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