Export Dependence versus the New Protectionism

Constraints on Trade Policy in the Industrial World

Glenn Randall Fong

• Publisher: Taylor & Francis
• Year: 2017
• eBook ISBN: 9781351395786
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In an international political economy characterised both by constancy and change, this study, first published in 1996, links together one seemingly incongruous continuity in international trade relations with an increasingly dramatic development in the economies of industrial countries. On the one hand, industrialised countries have become progressively dependent upon one another. On the other hand, the liberal international trade regime has yet to falter. These two points are tied together by seeking to explain the maintenance of liberal trade relations in terms of the mutual economic dependence of industrial countries. In particular, the study examines what may be a fundamental constraint on trade protectionism today: the reliance of industrialised countries on external trade relations, and especially on markets within the industrial world.

Chapter I

Export Dependence as a Constraint on Protectionism

INTRODUCTION

In an international political economy characterized both by constancy and change, this study links together one seemingly incongruous continuity in international trade relations with an increasingly dramatic development in the economies of industrial countries.¹ On the one hand, industrialized economies have become progressively dependent upon one another. Numerous studies have demonstrated that the ratio of trade to national production has steadily increased since the 1960s for all industrial countries.²

On the other hand, despite scholarly expectations and real world pressures to the contrary, the liberal international trade regime has yet to seriously falter. Protectionist inroads have certainly been made in consumer electronics, steel, and automobiles, joining illiberal trade in agriculture and textiles. Yet trade in telecommunications, aircraft, and services has been liberalized. The 1993 Uruguay Round agreement may be indicative of the maintenance, if not promotion of international interdependence in trade.

These two points are tied together in this study by seeking to explain the maintenance of liberal trade relations in terms of the mutual economic dependence of industrial countries. In particular, we will examine what may be a fundamental constraint on trade protectionism today: the reliance of industrialized economies on external trade relations, and especially on markets within the industrial world. This export dependence thesis is explored primarily for the case of the United States, although comparative implications for other industrial countries will also be addressed.

The remainder of this chapter elaborates the export dependence thesis and sets the substantive and theoretical backdrop against which it is set. In particular, the export dependence thesis is set against prevailing international political economy explanations of trade policy based upon import penetration and hegemonic stability. The thesis is also contrasted with the extensive literature on interdependence, dependence, and dependency.

The investigation of the export dependence thesis is conducted at three levels of analysis (industrial, national, and international) and in two modes of analysis (aggregate data and case study). Chapter II provides a first test for the thesis in a comprehensive aggregate data analysis of 129 United States industrial sectors. Varying levels of export dependence across the 129 sectors are directly related to their respective protectionist behaviors. The thesis is examined in the context of a vast array of protectionist instruments including escape clause, antidumping, and countervailing duty motions, voluntary export restraints, orderly marketing arrangements, quotas, the steel trigger price mechanism, and the Multifiber Arrangement. Among the most significant findings of this analysis is that industries dependent upon exports manifest relatively low levels of protectionism even if they are also highly penetrated by foreign imports. Industries threatened by import penetration evidence protectionist activity only if they are also not dependent upon foreign markets for sales.

Chapters III and IV provide a further test of the export dependence thesis in a crucial case study of the U.S. machine tool industry. The machine tool case is “crucial” because the export dependence thesis is pitted against what would seem to be overwhelming pressures propelling the industry towards protection. Despite experiencing severe and ever-intensifying import penetration, dramatic hegemonic decline, cyclical economic performance, and diminishing if not dissipated technological superiority worldwide, the industry maintained relatively liberal trade policy views through the 1970s. This anomalous outcome can be directly attributed in part to the industry’s high levels of export dependence.

Chapter V extends the analysis to other industrial countries and to international trade relations generally. Specific observations are made regarding differential levels of constraints on protectionism emanating from export dependence in North-North versus North-South trade relations. This final chapter concludes by drawing out the study’s implications for general theory in international political economy, and particularly for the study of national power and the structure of the international political economy.

This study has been theoretically as opposed to substantively motivated. At each level and mode of analysis we have sought to examine how much one can explain with our sole hypothesis. As such, comprehensive explanations of U.S. trade policy or international trade relations are not sought nor is an all-encompassing examination of the U.S. machine tool industry conducted. While the export dependence thesis constitutes our theoretical contribution, no pretense is made to the effect that complex outcomes in business and government policy can be accounted for by monocausal explanations. Without losing sight that “other factors” are always at play, our purpose here is to examine the explanatory power of one such factor, export dependence.

THEORIES OF TRADE POLICY

The core of this study is the explanation of protectionism or, more properly, the explanation of its absence at the industry level. We seek to determine whether or not industries seek trade protection. The thesis does not address the issue of whether industry demands, once in the governmental realm, are met or not.

An explanation of industry behavior is a fundamental issue that may logically precede an explanation of governmental response. In industrial countries, industry sources constitute a major breeding ground for protectionism. Government actors are often only secondary sources of protection. If and when official protection is adopted, government action is often (reluctantly) taken in reaction to industry demands. The state may shape, rechannel, or deny such demands, but if protection is adopted (in whatever form), it is usually initiated by industry not government.

A great deal of analysis has been devoted to how governments formulate foreign economic policy, often in the context of industry demands.³ This study establishes that context. Instead of examining how industry trade demands get through the sieve of government machinery, we seek to determine which industry demands do or do not get to the governmental sieve in the first place. In sum, this thesis is directly and primarily concerned with the explanation of industry trade policy views and only indirectly and secondarily with state foreign trade policy.

In constructing this explanation we can, at the outset, set aside most of the general macroeconomic arguments against protectionism and for free trade.⁴ We can do so because at the sectoral level, the economic fortunes of a protected industry may not be affected or may flourish while the economy as a whole suffers the costs of the protection gained by the one industry. First, while an economy as a whole suffers from the production costs of protection in terms of impaired specialization, resource allocation and efficiency, the protected industry can experience production gains. Second, the economy-wide consumption costs of protection in terms of higher prices, lower quality and reduced demand may not be considered instrumental to the protected industry. As one analyst of the production and consumption costs of protection has observed:

On the micro-economic level, decision makers cannot be expected to take into account those benefits and costs generated by their operations which are diffused over the entire economy.⁵

Even one of the most visible costs of protection — foreign retaliation — may not be relevant to the protected industry. Even if foreign retaliation is undertaken, the industry whose protection provoked the retaliation may not be affected. For instance, in response to the raising of U.S. duties on sheet glass in 1962, the EEC suspended tariff concessions on polyethylene, synthetic fibers, and varnishes.⁶ In the “chicken war” of 1963, the United States reversed tariff reductions on starches, brandy, and trucks in retaliation against EEC levies on poultry imports.⁷ Clearly, the macroeconomic costs of protection need not act as effective deterrents against protectionism at the sectoral level.

The Export Dependence Thesis

Once a sectoral level of analysis is adopted, however, and if an industry is dependent upon exports, then protectionist actions do indeed entail prohibitive costs, especially export price and foreign supply costs.

Export price costs. The first primary cost of protection for an export dependent industry concerns price competitiveness. Protection by any means raises the cost of the restricted imported good. Irrespective of the encouragement of industrial inefficiencies, protection induces price increases for domestically-produced substitutes through the market mechanism. And just as domestic prices may be raised, the prices of exportables directly competitive with the foreign goods are pushed up.⁸ Such price increases undermine the international competitiveness of exportables.

The price costs of protection are heightened under conditions where trade in intermediate goods is significant and where manufacturers are diversified vertically. Trade in intermediate goods — semimanufactures (e.g., yam, cement, steel) used as inputs for other semimanufactures or final goods — constitutes 40% each of OECD exports and imports in manufactures.⁹ This substantial trade has widespread ramifications for foreign economic policy.¹⁰ Of interest to this study are the effects of protection on intermediate goods for exports. If foreign intermediate goods are necessary for domestic production, protection against such inputs will raise the costs of production. The same increase in the costs of production and, therefore, in final price applies as well to exportables that utilize foreign inputs.¹¹

Clearly users of intermediate products have motivations to oppose protection on such goods. Yet given high and increasing levels of vertical integration in manufacturing, firms have become producers as well as users of intermediate goods.¹² These intermediate goods producers, in the interests of their final goods producing branches, may also oppose protection.

Foreign supply costs. The second primary cost of protection concerns foreign supply developments that adversely affect the international markets of export dependent industries. To begin with, a foreign supplier, finding access to a protected market restricted, may channel more of its shipments towards its own domestic market.¹³ The ability and effects of an industry resorting to greater domestic sales in response to protection abroad are enhanced under conditions of intra-industry trade. Intra-industry trade, or the simultaneous importing and exporting of similar if not identical...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Acknowledgments
• Chapter I: Export Dependence as a Constraint on Protectionism
• Chapter II: Export Dependence and U.S. Trade Relations
• Chapter III: U.S. Machine Tool Trade Relations
• Chapter IV: Explaining U.S. Machine Tool Trade Policy
• Chapter V: Export Dependence and International Political Economy
• Bibliography
• Index