This report is an update of an earlier USITC report on the economic effects of significant U.S. import restraints on the U.S. economy, prepared at the request of the United States Trade Representative as a direct successor to a similar report prepared in 1993.1/ Like its predecessor, this report addresses the economic effects of a liberalization of significant U.S. import restraints in manufacturing, agriculture, and services.
The base year for the study is 1993, since this is the year for which the most recent data are available on the structure of the U.S. economy. Therefore, the primary analysis in this report is an analysis of the effects of liberalizing trade barriers as they existed in 1993, given the economy as it was structured in that year. In addition, this report examines the features of the Uruguay Round Agreements (URA) of the General Agreement on Tariffs and Trade (GATT) that take effect in 1995 and discusses the likely implications of those agreements, as if applied to the U.S. economy as it existed in 1993.
The USITC's Computable General Equilibrium (CGE) Model of the United States is the principal tool used in the Commission's quantitative analysis.2/ The USITC CGE model allows analysis to extend beyond the specific sectors subject to import restraints. It models the likely effects on other sectors that are suppliers to or customers of the directly affected sectors, and on government revenues and returns to capital and labor. The USITC CGE model explicitly accounts for upstream and downstream production linkages and intersectoral competition for labor and capital. The model also provides measures of the effect of removing the import restraints on the economy as a whole, through estimates of the change in economic welfare.
The import restraints examined in this study are tariffs and quantitative restrictions such as quotas, voluntary restraint agreements (VRAs), and voluntary export restraints (VERs). For the purposes of this study, tariffs are specified as the average Most Favored Nation (MFN) ad valorem tariff calculated on a c.i.f. basis for 1993.3/ The effects of quotas are examined by translating them into their tariff equivalents, generally using the price-gap method. Economic theory suggests that the restrictions imposed by import quotas raise the domestic price above the world price for a commodity. Hence, the price gap between the domestic price and the world price (inclusive of transportation costs to deliver the product to the U.S. border, and adjusted for other market and quality differences) can be used to represent the premium associated with a particular quota.4/ The tariff equivalent is actually the percent above the world price that the price gap represents.
In 1993, several domestic quantitative restrictions were in place. These included the Multifiber Arrangement (MFA); VERs on automobiles and machine tools which expired in 1993; the meat VRA; the agricultural quotas on cotton, dairy products, peanuts, and sugar; and the ban on the importation of cabotage maritime services.5/ Tariffs were in place for all these sectors except cabotage maritime services, but among them only the tariffs on motor vehicles, which includes autos, and certain textile and apparel products were considered significant by the criteria described below.
For sectors protected by tariffs, USITC staff developed a standard to determine a "significant" tariff level. Two criteria were applied to commodities defined, in general, at a level equivalent to the 4-digit level of the Standard Industrial Classification (SIC): 1) a 1993 MFN ad valorem tariff rate of 7.5 percent or higher and $100 million or more in trade, calculated on a cost, insurance, and freight (CIF) basis or 2) sectors with over $350 million in tariff revenues collected in 1993. The objective was to identify a comprehensive list of imports that includes all those for which imposition of tariffs might be expected to alter patterns of trade, either because a high tariff significantly affects the price, or because a high volume of trade is subject to the tariff. These criteria qualify 13 sectors for study: frozen fruits, fruit juices, and vegetables; industrial chemicals; rubber and plastic footwear; nonrubber footwear; leather gloves and mittens; personal leather goods; ceramic wall and floor tile; china tableware; blast furnace and steel mill products; ball and roller bearings; household audio and video equipment; motor vehicles; and costume jewelry and costume novelties.
Two general equilibrium analyses were performed for the sectors subject to significant import restraints.6/ After tariff equivalents were estimated for nontariff barriers, the first simulation, reported in chapter 2, estimated the effects of simultaneously removing tariffs and the tariff equivalents of the nontariff barriers for all covered sectors. This provided an estimate of the economy-wide effects of all import restraints. Then the effects of eliminating the barriers for each sector individually were estimated, as reported in chapters 3 through 6. Each simulation yielded estimates of net welfare changes for the economy as a whole due to liberalization of the specific sector, as well as estimated effects on trade, output, and employment for the sector (or sectors) being liberalized and for the rest of the economy. This summary will present the most important results of these analyses, beginning with the effects of trade liberalization on the whole economy. These include the economy-wide effects of liberalizing all restraints simultaneously, and of liberalizing individual sectors. Then more specific effects, on sector output, employment, and trade, of sectoral liberalization will be presented. Finally, results of applying URA liberalization to the model will be summarized.
A measure of economic welfare effects is presented as a summary measure of the effects of the changes in trade barriers. This measure attempts to capture, in a single number, the overall benefit or cost to the economy resulting from these changes; therefore, it aggregates various (possibly offsetting) effects. Economic theory suggests that, as the significant import restraints are lifted, capital and labor will move to sectors that are more productive in utilizing these inputs. Also, consumers and producers that use products formerly subject to import restraints will experience lower prices for these goods which increases the purchasing power of their budgets. Consumers will benefit from the elimination of income transferred from U.S. purchasers to the foreign and domestic firms and individuals that have held import quotas. Finally, the welfare effect captures losses in employment and profits that occur as imports replace production and employment in some sectors. If the output of previously protected sectors declines, their upstream suppliers may also experience adverse effects as a result of diminished demand for their products. Simultaneous liberalization of all considered trade barriers results in an estimated gain of approximately $15.5 billion for the U.S. economy in 1993.7/ As seen from the individual liberalization estimates (see table ES-1), liberalization in the textiles and apparel sector has an effect equal to 65 percent of the gain from total liberalization. Liberalization of restraints in textiles and apparel provided the U.S. economy an estimated $8.6 to $10.0 billion in 1993. The next largest effect is a result of liberalization of the maritime sector's Merchant Marine Act of 1920 (commonly referred to as the Jones Act). Of the five agricultural sectors examined, three (dairy, sugar, and meat) have measurable benefits from liberalization. High MFN duties on textiles and apparel, steel, motor vehicles, nonrubber footwear, and audio and video equipment have particularly important effects. The effect of eliminating duties for textiles and apparel, estimated separately from the effects of eliminating quotas, is a welfare gain of $958 million (see chapter 3). The welfare change from an elimination of tariffs is estimated to be $162 million for steel, $122 million for vehicles,8/ $147 million for nonrubber footwear, and $98 million for audio and video equipment.
Employment, Output, and Trade Effects
Estimates are provided for the effect on employment, output, imports, and exports from the removal of import restraints for each sector individually, as summarized in table ES-2. Each of these simulations is constructed independently of the others.
Table ES-1
Economic welfare change from liberalization of all restraints, by sector, 1993
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Economic
welfare
Sector change
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Simultaneous liberalization of all significant restraints1/ 15,490
Individual liberalization:
Textiles and apparel2/ . . . . . . . . . . . . . 10,037
Maritime transport (Jones Act) . . . . . . . . . 2,790
Dairy . . . . . . . . . . . . . . . . . . . . . 1,013
Motor vehicles . . . . . . . . . . . . . . . . . 710
Sugar . . . . . . . . . . . . . . . . . . . . . 661
Meat . . . . . . . . . . . . . . . . . . . . . . 185
Blast furnaces and steel mills . . . . . . . . . 162
Non-rubber footwear. . . . . . . . . . . . . . . 147
Home audio and video equipment . . . . . . . . . 98
Industrial inorganic and organic chemicals . . . 62
Rubber and plastic footwear. . . . . . . . . . . 48
Ball and roller bearings, and parts. . . . . . . 47
Ceramic wall and floor tile. . . . . . . . . . . 41
Frozen fruit, fruit juices, and vegetables . . . 24
Costume jewelry and costume novelties. . . . . . 11
China tableware. . . . . . . . . . . . . . . . . 11
Personal leather goods . . . . . . . . . . . . . 11
Leather gloves and mittens . . . . . . . . . . . 6
Cotton . . . . . . . . . . . . . . . . . . . . . 0.3
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1/ Does not include the effects of liberalization of peanut quotas.
2/ Upper bound of estimates. See chapter 3.
Source: Estimated by the staff of the USITC.
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Employment Output Imports Exports
Sector Number1/ Percent Dollar2/ Percent Dollar2/ Percent Dollar2/ Percent
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Liberalized sectors:
Manufacturing:
Motor vehicles. -3,419 -0.7 -925 -0.7 1,202 1.4 -25 -0.2
MFA sectors:3/
Broadwoven
fabric mills. . . -10,234 -3.4 1,380 -3.4 571 18.9 -107 -3.0
Narrow fabric mills . . -391 -1.5 -35 -1.5 15 10.4 -6 -1.4
Yarn mills and
textile finishing. -3,617 -2.7 -488 -2.7 33 9.6 -6 -2.4
Thread mills. . -300 -3.5 -45 -3.5 7 8.0 -5 -3.2
Floor coverings -487 -0.6 -85 -0.7 112 12.9 -3 -0.5
Felt and textile
goods, n.e.c. . . -355 -1.5 -40 -1.5 10 2.0 -7 -1.4
Lace and knit fabric
goods. . . -2,754 -4.6 -520 -4.6 52 18.5 -16 -4.3
Coated fabrics,
not rubberized. . -232 -2.1 -46 -2.1 22 5.9 -19 -1.9
Tire cord and fabric. 3 (5) (4) (5) (4) 3.3 (4) 0.1
Cordage and twine -112 -1.4 -7 -1.4 5 3.4 (4) -1.2
Nonwoven fabric -28 -0.3 -14 -0.3 3 2.4 (4) -0.2
Women's hosiery,
except socks. . . -150 -0.3 -12 -0.3 8 14.9 (4) -0.2
Hosiery, n.e.c.. . . . -238 -0.4 -20 -0.4 9 7.2 (4) -0.3
Apparel made from
purchased
materials. -36,110 -5.3 -3,634 -5.3 8,001 20.7 -220 -5.0
Curtains and
draperies. -25 -0.1 -3 -0.1 17 14.7 (4) 0.6
House furnishings,
n.e.c... . -364 -1.1 -89 -1.1 199 12.4 (4) -0.3
Textile bags. . -45 -0.6 -6 -0.6 6 9.5 (4) 0.1
Canvas and related
products . -68 -0.4 -6 -0.4 12 8.2 (4) 0.3
Pleating, stitching,
trimmings
and schiffli
embroidery -871 -1.6 -169 -1.6 21 13.6 (4) -0.6
Fabricated textile
products . -81 -0.3 -14 -0.3 21 1.9 4 0.4
Luggage. . -814 -7.9 -58 -8.0 322 14.4 -13 -7.3
Women's handbags
and purses 4 0.1 (4) (5) 113 9.1 6 15.3
Agricultural sectors:
Sugar. . . -1,633 -6.7 -668 -6.7 613 72.4 -10 -4.1
Sugar-containing
products . -61 (5) -18 (5) 52 1.6 3 (5)
Butter . . -225 -3.9 -108 -3.9 1 18.1 -5 -3.8
Cheese . . -633 -2.9 -441 -2.9 401 59.1 -1 -2.4
Dry/condensed milk
products . -700 -3.4 -304 -3.4 346 62.1 -13 -2.8
Cream. . . -480 -0.6 -180 -0.6 2 39.1 (4) -0.5
Meat. -45 -0.3 -193 -0.3 204 7.4 -10 -0.3
Cotton . . (5) (5) (4) (5) (4) 12.7 (4) (5)
Maritime transportation
(cabotage) -2,450 -22.8 -745 -22.8 1,070 35.7 (6) (6)
High MFN tariff sectors
(except motor vehicles):
Ball and roller
bearings . -393 -1.2 -87 -1.2 68 5.4 -12 -1.1
Ceramic wall and
floor tile -676 -7.2 -59 -7.2 62 10.7 -2 -4.5
China tableware -263 -7.0 -33 -7.0 36 9.6 4 6.8
Costume jewelry
and costume
novelties. -257 -1.5 -30 -1.5 67 6.4 -3 -1.3
Footwear,
nonrubber. -1,316 -2.0 -82 -2.0 426 7.1 37 6.1
Footwear, rubber
and plastic . . . -113 -1.7 -7 -1.7 296 8.2 1 0.7
Frozen fruit, fruit juices and
vegetables -287 -0.8 -95 -0.8 123 15.7 -5 -0.7
Industrial inorganicand
organic chemicals. . . . -241 -0.1 -118 -0.1 106 0.7 -15 -0.1
Household audio and
video equipment -466 -1.3 -222 -1.3 528 3.1 -49 -0.8
Leather gloves
and mittens -139 -6.0 -8 -6.0 18 11.8 -1 -4.3
Personal leather
goods. . . -200 -2.9 -18 -2.9 29 8.7 -1 -2.8
Products from blast
furnaces
and steel mills -1,265 -0.4 -350 -0.4 285 2.8 -21 -0.4
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1/ Full-time equivalents.
2/ In millions of dollars at base year prices.
3/ Textile and apparel estimates are upper bound figures. See chapter 3.
4/ Change less than $500,000.
5/ Change less than 0.05 percent.
6/ Not applicable.
Source: Estimated by the staff of the USITC.
ManufacturingAutomobiles
For the years 1992-1993 and 1993-1994 a voluntary export restraint (VER) of 1.65 million units per year was in place on imports of autos from Japan; imports in 1993 were at 97 percent of this quota. The estimated effect of the removal of the quota alone is a net welfare gain of $588 million. Simultaneously removing the tariff applied to motor vehicles increases the effect to about $710 million. The removal of both barriers results in a decrease in domestic automobile output of about $925 million (0.7 percent) and the loss of about 3,400 full-time equivalent jobs.
Textiles and apparel
Liberalization of all import restraints in the textile and apparel sectors causes significant increased import penetration. The largest import increase by far, both in dollar and percentage terms, is in apparel made from purchased materials (apparel), with an increase of about $8.0 billion in imports, representing a 20.7-percent gain over original levels. Broadwoven fabrics are next, with a $571 million increase in imports (18.9 percent). Apparel and broadwoven fabric mills also have the largest losses in employment and output among the MFA sectors. Apparel made from purchased materials experiences a decline of about $3.6 billion in output and a decline of about 36,000 displaced full-time equivalent workers (jobs). Broadwoven fabric mills experience a decline in output of over $1.3 billion and about 10,000 jobs.
Agriculture
Of the five agricultural sectors analyzed in this study, four are analyzed in a general equilibrium framework (sugar, dairy products, cotton, and meat). The effects of removing the quotas in cotton are extremely small, since cotton imports are negligible.
Removal of import restraints results in an increase in import penetration for the five liberalized agricultural sectors. Imports of sugar and sugar-containing products would go up by a total of $665 million. Among dairy subsectors, imports of cheese and dry or condensed dairy products would increase by approximately 60 percent, or $401 and $346 million respectively. Elimination of the import barriers in meat would result in increased imports of $204 million, or 7.4 percent. Employment losses in the sugar and sugar-containing products industries were estimated as approximately 1,700 jobs; job loss in the four dairy sub-sectors is estimated at about 2,000 jobs, and meat would lose less than 100 full-time equivalent jobs.
Analysis of the benefits of the liberalization of restraints in the peanut sector is conducted using a partial equilibrium framework. Liberalization in the peanut sector brings a welfare gain of $93 million to consumers from lower peanut prices. The producer loss is estimated to be $92 million.
Services
With the exception of transportation services, in general significant U.S. import restraints in services do not exist. While foreign providers of some services face constraints on operations in the United States, most of these barriers are, in fact, requirements that foreign service providers adhere to the same domestic regulatory schemes faced by domestic providers of the service.
Within transportation services, the air transport sector has significant restraints in the form of restrictive regulations and bilateral agreements that effectively restrain international air transport services. However, the ways in which international air transport prices are negotiated, and the lack of consistent price data preclude formal modeling of this service sector.
Maritime transport likewise is subject to significant import restraints by means of restrictive regulations. One of the more important set of restrictions is the Merchant Marine Act of 1920 (Jones Act), which prohibits foreign vessels from carrying domestic freight between U.S. ports (cabotage). It is possible to estimate a tariff equivalent with the price-gap method for Jones Act trade and conduct analysis using the USITC CGE model.
Imports of "cabotage services" would rise by about $1.0 billion, while domestic production in this sector would fall by $745 million. Employment in this sector would drop by about 2,500 full-time jobs, as estimated.
High MFN Tariff Sectors
The high MFN tariff sectors are those sectors which, regardless of the existence of quantitative restrictions, had tariffs meeting the "significant tariff" criteria described above. For these sectors, liberalization causes significant import penetration. Among the high tariff sectors, motor vehicle imports increase the most as a result of elimination of the duty alone, with a $980 million (1.2 percent) gain. (Table ES-2 reports the effect of removing the duty and VER together.) Imports of household audio and video equipment increase by $528 million (3.1 percent), and nonrubber footwear by $426 million (7.1 percent). Other effects of tariff liberalization in these high tariff sectors vary widely, as shown in table ES-2 and chapter 6.
Welfare Effects of the Uruguay Round Agreements
The GATT URA entered into force in 1995. The agreements provide for the reduction or elimination of many tariff and nontariff barriers, including the elimination (through tariffication) of all quotas on agricultural goods and the phaseout of quotas on textile and apparel goods in place under the MFA.9 Among those sectors included in this report as having significant import restraints, some are found to be likely to be affected by terms of the URA as they apply in 1995. Estimates of the effects are made for the hypothetical case that would have arisen had the current (1995) tariff and quota provisions of the URA been applied in 1993, the base year of the current USITC CGE model. Tariff liberalizations under the URA will generally be phased in over a 10 year period, so that the first-year effects can be expected to be small. However, significant first-year reductions do affect coated fabrics among the textile and apparel industries (a -1.5 percentage point tariff reduction). For goods with high MFN tariffs, those with significant tariff reductions under the first year URA are ceramic tile (-1.0 percentage point) and china tableware (-1.0 percentage point). The sectors examined in this report that have significant declines in import quotas during the first year of the URA are meat and dairy products.
Compared to the complete elimination of all significant trade restraints in the sectors under consideration, the quantifiable effects of the partial reductions called for in 1995 by the URA are small. For textiles and apparel products, the reduction of tariffs under the URA produces an estimated welfare gain of about $15 million; for dairy products, the gain is $154 million, and for meat the gain is $157 million. For all of the sectors analyzed in this report having high MFN tariffs, the simultaneous reduction of their duties in accord with the URA yields a welfare gain of $20 million.
The simultaneous application of URA agreements to reduce tariffs and import quotas in the sectors analyzed in this report produces an increase in net welfare of $321 million, resulting mostly from the lower prices paid by consumers. The greatest effects are in the meat and dairy sectors, which respectively account for $157 million and $154 million of the welfare gain. In this scenario, the largest declines in domestic production occur in the meat sector ($137 million), dry and condensed milk ($57 million), and household audio and video equipment ($55 million).
1/ See USITC, The Economic Effects of Significant U.S. Import Restraints, USITC publication 2699, Nov.
1993.
A series of earlier studies, prepared at the request of the Committee on Finance of the U.S. Senate, was
presented in three parts: USITC, The Economic Effects of Significant U.S. Import Restraints, Phase I:
Manufacturing, USITC publication 2222, Oct. 1989, USITC, The Economic Effects of Significant U.S. Import
Restraints, Phase II: Agricultural Products and Natural Resources, USITC publication 2314, Sept. 1990, and
USITC, The Economic Effects of Significant U.S. Import Restraints, Phase III: Services, USITC publication 2422,
Sept. 1991.
2/ For views of individual Commissioners, see "Commissioner Comments" after chapter 7. For the views of
Commissioner Bragg on economic modeling, see, The Economic Effect of Antidumping and Countervailing Duty Orders
and Suspension Agreements, USITC publication 2900, June 1995, at XIII.
3/ Average ad valorem tariff rates on a dutiable value basis are calculated by dividing the estimated duties
collected by the U.S. Treasury for a sector by the value of imports in that sector that are subject to duties.
Consequently, the tariff rate used in this report embodies both ad valorem and specific tariff rates specified
in the Harmonized Tariff Schedule.
4/ For a detailed discussion of tariff equivalents of quotas and the price-gap method, see Chapter 7 of this
report. Also, on the price-gap method, see R. Baldwin, "Measuring Nontariff Trade Policies," NBER working
paper #2978, May 1989, and Deardorff and Stern, "Methods of Measurement of Non-tariff Barriers,"
UNCTAD/ST/MD/28 (Geneva: United Nations Conference on Trade and Development, 1985).
5/ Cabotage is a term used in the maritime transport industry to indicate the carriage of products or people
between two ports within a country such as between Anchorage and Los Angeles in the United States.
6/ Except for the peanut sector, which is not represented in the general equilibrium model.
7/ All estimates of effects in this summary and in the report should be read as applying to the 1993 U.S.
economy as depicted in the USITC CGE model, unless specified otherwise.
8/ The $122 million effect of the tariff elimination for motor vehicles is part of the $710 million reported
as the effect of the elimination of the VER and duties together.
9/ Import quantity restrictions associated with the MFA are not included in the present analysis because
product categories and country-specific restrictions underwent substantial modifications between 1993 and 1995.