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The Peninsula

What Could be Saved by U.S. Trade Safeguards?

Published March 25, 2019
Category: South Korea

By Haram Chung

The World Trade Organization (WTO) authorized South Korea to levy $85 million in tariffs on U.S. products as compensation for the improper way the U.S. calculated higher anti-dumping duties on Korean-made large residential washing machines. Apart from this, however, there was a controversy over the U.S.’s safeguard, which imposed another tariff on Korean premium washing machines. It was challenged in the WTO’s dispute settlement system.

In January of 2018, the United States approved safeguard tariffs from a Section 201 case on Samsung and LG’s large residential washing machines. A safeguard, according to the WTO, is a measure taken “to protect a specific domestic industry from an increase in imports of any product which is causing, or which is threatening to cause, serious injury to the industry.” As a sort of a trade barrier, the U.S. used the Section 201 to protect its own domestic industry, however, the WTO decision demonstrates that in this case the safeguard was not justified.

Trade barriers put in place through the use of tools similar to Section 201 are designed to provide temporary protection to industries under threat from unfair trade practices, but they can also be abused to protect a domestic industry to ensure that a producer earns a profit.

However, U.S. citizens are also consumers. The U.S. citizen, as a consumer, can suffer from the use of safeguards. If imported goods lose their competitiveness due to increasing tariffs, the market share of domestic firms will increase. If there is no competitor, domestic enterprises may use the extra profits to raise their dividend rate or product price to earn a profit rather than invest in research and development (R&D). Innovation is hard to expect in companies that have relief instead of competitiveness. Also, if the firm produces merchandise using high cost domestic raw materials or intermediary goods rather than cheaper imports, consumers will pay unnecessarily higher prices.

If the increase of suppliers’ profit is higher than the losses for domestic consumers, the safeguard will have performed its role. As the supply of domestic goods increase with the increase in demand, the effect of increasing the number of jobs can be expected. However, one year after imposing the safeguard, U.S. domestic enterprises have lost market share, only intensifying consumers’ burden. Intuitively it may seem that the overseas company bear the expense of the tariff, but if the firm increases its product prices, consumers who purchase the product at an increased price also bear the cost.

After the safeguard was imposed, Samsung and LG increased the price of their washing machines 8 percent. Whirlpool, which petitioned for the safeguard, saw its market share drop from 17.3% before the safeguard to 15.7%, falling from 2nd to the third place followed with 19.1% for Samsung Electronics and 17.2% for LG Electronics. Even though Samsung and LG raised their prices due to the safeguards, their market share increased. Conversely, consumers who purchased goods at increased prices have borne the cost of the tariffs.

Although local consumers are paying higher prices for goods, proponents suggest that the future gain is expecting to surpass the initial disadvantage. However, potential success stories are few and far between. Similar efforts by the previous government generally failed to protect factories and jobs. The Obama administration levied tariffs on Chinese tires to curb their impact on the U.S.’s domestic tire market. Nevertheless, according to a report from the Peterson Institute for International Economics, the tariffs protected 1,200 jobs, while costing the retail sector almost 4,000 jobs and domestic consumers spent $1.1 billion more on tires because of tariffs.

Likewise, a retaliatory tariff, which is authorized by WTO, is not always helpful in the economy. In Korea, it can also burden consumers, and in the U.S., not only consumers who have been saddled with import duties, but also producers in other areas can become the scapegoat of retaliation. Unnecessary tariffs do not fulfill anyone’s interests. The Trump administration is scheduled to announce the result of a review on whether to maintain anti-dumping duties in April. Not only about the improperly measured anti-dumping, but it also needs to reconsider safeguards that unnecessarily harm whole economy.

Haram Chung is currently an Intern at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from TaylorHerring’s photostream on flickr Creative Commons.

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