Do Protectionist Trade Policies Protect? The Unintended Consequences of an Antidumping Tariff

In the trade environment (as in other policy areas of public policy), policy advocates sometimes suffer buyer's remorse from unintended consequences of such policy pursuits. A prime example is provided by the antidumping and countervailing petition against the Canadian cattle industry filed by the Ranchers-Cattlemen Action Legal Fund (R-CALF) in 1998. R-CALF, a producer organization created in 1998, claimed that fed and feeder cattle price declines between 1993 and 1998 (about 27% in real terms) were largely due to increased US imports of fed cattle from Canada (see sidebar). Many of R-CALF's members were ranchers in the Northern Great Plains and Rockies region. These ranchers typically sell feeder cattle to US feedlots.

In January 1999, the US International Trade Commission (ITC) ruled that US cattle producers may have been materially injured by US imports of Canadian fed cattle. On June 30, 1999, the US Department of Commerce's Import Administration issued a preliminary ruling instructing the US Customs Service to require cash deposits or bonds totaling 4.73% (later increased to 5.57%) of the value of imported Canadian fed cattle. The ruling was based on a preliminary conclusion that Canadian feedlot managers had sold fed cattle to US purchasers below the "normal value" of those cattle in Canada. In November 1999, the ITC issued its final ruling, in which five of the six commissioners voted to rescind the preliminary tariff. Initially, R-CALF appealed the ITC's negative decision under the Chapter 19 provisions of NAFTA. However, the appeal was later retracted.

The R-CALF initiative to impose tariffs on fed cattle imports from Canada was misguided for three reasons. First, because Canadian fed cattle exports to the United States account for only a small proportion of total US beef supplies, a tariff was likely to have had little impact on US fed cattle prices and even smaller impacts on US feeder cattle prices. Second, although Canadian fed cattle exports account for only a small share of US beef supplies, they are a much larger share of total Canadian cattle production. A tariff that reduced Canadian fed cattle exports to the United States was likely to have a proportionately larger negative effect on prices of Canadian fed cattle and, consequently, on prices paid by Canadian feedlots for feeder cattle. Ironically, given the increased importance of Canadian feedlots to northern-tier US feeder cattle producers, the adverse Canadian feeder cattle price effects could have offset any positive effects on US cattle prices. Third, Canada is the US's fourth largest export market (10-12% market share) for beef. An antidumping tariff was likely to generate retaliatory actions and reduce market opportunities for the US beef industry.

Quantitative Estimates of the Impacts of the Tariff

We estimated the impacts of the proposed tariff on US and Canadian fed cattle and feeder cattle prices using a quantitative model. The model accounts for US import demand and Canadian export supply of fed cattle, and the relationships between fed and feeder cattle prices in both countries (Brester, Marsh, & Smith, 2002). Table 1 presents the results. US fed cattle prices were estimated to increase by $0.13/cwt in the short-term to $0.63/cwt in the long-term, assuming that carcass and boxed beef imports (not subject to the tariff) from Canada would not increase. Average US feeder cattle prices were estimated to increase by $0.07 and $0.90/cwt in short-term and long-term, respectively (or a 0.08% to 1.07% increase over 1998 average prices). However, average feeder cattle prices in northern-tier states were estimated to increase by only $0.05 and $0.86/cwt (a smaller increase relative to the rest of the US) because of the adverse effects of reduced Canadian demand for feeder cattle.

Fed cattle imports from Canada were estimated to decline by between 4% and 19% in the short term and long term, respectively, from 1998 levels. Canadian fed cattle prices were estimated to decline by $1.77 and $2.17/cwt and Canadian feeder cattle prices by $0.73 and $2.24/cwt in the short term and long term, respectively. The estimated effects of the tariff on Canadian fed cattle and feeder cattle prices were considerably larger because pretariff sales to the US market from Canada account for about 40% of Canada's fed cattle production. However, to the extent that US packers may have increased imports of carcass and boxed beef, these negative effects on Canadian cattle prices would have been moderated.

Implications

R-CALF's assessment of the potential benefits of the tariff was flawed, because the organization only considered the bivariate relationship between imports and cattle prices. That is, they failed to consider the multiple factors that influenced market conditions and caused low cattle prices in 1997 and 1998—namely, a substantial increase in US red meat and poultry supplies driven largely by an increase in domestic production. In addition, the cumulative affects of a 25-year decline in consumer demand for beef added to price woes. Furthermore, R-CALF seemed to ignore the growing importance of Canadian feedlots as markets for northern-tier feeder cattle.

Fortunately, the International Trade Commission did pay attention to more careful economic analyses. Thus, Harberger's (1993) perspective that economists do play a critical role in enabling society to identify the unintended consequences of perhaps otherwise well-intended policy initiatives was confirmed.

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