Effects of U.S. trade remedy law enforcement under uncertainty: the case of steel.

• Author: Chung, Jae W.

1. Introduction

   The history of trade protection for the U.S. steel industry is long and complex. The period of protection for steel is customarily broken down into three phases: 1969-74, protection principally by voluntary export restraint (VER); 1978-82, protection by a trigger price mechanism; and 1982 to the recent past, protection by both VER and trade remedy policies.(1)

   Among the various trade remedy provisions, sections 701 (countervailing duty: CVD) and 731 (antidumping duty: AD) are the ones most frequently invoked in connection with steel imports.(2) These provisions are implemented through quasi-judicial processes conducted by the International Trade Commission (ITC) in collaboration with the International Trade Administration (ITA). Unlike trade policies in the past, which were implemented fairly systematically (through tariffs and VERs) in response to changes in the trade balance, the entire judicial process for CVD and AD cases begins with petitions filed randomly by firms, industries, and unions. American trade policy in the third phase therefore consists of both a systematic and an unsystematic component. This requires a researcher to incorporate uncertainty into any analytical model related to CVD and AD policies.

   There have been numerous studies of U.S. trade remedy policies.(3) Most of them are concerned with the argument on "rules or discretion" for the ITC's decision-making criterion. References on the effectiveness of trade remedy policy are limited. An interesting study is that of Herander and Schwartz (1984), who suggest that foreign dumping margins were sensitive to U.S. threats by means of the AD policy during the period 1976-86.(4) However, it is questionable whether their model would be suitable to explain the cases in the third phase because they ignored the uncertainty dimension in their analyses.

   The purpose of this paper is to explore the effectiveness of U.S. trade remedy law enforcement by sections 701 and 731 on the import penetration of foreign-manufactured steel into the U.S. market for the period 1983-92. I analyze this problem within the context of uncertainty. In addition, only three industries (food, chemicals, and steel) have been chiefly subject to sections 701 and/or 731 during the period of observation. Therefore, an industry-specific analysis is more appropriate. Given the short period of active implementation of the two provisions, it is necessary to specify the model as simply as possible. To meet both methodological needs, I separate the effect that is explained mainly by unsystematic policies from the total effect of both systematic (tariffs and VERs) and unsystematic (CVD and AD) policies on the steel industry. This generates the probability-augmented model to be used as the theoretical basis for the research. The model explains foreign steel import penetration into the U.S. steel market primarily in terms of unanticipated trade policy and expected import penetration.

   Estimated results suggest that the CVD and AD policies were effective in protecting the U.S. steel industry, but the degree of effectiveness was small. The results provide valuable insights into the effectiveness of trade remedy policy. The low degree of effectiveness may imply a limit to administrative/legislative solutions.

2. The Theoretical Model

   To derive a simplified model, I employ the rational expectations hypothesis and the innovation accounting and vector autoregressive methods.(5) I first lay out a model for bidirectional causation between import penetration and the terms of trade, each of which is influenced by trade policy instruments and various lagged variables. In essence, its underlying microeconomic rationale is the relationship between price and quantity.

   The model is

   [M.sub.t] + a[P.sub.t] = [summation over i] [b.sub.i][M.sub.t-i] + [summation over i] [c.sub.i][P.sub.t-1] + d[Z.sub.t] + [u.sub.t] (1)

   [P.sub.t] + a[prime][M.sub.t] = [summation over i] [b[prime].sub.i][M.sub.t-i] + [summation over i] [c[prime].sub.i][P.sub.t-i] + d[prime][Z.sub.t] + [u[prime].sub.t] (2)

   (i = 1, 2, ...)

   where M = foreign import penetration into the domestic steel market, P = terms of trade, Z = trade policy, and u and u[prime] = random errors.

   I assume that trade policy Z consists of both systematic and unsystematic components and that the policy authority uses the following policy rule:

   [Z.sub.t] = g[G.sub.t-i] + [[Zeta].sub.t] (3)

   where [G.sub.t-i] = the systematic trade policy vector at time t - i such as predetermined tariffs and import quotas (or VER in case of steel), and [[Zeta].sub.t] = the random component of trade policy at time t, such as CVD and AD policies implemented through quasi-judicial processes.

   The reduced form of Equations 1 and 2 yields the following equation:

   [M.sub.t] = [[Sigma].sub.i][[Alpha].sub.i][M.sub.t-i] + [[Sigma].sub.i][[Beta].sub.i][P.sub.t-i] + [Gamma][Z.sub.t] + [[Epsilon].sub.t] (4)

   where [[Alpha].sub.i] = ([b.sub.i] - a[b[prime].sub.i])/(1 - aa[prime]), [[Beta].sub.i] = ([c.sub.i] - a[c[prime].sub.i])/(1 - aa[prime]), [Gamma] = (d - ad[prime])/(1 - aa[prime]), and [[Epsilon].sub.t] = ([u.sub.t] - a[u[prime].sub.t]/(1 - aa[prime]).(6)

   I take expectations throughout Equations 3 and 4 to have

   E([M.sub.t]) = [[Sigma].sub.i][[Alpha].sub.i][M.sub.t-i] +...