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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13671.
Length: Date of creation: Dec 2007 Date of revision: Handle: RePEc:nbr:nberwo:13671
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Find related papers by JEL classification: F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
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