Trade Remedy Provisions

Transcription

1 9 Trade Remedy Provisions Thomas J. Prusa The question of whether preferential trade agreements (PTAs) are good or bad for the global trade system has always been contentious. As experience has accumulated, our understanding of the consequences of PTAs has evolved. The traditional worries about welfare impacts associated with trade creation and diversion have been augmented by a multitude of new and unanticipated concerns. 1 Most countries have been reducing tariffs across the board for all partners on a nondiscriminatory basis, and the value of PTA preferences has, as a consequence, steadily fallen. How much trade creation or diversion can be expected when preferential rates are essentially the same as most favored nation (MFN) rates? 2 For many PTAs, therefore, the main welfare consequences are likely to stem from nontariff provisions. Indeed, as emphasized in this handbook, PTAs have increasingly come to address many issues beyond tariffs government procurement, labor standards, environmental protection, and so on. This chapter examines the potential effects of one such beyond-tariffs area, trade remedy provisions. The focus is on the most frequently used of these provisions: antidump - ing measures, countervailing duties (CVDs), and safeguard measures. Antidumping measures and countervailing duties are designed to sanction exporters who engage in unfair trading practices that cause material injury to domestic producers. These unfair practices can take the form of selling products below their normal price (dumping) or of benefiting from government-provided subsidies (the situation that CVDs are meant to address). By contrast, safeguard actions are designed to deal with unexpected circumstances arising in the course of fair trade. They can be imposed even if there has been no unfair trade practice, as long as imports have increased to such an extent that domestic producers have suffered serious injury. Because this material injury standard is considered weaker, and because antidumping measures and CVD protection are country specific, sanctions against unfair trade practices are generally easier to apply. World Trade Organization (WTO) rules require that, for all of the trade remedies discussed here, there be a link between change in trade volume and the imposition of trade protection; the existence of a causal link is generally determined by an administrative body in the importing country. An important precursor to the analysis reported here was the development of a database of PTA provisions. As of early 2009, the database contained detailed information on trade remedy provisions in 74 PTAs. The longer-run goal is to survey all PTAs reported to the WTO. Some PTAs include no language concerning specific trade remedies; others prohibit trade remedies against members. Often, PTAs allow trade remedies but add extra rules. The database permits us to dig deeper and look at which rules were actually included in the agreements. We are then able to determine whether certain rules are more common than others and whether countries that are involved in many PTAs are consistent in the provisions they enact in different agreements. The next section surveys some of the political and economic justifications for including trade remedy provisions in PTAs. The subsequent sections take advantage of the database to survey the provisions contained in the PTAs included. As a first step, the PTAs are divided into three groups: those with trade remedy rules, those that prohibit the use of trade remedies, and those without any trade remedy rules. Specific provisions are then scrutinized in greater detail. Next, the hub-and-spoke pattern of PTAs is discussed, along with the hubs use of trade remedy provisions. Despite considerable variation in rules within hubs, there is evidence of different North American and 179

2 180 Thomas J. Prusa European philosophies regarding trade remedies. The set of PTAs that have managed to prohibit one or more trade remedies is then examined. Finally, the chapter concludes with an analysis of the important issue of protection diversion. Before moving to the main discussion, a comment on terminology is useful: the terms trade remedies, contingent protection, and administered protection are employed interchangeably in this chapter. The Political Economy of the Need for Trade Remedies in PTAs The rationale for the inclusion of preferential tariff schedules and definitions of rules of origin in PTAs seems clear. It is less obvious why most PTAs devote significant language to amending and qualifying the use of trade remedies. One explanation for the widespread presence of trade remedies in PTAs is the political economy of protectionism (Tharakan 1995). The long-term process of tariff liberalization in the post World War II era has reduced tariff rates to very low levels worldwide. Import-competing sectors, however, still have an incentive to secure protection through whatever means they can find. With the most direct route (tariffs) eliminated, these interests turn to the next best alternative, contingent protection (trade remedies). A second, related argument is that contingent protection acts as a pressure-release valve that enables continued liberalization (Jackson 1997). Trade liberalization often imposes costs of adjustment on uncompetitive industries, and the incorporation of trade remedy measures in PTAs may be thought of as a way of managing the political consequences of these costs through a temporary reversal of liberalization. Empirically, it turns out that the trade remedy rules in PTAs often make granting protection more difficult. A third rationale explains why this might be so. The inclusion of PTA provisions that restrict the use of trade remedies is consistent with the view that contingent protection is necessary because countries are insufficiently open to trade. For example, Mastel (1998) argues that dumping is driven by closed home markets. The elimination of barriers to intra-pta trade reduces the ability of firms to dump, as they no longer have a protected home market where they can earn supernormal profits. 3 This third explanation is also consistent with the lack of rules on countervailing duties in PTAs. Specifically, given that most PTAs have failed to strengthen antisubsidy rules, the notion that there will be fewer subsidies and thus less need for countervailing duties is not supported. Each of the three explanations suggests that PTAs may alter the demand for trade remedy protection. On the one hand, import-competing sectors need to be assured that they can protect themselves from the unanticipated consequences of the regional liberalization program. Retaining trade remedies in the PTA helps maintain political support for the agreement. On the other hand, regional liberalization might eliminate unfair trade. To the extent that PTA trade remedy provisions offer new forms of protection or make existing forms of protection easier to obtain, they are similar to provisions in PTAs for long transition periods, complicated rules of origin, and carve-outs for sensitive sectors all of which result in slower liberalization for import-competing sectors. Instead of directly cushioning the effects of the PTA by drawing out the process of tariff elimination, trade remedies achieve a different cushioning effect by specifying a set of conditions injury to the domestic industry under which regional liberalization may be temporarily suspended or partially reversed. Bilateral safeguard rules are an example of rules that temporarily reverse preferential concessions. Such rules may hurt PTA partners and moderate beneficial trade creation, but they may be beneficial from a global perspective if they serve to lessen trade diversion. PTA provisions that make contingent protection more difficult to grant have more subtle effects. Abolishing or restricting the use of trade remedies with respect to PTA partners trade will most likely increase intrabloc trade. The welfare effects, however, are uncertain. The ambiguity stems from the well-known insight that preferential trade arrangements have both trade creation and trade diversion effects (Viner 1950). Rules on contingent protection can clearly both create and divert trade (Bown and Crowley 2007). The danger is that, as intraregional trade expands because of preferential tariffs, contingent protection will be increasingly directed at the imports of nonmembers. Bhagwati (1996) and Bhagwati and Panagariya (1996) foresaw this danger, arguing that the elastic and selective nature of contingent protection increases the risk that PTAs will lead to trade diversion. 4 As specific provisions are discussed in what follows, it is important to consider the conflicting motivations countries may have when negotiating agreements. If trade remedies serve primarily as pressure-release valves, PTAs should include provisions that make it easier for domestic industries to raise barriers, but if PTAs open up closed home markets, then, arguably, some trade provisions are not needed.

3 Trade Remedy Provisions 181 Incidence of Trade Remedy Actions Before discussing the role of trade remedies in PTAs, it is useful to review the incidence of trade remedy actions over the past decade. Table 9.1 presents data from notifications made by members to the WTO over the period. Whereas the other WTO exceptions infant industries, balance of payments, national security, and so on are rarely invoked, the provisions studied in this paper have been used literally hundreds (or, in the case of antidumping measures, thousands!) of times. 5 Countries clear preference for using antidumping rather than countervailing duty measures or safeguards is striking. As shown, there were nearly nine times more initiations of antidumping measures (3,220) than of countervailing duty (201) and safeguard (163) actions combined. 6 A similar discrepancy is seen in the number of measures applied. There has been a significant change in the use of these remedies. The four major users Australia, Canada, the European Union (EU), and the United States accounted for more than 90 percent of the contingent trade initiations during the 1980s and were the targets in more than 75 percent of the investigations (Prusa 2001). 7 By contrast, countries from all parts of the world are now active users and targets of contingent protection (Prusa 2005). Since 1995, 43 countries have initiated antidumping cases, 18 have initiated countervailing duty cases, and 30 have initiated global safeguard cases. Nearly 100 countries have been the subject of antidumping investigations, and 40 have been targeted in countervailing duty investigations. 8 The broadened set of uses and targets of trade remedies reflects increased globalization. Trade remedies can reinforce the trade diversion effects of a PTA: on average, the imposition of antidumping and countervailing duty measures reduces subject imports from the targeted country by about half (Prusa 2001). When faced with contingent protection measures, non-pta members will be at an even greater disadvantage than under preferential tariffs. The potential for such discrimination is clear for country-specific measures such as antidumping Table 9.1. Trade-Contingent Initiations and Measures in PTAs, Trade-contingent instrument Initiations Measures Antidumping measures 3,220 2,052 Countervailing duties Safeguards Source: WTO Secretariat. and countervailing duty measures, but it is also a major concern for global safeguards because provisions in PTAs often allow PTA members to be excluded from these safeguards (Bown 2004). Trade Remedy Provisions in PTAs PTAs vary in size, degree of integration, geographic scope, and members level of economic development, and the political and economic demands for trade remedy provisions across PTAs also necessarily vary. The proliferation and diversity of PTAs has produced a complicated pattern in the use and inclusion of trade remedy provisions across PTAs that defies simple characterization. Some PTAs contain long discussions of trade remedy rules; others do not even mention trade remedies. For some PTAs, the trade remedy provisions make protection easier, but in most cases they make it more difficult to impose. A simple characterization is impossible, not only because trade remedy provisions vary from one PTA to the next but also because provisions differ for the same country across different PTAs. For example, PTAs entered into by the United States have no specific antidumping provisions except for the North American Free Trade Agreement (NAFTA), which contains a number of these provisions notably, the creation of binational panels that review antidumping determinations made by national authorities. Similarly, the EU has entered into PTAs that have no antidumping rules, others that contain many antidumping rules, and even some that prohibit the use of antidumping. Diversity among PTAs Tables 9.2 and 9.3 present a summary of the 74 PTAs surveyed and their characteristics. With only four exceptions, the PTAs mapped were notified to the WTO. The database includes PTAs with members in Europe, North America, the Caribbean, Latin America, Asia and the Pacific, Africa, and the Middle East. The sample reflects the economic diversity of PTAs, covering as it does North-North, South- South, and North-South agreements. Most (46) of the sampled PTAs have a mix of developed and developing countries in their membership; 22 have only developing countries as members, and 6 have developed members only. 9 The sample is dominated by free trade agreements: 80 percent of the PTAs in the sample are free trade areas, 10 percent are customs unions, and 10 percent are preferential trade areas. 10

4 182 Thomas J. Prusa Table 9.2. Contingent Protection Rules in Selected PTAs Trade remedy Development Entry into Relevant GATT status of Countervailing Global Bilateral PTA force provision Type a members Antidumping duty safeguards safeguards AFTA 1992 Enabling Clause FTA Developing No rules No rules No rules Rules Andean Community 1993 CU Developing Rules Rules No rules Rules ANZCERTA 1990 Article XXIV FTA Developed Disallowed Rules No rules Rules Australia Singapore 2003 Article XXIV FTA Mixed Rules Rules No rules Disallowed Australia Thailand 2005 Article XXIV FTA Mixed Rules Rules Rules Rules Australia United States 2005 Article XXIV FTA Developed No rules No rules Rules Rules CACM 1961 Article XXIV CU Developing Rules Rules No rules No rules Canada Chile 1997 Article XXIV FTA Mixed Disallowed No rules Rules Rules Canada Costa Rica 2002 Article XXIV FTA Mixed Rules No rules Rules Rules Canada Israel 1997 Article XXIV FTA Mixed No rules Rules Rules Disallowed CARICOM 1973 Article XXIV CU Developing Rules Rules No rules Rules CEMAC 1999 Enabling Clause PTA Developing No rules No rules No rules No rules China Hong Kong SAR, China 2004 Article XXIV FTA Developing Disallowed Disallowed No rules Rules China Macao SAR, China 2004 Article XXIV FTA Developing Disallowed Disallowed No rules Rules COMESA 1994 Enabling Clause PTA Developing Rules Rules No rules Rules EEA 1994 Article XXIV FTA Developed Disallowed Disallowed No rules Rules EFTA 2001 Article XXIV FTA Developed Disallowed Disallowed No rules Rules EFTA Chile 2004 Article XXIV FTA Mixed Disallowed Rules Rules Rules EFTA Croatia 2002 Article XXIV FTA Mixed Rules Rules No rules Rules EFTA Israel 1993 Article XXIV FTA Mixed Rules Rules No rules Rules EFTA Jordan 2002 Article XXIV FTA Mixed Rules Rules No rules Rules EFTA Macedonia, FYR 2001 Article XXIV FTA Mixed Rules Rules No rules Rules EFTA Morocco 1999 Article XXIV FTA Mixed Rules Rules No rules Rules EFTA Palestinian Authority 1999 Article XXIV FTA Mixed Rules Rules No rules Rules EFTA Singapore 2003 Article XXIV FTA Mixed Disallowed Rules No rules Rules EFTA Tunisia 2005 Article XXIV FTA Mixed Rules Rules Rules Rules EFTA Turkey 1992 Article XXIV FTA Mixed Rules Rules No rules Rules EU 1958 Article XXIV CU Developed Disallowed Disallowed No rules Disallowed EU Algeria 1976 Article XXIV FTA Mixed Rules Rules Rules Rules EU Andorra 1991 Article XXIV CU Mixed No rules No rules No rules No rules EU Chile 2003 Article XXIV FTA Mixed Rules Rules Rules Rules EU Croatia 2002 Article XXIV FTA Mixed Rules Rules No rules Rules EU Egypt, Arab Rep Article XXIV FTA Mixed Rules Rules Rules Rules EU Faeroe Islands 1997 Article XXIV FTA Mixed Rules No rules No rules Rules EU Macedonia, FYR 2001 Article XXIV FTA Mixed Rules No rules No rules Rules EU Israel 2000 Article XXIV FTA Mixed Rules No rules No rules Rules EU Jordan 2002 Article XXIV FTA Mixed Rules No rules No rules Rules EU Lebanon 2003 Article XXIV FTA Mixed Rules Rules Rules Rules EU Mexico 2000 Article XXIV FTA Mixed Rules Rules No rules Rules EU Morocco 2000 Article XXIV FTA Mixed Rules No rules No rules Rules EU OCT 1971 Article XXIV FTA Mixed No rules No rules No rules Rules EU Palestinian Authority 1997 Article XXIV FTA Mixed Rules No rules No rules Rules EU South Africa 2000 Article XXIV FTA Mixed Rules Rules Rules Rules EU Switzerland Liechtenstein 1973 Article XXIV FTA Developed Rules No rules No rules Rules (continued next page)

5 Trade Remedy Provisions 183 Table 9.2. (continued) Trade remedy Development Entry into Relevant GATT status of Countervailing Global Bilateral PTA force provision Type a members Antidumping duty safeguards safeguards EU Syrian Arab Republic 1977 Article XXIV FTA Mixed Rules Rules No rules Rules EU Tunisia 1998 Article XXIV FTA Mixed Rules No rules No rules Rules EU Turkey 1996 Article XXIV CU Mixed Rules No rules No rules Rules GCC 1981 Enabling Clause PTA Developing No rules No rules No rules No rules Group of Three (Colombia, Mexico, and Venezuela, RB) 1995 FTA Developing Rules Rules Rules Rules Japan Singapore 2002 Article XXIV FTA Mixed No rules No rules Rules Rules Korea, Rep. Chile 2004 Article XXIV FTA Developing Rules Rules Rules Rules LAIA/ALADI 1981 Enabling Clause PTA Developing No rules No rules No rules Rules Mercosur 1991 Enabling Clause CU Developing Rules Rules No rules Disallowed Mexico Chile 1999 Article XXIV FTA Developing No rules No rules Rules Rules Mexico EFTA 2001 Article XXIV FTA Mixed Rules Rules No rules Rules Mexico Israel 2000 Article XXIV FTA Developing Rules Rules Rules Rules Mexico Japan 2005 Article XXIV FTA Mixed No rules No rules Rules Rules Mexico Nicaragua 1998 Article XXIV FTA Developing Rules Rules Rules Rules Mexico Northern Triangle 2001 FTA Developing Rules Rules Rules Rules Mexico Uruguay 2004 FTA Developing Rules Rules Rules Rules NAFTA 1994 Article XXIV FTA Mixed Rules Rules Rules Rules New Zealand Singapore 2001 Article XXIV FTA Mixed Rules No rules No rules Disallowed SADC 2000 Article XXIV FTA Developing Rules Rules No rules Rules SAFTA 1995 Enabling Clause PTA Developing Rules Rules No rules Rules SPARTECA 1981 Enabling Clause PTA Mixed Rules No rules No rules Rules Turkey Israel 1997 Article XXIV FTA Developing Rules No rules No rules Rules United States Bahrain 2006 Article XXIV FTA Mixed No rules No rules Rules Rules United States CAFTA-DR 2006 Article XXIV FTA Mixed No rules Rules Rules Rules United States Chile 2004 Article XXIV FTA Mixed No rules Rules Rules Rules United States Israel 1985 Article XXIV FTA Mixed No rules No rules No rules Rules United States Jordan 2001 Article XXIV FTA Mixed No rules No rules Rules Rules United States Morocco 2006 Article XXIV FTA Mixed No rules No rules Rules Rules United States Singapore 2004 Article XXIV FTA Mixed No rules No rules Rules Rules WAEMU/UEMOA 2000 Enabling Clause PTA Developing Rules No rules Rules Rules Source: Author s compilation. Note: Blank cells under Relevant GATT provision indicate PTAs not notified to the WTO. AFTA, ASEAN Free Trade Area; ANZCERTA, Australia New Zealand Closer Economic Relations Trade Agreement; ASEAN, Association of Southeast Asian Nations; CACM, Central American Common Market; CAFTA-DR, Dominican Republic Central America Free Trade Agreement; CARICOM, Caribbean Community; CEMAC, Economic and Monetary Community of Central Africa (Communauté Économique et Monétaire de l Afrique Centrale); COMESA, Common Market for Eastern and Southern Africa; EEA, European Economic Area; EFTA, European Free Trade Association; EU, European Union; GCC, Gulf Cooperation Council; LAIA/ALADI, Latin American Integration Association/Asociación Latinoamericana de Integración; Mercosur, Southern Cone Common Market (Mercado Común del Sur); NAFTA, North American Free Trade Agreement; OCT, Overseas Countries and Territories; SADC, Southern African Development Community; SAFTA, South Asian Free Trade Area; SAR, special administrative region; SPARTECA, South Pacific Regional Trade and Economic Cooperation Agreement; WAEMU/UEMOA, West African Economic and Monetary Union/Union Économique et Monétaire Ouest-Africaine. a. CU, customs union; FTA, free trade area; PTA, preferential trade agreement.

6 184 Thomas J. Prusa Table 9.3. Characteristics of PTAs Intra-PTA imports, 2005 Percentage (billions of Characteristic Number of total U.S. dollars) Relevant GATT provision Article XXIV Enabling Clause Unknown Type of agreement Customs union Free trade agreement Preferential trade agreement Development status of members Developed ,932.4 Developing Mixed ,307.7 Source: Author s compilation. Note: GATT, General Agreement on Tariffs and Trade. Numbers may not sum to totals because of rounding. The substantial variation in trade remedy provisions across PTAs likely reflects the diversity among PTAs. Size. Many PTAs involve fairly small amounts of intraregional trade; these include the Economic and Monetary Community of Central Africa (CEMAC, Communauté Économique et Monétaire de l Afrique Centrale); the agreements between the European Free Trade Association (EFTA) and Tunisia, Mexico, and Uruguay and between the United States and Bahrain; and the West African Economic and Monetary Union/Union Économique et Monétaire Ouest- Africaine (WAEMU/UEMOA). Others, including the EU, the European Economic Area (EEA), and NAFTA, involve substantial amounts of trade. PTAs with a great deal of trade may well have greater political demands for trade remedies than those with less trade. It is clear, however, that although size may matter, it is not the only determinant of trade remedy rules: the two largest PTAs, the EU and NAFTA, have very different philosophies about trade remedy rules, as do two of the smallest PTAs, CEMAC and EFTA Tunisia. Integration. There is no clear definition of integration with respect to PTAs, and PTAs differ greatly as to their degree of integration. Clearly, however, the extent to which PTAs go beyond simple tariff reductions influences the type of trade remedy provisions and the approach toward them. PTAs with deeper integration have adopted harmonized or common behind-the-border measures, they have allowed for free or freer movement of capital and labor, and some have even adopted a single currency. PTAs that aim at deeper integration are more likely to do away with trade remedy measures. Development status. Many PTAs have a mixed membership of developed and developing countries; others have only developing or developed countries as members. Developed countries such as Canada, the United States, and EU members have a long history with trade remedies that might change their political willingness to restrict or prohibit the use of these instruments. Legal basis. The PTAs in our survey represent about half of the total number of PTAs notified to the WTO under the General Agreement on Tariffs and Trade (GATT) Article XXIV and the Enabling Clause of As shown in table 9.3, about 82 percent of the PTAs in our sample were notified under Article XXIV of GATT and about 12 percent under the Enabling Clause. 12 Given its roots, PTAs notified under the Enabling Clause may have fewer rules. A First Look at the Provisions For this analysis, three key trade remedy provisions were mapped: antidumping measures, countervailing duties, and global safeguards. In addition, information was gathered on the provisions regarding bilateral safeguards. These are found in most PTAs and are meant to apply only to the trade of other PTA members. They provide a temporary escape hatch from PTA commitments. Generally, bilateral safeguards require evidence of increased imports from regional partners and of serious injury to the domestic industry. In this sense, they are similar to the other forms of contingent protection. A two-level template was adopted to facilitate the analysis and comparison of PTAs. First, for each provision, PTAs were mapped into three distinct groups: Those that disallow the remedy among the members Those with no language regarding the remedy Those with specific rules regarding the remedy. A quick glance at table 9.2 shows that there is considerable variation, both among PTAs and within provisions. Some PTAs prohibit the use of antidumping and countervailing duty remedies against members; in this group are the agreements between China and Hong Kong SAR, China, and between China and Macao SAR, China; the EEA; EFTA; and the EU. Others have no language for any of the main trade remedy laws, and some have no language for antidumping and countervailing duty measures but contain special provisions for global safeguards. Finally, many PTAs have extra rules for all the provisions studied. Some key differences among PTAs and trade remedy provisions emerge from the analysis: Antidumping is by far the most likely provision to be prohibited (see table 9.4). 13

7 Trade Remedy Provisions 185 Table 9.4. Summary of Contingent Protection Rules in PTAs Countervailing Global Bilateral Provision Antidumping duty safeguards safeguards Disallowed Number Percent No rules Number Percent Rules Number Percent Source: Author s compilation. PTAs are most likely to have no special rules concerning global safeguards. PTAs often have additional rules for antidumping and bilateral safeguards. Most PTAs either have no specific countervailing duty provisions or have very weak CVD rules. A reason may be that the economic impact of subsidies is rarely confined to intra-pta trade; subsidies affect global trade. Accordingly, there may be little economic justification for their inclusion in a PTA. What Provisions Are Included? As seen in table 9.4, PTAs often include rules for trade remedies. Details about the key rules contained in the PTAs are presented next, following which I discuss how often specific rules are included in the agreements. Antidumping. Box 9.1, point C, outlines specific categories of rules related to antidumping that may be included in PTAs. PTAs have modified four key requirements in antidumping investigations: de minimis dumping margins, de minimis dumping volumes, the lesser-duty rule, and the duration of final antidumping duties. Under WTO rules, an antidumping investigation is to be terminated immediately if the dumping margin is found to be less than 2 percent of the export price or if the volume of dumped imports from a particular country is less than 3 percent of imports. PTA provisions that specify higher de minimis dumping margins or higher de minimis volumes than the WTO benchmarks will treat PTA partners more favorably. This is because even though exports from PTA and non-pta sources may be found to have the same dumping margin, the investigation against the PTA member will terminate, while the investigation against non-pta sources will continue if the margin turns out to be higher than the WTO benchmark but less than or equal to that prescribed in the PTA. Multilateral rules encourage but do not mandate the application of an antidumping duty that is less than the dumping margin if a lesser duty would be adequate to remove the injury to the domestic industry. A lesser-duty rule or mandate in a PTA can provide a significant advantage to members. In the event that an antidumping action is taken by a country against a group of suppliers, some of which happen to be PTA members and others not, PTA partners will face a lower antidumping duty, even though the antidumping investigation might have found the same dumping margin against all suppliers. Under multilateral rules, definitive antidumping duties are to be terminated within five years from their imposition. Thus, PTAs that impose a shorter termination period on regional partners will give an advantage to exporters from those countries. Antidumping duties against exports from PTA partners will already have been phased out, while exports from non-pta partners can continue to be restrained by the duties. These four provisions (C.2 C.5 in box 9.1) modify existing WTO antidumping provisions. By contrast, the establishment of a regional body that has the power to conduct investigations, or the authority to review or remand final determinations of national authorities, is a unique innovation in PTAs. The PTA literature suggests that a regional institution can have a significant effect on the frequency of antidumping initiations and measures against PTA partners. The best-known example of such a regional institution occurs in Chapter 19 of NAFTA, which allows a binational panel to review the final antidumping or countervailing duty determination made by the authority of another NAFTA partner.

8 186 Thomas J. Prusa Box 9.1. Antidumping Template Box 9.2. Countervailing Duties Template A. Antidumping actions disallowed B. Antidumping actions allowed, but with no specific provisions C. Antidumping actions allowed, with specific provisions 1. Mutually acceptable solution 2. Different de minimis dumping margin 3. Different de minimis dumping volume 4. Lesser-duty rule 5. Different duration of antidumping duty 6. Regional body or committee a. Conducts investigations and decides on antidumping duties b. Reviews or remands final determinations c. Other A. Subsidies: Export subsidies on agriculture prohibited B. State aid: Incompatible if it distorts competition C. Countervailing duties 1. Disallowed 2. Allowed, but with no specific provisions 3. Allowed, with specific provisions a. Mutually acceptable solution b. Regional body or committee Conducts investigations and decides on countervailing duties Reviews or remands final determinations Other There are differing views on the impact of this specific provision. Using a time dummy to control for the pre-pta versus post-pta effect, Jones (2000) finds a statistically significant reduction in both U.S. antidumping filings against Canada and Canadian antidumping filings against the United States after NAFTA took effect. Blonigen (2005), however, incorporates information on actual panel activity and finds no evidence that binational reviews under Chapter 19 of NAFTA affected the frequency of U.S. filings or affirmative determinations against Canada and Mexico. The fact that the United States has refused to include a similar provision in any subsequent PTAs suggests that U.S. policy makers believe that the binational panels have altered the pattern of protection. Countervailing duties. In contrast with the provisions on antidumping, which address key statutory criteria, the provisions concerning countervailing duties include very few substantive rules (see box 9.2). As previously discussed, this absence is probably related to the lack of limits on state aid and subsidies in PTAs. Two provisions regarding countervailing duties appear noteworthy. First, some PTAs specify a series of steps that members are first required to take to try to reach a mutually satisfactory outcome before the countervailing duty investigation begins. Such provisions might lead to fewer disputes, although to date there is no empirical evidence regarding their impact. Second, provisions giving regional bodies the ability to conduct countervailing duty investigations or to review and remand final determinations have received significant attention, and there is some empirical support for the hypothesis that they do reduce the number of disputes. Global safeguards. Provisions that allow PTAs to exclude members from global safeguard actions have received considerable attention. Imports from PTA members may be Box 9.3. Global Safeguards Template A. Rights and obligations under GATT Article XIX/ Safeguards Agreement retained B. PTA members excluded from global actions under defined conditions 1. Grounds for exclusion a. Imports from the other party do not account for a substantial share of total imports b. Imports from the other party do not contribute to serious injury or threat thereof 2. Definitions a. Substantial share Imports are among the top five suppliers during the most recent three-year period Exports jointly account for 80 percent of the total imports of the importing country b. Contribute importantly to serious injury Growth rate of imports from a party is lower than the growth rate of imports from all sources excluded from a global safeguard action if those imports do not account for a substantial share of total imports and if they do not contribute to serious injury or the threat thereof (box 9.3). Most PTAs describe very precisely what is meant by substantial share of total imports and contribute importantly to serious injury. For example, a number of PTAs state that imports from a PTA partner do not constitute a substantial share of total imports if that partner is not among the top five suppliers during the most recent three-year period. Similarly, imports from a PTA partner do not contribute importantly to serious injury or threat thereof if the growth rate of those imports during the period of serious injury is appreciably lower than the growth rate of total imports from all sources. The WTO Appellate Body has repeatedly rejected safeguard actions from which PTA partners are excluded. As noted earlier, these exclusions are highly contentious and have prompted non-pta members to file multiple WTO

9 Trade Remedy Provisions 187 dispute cases. In each case, the Appellate Body had ruled against the WTO member s exclusion of PTA partners. Bilateral safeguards. There are two types of bilateral safeguards: transition safeguards and special safeguards. Transition safeguards are designed to mitigate the costs incurred as industries adjust to the preferential tariffs and often can only be imposed during the transition period. Special safeguards are provisions for products or sectors that are politically sensitive. PTAs often include extensive language defining when and for how long bilateral safeguards can be imposed (see box 9.4). Part of the reason for this detail might be the absence of analogous WTO provisions specifying the default behavior unlike the case with the other trade remedies. The role of regional bodies in bilateral safeguard actions is noteworthy. Regional institutions might have a coordinating function, serving for example, as clearinghouses for information on emergency action. Alternatively, regional authorities could conduct safeguard investigations or review safeguard measures taken by national authorities. Box 9.4. Bilateral Safeguards Template A. Safeguard measures disallowed B. Safeguard measures allowed, but with no specific provisions C. Safeguard measures allowed, with specific provisions 1. Conditions for application of safeguard a. Increasing imports cause serious injury to domestic industry b. During transition period, reductions in tariffs lead to increased imports and to serious injury c. Other 2. Mutually acceptable solution 3. Investigation 4. Application of safeguard measures a. Only to the extent necessary to remedy serious injury and facilitate adjustment b. Suspension of concessions, tariff reduction, or reversion to most favored nation rates c. Other 5. Provisional measures 6. Duration and review of safeguard measures a. Less than four years duration b. Not allowed beyond transition period 7. Maintenance of equivalent level of concessions (compensation) 8. Suspension of equivalent concessions (retaliation) 9. Regional body or committee a. Conducts investigations and decides on safeguard duties b. Reviews or remands final determinations c. Other 10. Notification and consultation 11. Special safeguards The special safeguard provisions in the PTAs are usually applied to agricultural products and textiles and clothing, which in many countries are the most difficult sectors to liberalize. Products or sectors that are hard to liberalize at the multilateral level are also hard to liberalize in PTAs and require special safeguard treatment. Hub-and-Spoke Pattern A review of the list of PTAs in table 9.2 shows that the proliferation of PTAs has not happened by chance; rather, a small set of countries recurs as members of most PTAs. Put differently, there is a pronounced hub-and-spoke and cross-regional pattern in the PTAs in the sample. The largest constellations are grouped around the EU, EFTA, and the United States (figure 9.1), but there are other active PTA players, including Mexico, with 9 PTAs, Singapore (6), Australia (5), Chile (5), and Canada (4). The prominent hub-and-spoke and cross-regional pattern of the PTAs in the sample raises the question of whether there are identifiable features in the trade remedy provisions negotiated by the hubs. The hypothesis is that each major hub negotiates according to certain key principles. The rules and philosophy may vary across hubs, but we expect consistency within a hub. Table 9.5 presents a summary of the provisions in each PTA. Looking first at the antidumping provisions, we see that EFTA and the EU have a different philosophy than the other major hubs, notably the United States. Among the EU s PTAs, 90 percent either prohibit antidumping measures or limit their use. All of EFTA s agreements either prohibit or limit the use of antidumping. By contrast, almost 90 percent of U.S. PTAs contain no language on antidumping, and, indeed, it is clear that the United States is the least open of all hubs to the inclusion of antidumping provisions in PTAs. This does not imply that any of the hubs consistently incorporates the same rules in each (or even most) agreements. Table 9.6 shows whether a rule is included in the majority of each hub s agreements. When the hubs are inspected more closely, there is little evidence that any of them negotiate the same rules in all their PTAs. For instance, for only five hubs the EC, EFTA, Mexico, Australia, and Canada are there antidumping rules in most of the agreements, and only in the EC and EFTA do most agreements contain the same substantive provision. Moreover, this provision (regarding a mutually acceptable solution) involves rather weak language. The other three hubs often have antidumping rules, but for no hub is a particular rule included in most of the agreements. Thus, while it is fair to say that the Europeans are more

10 188 Thomas J. Prusa Figure 9.1. Hub-and-Spoke and Cross-Regional Arrangement of PTAs EU EFTA Mexico United States Singapore Chile Australia Canada EU EEA EU Turkey EU Tunisia EU Syrian Arab Republic EU Switzerland Liechtenstein EU South Africa EU Palestinian Authority EU OCT EU Morocco EU Mexico EFTA Turkey EFTA Tunisia EFTA Singapore EFTA Palestinian Authority EFTA Morocco EFTA Jordan EFTA Israel EFTA Macedonia, FYR EFTA Croatia NAFTA Mexico Uruguay Mexico Northern Triangle Mexico Nicaragua Mexico Japan Mexico Israel Mexico EFTA Mexico Chile Group of Three U.S. Singapore U.S. Morocco U.S. Jordan U.S. Israel U.S. Chile Australia U.S. U.S. CAFTA-DR U.S. Bahrain NAFTA U.S. Singapore New Zealand Singapore Japan Singapore EFTA Singapore Australia Singapore AFTA U.S. Chile Mexico Chile Korea, Rep. Chile EU Chile Canada Chile SPARTECA ANZCERTA Australia U.S. Australia Thailand Australia Singapore NAFTA Canada Israel Canada Costa Rica Canada Chile EU Lebanon EFTA Chile EU Jordan EFTA EU Israel EEA EU Faeroe Islands EU Macedonia, FYR EU Egypt, Arab Rep. EU Croatia EU Chile EU Andorra EU Algeria Source: Author s compilation. Note: AFTA, ASEAN Free Trade Area; ANZCERTA, Australia New Zealand Closer Economic Relations Trade Agreement; ASEAN, Association of Southeast Asian Nations; CAFTA-DR, Dominican Republic Central America Free Trade Agreement; EEA, European Economic Area; EFTA, European Free Trade Association; EU, European Union; Mercosur, Southern Cone Common Market (Mercado Común del Sur); NAFTA, North American Free Trade Agreement; OCT, Overseas Countries and Territories; SPARTECA, South Pacific Regional Trade and Economic Cooperation Agreement. open than the United States to incorporating antidumping provisions in PTAs, there is not compelling evidence that the European PTAs are consistent in the precise rules they negotiate. Ironically, PTAs appear to have a more unified approach toward countervailing duties. The commonality seems to be that extra provisions are not included in regional agreements. With the exception of EFTA and, to a lesser extent,

11 Trade Remedy Provisions 189 Table 9.5. Cross-Tabulation of Contingent Protection Rules, by Hub (percent) Full sample EU EFTA Mexico United States Singapore Chile Australia Canada Provision (74 PTAs) (21 PTAs) (12 PTAs) (9 PTAs) (9 PTAs) (6 PTAs) (5 PTAs) (5 PTAs) (4 PTAs) Antidumping Disallowed No rules Rules Countervailing duties Disallowed No rules Rules Global safeguards Disallowed No rules Rules Bilateral safeguards Disallowed No rules Rules Source: Author s compilation. Notes: EFTA, European Free Trade Association; EU, European Union; PTA, preferential trade agreement. Table 9.6. Antidumping Template for Selected PTA Hubs Provision EU EFTA Mexico United States Singapore Chile Australia Canada A. Antidumping actions disallowed B. Antidumping actions allowed, but with no specific provisions X X C. Antidumping actions allowed, with specific provisions X X X X X 1. Mutually acceptable solution X X 2. Different de minimis dumping margin 3. Different de minimis dumping volume 4. Lesser-duty rule 5. Different duration of antidumping duty 6. Regional body or committee a. Conducts investigations and decides on antidumping duties b. Reviews or remands final determinations c. Other X X Source: Author s elaboration. Note: EFTA, European Free Trade Association; EU, European Union; PTA, preferential trade agreement. Regional hubs are checked if at least 50 percent of their PTAs include the specific provision. Mexico, there is little support for prohibiting countervailing duties or even including CVD provisions in regional agreements. Of the five hubs that tend to have countervailing duty rules EFTA, Mexico, Chile, Australia, and Canada four have also negotiated restrictions on agricultural subsidies (table 9.7). As discussed earlier, developments on countervailing duties may depend on progress on subsidization, and it is likely that substantial progress on subsidization will only come via a multilateral format. Interestingly, only two hubs (EFTA and Mexico) include the same provision in most of their agreements. By chance, the one provision again involves rather weak language about a mutually acceptable solution. This

12 190 Thomas J. Prusa Table 9.7. Countervailing Duties Template for Selected PTA Hubs Provision EU EFTA Mexico United States Singapore Chile Australia Canada A. Subsidies: Export subsidies on agriculture prohibited X X X X X B. State aid: Incompatible if it distorts competition X X C. Countervailing duties 1. Disallowed 2. Allowed, but with no specific provisions X X X X 3. Allowed, with specific provisions X X X X X a. Mutually acceptable solution X X b. Regional body or committee Conducts investigations and decides on antidumping duties Reviews or remands final determinations Other X Source: Author s elaboration. Note: EFTA, European Free Trade Association; EU, European Union; PTA, preferential trade agreement. Regional hubs are checked if at least 50 percent of their PTAs include the specific provision. provision does not impinge on any decision criteria once a case is initiated. A survey of global safeguards supports the view that the hubs strive for a consistent approach across PTAs. Only four hubs (Mexico, the United States, Chile, and Canada) include additional rules in most of their agreements, but they tend to include similar provisions across PTAs. All four of these hubs allow PTA members to be excluded from global actions (table 9.8). We also see some consistency in how the exclusions are incorporated: three of the four exclude on the basis of market share and three of the four, on the basis of lack of impact. As has been mentioned, the exclusion provisions have been the subject of repeated WTO disputes (Argentina Footwear; United States Wheat Gluten; United States Line Pipe; and United States Steel). In each case, the investigating authority included imports from all sources in making the determination that imports were entering in such increased quantities as to cause serious injury to the domestic industry, but, instead of applying safeguard measures to all imports irrespective of their source, the country invoking the safeguard action excluded its PTA partners. In all four cases, the Appellate Body ruled against the WTO member that included its PTA partners in the safeguard investigation but excluded them in the application of the safeguard measure. 14 The provisions excluding PTA partners from global safeguard actions once again raise concerns about increased discrimination against nonmembers and the welfare impacts of trade diversion. Although WTO dispute settlement panels have consistently ruled against excluding PTA partners from safeguard measures, they have done so on quite narrow grounds. Conceivably, under a different set of circumstances, exclusion of PTA partners from safeguard measures could pass muster. Bilateral safeguards display more consistency across hubs than do the other three statutes. All eight major hubs have bilateral safeguard rules (table 9.9). Indeed, there appears to be more commonality across the precise rules than for the other three trade remedy statutes combined. Nevertheless, there again appears to be some evidence of distinct European and North American approaches toward bilateral safeguard rules. Although there is considerable consistency across EC and EFTA PTAs, the precise rules differ from those in the other hubs. PTAs That Prohibit Trade Remedies Thirteen of the surveyed PTAs have abolished the application to intraregional trade of one or more trade remedies. What distinguishes these PTAs? Why have they been able to abolish trade remedy measures against members trade? The depth of market integration incorporated in the PTA is the leading candidate for explaining the abolition of trade remedy measures, particularly antidumping. A common subsidy policy is one example of a policy reflecting deeper integration, and, as was previously discussed, there is some evidence that a common subsidy policy influences countervailing duty provisions. De Araujo, Macario, and Steinfatt (2001) have argued that the implementation of

13 Trade Remedy Provisions 191 Table 9.8. Global Safeguards Template for Selected PTA Hubs Provision EU EFTA Mexico United States Singapore Chile Australia Canada A. Rights and obligations under GATT Article XIX/Safeguards Agreement retained X X X X B. PTA members excluded from global actions under defined conditions X X X X 1. Grounds for exclusion a. Imports from the other party do not account for a substantial share of total imports X X X b. Imports from the other party do not contribute to serious injury or threat thereof X X X 2. Definitions a. Substantial share Among the top five suppliers during the most recent three-year period X X X Exports jointly account for 80 percent of the total imports of the importing country b. Contribute importantly to serious injury Growth rate of imports from a party is lower than the growth rate of imports from all sources X X Source: Author s elaboration. Note: EFTA, European Free Trade Association; EU, European Union; PTA, preferential trade agreement. Regional hubs are checked if at least 50 percent of their PTAs include the specific provision. common macroeconomic and microeconomic policies in the EU reduced the social and political cost related to the removal of antidumping provisions. Wooton and Zanardi (2002) link the phasing out of antidumping measures with the creation of a single market. Taken together, these support the view that PTAs which go beyond the elimination of border measures or adopt common internal regulations are more likely to do away with trade remedy measures. The adoption of a common competition policy might also permit the elimination of certain trade remedies. It might, for example, make antidumping redundant. Of course, the two explanations are not mutually exclusive, since a common competition policy may not make sense until a sufficiently high level of integration is achieved. Hoekman (1998), however, dismisses the notion of a link between the adoption of a common competition policy and the abolition of antidumping in a PTA by arguing that the adoption of a common competition policy in a PTA is often motivated by the need to manage the consequences of deeper integration. 15 A third factor might be the development status of the members of the PTA. Development status could proxy for a wide set of political-economy factors that might affect the ability to prohibit trade remedies. Over the past two decades, developing countries have become more frequent users of antidumping and safeguard actions, and their embrace of antidumping might make it difficult for them to give up such remedies. Indeed, we find that only two developing-economy PTAs, those between China and Hong Kong SAR, China, and between China and Macao SAR, China, have prohibited antidumping measures. Table 9.10 brings together background data on those PTAs that have abolished trade remedies. On average, such PTAs enjoy greater intra-pta trade (both in value and share) and are more likely to have a competition policy provision in the PTA and to have achieved deeper integration. There does not seem to be any difference with respect to the adoption of a common external tariff. PTAs that have disallowed trade remedies and PTAs that retain the instruments appear equally likely to have a common external tariff. Trade and Protection Diversion A concern about PTAs that prohibit trade remedies or add additional rules regarding them is that having such provisions does not guarantee that disputes will not occur. The rules may mean that fewer cases will be filed against PTA members, but that tells us little about what may happen to

14 192 Thomas J. Prusa Table 9.9. Bilateral Safeguards Template for Selected PTA Hubs Provision EU EFTA Mexico United States Singapore Chile Australia Canada A. Safeguard measures disallowed B. Safeguard measures allowed, but with no specific provisions C. Safeguard measures allowed, with specific provisions X X X X X X X X 1. Conditions for application of safeguard a. Increasing imports cause serious injury to domestic industry X X X X b. During transition period, reductions in tariffs lead to increased imports and to serious injury X X X X X c. Other X X 2. Mutually acceptable solution X X X X X X 3. Investigation X X 4. Application of safeguard measures a. Only to the extent necessary to remedy serious injury and facilitate adjustment X X b. Suspension of concessions, tariff reduction, or reversion to most favored nation rates X X X X X X c. Other 5. Provisional measures X X X 6. Duration and review of safeguard measures a. Less than four years duration X X X X X X b. Not allowed beyond transition period X X X 7. Maintenance of equivalent level of concessions (compensation) X X X X X 8. Suspension of equivalent concessions (retaliation) X X X X X 9. Regional body or committee a. Conducts investigations and decides on safeguard duties b. Reviews or remands final determinations c. Other X X X 10. Notification and consultation X X X X X X X X 11. Special safeguards X X X Source: Author s elaboration. Note: EFTA, European Free Trade Association; EU, European Union; PTA, preferential trade agreement. Regional hubs are checked if at least 50 percent of their PTAs include the specific provision. other countries. The PTA provisions might simply lead to fewer intra-pta disputes but to just as many (or even more) cases against non-pta members. Bhagwati (1996) and Bhagwati and Panagariya (1996) argue that the elastic and selective nature of administered protection makes protection diversion a particularly pernicious and unforeseen consequence of PTAs. Administered protection is elastic because it is arbitrary and the targets can be easily manipulated. So, apart from the discrimination introduced by preferential tariffs, PTAs can lead to more discrimination against nonmembers of the PTA through more frequent trade remedy actions against them: trade diversion begets protection diversion, which begets more trade diversion. The issue is clearest regarding global safeguards. Fifteen PTAs allow members to be excluded from safeguard protection. 16 Once safeguard protection is enacted, another form of PTA-induced discrimination is introduced. Even if the PTA discriminatory tariff preferences are modest, global safeguard duties often exceed 10 percent. Thus, the secondary trade diversion stemming from safeguards may surpass the primary trade diversion resulting from tariff preferences. 17 Protection diversion is also relevant for antidumping provisions. Unfair trade is poorly measured according to WTO rules; often, all exporters to a market might be found guilty of dumping. Over the past decade, it has become increasingly rare for authorities to fail to determine that

15 Trade Remedy Provisions 193 Table Characteristics of PTAs That Have Disallowed Trade Remedies Disallowed Intra-PTA imports Value Common (billions Share of external Development Bilateral of U.S. trade tariff Competition PTA level Antidumping CVD safeguards dollars) (percent) (percent) chapter Integration ANZCERTA Developed X X X Australia Singapore Mixed X 9.9 X Canada Chile Mixed X X Canada Israel Mixed X X China Hong Kong SAR, China Developing X X X China Macao SAR, China Developing X X X EEA Developed X X X X EFTA Developed X X X X EFTA Chile Mixed X X X EFTA Singapore Mixed X X EU Developed X X X 2, X X X Mercosur Developing X X X New Zealand Singapore Mixed X X Group average (of 13) 6 (of 13) Group average, excluding EU Average of other PTAs (of 61) 4 (of 61) Source: Author s compilation. Note: ANZCERTA, Australia New Zealand Closer Economic Relations Trade Agreement; CVD, countervailing duty; EEA, European Economic Area; EFTA, European Free Trade Association; EU, European Union; Mercosur, Southern Cone Common Market (Mercado Común del Sur); PTA, preferential trade agreement; SAR, special administrative region. unfair pricing exists. 18 Unfair trade may be practiced by suppliers within as well as outside the trade bloc. But, given that PTA rules on antidumping measures make it impossible (if the measures are abolished by the PTA) or more difficult (if the PTA rules tighten discipline on their use) to apply that remedy to intrabloc members, antidumping duties might be applied only to countries outside the bloc. Antidumping duties are rarely less than 10 percent, so, as with global safeguards, it is quite possible that the secondary trade diversion may surpass the primary trade diversion. Moreover, as Bhagwati (1996) has argued, the source of injury might be truly rooted in the PTA preferences, but the PTA rules may result in the antidumping duties being imposed on non-pta sources. To get a sense of the extent of the diversion, I augmented the PTA database with information on worldwide antidumping activity since The earlier years of data were gathered to allow a better comparison of pre-pta and post-pta filing patterns. Altogether, I have information on 4,805 antidumping cases initiated by WTO countries that belong to at least one PTA. The annual number of antidumping disputes initiated by PTA members against PTA members (intra-pta filings) is calculated for each importing country. Because PTAs are enacted over a variety of years, I abstract from calendar time and instead consider time as measured relative to the year the PTA was enacted. For each PTA, year zero is the year the PTA was enacted, year t 1 is the year before establishment, year t 2 is two years before, t + 1 is the year after establishment, and so on. This view of time allows us to conveniently aggregate across PTAs. In figure 9.2, the aggregate number of antidumping disputes is plotted in relation to each PTA s inception. The chart is compelling. During the years prior to the creation of the PTA, intra-pta antidumping activity increases. In the year the PTA is enacted (time = 0), the number of antidumping disputes drops sharply, and it remains much lower than the pre-pta level. On average, during the 10 years prior to the PTA, there were 29.5 antidumping cases per year; by contrast, during the 10 years following the PTA, there were just 23.6 cases per year.

16 194 Thomas J. Prusa Figure 9.2. Intra-PTA Antidumping Filings, Sample of 74 PTAs cases per year 23.6 cases per year PTA enactment 35 number of cases Source: Author s calculations. Note: PTA, preferential trade agreement time in years, relative to enactment of PTA Although the results are persuasive, the analysis does not control for the possibility that antidumping activity in general against both members and nonmembers of the PTA may have fallen coincidentally with the enactment of the PTA. That is, the analysis is not able to distinguish the PTA effect from some other trend. For instance, given that the Uruguay Round was concluded in 1994 and that many PTAs were enacted in the mid-1990s, it is possible that the observed decline in antidumping activity might be a result of antidumping provisions in the Uruguay Round rather than of the PTA provisions. To control for this possibility, a difference-in-difference analysis is needed. The general idea is to identify the effect of a specific treatment by comparing the treatment group, after treatment, with the same group before treatment and with some other control group. In this case, the treatment group is composed of countries that join a PTA, and the control group is made up of countries not in a PTA. The comparison will therefore involve antidumping filings against PTA members and nonmembers both before and after each PTA is enacted. In table 9.11, the protection diversion effect is clearly seen. Of the cases filed during the pre-pta period, 58 percent were against non-pta countries and 42 percent were against PTA members. By contrast, during the post-pta period, 90 percent of the cases were against non-pta coun- Table Antidumping Activity, by PTA Status Target Non-PTA PTA Time member member Total Pre-PTA Number of cases Percent Post-PTA Number of cases 3, ,929 Percent Total Number of cases 4, ,805 Percent Source: Author s calculations. Note: PTA, preferential trade agreement. tries, and only 10 percent were against PTA members. So, during the before period, the difference between PTA members and nonmembers is 16 percentage points, but in the after period, the difference is 80 percentage points, yielding a difference-in-difference result of 64 percentage points. The implied change in filing patterns is quite large: the results suggest that almost 1,300 antidumping cases, or about one-third of the 3,929 cases filed during the post- PTA period, were diverted away from PTA members.

17 Trade Remedy Provisions 195 The results clearly raise the specter of protection diversion and more subtle forms of trade diversion. It is true that tariff preferences are small and might result in only modest amounts of trade diversion. This does not imply, however, that trade diversion is not a concern; rather, it appears that other provisions of the PTA might be a greater source of discrimination. Conclusions Overall, the findings highlight the need to be vigilant about the impact of trade remedy provisions in PTAs. These provisions vary greatly across PTAs and increase the overall complexity of the world trade environment. Pricing behavior that is perfectly fine when the product is exported to one country may be sanctioned when the product is exported to another country. Trade remedy provisions in PTAs have a mixed welfare impact. This ambiguous finding partly reflects the existence of trade creation and trade diversion within the PTA. In some cases, PTA rules appear mostly to promote trade creation; at other times, the rules seem simply to constitute trade diversion. Some PTA rules make it easier to restrain intra-pta imports. Such provisions may benefit global welfare by mitigating trade diversion stemming from preferential tariffs. More often, PTA rules either prohibit contingent protection against PTA members or make contingent protection harder to apply against members. This raises the very real possibility that PTAs induce protection diversion, which, in turn, produces more trade diversion. There are other possible consequences of including trade remedy provisions in PTAs. For instance, PTAs might serve as small-scale experiments that allow countries to better understand the practical effect of certain provisions. If parties find certain new rules attractive, those rules might be incorporated in future WTO negotiations. In this sense, PTAs might act as beta testing for the larger-scope WTO rounds. By giving members experience with new provisions, PTA rules could streamline future WTO negotiations. Conversely, the trade remedy provisions in PTAs may erode the market access that nonmembers thought they had secured in prior WTO rounds. The erosion is not limited to trade diversion stemming from preferential tariffs but also comes about because of selective use of contingent protection rules. As a result, PTAs may make it more difficult for non-pta members to agree to future WTO liberalization out of concern that the requisite quid pro quo by PTA members may not be realized. The complicated pattern of inclusion of these provisions threatens the delicate give-and-take balancing of incentives that is at the crux of the GATT or WTO agreements. Notes The author thanks Robert Teh and the staff of the WTO Secretariat for their assistance in developing the trade remedy database. 1. World Bank (2005) contains an excellent discussion of the myriad of effects associated with the proliferation of PTAs. 2. There is growing evidence that a high percentage of PTA tariff preferences are never utilized. Brenton and Ikezuki (2005), Amiti and Romalis (2007), and Dean and Wainio (2009) discuss utilization for different countries, products, and time periods. Francois, Hoekman, and Manchin (2005) find a threshold preference margin of 4 percent below which preference margins are irrelevant, probably because of high compliance costs such as the cost of paperwork and red tape. 3. This third rationale does not explain why PTAs simply do not prohibit the use of trade remedies against PTA members. After all, from Mastel s (1988) perspective, the elimination of intraregional tariffs and other border barriers also means that the raison-d être for trade remedies is eliminated. 4. Bhagwati writes, My belief that [free trade agreements] will lead to considerable trade diversion because of modern methods of protection, which are inherently selective and can be captured readily by protectionist purposes, is one that may have been borne out in the [European Economic Community, EEC]. It is well known that the European Community has used antidumping actions and [voluntary export restraints] profusely to erect Fortress Europe against the Far East. Cannot much of this be a tradediverting policy in response to the intensification of internal competition among member states of the European Community? (Bhagwati 1996, 37). 5. Official statistics on other border measures are not widely published. From my review of WTO and U.S. reports, I doubt that there have been more than a few hundred disputes involving all other trade remedies combined. 6. The context should be taken into account in looking at the small number of safeguard initiations and actions, compared with the other trade remedy measures, since a safeguard action may involve multiple import sources. 7. In this paper, European Union is regularly used when discussing the pre-1993 European Community. The European Community enacted many PTAs before The four traditional users now account for only about one-third of antidumping initiations and less than one-tenth of safeguard initiations. Traditional users still account for about three-fourths of all countervailing duty initiations. 9. The category developed countries refers to Australia, Canada, the EU, EFTA members, Japan, New Zealand, and the United States. All other countries are classified as developing. 10. Free trade areas account for a comparably large share of all notified PTAs. 11. As of July 18, 2007, 157 PTAs in force had been notified to the WTO under either GATT Article XXIV or the Enabling Clause. 12. These percentages are very comparable to those for all notified PTAs. Of the 157 PTAs notified to the WTO under either Article XXIV or the Enabling Clause, 82 percent were notified under Article XXIV. 13. In the case of the EEA, the prohibition on antidumping applies only to intraregional trade in goods that fall under chapters 25 to 97 of the WTO s Harmonized Tariff System. In other words, antidumping measures can still be taken against agricultural and fishery goods. 14. The key concept that underlines all these cases has been called parallelism. In brief, parallelism prohibits any asymmetry in the application of safeguard measures. The Appellate Body s decisions have been carefully worded; the panel has avoided ruling on whether GATT Article XXIV permits the exemption from a safeguard measure of imports originating in a member of a free trade area. The decisions have all been

18 196 Thomas J. Prusa crafted so as to address only the specific facts and circumstances of the case at hand. 15. Hoekman (1998) defines deep integration as consisting of explicit actions by governments to reduce the market-segmenting effect of differences in national regulatory policies that pertain to products, production processes, producers, and natural persons. In practice, this will require decisions (a) to regard a partner s policies as equivalent (mutual recognition) or (b) to adopt a common regulatory stance in specific areas (harmonization). 16. The PTAs are United States Singapore; United States Jordan; United States CAFTA-DR (Central America Free Trade Agreement plus Dominican Republic); NAFTA; Mexico Uruguay; Mexico Northern Triangle; Mexico Nicaragua; Mexico Israel; Mexico Chile; Group of Three; EU Chile; Canada Israel; Canada Chile; Australia United States; and Australia Thailand. 17. Bown (2004) shows that the exclusions incorporated into the U.S. steel safeguard created significant discrimination and that developed and developing countries differed in their ability to adjust to the tariffs. 18. For the United States, the U.S. Department of Commerce finds unfair pricing in more than 95 percent of all firms investigated; Blonigen (2003) finds that the average U.S. dumping margin exceeds 60 percent. References Amiti, Mary, and John Romalis Will the Doha Round Lead to Preference Erosion? IMF Staff Papers 54 (2): Bhagwati, Jagdish Regionalism and Multilateralism: An Overview. New Dimensions in Regional Integration, ed. Jaime de Melo and Arvind Panagariya. Cambridge, U.K.: Cambridge University Press. Bhagwati, Jagdish, and Arvind Panagariya, eds The Economics of Preferential Trade Agreements. Washington, DC: AEI Press. Blonigen, Bruce A Evolving Discretionary Practices of US Antidumping Activity. NBER Working Paper 9625, National Bureau of Economic Research, Cambridge, MA The Effects of NAFTA on Antidumping and Countervailing Duty Activity. World Bank Economic Review 19 (December): Bown, Chad P How Different Are Safeguards from Antidumping? Evidence from U.S. Trade Policies toward Steel. Working Paper, Brandeis University, Waltham, MA. Bown, Chad P., and Meredith A. Crowley Trade Deflection and Trade Depression. Journal of International Economics 72 (1): Brenton, Paul, and Takako Ikezuki The Value of Trade Preferences for Africa. Trade Note 21, World Bank, Washington, DC. Dean, Judith M., and John Wainio Quantifying the Value of US Tariff Preferences for Developing Countries. In Quantifying the Value of Preferences and Potential Erosion Losses, ed. Bernard M. Hoekman, Will Martin, and Carlos Alberto Primo Braga. Washington, DC: World Bank. De Araujo, José Tavares, Jr., Carla Macario, and Karsten Steinfatt Antidumping in the Americas. Journal of World Trade 35: Fiorentino, Roberto V., Luis Verdeja, and Christelle Toqueboeuf The Changing Landscape of RTAs: 2006 Update. WTO Discussion Paper 12, World Trade Organization (WTO), Geneva. Francois, Joseph, Bernard Hoekman, and Miriam Manchin Preference Erosion and Multilateral Trade Liberalization. World Bank Economic Review 20 (2): Hoekman, Bernard Free Trade and Deep Integration: Antidumping and Antitrust in RTAs. World Bank Policy Research Working Paper 1950, World Bank, Washington, DC. Jackson, John H The World Trading System: Law and Policy of International Economic Relations. Cambridge, MA: MIT Press. Jones, Kent Does NAFTA Chapter 19 Make a Difference? Dispute Settlement and the Incentive Structure of US/Canada Unfair Trade Petitions. Contemporary Economic Policy 18: Mastel, Greg Antidumping Laws and the U.S. Economy. Armonk, NY: M. E. Sharpe. Prusa, Thomas J On the Spread and Impact of Antidumping. Canadian Journal of Economics 34 (3): Antidumping: A Growing Problem in International Trade. World Economy 28: Tharakan, P. K. M Political Economy and Contingent Protection. Economic Journal 105: Viner, Jacob The Customs Union Issue. New York: Carnegie Endowment for International Peace. Wooton, Ian, and Maurizio Zanardi Trade and Competition Policy: Antidumping versus Anti-Trust. Discussion Paper in Economics 02-06, University of Glasgow, Glasgow, Scotland. World Bank Global Economic Prospects 2005: Trade, Regionalism, and Development. Washington, DC: World Bank.