Trade Deflection and Trade Depression

This is the first paper to empirically examine whether a country’s use of an import restricting trade policy distorts a foreign country’s exports to third markets. We first develop a theoretical model of worldwide trade in which the imposition of antidumping and safeguard tariffs, or “trade remedies,” by one country causes significant distortions in world trade flows. We then empirically test this model by investigating the effect of the United States’ use of such import restrictions on Japanese exports of roughly 4800 products into 37 countries between 1992 and 2001. Our estimation yields evidence that US restrictions both deflect and depress Japanese export flows to third countries. Imposition of a US antidumping measure against Japan deflects trade, as the average antidumping duty on Japanese exports leads to a 5-7% increase in Japanese exports of the same product to the average third country market. The imposition of a US antidumping measure against a third country depresses trade, as the average US duty imposed on a third country leads to a 5-19% decrease in Japanese exports of that same product to the average third country’s market. We also document the substantial variation in trade deflection and trade depression across different importing countries and exported products.