*

Universal Stainless



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Jensen, N.M. International institutions and market expectations: Stock price responses to the WTO ruling on the 2002 U.S. steel tariffs. Rev Int Org 2, 261–280 (2007).

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  • World Trade Organization
  • Tariffs
  • Trade
  • Steel
  • Protectionism

JEL Codes

  • F13
  • F14
  • F53
  • F59
  • K33