CHALLENGES TO TRADE LIBERALIZATION

Table of Contents:

Trade liberalization occurs when governments and other institutions reduce trade barriers and support free trade. Challenges to free and fair global trade remain, however. Unfair pricing, government subsidies to domestic industries, and other concerns continue to distort free market outcomes and skew the benefits of free trade in the global economy.

Dumping and Government Subsidies

Dumping is an illegal trade practice that occurs when a producer from one country sells a product in a second country at a price lower than its production costs or lower than the price charged in the producer's home market. In addition, dumping must cause material damage to producers in the second country. Material damage takes many forms, including negative effects on industry output, employment, market share, sales, or profits. The difference between the foreign product's price in its home market and the lower price in the second country is called the dumping margin. U.S. firms, labor unions, or other injured parties can initiate a dumping complaint.[1] The World Trade Organization's Anti-Dumping Agreement established strict guidelines about how member nations should investigate and respond to dumping or unfair subsidization.

Another unfair trade practice occurs when government subsidies to export industries give certain firms a competitive advantage in global markets. Unfair financial assistance to businesses include tax breaks, low-interest government loans, or direct cash payments to firms. Subsidies are viewed as unfair because they lower the price of subsidized products, which makes these products more attractive to buyers in home and foreign markets.

Dumping and unfair subsidization are viewed as harmful to the global trading system mainly because they disrupt normal pricing mechanisms, encourage production inefficiencies, threaten domestic producers, and invite retaliation by foreign governments. In the United States the Import Administration (IA) and U.S. International Trade Commission (USITC) rule on dumping and unfair subsidization complaints.[2] An affirmative ruling means that a foreign producer has engaged in unfair trade practices and that retaliatory measures are warranted. A negative ruling means that there is insufficient cause to retaliate against the foreign producer. From 1980 to 2008, U.S. agencies ruled on 1,632 unfair trade petitions against foreign producers, of which 637 received an affirmative ruling and 995 received a negative ruling or were dismissed.[3] In 2012 the United States had 283 antidumping and countervailing duty orders in effect, more than half with just five countries: China (114 orders), India (23), Taiwan Province of China (16), South Korea (14), and Japan (13).[4] A countervailing duty is a retaliatory tariff designed to offset the financial advantage gained through dumping or subsidization.

Terms of Trade

Terms of trade measures the relative unit prices of a country's exports and imports. The terms of trade is expressed as a ratio of a country's export price index to its import price index. Today these price indexes are linked to a 2000 base year, at which time the terms of trade index was set at 100. A favorable movement in a country's terms of trade occurs when the terms of trade index rises above 100. A favorable movement indicates the unit price of goods exported by a country has increased relative to the unit price goods imported by that country. A country's terms of trade deteriorates when the index falls below 100. This occurs when the unit price of goods exported by a country has decreased relative to the unit price of goods imported by the country.

Historically the terms of trade has been a contentious trade issue, particularly when the terms of trade turned against commodity-producing poorer countries in their trade dealings with the richer industrialized countries. In the past developing countries were encouraged by some multilateral development organizations to specialize in commodities such as cocoa, coffee, cotton, rubber, sugar, or tobacco. The result was sometimes unbalanced development and an overreliance on a single crop. One-crop economies left some poorer economies more vulnerable to changes in global market conditions and the resulting periods of economic boom and bust.

From 2000 to 2011 the terms of trade shifted with market conditions. For example, during this period of time there was a dramatic increase in the price of oil and certain mineral and mining products, which improved the terms of trade for oil-producing and mineral-producing nations in Africa, Latin America, and the Middle East. At the same time the terms of trade worsened for some manufacturers in East Asia and Southeast Asia due to fierce price competition with manufacturers from the advanced economies.[5]

  • [1] U.S. International Trade Commission (USITC), Department of Commerce (DOC), “Antidumping and Countervailing Duty Laws under the Tariff Act of 1930,”; International Trade Administration, DOC, “An Introduction to U.S. Trade Remedies,”
  • [2] Ibid
  • [3] U.S. International Trade Commission, “Table 1: Title VII Case Summary,” Import Injury Investigations Case Statistics, FY 1980–2008, (Washington, DC: Office of Investigations/ITC, February, 2010), 1.
  • [4] U.S. Government Accountability Office (GAO), “Antidumping and Countervailing Duties, Table 1: Top 5 Countries with Most U.S. AD/CV Duty Orders in Place, as of March 2012,” Antidumping and Countervailing Duties: Report to Congressional Requesters (Washington, DC: GAO, May 2012), 9.
  • [5] UN Conference on Trade and Development (UNCTAD), Trade and Development Report, 2012 (New York: United Nations, 2012), 8-9; World Bank, “Net Barter Terms of Trade Index,”
 
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