Threatening to retaliate is a common means of influence in trade conflicts. In most cases, retaliation is carried out either through the suspension of tariff concessions or through additional tariffs. The target of retaliations can be industries that were uninvolved in the original conflict. This article examines the use and effectiveness of such “cross-industry” threats.
With a cross-industry threat, the compositions of domestic games tend to become more complicated with respect to both the threat's sender and target, as compared with intra-industry cases. Unrelated industries tend to have different industrial associations, fall under different bureaucratic jurisdictions, and be represented by different politicians. Thus, we can expect the decision-making process involving cross-industry threats to be more complicated and politically difficult than in intra-industry cases.
However, the extensive literature on threat effectiveness has paid insufficient attention to whether retaliation threats are cross-industry or intra-industry. To compensate for this limitation, I examine cases involving U.S. unilateral trade actions and WTO dispute settlements, which yield several findings.
First, the use of cross-industry threats by the United States has increased dramatically in 1980s.
Second, a close examination of U.S. section 301 cases reveals that cross-industry threats are clearly more effective than intra-industry ones. The selection of targets (cross-or intra-industry) also exhibits a clear tendency. Cross-industry threats are used almost exclusively in attempts to open foreign markets (through the removal or modification of high tariffs, quantitative restrictions, patent protections, industrial standards, tax systems, etc.), and not in the cases of export subsidies, in which the purpose of the U.S. is to protect its own industries from import penetration.
The increase in the use of cross-industry retaliation, this study argues, is caused by the changing nature of the negotiation process. After the 1980s, the principle source of trade conflicts shifted from foreign export penetrations (e.g., textile, steel, and auto) to foreign non-tariff barriers such as government regulation, copyright protection, market structure, and domestic institutions. The domestic group supporting trade barriers are not limited to the export industry, and therefore, are not always subject to trade retaliation. Since this renders threats of intra-industry retaliation ineffective, cross-industry threats are now used more frequently.
This trend is not limited to the United States. Records from WTO dispute settlement cases demonstrate that most trade retaliations are now targeted at industries that are unrelated to the original conflict.
Underlying this change is a dynamic process of liberalization and international harmonization. Trade liberalization begins with competitive industries, and uncompetitive industries tend to be left behind. Similarly, domestic systems of nontradable goods sectors are last to be harmonized. Therefore, as internationalization continues, supporters of alleged trade barriers are less likely to engage in export businesses, thereby decreasing their likelihood of becoming a target of direct trade retaliation.
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