Working Paper: NBER ID: w13671
Authors: Bruce A. Blonigen; Benjamin H. Liebman; Wesley W. Wilson
Abstract: A primary function of trade policy is to restrict imports to benefit the targeted domestic sector. However, a well-established theoretical literature highlights that the form of trade policy (e.g., quotas versus tariffs) can have a significant impact on how much trade policy affects firms' abilities to price above marginal cost (i.e., market power). The US steel industry provides an excellent example to study these issues, as it has received many different types of trade protection over the past decades. We model the US steel market and then use a panel of data on major steel products from 1980 through 2006 to examine the effects of various trade policies on the steel market. We find that the US steel market is very competitive throughout our sample with the exception of the period in which they received comprehensive voluntary restraint agreements (i.e., quotas) and were able to price substantially above marginal cost. All other forms of protection were in tariff form and had little effect on market power, consistent with prior theoretical literature on the nonequivalence of tariffs and quotas. We also find evidence that market power eroded over time in steel products where mini-mill producers gained sizeable market share, highlighting the role of technology in the market as well.
Keywords: trade policy; market power; US steel industry
JEL Codes: F13; F23; L11; L61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Voluntary Restraint Agreements (VRAs) (L42) | decrease in import penetration (F14) |
| Voluntary Restraint Agreements (VRAs) (L42) | increase in industry's ability to price above marginal cost (L11) |
| increase in minimill production (L61) | decrease in market power (D49) |
| tariffs and antidumping duties (F18) | lower import volumes (F14) |
| tariffs and antidumping duties (F18) | no impact on market power (D49) |
| Voluntary Restraint Agreements (VRAs) (L42) | significant impact on market power (F61) |