Public vs. Private Enforcement of Trade Agreements : Public vs. Private Enforcement of Trade Agreements Megumi Naoi Assistant Professor Department of Political Science UCSD Evidence from China’s Trade with the U.S., Japan and South Korea


Motivation: Motivation What accounts for governments’ choice across different enforcement mechanisms for international economic agreements? Why Study Enforcement: The literature tends to study agreements as IV or DV. Politics after the agreements are made—i.e., battles over enforcement—tend to be missing. Why Study Choice, Not Levels: Empirical research on enforcement has lagged behind theories partly due to the measurement and identification issues. This paper: China’s choice across different instruments of enforcement for export restraint agreements with the U.S., Japan and South Korea since 1995


Possible Enforcement Outcomes: Addressing the Selection Effects : Possible Enforcement Outcomes: Addressing the Selection Effects Instrument Choice: Open Quota Bidding vs. No Open Quota Bidding Bi Agreement vs. Not


The Dependent Variable: Enforcement Choices : The Dependent Variable: Enforcement Choices The total of 94 dispute cases which encompass around 70 commodities. 35 bilateral agreements, 59 cases escalated to the use of anti-dumping and safeguard protection by China’s trading partners. The Puzzle: China’s choice differs across commodities and vis-à-vis different countries


The Puzzle (continued)—Introduction of Open Export Quota Bidding System (1994): The Puzzle (continued)—Introduction of Open Export Quota Bidding System (1994)


The Literature on Enforcement Choice: The Literature on Enforcement Choice a. Maximizes political gains Enforcement choice as distributive politics b. Minimizes retaliation risks Enforcement choice as a strategic bargaining c. Minimizes enforcement costs Efficiency-driven


Argument: Argument Open Quota Bidding: To deter collusion b/w politically powerful industries and local-level governments to breach the agreement ex ante and expose the violations ex post. The Argument in Two Steps: (i) The Role of Decentralization—Local Officials’ Incentives to Breach All are better off enforcing VERs > provoking safeguard or anti-dumping. Yet, local officials have strong incentives to breach the VERs agreement. 1. Local governments own exporting firms. 2. Can retain export revenues under a fiscal decentralization. 3. Local authorities are granted enforcement authorities. (ii) Derive hypotheses on industry and local characteristics that proxy strong political influence over local officials.


Hypotheses : Hypotheses Proposition The government is more likely to use bilateral and private enforcement mechanism (i.e., open quota bidding system) when an industry or locality has higher probability of colluding with local officials. + Hypothesis 1: “Political clout” The probability of the government choosing an open quota bidding system (bilateral & private enforcement mechanism) + Hypothesis 2: ”Enforcement difficulty” The probability the government NOT entering bilateral VERs agreement (WTO- legal protection such as anti-dumping and safeguard)


Proxies for Political Clout in an Authoritarian Context : Proxies for Political Clout in an Authoritarian Context Democracies Employment size, geographic concentration, and campaign donations China Employment size, geographic concentration, and political representation in the Central Committee of Chinese Communist Party (career background of CC members who held provincial positions in the past)


Alternative Hypotheses and Controls : Alternative Hypotheses and Controls Retaliation Risks % variable measuring the size of export market in a country n per China’s total export values in year t. Distributive Politics Net transfer per capita allocated from the central government to a province i in year t. Controls Sector dummy: Textile, Agriculture, Chemical, and Steel Country dummy: U.S.


Data and Methods: Data and Methods Bilateral agreements: Newspaper archives (English, Japanese, and Chinese) and memorandum published by the governments or industry groups. Included both government-to-government and industry-to-industry VERs agreements. WTO: Cases ended with China’s trading partners’ use of WTO-legal contingent protection (AD, SG, CVD) Open Bidding vs. Not: Newspaper archives & Chinese Ministry of Commerce’s website.


Slide12: Choices are nested and/or sequential—multinomial probit won’t work. Indeed, Hausman test reveals that I.I.A. assumption does not hold. Treat each of the enforcement choice as a binary choice (0-1) and estimate each of the three boxes with the same co-variates. Models


Results: Results


Discussion: Discussion Generalizability beyond China Multi-layered enforcement authorities and the misalignment of incentives. the central government is less political and more insulated from industry groups than the local-level officials. Use of safeguard and anti-dumping measures as a function of enforcement probability. A motive of authoritarian government to increase transparency to hold powerful private actors and local-level officials accountable to the international agreement and to lower the information cost of identifying violations China’s enforcement problem: lack of will or capacity?


Examples : Examples Textile dispute with the U.S. (2006): bilateral VERs agreement & the use of the open quota bidding system Honey dispute with the U.S. (2001): bilateral VERs—failed to enforce, led to anti-dumping suit by the U.S. Garlic disputes with South Korea and Japan (2000): bilateral agreements made, but the open quota bidding was used only in the South Korean case, not in the Japanese case.


Example: Low information cost to identify who breaches the agreement: Example: Low information cost to identify who breaches the agreement CHINA SEES HIGHER EXPORTS OF LICORICE ROOT VIA TIANJIN PORT TIANJIN, Aug 29 2005 Despite the restrictive measures of export quota bidding on the export of licorice root, a medicinal herb under priority state protection, exports via Tianjin Port rose in the January-July period. Customs statistics show that the total export through Tianjin came to 1,599 tons worth of US$3.27 million in the first seven months, up 1.6 per cent and 6.5 per cent from the same period of 2004. The export price of licorice root averaged US$2,045 per ton, up 4.9 per cent.