Journal
of International
Economics
36 (1994) 501-513.
North-Holland
Book reviews
Takatoshi
(University
Research,
Ito and Anne 0. Kruegers,
eds., Trade
and Protectionism
of Chicago Press, Chicago, for the National Bureau of Economic
1993) pp. 449, $68.
This excellent volume contains essays on many important
trade and trade
policy issues on Pacific Rim economies, including
the United States, Japan,
South Korea and Taiwan. The book opens with two general chapters (Part
1). The first one is by Richard Snape on the relationship
between regional
integration
and the multilateral
trading
system. The chapter
sets forth
various rationales for different forms of liberalization.
For example, countries
may seek negotiated
trade barrier reductions
(rather than unilateral
reductions) because trade negotiators
politically need some concessions
in return.
Furthermore,
the resulting international
commitments
can provide a bulwark
against domestic sectoral pressures. The chapter makes interesting
references
to the hub-and-spoke
trading system of the 1930s but leaves out a lot of
details, which can be of particular relevance to the current integration
efforts
and direction
of the United States. The chapter concludes
by emphasizing
the importance
of multilateralism
and non-discrimination,
particularly
for
small countries.
In Chapter 2, Anne Krueger makes a forceful case that existing economic
conditions
and trading patterns among Western Hemisphere
countries
will
not lead to much diversion of trade from East Asian nations. Furthermore,
such integration
will tend to support
domestic
reforms, spur economic
growth and provide a more attractive market for East Asian economies. As
pointed out in the comments
by Robert Baldwin, however, there are specific
sectors, such as textile and footwear,
where trade diversion
can still be
substantial.
This is particularly
the case for the textile and garment industry,
since the rule of origin under NAFTA
is the stringent
yarn-forward
rule.
Though Krueger’s arguments
are aimed at examining
the external effects of
integration
in the Americas, the same arguments
can be used to support the
view that NAFTA
is, at least in the aggregate,
beneficial
to the U.S.
economy. Mexico will grow faster and the United States will benefit from the
Mexican stability and increased prosperity.
Krueger’s chapter should be of
relevance to the current debates on the merits of NAFTA.
Chapter
3, by Ken Flamm, is by far the most technical
piece of the
volume. It examines the issue of dumping in the semiconductor
industry by
looking into the time path of prices of semiconductors
over the product life
cycle. The model constructed
tracks real-life semiconductor
prices reasonably
0022-1996/94/$07.00
0
1994 Elsevier
Science
B.V. All rights
reserved
502
Book reviews
well. The main message of the chapter is that marginal cost is a much better
benchmark for determining dumping in the semiconductor industry than
long-run average cost, which the author argues is what the Department of
Commerce basically uses.
Even though one can have minor qualms with Flamm’s model (e.g. using
conjectural variation in an open loop dynamic game), it is a clear improvement over those in the literature. My main problem with this chapter is that
in a sense, Flamm is treating the issue of dumping determination too
‘academically’. From recent research on the implementation of dumping,
there is a fair amount of evidence that the determination of dumping and
dumping margins is quite arbitrary. The problem of dumping determination
is not so much that the Department of Commerce erroneously uses the
wrong criterion (average cost rather than marginal cost), but that it uses too
many discretionary adjustments, often based on information supplied by the
complainants. A ‘constructed’ marginal cost used by the Department of
Commerce for dumping determination, without tightening the procedures
and standard, would not be more accurate than a ‘constructed’ long-run
average cost in practice.
Chapter 4 examines Japan’s agricultural protection, One interesting aspect
of this chapter is the focus in the changes in agricultural protection over time
in Japan. For example, the chapter points out that strong agricultural
protection in Japan is a relatively recent phenomenon. Japan’s level of
agricultural protection in 1955 was much lower than that of European
countries. But Japan’s protection of agriculture rose sharply and became the
highest among industrial countries by 1970. The chapter discusses in detail
the relevant laws and regulations in Japan that protect agriculture. Regressions are done to explain the level of agricultural protection as well as its
growth. Some interesting results are obtained. For example, from 1975 to
1987 the growth of agricultural protection in Japan can be mostly explained
by changes in the international terms of trade of agricultural products.
Chapter 5 examines agricultural protection in general and that in East
Asia in particular. The chapter makes the point that Taiwan and Korea have
experienced tremendous agricultural protection in recent years. In fact their
levels of protection in agriculture have almost caught up with those in Japan
or the EC. But overall the history of agricultural protection in East Asia is
similar to that observed elsewhere. Due to relatively little land and high
population, it is expected that East Asia will continue its trend of further
protecting the agricultural sector.
Saxonhouse, in Chapter 6, highlights the point that as Japan’s institutions
come and go over time, its economic performance remains successful. This
should caution us that we should look more to Japanese fundamentals than
transient practices in explaining the Japanese economy. He then provides a
variant of some of the empirical work on Japanese trade patterns that he has
Book reviews
503
performed elsewhere, using regressions relating import shares and net exports
to national factor endowments. Saxonhouse shows that while Japan’s trade
pattern is distinctive, it is distinctive because its factor endowments are
distinctive. The interesting aspect of this chapter is that the author is able to
reline his empirical work by taking into account almost all the criticisms
directed toward his previous work. For example, countries that biased
toward protection are dropped from his sample. Tolerance intervals, rather
than forecast intervals, are used to test whether Japanese trade patterns are
different. These improvements make the results in the chapter much more
robust.
Chapter 8 provides a study of the access in the wool textile industry to
Japan. While the case study is itself interesting, it is somewhat puzzling why
this industry is chosen to study the access to the Japanese market from Asian
countries in the first place. As the chapter indicates, material costs are
unimportant in this segment of the textile industry. Fashion and design are
the crucial inputs. It is clear that given these characteristics, lower cost
countries in Asia will not have a comparative advantage in exporting to
Japan. Having focused on wool textile, the chapter also neglects in its case
study to compare the access to Japan with other industrialized countries in
the same sector. If design necessitates a long-term relationship between
manufacturers and retailers in Japan and this reduces the volume of imports
in the wool textile industry, how do other countries respond to similar
features of the same industry? Do other industrialized countries have more
or less access in this industry from their neighbors? Although the chapter
leaves many questions unanswered, it does examine many interesting features
of the distribution system in Japan. It also highlights, correctly I believe, the
importance of the reforms in the Large Scale Retail Store Law in Japan that
would allow more imports. This also indirectly points to an important
success of the SII, not only for U.S. products, but also for Asian exports.
Part IV contains two chapters (Chapters 9 and 10) on Japanese foreign
direct investment and technology transfer in Asia. Both are informative, with
a wealth of recent statistics on Japanese direct investment. The major
problem with the first chapter is the underlying assumption that, by
definition, foreign direct investment is technology transfer. Given the controversy of how Japanese firms abroad do not want to hire locals as high-level
managers and that Japanese firms are often accused of limiting their transfer
of technology, this assumption should be examined more clearly. Chapter 10
contains a very interesting discussion of the behavior of the Japanese
affiliates in Asia. It is documented that Japanese affiliates in Asia export
more than their counterpart
affiliates in the United States. The most
important export market for the affiliates in Asia is Japan. There is also a
different pattern of procurement of capital goods between Japanese aftiliates
in Asia and in other regions. For affiliates in Asia, about half of capital
504
Book
reoiews
equipment
is supplied by local firms, while the other half is purchased from
Japan. For Japanese affiliates in the United States and those in the EC, the
local market supplies around 65-80 percent of total capital equipment.
For
products such as electrical machinery and precision machinery, the pattern of
trade is such that Japan exports parts to be assembled
in Asia, with the
finished product coming back as imports.
For transport
machinery,
Asia
imports parts as well as finished products from Japan. On weakness of this
chapter is that it provides very little analysis on the effects of the activities of
these affiliates. Do these affiliates help the host countries more or less than
affiliates of U.S. or European
multinationals?
If a significant
part of intraindustry trade between Asia and Japan is intra-firm trade, what is the welfare
implication
for the trading nations?
Chapters 11, 12 and 14 of Part V focus on the determination
and effects of
trade policies of Taiwan. Chapters 11 and 12 examine the political economy
of Taiwan’s trade protection, while Chapter 14 focuses on the effectiveness of
preferential
policies for Taiwanese
strategic industries.
Both Chapters
11 and 12 come to a similar conclusion,
namely that, at
least up until recently (the first half of the 198Os), the government
of Taiwan
enjoyed a fair degree of autonomy,
shielded from the lobbying pressures of
the private interest groups. Chapter 12 econometrically
confirms this result,
showing that the interest group model performs poorly compared with the
national
interest model in a series of regressions.
In Chapter 11, Robert Baldwin and Douglas Nelson did an excellent job
in discussing, analyzing and comparing
the reasons for the relatively liberal
trade policies in the United States and Taiwan. The key to both cases is that
there have been external
threats that allow the governments
to remain
semiautonomous
from private-sector
pressure. In the case of the United
States, the external pressure is the Cold War and the imperative
to provide
an export market for countries
susceptible
to Communism.
International
leadership implies economic leadership and a more liberal trade policy. The
relative decline of U.S. dominance
since the late 1960s also implies that
domestic U.S. concern will become more important.
For Taiwan,
the situation
is considerably
more extreme. The external
threat is linked to the survival of the Nationalist
government
itself. Martial
law was imposed until 1987 and since then there has been a more significant
government
autonomy. The chapter argues that this autonomy
allows Taiwan
to switch from import substitution
to a more outward-looking
trade regime.
With the advent of democratic policies, it is predicted that conventional
rentseeking activities will have a greater influence on the conduct of trade.
The contribution
of this excellent chapter is that it highlights incidences
when the degree of autonomy
of a government
can lead to liberalization.
The
weakness is that it does not discuss why a government
shielded from the will
of its populace will pursue the national rather than personal interest. To put
Book
reviews
505
it in another way, why does Taiwan not follow the path of Philippines
under
Marcos?
Chapter
12 essentially tests the thesis of Chapter
11. For 198 1 and 1986
the authors show that the national
interest model fares better in explaining
trade policies than the interest group models. While I do not doubt the
conclusions,
I do have some concerns
about the implementation
of the
empirical test. One problem with the tests is that often it is hard to see why
some explanatory
variables are in one model and not the other. For example,
import penetration
is listed as a variable in the national
interest model. It
can easily be argued that an industry hurt by imports can more successfully
lobby the government,
thus fitting the interest group approach. Furthermore,
the paper provides no explanation
as to why foreign direct investment
should
be used in the interest group model.
Chapter
14 provides an empirical
analysis of the effects of the recent
attempts
(since 1982) at targeting
industries
in Taiwan.
The government
policies include preferential
loan policy and government
assistance in management and technology. The chapter discovers that preferential loans do not
significantly
influence
interest burden, do not significantly
stimulate
fixed
capital formation,
and have no close relation with operational
performance.
In contrast, management
and technology
assistance promotes a greater level
of production
performance.
But whether a firm obtains assistance
through
the government
or through
other institutions
is not a key factor in
influencing
performance.
This chapter provides much interesting
information.
But there are still some important
omissions. For example, given that these
policies use up real resources,
what are the true opportunity
costs of
targeting? Furthermore,
while previous chapters argue that trade policies are
not influenced by lobbying in Taiwan, it would have been interesting to see if
there are rent-seeking
activities associated
with these industrial
policies.
Lastly, Chapters
13 and 15, in combination
with Chapter 7, form a group
of chapters that focus on trade policies with respect to Korea. Chapter 7
examines the various types of administered
protections
in the United States
and studies their impact on Korea. The trade instruments
studied are
impressively
broad, focusing not only on anti-dumping
and countervailing,
but also on other U.S. trade laws such as 301, 337 and 201. It documents
the
rising trend of protection
of each instrument
and shows how Korea responds
by quality upgrading
and diversion of exports to other markets. This is an
impressive chapter and I only have minor problems with it. One objection is
that the author wants to justify dumping
by Korea by appealing
to infant
industry policies, i.e. prices may be relatively high at home because of import
protection
and export subsidies. This may in fact be the case, but it is
unclear why the author wishes to defend this type of dumping or this set of
policies.
Chapter 13 focuses on the determinants
of Korean import restrictions.
The
506
Book reviews
performance of the regression results are mixed. For instance, the effective
protection regression for 1978 has only the dummy variable for heavy and
chemical industries, with the proportion of output purchased by consumers
being statistically significant and with the right sign. For the 1982 regression,
the value added is significant and has the wrong sign.
In common with all the econometrically
oriented political economy
chapters in this volume, this chapter has the limitation that there is no
formal structure guiding the selection of variables. Furthermore, some of the
variables are likely to be endogenous. For instance, market concentration
tends to make lobbying easier, but at the same time, protection will promote
market concentration. It would also have been nice if this, or other papers,
look into the determinants not only of trade barriers, but other instruments
like export subsidies.
The final chapter is a fascinating one on the distributional inequities in
Korea. It traces the existing inequities in the concentration of economic
power to the big business groups, to government tax policies, industry and
firm targeting and inadequate labor policy. The chapter concludes that the
export-oriented policies in Korea, while not by themselves responsible for
inequities, are certainly not enough to result in a more equitable distribution
of income. The chapter highlights an important current issue in Korea:
militant labor disputes arising from income inequities. At times the chapter
overstates its case by a wholesale criticism of Korea’s economic record,
pointing to chronic inflation and excessive speculative activities. On the other
hand, the author may be too easy on the zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPO
particular export-oriented
strategy
adopted by Korea: concentration of economic power and company targeting.
In contrast, Taiwan, which also pursues an export promotion strategy, but
emphasizes the importance of small and medium size firms, is able to grow
with less income inequality and less labor problems.
Overall, this book contains much useful information and insights. I
recommend it highly to anyone interested in trade issues in East Asia.
SSDI 0022-1996(93)01302-U
K.C. Fung
University of California at Santa Cruz
Anne 0. Kreuger, Economic Policies at Cross Purposes: The United States
and Developing Countries (The Brookings Institution, Washington, DC,
1993) pp. 251, $24.95.
Optimists have detected a new consensus on economic
across the so-called developing world. Planning is out and
trade liberalization and export promotion have quickly
substitution; fiscal reforms and inflation stabilization are
policies building
the market is in;
replaced import
being attempted