Question

Apply specific models developed throughout the course to demonstrate how domestic and foreign events (e.g., wars, changes in trade barriers, development abroad) have impacted the level of and changes in imports and exports in the United States for the 10 year time frame of 1973-1983

Answer 1

°In response to the steadily growing market share of Japanese steel imports, the United States in 1968 negotiated a three year voluntary restraint agreement with Japanese and European exporters~.Exports of steel to the United States were limited to a target of 14 million tons in 1969—22 percent below their 1968 level. The target was allowed to increase gradually during the subsequent years. And the agreement was extended in 1971 for three additional years. In the face of the quantity restriction, the Japanese and European exporters shifted their product mix from lower-valued steels—where they had made the largest inroads—to higher-valued products. During the six years of the import restrictions, domestic prices of higher valued steel products, such as cold- and hot-rolled steel, remained fairly close to those of the Japanese. The price of lower-valued steel products, such as structurals, however, increased well above the world price. As a result of this shift, even though the tonnage of steel imports was reduced, the overall value of imports remained approximately the same. The net effect of increased competition in higher-valued steels and less competition in lower-valued steels was, if anything, to hurt the U.S. steel industry. The rate of return of the industry during the period of import restrictions (1969—74) was lower than during the three years prior to the period of import protection and the two years subsequent to import protection, During the protected period, capital expenditures in constant dollars declined relative to 1967 as well as to the years subsequent to the expiration of the voluntary restraint agreements. Moreover, the voluntary import restraints did not stop the decline in the steel industry’s employment levels. Trigger prices,, too, have been unsuccessful in fostering a healthy, domestic steel industry. The tiigger prices have been successful in reducing the market share of steel imports fiom Japan and the European Economic Community. But the bulk of this gap has been filled by imports from other foreign producers. Moreover, the trigger price mechanism acts to increase the profit margin of foreign producers as soon as it becomes effective. As such, it provides them with an incentive to increase their production, even if sold at prices below the trigger and prevailing market prices. This distortion of incentives can be expected to lead directly to an increase in the incidence of dumping charges by U.S. producers. The 1950-to-1983 experience of the U.S. steel industry can be explained largely in terms of’ the standard bade theory without any reference to government interference in world steel markets. Following World War 11, as Japan rebuilt its steel industry, resulting in larger and more efficient plants, the cost advantage of producing steel shifted from U.S. producers to Japanese producers. The steady loss of market share by U.S producers is, to a large extent, due this shift in cost effectiveness.

In January 1982, major US. steel companies sought relief from government-subsidized competitors. As a result of these legal actions, the U.S. government dropped enforcement of the trigger price mechauism. Preliminarily in June and finally in late August, the Commerce Department upheld charges of’ government-subsidized steel prices against six Western European nations. Under the law, high tariffs in the form of countervailing and penalty duties would have been levied to of The the advantages of foreign subsidies and dumping. In their stead, the Commerce Department negotiated quotas on European steelmakers. Individual ceilings for specific categories also were set.

Import tariffs and export subsidies represent another set of policies attempting to improve the balance of trade. Advocates of these policies observe that tariffs raise the domestic prices of imported goods and subsidies reduce the prices of exported products to foreigners. This reduction in imports and the stimulus to exports are believed to improve the balance of trade and, consequently, domestic economic conditions. An analysis of the effects of changes in average tariff rates on the trade balance, however, indicates that the real-world effects of tariffs on the balance of trade are more complex. Not only do tariffs reduce imports but they are associated with a decline in exports as well. Thus, the impact of tariffs on the trade balance is ambiguous (with the exception of the extreme case in which a country is running a trade balance deficit and then bans all imports). The decline in exports and imports indicates that the overall volume of trade is reduced by tariffs. Moreover, since both exports and imports are reduced by import tariffs, the trade balance (exports less imports) would be little changed. This result can be understood by realizing that exports and imports are two sides of the same transaction: The object of producing goods for export is to be able to import and consume goods produced by foreigners. Suppose that a tariff successfully reduces the volume of imports by one-half’. There are now only half as many foreign goods available to exchange for domestically produced goods, given the world terms of trade. So, the volume of exports must be reduced symmetrically by one-half. The net effect on the trade balance is zero. In other words, a tax on imports is equivalent in effect to a tax on exports. This principle is referred to as Lerner’s symmetry theorem, a well known principle of trade theory. Quantitative restrictions in the form of import quotas and self imposed foreign export quotas also are on the menu of protectionist policies. In principle, there is a precise correspondence between quotas and tariffs: For any quota (or quantitative restriction) imposed, there exists a tariff that will produce exactly the same price and quantity effects on the volume of imports and exports. The Lerner symmetry theorem is equally applicable to quotas. A restriction on imports is equivalent to a restriction on exports and can he expected to have little or no effect on the balance of trade.