Routledge

Extended Case Studies

Chapter 1

The Marvel of the iPod

A danger for any textbook writer is that a key example used in the book may overnight become irrelevant. In the rapidly changing world of consumer electronics, where fads can quickly affect what is popular and what is not, product lives are notoriously short. Has that fate befallen our Chapter 1 focus on the Apple iPod?

The logic of Chapter 1, that few consumer products are produced entirely in one country and that the companies producing them must be attuned to changing market conditions that affect suppliers and buyers worldwide, would be relevant even if the iPod had fallen from favor. That outcome, however, has not yet occurred. The inner workings of the iPod may have changed, and the country locations where different components are sourced are unlikely to remain true to the static snapshot from 2005. But, this distinctive media player remains a popular fixture of those who want music and entertainment on the go. In spite of the rapid decline in the output of goods that occurred on a worldwide basis in the fourth quarter of 2008, iPod sales actually grew. In fact, Apple reported that iPod sales reached a record 22.7 million in 2008. Apparently, the market is not yet saturated.

Adapted from Chris Nuttall, ‘Apple escapes credit crunch as iPod sales grow,’ Financial Times, 22 January 2009.

Continuing Sagas

Trade and investment decisions can change quickly, just as many trade policy issues do not remain static. Here are a few updates regarding situations discussed in the 7th edition.

Chapters 6 & 7

Tempestuous Trade in Steel

The recession of 2001–2002 created major adjustment pressures in the world steel industry, and there were frequent calls for protection, as recounted in Chapter 5. Recovery from that downturn initially was helped by strong Chinese growth. Yet the downturn of GDP in OECD countries as a result of the 2008–2009 financial crisis has again resulted in a world steel market plagued by overcapacity and heightened import competition in OECD countries.

The role of China in this situation has markedly changed. The following figures from the UN Comtrade data base show Chinese trade in SITC 67, the iron and steel industry, given in billions of dollars:

Exports Imports Net trade in steel Year
$3.3 $13.6 −$10.3 2002
$13.9 $23.4 −$9.5 2004
$32.5 $21.6 $10.9 2006
$71.0 $27.1 $53.9 2008

Although the booming Chinese economy was a net importer of steel earlier in the decade, China is now a net supplier of steel on the world market. Given the history of vigorous use of antidumping procedures by this industry in the United States especially, we might predict on political economy grounds that greater legal action will be taken against Chinese imports.

To assess whether steel and steel products stand out among other trade actions, a useful step is to consult the entries from Chad Bown's database on China-specific safeguards (allowed until 2014 under the terms of China's WTO entry) and on anti-dumping cases brought against Chinese producers by U.S. industries. His compilations are available as Bown, Chad P. (2009) ‘Global Antidumping Database,’ [Version 5.0, July], available at www.brandeis.edu/~cbown/global_ad/.

China-specific Safeguards
Product Date Case Brought
Certain Brake Drums and Rotors 06/06/2003
Certain Ductile Iron Waterworks Fittings 09/05/2003
Uncovered Innerspring Units 01/06/2004
Certain Circular Welded Non-alloy Steel Pipe 08/02/2005
Certain Passenger Vehicle and Light Truck Tires 04/20/2009
Antidumping Cases against Chinese producers
Product Date Case Brought
44'-Diamino-22'-Stilbenedisulfonic Acid and Stilbenic Fluorescent Whitening Agents 04/08/2003
Color Television Receivers 05/13/2003
44'-Diamino-22'-Stilbenedisulfonic Acid Chemistry 05/23/2003
Polyethylene Retail Carrier Bags 06/27/2003
Tetrahydrofurfuryl Alcohol 06/30/2003
Ironing Tables and Certain Parts Thereof 07/08/2003
Electrolytic Manganese Dioxide 08/11/2003
Wooden Bedroom Furniture 11/10/2003
Hand Trucks 11/21/2003
Carbazole Violet Pigment 23 11/28/2003
Certain Frozen and Canned Warmwater Shrimp and Prawns 01/08/2004
Crepe Paper Products 02/23/2004
Certain Tissue Paper Products 02/23/2004
Magnesium 03/09/2004
Certain Circular Welded Carbon Quality Line Pipe 03/09/2004
Chlorinated Isocyanurates 05/21/2004
Artists' Canvas 04/06/2005
Diamond Sawblades and Parts Thereof 05/10/2005
Certain Lined Paper Products 09/19/2005
Carbon and Certain Alloy Steel Wire Rod 11/18/2005
Activated Carbon 02/02/2006
Certain Activated Carbon 03/15/2006
Certain Polyester Staple Fiber 06/29/2006
Coated Free Sheet Paper 11/06/2006
Sodium Hexametaphosphate 02/15/2007
Certain Steel Nails 06/04/2007
Circular Welded Carbon Quality Steel Pipe 06/14/2007
Certain New Pneumatic Off-The-Road Tires 06/22/2007
Light-Walled Rectangular Pipe and Tube 07/03/2007
Laminated Woven Sacks 07/05/2007
Steel Wire Garment Hangers 08/10/2007
Electrolytic Manganese Dioxide 08/28/2007
Lightweight Thermal Paper 09/27/2007
Raw Flexible Magnets 09/28/2007
Polyethylene Terephthalate Film/Sheet/Strip (PET Film) 10/05/2007
Sodium Nitrite 11/15/2007
Aminotrimethylenephosphonic Acid and 1-Hydroxyethylidene-1/1-Diphosphonic Acid 01/08/2008
Uncovered Innerspring Units 01/07/2008
Small Diameter Graphite Electrodes 01/25/2008
Circular Welded Austenitic Stainless Pressure Pipe 02/05/2008
Steel Threaded Rod 03/12/2008
1-Hydroxyethylidene-1/1-Diphosphonic Acid 03/26/2008
Frontseating Service Valves 03/26/2008
Certain Circular Welded Carbon Quality Steel Line Pipe 04/14/2008
Citric Acid and Certain Citrate Salts 04/22/2008
Certain Tow Behind Lawn Groomers and Certain Parts Thereof 07/01/2008
Certain Kitchen Appliance Shelving and Racks 08/07/2008
Oil Country Tubular Goods 04/15/2009
Prestressed Concrete Steel Wire Strand 06/03/2009
Certain Steel Grating 06/05/2009
Wire Decking 06/11/2009
Woven Electric Blankets 07/01/2009

Many industries outside the steel sector have been active in bringing such cases, but there has been an increase in the number and share of cases involving steel and steel products in the most recent year. In the case of recent entries, final decisions have not been released yet. Bown's data set gives the outcome of the cases brought, and if a duty was levied, the amount of duty. An additional piece of information that would help put this list in perspective is the amount of imports and the amount of domestic production in each industry.

Chapters 6, 7 & 10

U.S. Cotton Subsidies

Although the WTO ruling against U.S. cotton subsidies came in 2004, Brazil did not immediately retaliate, hoping that negotiations in the Doha Round would satisfactorily address U.S. practices. In terms of WTO formalities, both countries requested the suspension of arbitration proceedings in November 2005. Brazil requested the resumption of these proceedings in August 2008, and in August 2009 Brazil received WTO approval to impose sanctions on $295 million of trade with the United States. The figure was much less than the $4 billion of damages sought by Brazil, in part due to changes in U.S. law and reductions in the amount of illegal subsidies paid. But the 2008 farm bill passed by the U.S. Congress did not attempt to bring U.S. practices into full conformity with WTO standards. In addition, the United States has shown little flexibility in changing its restrictions on imported sugar or ethanol, two other areas of major interest to Brazil. That lack of progress likely influenced Brazil's decision to force action in the cotton case.

How might Brazil retaliate most effectively? The most common approach is to levy a prohibitive tariff on imports equal to the value of trade authorized above. Because that strategy simply eliminates trade, economists might regard a preferable alternative to be the imposition of an optimal tariff that would still allow trade but exploit the importer's market power as an important export destination for U.S. producers. U.S. producers would lower their prices to Brazilian buyers in order to limit the reduction in their sales in the Brazilian market. In that case, even if the U.S. practices never changed, Brazil would gain from taking retaliatory steps. If a country is not that large a market for U.S. exports, however, then such a terms of trade gain is not likely.

Rather than target U.S. goods, Brazil announced its intention to infringe U.S. patents for pharmaceutical products. Brazil regards this step as an effective way to shift rents on existing drugs from U.S. patent holders to Brazilian generic producers and consumers. Such a step also might mobilize another voice within the United States to seek a change in U.S. agricultural subsidy practices. The arbitrator's award did approve such cross retaliation, not limited to trade in goods alone, but only if future damages rose to a high enough threshold amount to make it impractical to retaliate against imports of goods alone.

See Jonathan Wheatley, ‘Brazil ready to infringe US drug patents,’ Financial Times, August 30, 2009; Frances Williams, ‘Brazil wins WTO go-ahead for US sanctions,’ Financial Times, August 31 2009; and WTO confirms ruling favouring Brazil in cotton dispute with US MercoPress. September 1, 2009. Also, see the WTO documents WT/DS267/ARB/1 and WT/DS267/ARB/2.

Chapter 7

Virgin Galactic Moves Forward

Virgin Galactic sold a 32 percent stake to Abu Dhabi for $280 million. This case is a reminder that the owners of a company may be located in a different country than those who produce the goods and services that the company sells or those who oversee operations from headquarters in yet another country. The rationale for strategic trade policy considered in Chapter 7 becomes even more difficult to apply when the winners from any such intervention are more and more diffused.

For more information see Maria Abi-Habib, ‘Virgin Galactic Sells Stake to Abu Dhabi,’ The Wall Street Journal, July 28, 2009, and http://www.businessweek.com/globalbiz/content/aug2009/gb2009083_575376.htm.

EU Antidumping Duties on Chinese and Vietnamese Shoes

In October 2008 the EU trade commissioner Peter Mandelson announced that the EU would retain the antidumping duties it levied in 2006 against imported shoes from China and Vietnam. This action applies while the EU conducts a review of the antidumping measures and the harm that would be caused by their removal. Because the duties are 16.5 percent for imports from China and 10.0 percent from Vietnam, the effect on the average imported shoe at a price of €8 is to raise the price to €9. Expenditures on consumer goods account for a larger share of the budget of low income individuals, and therefore the remedy has a negative effect on income distribution.

Italy and other Mediterranean countries strongly supported the commissioner's action. Although EU member states had lobbied against this step and in a nonbinding poll voted 15–12 against it, the commissioner characterized this vote as a small majority. He claimed that consistency called for carrying out a review whenever requested by an EU industry.

Sources
  • Alan Beattie, ‘Brussels extends import tax on shoes,’ Financial Times, 29 September 2008.
  • Andrew Bounds, ‘Deal ends EU impasse on Asian shoe tariffs,’ Financial Times, 4 October, 2008.

Chapter 8

More on Chrysler

The hopes of Cerberus in taking on the challenges of running a car producer focused on the US market proved to be far too optimistic. The new owners had relied upon a high level of debt in their takeover from Daimler, but unfortunately for them, rising gasoline prices and then the global financial crisis (and the rapid decline in US GDP in the fourth quarter of 2008 and the first quarter of 2009) had a particularly negative effect on car sales.

Although Chrysler received a temporary reprieve through government loans by the Bush Administration and then the Obama Administration, Chrysler had difficulty reaching a survival agreement with the government, its unions, and its private lenders. The fact that the major lenders happened to be banks that were receiving federal assistance further complicated the picture. The eventual offer to the holders of secured debt proved particularly controversial, relative to the unsecured claims of labor. The offer to the former group approximated the value of the company if it were liquidated, or roughly a third of the book value of the loans. The negotiations with the lenders collapsed, and Chrysler declared bankruptcy on April 30, 2009

Chrysler emerged from bankruptcy just 42 days later, with the Italian producer Fiat taking a 20 percent ownership stake. Fiat did not contribute any capital to fund the new firm, but it is making its engine technology and foreign distribution network available. Its ownership share may rise further, if and when Chrysler is able to repay its government loans. Becoming part of a multinational corporation may be Chrysler's best hope of survival.

Adapted from Neil King Jr., and Jeffrey McCracken, ‘Chrysler Pushed into Fiat's Arms,’ Wall Street Journal, May 1, 2009 and ‘U.S. Played Rough with Chrysler's Creditors,’ Wall Street Journal, May 11, 2009, and Daniel Dombey and Bernard Simon, ‘Bush bails out Detroit with $17 bn package,’ Financial Times, December 20–21, 2008.

Chapter 10

The EU Banana Dispute

The World Trade Organization's Dispute Settlement Body rejected an EU appeal of a ruling against its banana import regime. Current EU policy favors imports from African, Caribbean, and Pacific (ACP) countries, which once again has been ruled to be inconsistent with the EU's WTO commitments. Rulings against EU policy predate the establishment of the WTO in 1995.

The ruling held that the EU duty on non-ACP bananas, currently €176 per ton, do not provide adequate access to those producers. The EU stated that resolution of the problem should occur within the Doha Round of multilateral trade negotiations. Given the failure of those talks to proceed, the prospects for any serious reform of the system seem slight. Caribbean interests had earlier expressed relief that the Doha Round talks foundered in July 2008, and an effort to restart the talks in December 2008 were cancelled.

Sources
  • Sebastien Falletti, ‘EU looks at Doha to solve banana dispute,’ Europolitics, 28 November 2008.
  • BBC Worldwide Monitoring, ‘WTO rules against Caribbean banana producers,’ 11 February 2008.
  • BBC Worldwide Monitoring, ‘World trade talks' failure good for Caribbean — ex-diplomat,’ 31 July 2008.
Beyond or Back to the Generalized System of Preferences?

As reported in the textbook, the EU provides trade preferences to developing countries through three different regimes. Standard GSP provides tariff preferences to 176 developing countries and territories on over 6,300 tariff lines. GSP-Plus offers additional tariff reductions to developing countries that commit to steps of good governance and sustainable development. The 50 least-developed countries identified by the United Nations qualify for duty-free and quota-free access for nearly all goods.

Outside this system, the EU has provided favorable treatment to imports from the ACP countries. Originally those measures were part of the Lome Convention signed in 1975 and extended several times through 1999 until it was replaced by the Cotonou Agreement. The WTO waiver for these special provisions expired at the end of 2006.

To replace this unilateral set of preferences, the EU has been negotiating Economic Partnership Agreements with ACP countries. These agreements entail reciprocal obligations. Developing country signatories would have the assurance that the agreement could not be unilaterally altered by the EU . On the other hand, the developing countries are unlikely to see an immediate new benefit from greater market access, because they already enjoy that special privilege on most products. Most significantly, they are expected to open their markets to EU products. EU officials cite that liberalization is a positive step in integrating developing countries more closely into world trade networks.

(A similar asymmetry existed in the US negotiation of the Dominican Republic — Central American Free Trade Agreement in 2004. The Central American countries already benefited from trade provisions of the Caribbean Basin Initiative, a set of preferences granted earlier in 1983 and extended by the Caribbean Basin Trade Partnership Act on 2000. Because the CAFTA represents a treaty commitment that cannot be unilaterally altered by the US, the Central American countries gained some insurance against future political pressures to alter US trade policy. In fact, Central American heads of state came to Washington DC to lobby in support of the agreement. But, Costa Rica was the last country to ratify the agreement in 2008 because it was particularly skeptical of provisions requiring it to open its insurance and telecommunications markets to US competitors.)

In November 2008 Cote d'Ivoire became the first African country to sign an Economic Partnership Agreement with the EU. Cote d'Ivoire will phase out tariffs on over 80 percent of its imports from the EU over a 15 year period. It will immediately eliminate tariffs on chemicals and vehicles, which it does not produce. Such tariffs can be regarded as revenue tariffs that do not distort domestic production, a virtue similar to the British tariff structure in the late nineteenth century that is cited in the textbook. Not surprisingly, then, a major concern of Cote d'Ivoire is the loss of tariff revenue. The EU has promised an unspecified amount of aid to compensate for this effect of the policy change.

Because the EU raised duties on key African exports such as cocoa and cocoa butter, many countries have felt pressured to negotiate. Some activists advocate that African countries instead pursue the GSP-Plus option.

Sources
  • Inter Press Service, Africa News, ‘Cote d'Ivoire Government signs trade pace with Europe,’ 28 November 2008.
  • The East African, Africa News, ‘Africa: Forget EPAs with Europe, Go for GSP-Plus, Activists Say,’ 2 November 2008.
  • The Post, Africa News, ‘Cameroon signs interim Economic Partnership Accord with EU,’ 19 January 2009.
  • Oxfam International, ‘A Matter of Political Will: How the European Union can maintain market access for African, Caribbean and Pacific countries in the absence of Economic Partnership Agreements,’ March 2007.
Intellectual Property Issues Remain Contentious

The TRIPs agreement (Trade Related Intellectual Property) establishes the presumption that pharmaceutical products must be afforded patent protection in countries where the products are duly registered, but developing countries also have the right to ignore this protection in the case of public health concerns. This flexibility includes not only products to be consumed in the developing country, but also the opportunity to provide the drug to other developing countries that may not have the capacity to produce it themselves.

A dispute between the EU, Brazil and India arose in December 2008 from the seizure in the Netherlands of a key ingredient to produce a generic hypertension drug. The drug was being shipped from India to Brazil. The EU maintains the right to inspect all drug shipments passing through its territory in order to protect EU citizens, as well as residents of developing countries, from the risk of using fake medicines. EU officials cite a 50 percent increase in fake medicines from 2006 to 2007, with one third coming from India. The EU seizure of the shipment was taken in response to a request from the registered patent holder, the American firm Merck and Company.

Brazil, India, and other developing countries reject this justification. They claim that the action is simply an effort to eliminate the opportunity for developing countries to use the agreement's flexibilities to address public health concerns. Brazil stated that it was investigating over a dozen seizures of drug shipments destined for African and Latin American countries that occurred in 2008.

Adapted from Jonathan Lynn, ‘EU, developing states class over generic drug swoop,’ Reuters.com, 4 March 2009.