Copyright © The Author 2007. Published by Oxford University Press.
Trade adjustment in the WTO system: are more safeguards the answer?
* Brandeis University and the Brookings Institution, e-mail: cbown{at}brandeis.edu
** Brandeis University, e-mail: mcculloch{at}brandeis.edu
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For countries to engage successfully in the international trading system, their industries, firms, and workers must respond continually to new conditions of competition. The continuing need to adjust arises both from policy changes approved in multilateral negotiations—e.g. implementation of trade liberalization commitments, preference erosion, or adverse terms-of-trade consequences of export subsidy elimination—and from ongoing changes in competitive pressures inherent in a liberal trading system—e.g. effects on comparative advantage of changes in technology or factor supplies. But the political response to a situation calling for adjustment is often a call for ‘safeguards’—whether as an ex ante provision in negotiated agreements or as an ex post measure once the agreement has been signed and the reality of new conditions takes shape. This paper examines the range of adjustment problems confronting the current and future international trading system, the economic arguments for intervention to deal with these problems, the adjustment environment as set out in the current World Trade Organization (WTO) Agreements, and proposals for reform. While the adjustment problems we discuss apply to both rich and poor WTO member countries, we highlight the issues of adjustment especially relevant for developing countries.
Key Words: adjustment • safeguards • WTO • developing countries
We are indebted to Bernard Hoekman, Kimberly Ann Elliott, J. Michael Finger, and participants in the Oxford Review of Economic Policy editorial seminar for useful discussions and comments on an earlier draft. We also acknowledge financial support from the World Bank. However, the opinions expressed in this paper are our own and do not necessarily reflect those of the World Bank or the Brookings Institution. Any remaining errors are also our own.
1 Because it is impossible to predict accurately the changes resulting from implementation of a complex package, in some cases policy-makers may be unduly pessimistic, fearing a net loss that in reality would not materialize.
2 On the effects of China's acceptance into the WTO system on Latin American and Asian exporters, see, for example, Eichengreen et al. (2004), IADB (2005), and Hanson and Robertson (2006). As we discuss in section IV(v), some of the affected countries have sought to restore their preference margins for textile products by negotiating PTAs with major importing nations.
3 Changes in the relative prices of inputs may cause firms at home and abroad to alter technology choices even in the absence of innovation, and changes in relative input prices may provide an incentive for development of new technologies.
4 An example is the US apparel industry, where the rate of new entry into the shrinking industry has been nearly as high as the rate of exit (Levinsohn and Petropoulos, 2001). In a theoretical model with heterogeneous firms, even export-driven expansion at the industry level may be accompanied by dislocation at the level of the individual firm (Melitz, 2003). In Melitz's model, industry expansion drives up wages, thus forcing the least productive firms to exit.
5 In theory, such external benefits of liberalization should be internalized in reciprocal bargaining (e.g. Bagwell and Staiger, 2002). In practice, and especially in a negotiation involving a large number of countries, some such benefits are sure to remain un-internalized.
6 Although many developing countries would experience substantial preference erosion or other adverse terms-of-trade effects (and adjustment pressure) owing to an agreement, most would still gain overall owing to reductions in MFN tariff rates or other benefits. Simulations by Anderson and Martin (2005) of the effects of Doha Round proposals on agriculture suggest that most developing countries would experience net gains because improvements in market access would more than offset negative terms-of-trade effects. However, a few least-developed countries in sub-Saharan Africa and elsewhere could experience net losses. Anderson and Martin point out that nearly two-thirds of the total anticipated gains from eliminating all policy distortions of trade in goods would come from agriculture.
7 These efforts can complement programmes aimed at helping policy-makers improve their country's overall economic performance through reform of domestic regulations and institutions. An example is development of the World Bank's Doing Business In database. The database increases transparency by providing convenient access to such information as domestic market conditions that affect formation of new businesses, policies that govern firm exit via bankruptcy, and policies that affect hiring and firing of workers and thus labour market flexibility. Although facilitating trade is not their specific goal, these activities improve the economy's ability to respond to opportunities in international markets.
8 A perennial question regarding TAA is why a particular group of workers should be singled out for preferential treatment when they represent a small fraction of all workers who lose their jobs. One answer is that most job losses are not tied to a specific policy action of the national government; TAA reduces public opposition to trade liberalization and thus allows trade reforms with long-run benefits for the country and the world. Brainard (2007) calls for a new US programme to insure against sharp wage declines as well as unemployment for all permanently displaced workers. She points out that the current TAA programme ‘continues to disappoint’, in part because of confusion regarding which workers are eligible. Workers in the service industries have been completely excluded, despite the increased concern regarding offshore outsourcing. Also see Kletzer (2001), Rosen (2004), and Brainard et al. (2005).
9 Given that most workers are likely to face multiple job transitions during their working lives, programmes to improve workers' skills should not be limited to displaced workers. Education or training undertaken while workers are employed could reduce losses from spells of unemployment once a worker is displaced.
10 Sections IV(i)–(iii) draw on the analysis in Bown and McCulloch (2005) of the relationship between explicitly WTO-sanctioned trade laws and the adjustment environment in the United States.
11 Governments may be hesitant to sign trade agreements that lead to substantial liberalization without the insurance that a safeguard provision would allow. Also, because governments may later feel pressure to renege on negotiated liberalization commitments, safeguards act as a safety valve that protects the integrity of the rest of the agreement. See also the discussions in Bagwell and Staiger (2002, ch. 6).
12 See, for example, the discussion of the use of import restrictions across WTO members for the 1995–2000 period and the associated empirical analysis in Bown and McCulloch (2004).
13 The main result of protection from competing imports is to raise the profits of domestic firms in the industry and of potential entrants. Whether this aids an efficiency-enhancing transformation of the industry depends on how the additional profits are used and whether new entry occurs. In the US steel industry, vertically integrated producers apparently used their profits mainly to fund future antidumping litigation and thus perpetuate protection. However, higher domestic prices and profits also speeded the expansion of more efficient domestic minimills, thus heightening the need for integrated producers to adjust to changing domestic competitive conditions. On the much-discussed ‘success’ of safeguards benefiting the US motorcycle manufacturer, Harley Davidson, see Irwin (2005, p. 157). Irwin concludes that import relief played no role in Harley Davidson's turnaround.
14 In addition to the standard measures of protection of tariffs, tariff-rate-quotas, and quotas, the US statute (Section 2253(a) (3)) offers alternative policy choices such as: ‘one or more appropriate adjustment measures, including the provision of trade adjustment assistance’ and ‘any other action... which the President considers appropriate and feasible’.
15 Although different in theory, ‘antidumping and safeguards have proven in practice to be quite fungible’ (Finger and Nogués, 2006, p. 36). They give the example of Argentina, where protection-seekers denied safeguard protection responded by requesting relief under antidumping regulations.
16 Like safeguards, antidumping may serve a safety-valve function by helping policy-makers to manage domestic pressure for protection.
17 To address this issue, the authors compare how antidumping users have treated targeted WTO members and targeted non-members. There is little difference on the antidumping durations for the two groups, suggesting that removals of antidumping measures are ‘voluntary’.
18 Transitional safeguards (Article 6) in the WTO Agreement on Textiles and Clothing expired in January 2005.
19 ‘WTO Agricultural Negotiations: The issues, and where we are now’ (2004)—available on the WTO website at http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd11_ssg_e.htm (accessed 3 January 2007).
20 As with standard (global) safeguards and antidumping, it is possible that inclusion of special safeguard provisions may help to overcome political resistance to liberalization. Even so, their use postpones the benefits of this liberalization.
21 The Uruguay Round negotiations did not introduce rules on subsidies and countervailing measures into the GATT/WTO for the first time. The SCM largely expanded on the GATT 1947 Article VI regarding rules for countervailing duties, as well as the Tokyo Round Subsidies Code that had been adopted by some member countries on a plurilateral basis.
22 An additional concern is the potential for non-violation nullification and impairment claims in the case of impacted market access without any rules violation.
23 Bagwell and Staiger (2006) raise a different concern regarding subsidy rules under the SCM. They show that the constraints these rules impose may prevent negotiators from reaching the efficiency frontier through reciprocal trade liberalization.
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