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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.