Download On the Incidence of US Tariffs

INCIDENCE OF US TARIFFS
123
On the Incidence of US Tariffs
Don P. Clark and Donald Bruce
University of Tennessee
1. INTRODUCTION
UCH attention has been devoted to the study of the structure of tariffs in
industrial nations and its impacts on the level and composition of their
imports from developing countries.1 Studies have identified two sources of
bias against imports from developing countries inherent in tariff structures of
industrial nations. First, tariffs used by industrial nations have been found to bear
more heavily on products of export interest to developing countries than on
all imports or imports from other industrial nations. Many technologically
unsophisticated and unskilled labour-intensive products of export interest to
developing countries face relatively high tariffs. The second bias relates to tariff
escalation. Industrial nations have been found to escalate their tariff structure
according to the fabrication stage of each imported product. Raw materials enter
virtually duty free. Higher tariffs are assessed on intermediate products, with
even higher tariffs on final products. Tariff escalation is held to pose a barrier
against attempts by poorer countries to export goods at the high end of the
processing chain.2 While studies have shown that industrial nation tariffs tend to
discriminate against products of export interest to developing countries, they
have not given adequate recognition to the disparate manner in which tariffs are
applied to the trade of countries that have widely different levels of economic
well-being.
This paper provides evidence on the differential incidence of tariffs on products
of export interest to developing countries by investigating the relationship between
per capita incomes of US trading partners and tariff rates. Several features of
the present study represent improvements over earlier attempts to identify the
inter-country pattern of tariff incidence. First, we assess the incidence of tariffs
imposed by the US on imports from countries that span the entire range of per
M
The authors are grateful to an anonymous reviewer and to W. Charles Sawyer for providing many
helpful comments.
1
2
See Balassa (1965, 1967 and 1968), Johnson (1967), Finger and Yeats (1976) and Clark (1981).
See, for example, Balassa (1967 and 1968).
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DON P. CLARK AND DONALD BRUCE
capita incomes. Previous studies compare average tariff rates on all imports or
imports from industrial nations with the average tariff rate on imports from
developing countries. A second improvement pertains to the scope of country and
industry coverage. Rather than focusing on country groups, we include 72 countries and more than 370 four-digit US Standard Industrial Classification (SIC)
industries. Third, we use more recent data on tariffs and trade flows. Earlier
studies use data from the 1950s and 1960s. More recent data will reflect changes
in the composition of imports from developing countries that have taken place in
response to US trade policies and multilateral trade liberalisation. Fourth, unlike
previous studies, we use calculated ad valorem tariff rates that express tariff
revenue as a per cent of total import values. Calculated tariff rates will provide a
more accurate picture of true tariff rates faced by developing countries who enjoy
tariff preference margins under the Generalised System of Preferences (GSP)
Programme, the Caribbean Basin Economic Recovery Act (CBERA), and tariff
duty savings from Offshore Assembly Provisions (OAPs) in the US tariff code.
Earlier studies use published tariff rates. Finally, our study of the relationship
between tariffs and the level of economic development identifies both countryand industry-level determinants of tariff rates. Earlier studies focus only on
industry-level determinants.
2. TARIFF RATE DETERMINANTS
Our investigation of the incidence of US tariffs uses a regression approach that
specifies tariff rates as a function of per capita income of US trading partners. For
such an approach to yield unbiased estimates, other important determinants of
tariff rates must be included in the analysis. We examine a wide variety of
country- and industry-level determinants of US tariff rates.3
a. Country-level Determinants
Previous studies found US tariff rates tend to be relatively high on products of
export interest to developing countries. Tariffs have been found to rise with stage
of product fabrication. Such tariff escalation is held to pose a barrier against
efforts by poorer countries to produce and export more advanced goods at higher
stages of product fabrication. As poorer developing countries move up the per
capita income scale, they are expected to confront higher tariff rates in markets of
industrial nations. Tariff escalation leads to the expectation that US tariff rates
will be positively correlated with per capita income of trading partners.
3
Variable definitions, data sources and summary statistics are provided in the Appendix.
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INCIDENCE OF US TARIFFS
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Other country-level determinants of tariff rates are not well established in
the literature. Our model includes country characteristics that influence the
export potential of foreign countries under the assumption that import surges
were historically countered by high tariff rates. The intercountry pattern of US
tariff rates in the late 1920s and 1930s reflected a policy of protecting industry
and agriculture from a flood of foreign-made goods.4 As the US tariff structure
evolved over time, import-sensitive industries received relatively small tariff cuts
from multilateral trade negotiations.5 Gross domestic product of trading partners
reflects productive capacities and export capabilities of countries. Tariff rates are
expected to be positively correlated with the gross domestic product of trading
partners.
Geographical characteristics exert important influences over the volume of
trade. Included here are size and proximity to other countries. Leamer (1984)
argues that area might serve as a proxy for resource availability that would
encourage exports and protectionism in the importing country. Costs associated
with overcoming distance lead to the expectation that countries in close proximity to the US will account for more imports than distant countries. Proximity to
trading partners reflects such factors as seasonal trade, border trade, cultural and
language differences, and general market familiarity. Tariff rates are expected to
be positively correlated with geographic size and negatively correlated with distance from a trading partner.
A dummy variable is used to account for effects associated with the USCanada Free Trade Agreement (CFTA) that phased out tariffs on trade between
the two countries beginning in 1989. Canada accounts for about 20 per cent of
US imports. Tariff rates are expected to be lower on goods originating from
Canada.
Countries that adopt outward-oriented trade strategies will export more than
those using inward-oriented strategies such as import-substitution industrialisation policies.6 Export-oriented economies will face higher protection levels when
targeting the US market. Tariff rates are expected to be positively correlated with
the trade orientation of a trading partner.
Major petroleum exporting countries supply petroleum and related products.
They have not traditionally specialised in the production and export of manufactured products subject to tariffs. These countries are spread across the entire per
capita income scale. A dummy variable is used to identify major petroleumexporting countries. Tariff rates are expected to be lower for major petroleum
exporters.
4
5
6
A tariff history of the US is presented in Taussig (1967) and Lake (1988).
See Marvel and Ray (1983) and Clark (1987).
See Dollar (1992).
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DON P. CLARK AND DONALD BRUCE
b. Industry-level Determinants
Considerable research effort has been devoted to identifying industry-level
determinants of US tariff rates.7 Analyses have been conducted using a wide
variety of protection formation models.8 Studies have emphasised determinants
of protection structure relating to pressure-group formation incentives, group
voting strengths, equity considerations, international bargaining positions, comparative advantage, the economic theory of regulation, strategic retaliation,
endogenous protection and historical protection patterns. Protection-formation
models seek to explain who will have an incentive to secure protection from
import competition and who will bear the burdens. Protection is valuable to
import-sensitive industries. Benefits of tariffs are concentrated in politically
powerful domestic industries, while the costs are dispersed throughout the
entire economy. Winners and losers from protection are identified by focusing
on measures of constituent political power which influence an industry’s ability
to secure protection.
Imports serve the same economic purpose as entry. When market structure
characteristics enable firms to enjoy profits at home but do little to deter foreign
competition, firms will have an incentive to restrict market entry by foreign
rivals.9 Their ability to secure tariff protection will depend on the levels of
political influence they possess. Several market structure characteristics serve as
domestic entry barriers. These include the degree of scale economies, degree of
product differentiation and the extent of market concentration. Industry size
conveys political power. Comparative disadvantage activities will be candidates
for protection, while industries insulated from import competition by high transportation charges will have less need for tariffs.
Scale economies restrict entry by domestic firms. Industries that enjoy scale
economies are susceptible to import growth.10 Protection will be more valuable to
industries that engage in large-scale production. Scale economies also reflect
industry size and political power. Tariff rates are expected to be positively correlated with the degree of scale economies.
The relationship between industry concentration and political power is rooted
in Olson’s (1965) theory of collective goods. Seller concentration determines
political power of an industry’s special-interest groups by influencing its ability
to mobilise members, and by lowering incentives to free ride. When a few firms
7
See Pincus (1975), Caves (1976), Helleiner (1977), Clark (1980 and 1987), Ray (1981a, 1981b
and 1987), Ray and Marvel (1984) and Trefler (1993).
8
See, for example, Olson (1965), Brock and Magee (1978), Caves (1976), Marvel and Ray
(1983), Baldwin (1982) and Grossman and Helpman (1994).
9
See Stigler (1971) and Trefler (1993).
10
See Clark et al. (1990).
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account for a large share of industry sales, they will find it easier to mobilise
support for a common goal such as securing trade restrictions. Gains from protection will be concentrated among members of a small group rather than being
dispersed over many firms. Tariff rates are expected to be positively correlated to
the degree of industry seller concentration.
Product differentiation serves to restrict both domestic and foreign entry.
Industries that produce differentiated products will require less protection to
compete with foreign rivals than will industries that produce homogeneous goods.
Product differentiation is proxied by the advertising-sales ratio. Advertising is
intended to differentiate products, exploit quality differences, shift the demand
curve rightward and/or reduce the price elasticity of demand for a product.
Increased product differentiation is expected to make it difficult for foreign
producers to penetrate the US market. As such, tariff rates should be negatively
correlated with the degree of advertising intensity.
Industry size translates into political power. Large industries will be more
successful in securing protection than smaller ones. Industry size is measured
by an industry’s share in total US manufacturing employment. Tariff rates are
expected to be positively correlated with industry size.
Downstream consumers will influence an industry’s ability to secure trade
restrictions. The sales dispersion index reflects the diversity of industry consumers.
Lower values of the index are associated with industries that serve a wide range
of industrial consumers who can be expected to exert political opposition to the
demand for tariff protection. When industries sell to a narrow range of downstream activities, political opposition from industrial consumers will go unnoticed
or be deemed unimportant. Tariff rates should be positively correlated with the
sectoral dispersion index.
Comparative disadvantage industries will have an incentive to restrict import
competition. Two variables are used to measure the cost disadvantage of an
industry. Unskilled labour, the true scarce US factor, has an incentive to secure
protection from foreign competition. The average wage will measure unskilled
labour intensity. Industries with low average wages have high unskilled labour
intensities. Following Finger et al. (1982), we assume the US comparative disadvantage is also pronounced in physical capital-intensive industries.11 Physical
capital intensity is measured by the capital-to-labour ratio. Tariff rates are expected
to be negatively correlated with the average wage and positively correlated with
our measure of capital intensity.
11
According to Finger et al. (1982, p. 460), virtually all empirical work assumes physical capital
intensity is negatively related to US comparative advantage. Branson and Monoyios (1977) found
that the US is exporting services of human capital and is importing the services of unskilled labour
and physical capital.
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DON P. CLARK AND DONALD BRUCE
A natural trade barrier is also expected to affect an industry’s need for
trade restrictions. International transportation charges influence tradability of an
industry’s products. Bulky products of relatively low unit values will tend to
incur high ad valorem international shipping charges that tend to reduce the
volume of trade. Tariff rates should be negatively correlated with ad valorem
international transport charges.
3. EMPIRICAL STRATEGY AND RESULTS
We require a multivariate empirical structure that permits an analysis of
the various determinants of tariff rates. A single-limit Tobit specification is used
to identify country- and industry-level determinants of tariff rates because our
dependent variable is censored at zero. In addition to all of the factors discussed
in the previous section, the model also includes a quadratic of per capita GDP
and a constant term.
Our data set is a cross-section of ad valorem tariff rates in year 1992, where
an observation is an industry-country pair. For example, each observation is the
tariff rate on a four-digit SIC product imported from a particular US trading
partner.
Table 1 presents Tobit results. Signs on coefficients of per capita GDP variables
suggest that per capita income exerts a decreasingly positive effect on tariff rates.
The implied inverted U-shaped relationship suggests average tariff rates are lower
for the poorest and richest countries and higher for countries in the middle of the
income distribution.
A visual representation of the relationship between tariff rates and per capita
GDP is provided in Figure 1. This figure shows the average predicted value of
tariff rates for each level of per capita GDP for 72 US trade partners. We superimposed a cubic trend line to provide a more detailed analysis of this relationship.12 Industries exporting from the poorest countries face an average predicted
tariff rate of about four per cent. The average tariff rate falls slightly at the low
end of the income scale, rises through the middle portion of the income scale,
reaches a maximum in the upper third of the distribution, and ultimately declines
with per capita GDP at the high end of the income scale. This finding is not
consistent with the widely held view that tariffs used by industrial nations bear
more heavily on products of export interest to developing countries than on
imports from industrial nations. It is consistent with the tariff escalation pattern
12
Note that the superimposed cubic trend is derived solely from the average predicted tariff rates
for each level of per capita GDP (i.e. for each country in our data set). It is not directly related to
the coefficients on the quadratic per capita GDP specification in our Tobit analysis.
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INCIDENCE OF US TARIFFS
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TABLE 1
Determinants of US Tariff Rates
Variable (Expected Sign)
Tobit Analysis
Per Capita GDP (+)
0.0002a
(1.9E-05)
−4.34E-09a
(6.12E-10)
1.16E-07
(8.66E-08)
0.3625a
(0.0269)
0.2703a
(0.0456)
−4.1548a
(0.3660)
2.0587a
(0.1215)
−1.5878a
(0.2420)
2.5597a
(0.7650)
0.0172a
(0.0032)
−9.9055a
(2.8628)
61.9288a
(16.3844)
2.9714a
(0.2068)
−0.0003a
(7.33E-06)
0.0042a
(0.0007)
−4.3123a
(0.4836)
5.3264a
(0.4746)
Per Capita GDP Squared
GDP (+)
ln(Area) (+)
ln(Distance) (−)
Canada (−)
Trade Orientation (+)
Major Petroleum Exporter (−)
Scale Economies (+)
Seller Concentration Ratio (+)
Advertising-Sales Ratio (−)
Employment Share (+)
Sales Dispersion Index (+)
Average Wage (−)
Capital-Labour Ratio (+)
Transport Charge (−)
Constant
S.E.
N
5.9375
(0.0398)
15,167
Note:
Entries are Tobit coefficients with standard errors in parentheses.
a
Significant at the 1 per cent level.
reported in earlier studies if advanced countries account for most products at the
high end of the fabrication scale. These views can be reconciled by recognising
that developing countries are referring to the most unskilled labour-intensive
manufactures when they argue that industrial nation tariffs bear more heavily
on products of export interest to them. Many other exports from developing
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DON P. CLARK AND DONALD BRUCE
FIGURE 1
Average Predicted Ad Valorem Tariff Rates by Per Capita GDP
countries such as raw materials and products at the low end of the fabrication
scale face relatively low tariffs.
The overall incidence pattern suggests countries at the low end of the per
capita income scale export products that are subject to relatively low tariffs.
Higher tariffs are faced by more advanced countries that export intermediate
products and finished goods in which the US has a more pronounced comparative
disadvantage. Since tariff rates rise with per capita income over a wide range of
the income scale, the poorest countries will not be able to escape tariffs by
attaining higher levels of economic development.
Countries at the high end of the income scale are found to face declining
tariff rates. This might be due to the fact that the highest income countries engage
in two-way trade in technology-intensive products in which they all have a
comparative advantage. Trade negotiations conducted under the auspices of GATT
and the WTO might also contribute to this finding. When negotiating tariff cuts,
one objective of the US is to achieve offsetting tariff reductions from the most
advanced industrial nations such as EU members and Japan in order to improve
US exporters’ access to these markets. Developing countries lack bargaining
power, experience in negotiations and the ability to retaliate against policies
of industrial nations. They have not been able to form groups with enough
interests in common and a large enough size to extend or extract meaningful
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INCIDENCE OF US TARIFFS
131
tariff concessions from industrial nations. Over time, negotiations have resulted
in freer trade in manufactures among industrial nations than among industrial
nations and developing countries.13
The coefficient on GDP has the anticipated sign but is not statistically significant. Signs and significance for the remaining country-level variables generally
follow our expectations. Exports from countries that encompass large geographic
areas face higher tariff rates in the US market. This finding supports Leamer’s
(1984) contention that area serves as a proxy for resource availability and hence
export potential of trading countries. The finding pertaining to distance counters
our expectations. Tariff rates are found to increase as the distance between the
US and a trading partner increases. Outward-oriented trade strategy, as reflected
in our trade-orientation measure, exerts a positive influence on tariff rates. Major
petroleum exporters are found to have significantly lower tariff rates than other
countries. Tariff rates are found to be lower on goods originating from Canada.
Coefficients on industry-level variables are statistically significant and have
the expected signs. Domestic entry barriers exert significant influences on the
pattern of tariff rates. Tariffs are higher for industries that enjoy both scale
economies and seller concentration.14 Protection is more valuable to industries
that exhibit these characteristics. Scale economies and seller concentration also
convey political power. Seller concentration preserves gains from protection for a
smaller number of domestic firms. Product differentiation, proxied by advertising
intensity, exerts a significant negative effect on tariff rates, as expected.
Tariffs are also higher for larger, politically important industries, as measured
by the industry’s share in total manufacturing employment. The significant positive coefficient on the sectoral dispersion index shows industries serving a wide
range of downstream industrial consumers will face more political opposition to
their demands for protection. Tariff rates are higher for US industries that have a
more pronounced comparative disadvantage, as reflected in lower average wage
rate levels or higher capital intensity.15 The significant positive relationship between tariff rates and capital intensity may reflect a history of political receptivity
to protection for senescent industries in the United States. Ad valorem international transportation charges, a natural trade barrier, exert a negative impact on
tariff rates.
13
See Verreydt and Waelbroeck (1982, p. 380) and Ray and Marvel (1984, p. 452).
Many studies have identified industry-level determinants of tariff rates. Ray (1981a) and Caves
(1976) found significant negative relationships between tariff rates and scale economy measures.
Results pertaining to seller concentration in the present study are consistent with those reported by
Pincus (1975), Ray (1981b) and Clark (1987). Caves (1976) found a significant negative coefficient
on the seller concentration ratio.
15
Ray (1981a) found a significant negative coefficient on a capital intensity measure. Ray (1981a
and 1981b) and Clark (1980) established positive relationships between tariff rates and various
measures of labour intensity.
14
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DON P. CLARK AND DONALD BRUCE
4. CONCLUSIONS
This study examines the relationship between per capita income of US trade
partners and tariff rates. Studies that have reported that industrial nation tariffs
bear more heavily on products of export interest to developing countries than on
imports from other industrial nations are based on simple comparisons of average
tariff rates for these country groups. When tariff incidence is assessed across the
entire per capita income scale, findings counter conventional wisdom. Countries
at the low end of the income scale face relatively low average tariffs in the US
market. The average tariff rate actually falls slightly with increases in per capita
income at the low end of the income scale. It rises through the middle portion of
the income scale, reaches a maximum in the upper third of the distribution, and
ultimately declines with per capita GDP at the high end of the income scale.
Higher tariffs are faced by more advanced countries that export products in
which the US has a comparative disadvantage. Countries at the high end of the
income scale might face declining tariffs because they engage in two-way trade
in products in which they all have a comparative advantage. Trade negotiations
conducted under the auspices of GATT and the WTO might also have contributed to this finding. The US has sought offsetting tariff cuts from the most
advanced industrial nations in order to improve US exporters’ access to their
markets. The overall pattern of tariff incidence is consistent with the tariff escalation pattern reported in earlier studies if advanced countries account for most
products at the high end of the fabrication scale. Since tariff rates rise with per
capita income over a wide range of per capita incomes, poorer countries will not
be able to escape tariffs by attaining higher levels of economic development.
This tariff structure can be expected to limit growth prospects for the poorer
countries.
APPENDIX A
Data Definitions and Sources
Country-level
Figures on Gross Domestic Product and Per Capita Gross Domestic Product
pertain to 1992 and are taken from United Nations (1997). Area, in thousands of
square miles, is from Frankel and Romer (1999). Distance, in kilometres, is from
Fitzpatric and Modlin (1986). Following Stone and Lee (1995) and Balassa and
Bauwens (1987), trade orientation is proxied by the residuals from a regression
of per capita merchandise trade (exports plus imports) on per capita income and
population. Data are from United Nations (1997). Major petroleum exporters are
identified in United Nations Conference on Trade and Development (2001).
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Industry-level
The 1987 four-firm seller concentration ratio is reported in US Bureau of the
Census (1992). Minimum efficient scale, our scale economy measure, is defined
as average sales per firm for firms in the midpoint class size (defined by product
shipments) as a per cent of shipment values. The capital-to-labour intensity ratio
is expressed in millions of US dollars of capital per worker. The average wage is
total employee compensation per worker. The employment share is the share of
total manufacturing employment accounted for by an industry. These figures
pertain to 1992 and are from the US Bureau of the Census (1995). Ad valorem
international transport charges, import values and tariff revenue are from the US
Bureau of the Census (1993).
n
The sectoral dispersion index, DSPHi =
∑ si2,k, where si,k is the share of industry
k =1
i’s sales to two-digit consuming industry k. See Lustgarten (1975). This variable
and the advertising-sales ratio pertain to 1987 and are calculated from a US
Department of Commerce (1994) publication.
APPENDIX B
Summary Statistics
Variable
Mean
Standard
Deviation
Minimum
Maximum
Tariff Rate
GDP ($m)
Per Capita GDP ($)
ln(Area)
ln(Distance)
Canada
Trade Orientation
Major Petroleum Exporter
Scale Economies
Seller Concentration Ratio
Advertising-Sales Ratio
Employment Share
Sales Dispersion Index
Average Wage
Capital-Labour Ratio
Transport Charge
4.454
363,387
11,935
4.367
8.637
0.025
0.033
0.054
0.026
37.641
0.019
0.002
0.462
32,940
68.685
0.086
5.611
666,740
10,588
2.398
1.214
0.156
0.522
0.226
0.073
19.436
0.018
0.003
0.265
9,947
89.468
0.121
0.000
1,624
215
−2.303
2.303
0.000
−1.506
0.000
0.000
2.000
0.000
0.000
0.000
14,092
3.912
0.000
153.800
3,725,205
34,564
9.060
9.677
1.000
1.325
1.000
1.000
93.000
0.150
0.024
1.172
65,036
762.104
4.989
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DON P. CLARK AND DONALD BRUCE
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© 2006 The Authors
Journal compilation © Blackwell Publishing Ltd. 2006