American and Australian Tariff Policies: Do They Rock or Tango or Roll?

Round 1

Reviewer 1 Report

The paper shows the difference of two hypotheses on the determinants  of Australia's and the US' average tariffs levels.  Historical background covers a century (1904 to 2005), the results indicate strong long-run relations between US and Australian tariffs, though the speed of adjustment to the long-run  relationship is higher for the US. For me is not clear why so long period is chosen.

Literature review and theoretical background is correctly described.

Figure 1 and 2 need to explain more detailed.

The results show that there is a strong long-run relationship between US and Australian tariffs, but the  research results could be  shown more detailed.

Conclusions  could be  prepared  more detailed as well.

Author Response

Dear Reviewer,

Thank you for the comments addressed to our paper.

We here provide the full details of the way we have revised our paper, taking your comments into account:

“The paper shows the difference of two hypotheses on the determinants of Australia's and the US' average tariffs levels. Historical background covers a century (1904 to 2005), the results indicate strong long-run relations between US and Australian tariffs, though the speed of adjustment to the long-run relationship is higher for the US. For me is not clear why so long period is chosen.

Literature review and theoretical background is correctly described.

Figure 1 and 2 need to explain more detailed.

We have taken into account the remark of the reviewer, and have described the figures in more details.

The results show that there is a strong long-run relationship between US and Australian tariffs, but the research results could be shown more detailed.           

We thank the reviewer for the comment, and have developed our interpretation of the results, building also on the comments from the second reviewer.

Conclusions could be prepared more detailed as well.”

The conclusion has also been extended, to present in better way our results and interpretations.

We thank you for the attention devoted to the paper.

Reviewer 2 Report

There is a fundamental problem with the way the paper approaches the possible interrelationships between the time series of tariff rates in the US and Australia. It begins with the statement on page 1 that there are two alternative hypotheses - that the tariff policies of the 2 countries  are independently determined by domestic political economy  factors, or they interact according to a model of strategic tariff policy.  There is a third possibility, namely, that the times series of the 2 countries are both affected by events in the Rest of the World, or in effect in the world economy.

The source of the problem is the modelling of only 2 countries and the identification of the two countries in the world as the US and Australia.  In fact of course, they are just two countries in a world with many.  Their identification treats Australia in the case of the US and the US in the case of Australia as the Rest of the World.  This entirely ignores the possibility that the changes in tariff rates in in both countries may be affected by events in other countries , or more likely major shifts in the whole world.  The obvious examples are the Great Depression, which affected almost all of the world economy, and the post-World War II downward drift in tariff rates around the world under the influence of the  GATT. Indeed the authors do recognise the third possibility in the 4th paragraph on page 2 and elsewhere.

Starting with three possibilities, one can now ignore one of them - that the two countries interact as domestic tariff policy changes in one  induce a reaction in the other. In my view this is implausible.  I seriously doubt that Australian tariff policies have ever elicited a policy reaction from the US Government.  In the case of  Australia, I cannot identify a single instance when the Australian Government has changed its tariffs because of a change in US Tariff levels (This sets aside the separate influence of the mutual regional trade agreements.)  The only two feasible alternative are that the tariff policies of the 2 countries  are independently determined by domestic political economy  factors or they are both influenced by events in the rest of the world, or in the world economy as a whole (e.g. the Great Depression and the influence of the GATT, both global events).

As an example of the misinterpretation that their identification leads to, I disagree with the conclusion that the long-run coefficients indicate that higher tariffs in the US lead to  long-term rise in the Australian rates and vice versa. (It is true that the Smooth-Hawley tariff increases in the US played a significant role in the rise in protection during the Great Depression but they should be seen as a part of the world-wide surge in rates.) Rather these apparent interactions are part of global movements in tariff rates.

The authors need to respecify the model and then to rework the interpretation of their results.  (One part of this is already done - the import price indices of the US and Australia are in fact indices which measure changes in the price of imports from all sources. )

There is one detail that needs correction.  Their Figure 3 is  copied from Lloyd (2008, Figure 11).  This needs to be acknowledged. 

Having raised these issues, it is still true that the two possibilities I have outlined above are important in the world of global tariff policy and they do need to be tested. The existence of  parallel series for the US and Australia provides an opportunity to test them. 

Author Response

Dear Reviewer,

Thank you for the comment addressed to our paper.

We here provide the full details of the way we have revised our paper, taking your comment into account:

“There is a fundamental problem with the way the paper approaches the possible interrelationships between the time series of tariff rates in the US and Australia. It begins with the statement on page 1 that there are two alternative hypotheses - that the tariff policies of the 2 countries are independently determined by domestic political economy factors, or they interact according to a model of strategic tariff policy. There is a third possibility, namely, that the times series of the 2 countries are both affected by events in the Rest of the World, or in effect in the world economy. The source of the problem is the modelling of only 2 countries and the identification of the two countries in the world as the US and Australia. In fact, of course, they are just two countries in a world with many. Their identification treats Australia in the case of the US and the US in the case of Australia as the Rest of the World. This entirely ignores the possibility that the changes in tariff rates in in both countries may be affected by events in other countries, or more likely major shifts in the whole world. The obvious examples are the Great Depression, which affected almost all of the world economy, and the post-World War II downward drift in tariff rates around the world under the influence of the GATT. Indeed the authors do recognise the third possibility in the 4th paragraph on page 2 and elsewhere. Starting with three possibilities, one can now ignore one of them - that the two countries interact as domestic tariff policy changes in one induce a reaction in the other. In my view this is implausible. I seriously doubt that Australian tariff policies have ever elicited a policy reaction from the US Government. In the case of Australia, I cannot identify a single instance when the Australian Government has changed its tariffs because of a change in US Tariff levels (This sets aside the separate influence of the mutual regional trade agreements.) The only two feasible alternatives are that the tariff policies of the 2 countries are independently determined by domestic political economy factors or they are both influenced by events in the rest of the world, or in the world economy as a whole (e.g., the Great Depression and the influence of the GATT, both global events).

We clearly agree with the reviewer. That’s why we also rely in our argumentation on Irwin’s (1998) analysis, which shows that movements in the average tariff were very much caused by movements in import prices, and implies that exogenous movements in world prices: they are not related to one another directly but move with world prices may have impacted each country’s trade policy. That’s the reason why we include import prices (more precisely, their growth rate) and a measure of the producer price inflation rate for each country, to account for the relative and respective influence of external factors. The point made is acknowledged in the introductory part of the paper, as it is indeed a cautionary note on the interpretation of our results.

As an example of the misinterpretation that their identification leads to, I disagree with the conclusion that the long-run coefficients indicate that higher tariffs in the US lead to long-term rise in the Australian rates and vice versa. (It is true that the Smooth-Hawley tariff increases in the US played a significant role in the rise in protection during the Great Depression but they should be seen as a part of the world-wide surge in rates.) Rather these apparent interactions are part of global movements in tariff rates. The authors need to respecify the model and then to rework the interpretation of their results. (One part of this is already done - the import price indices of the US and Australia are in fact indices which measure changes in the price of imports from all sources.)

We thank the referee for pointing out this interpretation issue, which is now taken into account in the paper when we comment on the results (new footnote 8 distinguishes between the period pointed at by the reviewer and the later one, for which the variables related to the international trade-related institutions are not significant).

There is one detail that needs correction. Their Figure 3 is copied from Lloyd (2008, Figure 11). This needs to be acknowledged.

We really thank the reviewer for having spotted this important omission. Things have been corrected in the new version.

Having raised these issues, it is still true that the two possibilities I have outlined above are important in the world of global tariff policy and they do need to be tested. The existence of parallel series for the US and Australia provides an opportunity to test them.”

We thank you for the attention devoted to the paper.

Round 2

Reviewer 2 Report

The authors have verbally acknowledged my criticisms but the specification  of the model and the interpretation of the results are unchanged. They also continue to pose the choice as one between "tango" and "rock" whereas there are three alternative hypotheses of equal importance.  Perhaps it is a choice between "tango", "rock" and "roll"!

Re the specification of the model, the influence of the Rest of the world is much more than just import prices. The Depression drastically reduced the volume of world trade and it lead to a great increase in tariff levels around the world, led by the US but occurring in all major economies of the time.  Various authors have compiled series of tariff levels for major economies.

The empirical results are essentially unchanged. I dispute the interpretation  that the US tariffs have affected the level of tariffs in Australia and vice versa (though to a lesser extent). Anyone with a solid knowledge of the tariff histories of the two countries would not agree.  This result in my view is due to an inadequate specification of the model.

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Round 3

Reviewer 2 Report

The introduction of the European tariff variable is an improvement.

Yet, I still do not believe the result that the US tariff decisions influence those of the Australian  authority and vice versa. 

I will accept the paper for publication with two minor additions.  First, the sub-title should be "Do they rock or tango or roll?", in  order to reflect the three possibilities which the authors have acknowledged.  Second, they add a sentence somewhere stating  the following: One referee points out that in Australia all tariff decisions are examined publicly by a tariff-fixing authority which reports to the public on all tariff changes. There is no evidence in these reports the Australian authority fixes tariff levels in response to US tariff decisions.

Author Response

Please see the attachment.

Author Response File: Author Response.pdf