Examining pros and cons of the antidumping protection

Dumping, commonly known as “Predatory Pricing” in international trade is the act of charging a lower price for a good in a foreign market than one charges for the same good in a domestic market. This is often referred to as selling at less than “fair value”.

Antidumping laws were ostensibly passed to prevent foreign producers from dumping their products on domestic markets at abnormally low prices. Generally, a foreign company may be found guilty of dumping if it either sells its product on a domestic market for a price that is lower than what it sells for at home or if it sells a product for less than the cost of production.

Anti-Dumping can be tracked back to sixteenth century English writer who charged foreigners with selling paper at a loss to smother the infant paper industry in England. Another instance can be tracked to the seventeenth century in which the Dutch were accused of selling in the Baltic regions at ruinously low prices in order to drive out French merchants.

One of the classic examples of dumping can be looked at the Standard Oil Company, the way the company used aggressive pricing to force competitors to dump oil business and either club with standard oil or move out of the oil business. Though Standard Oil Company is believed to bring in trust based corporate model but it also is related to be the reason why US Congress passed the famous Sherman Antitrust Act – the source of all American anti-monopoly laws.

Antidumping laws have been in existence for several generations in various parts of the world but have been in one format or another. Since the conclusion of the Uruguay Round of GATT and the creation of the World Trade Organization (WTO), antidumping laws have become widespread. More countries are using them than ever before and the number of antidumping cases pending before various legal forums is now larger than ever.  

During the course of this paper we would looking at brief overview of antidumping issues across nations and few international issues that highlights how antidumping is good for bad corporations and bad for good corporations and vice versa.

History of Major events in Anti-Dumping laws

Some of early antidumping laws in history

Canada- 1904 Statute

New Zealand, 1905

Australia, 1906

Great Britain, 1921

United States-1916 and US Tariff Act of 1921

Stage wise development of Antidumping laws in US

(The Sherman Antitrust Act of 1890

Section 73, Wilson Teriff Act of 1894

Antidumping law of 1916

The U.S. Tariff Commission study of 1919

Antidumping law of 1921)

Modern Developments at international trade

GATT 1947-Article VI

Tokyo Round Antidumping Code

Uruguay Round Antidumping Agreement

Development of domestic anti dumping laws

Issues with Anti-Dumping Laws

The main problem with antidumping laws is that they are being used as clubs by domestic producers to batter foreign competitors. Rather than protecting the general public and domestic industries from predatory pricing, they are being used by domestic producers to feather their own nests at the expense of the general public, a practice which many economists term as rent-seeking. Rather than using the force of government to enhance competition and prevent unjust harm to consumers, domestic producers are using government to reduce the pressure of competition so that prices can remain above market levels. 

The WTO has adopted an antidumping provision as part of its rule structure. As a result, even countries that did not previously have an antidumping law of their own now have a set of rules in place that they can use to punish foreign producers if a case can be made that a foreign producer is selling a product on their domestic market at an aggressively low price.

Antidumping laws have been so abused that nearly all of the countries that attended the trade talks in Seattle in December, 2000 wanted to place reform of the antidumping laws on the conference agenda. But the United States succeeded in keeping this topic off the agenda, mostly because of pressure from labor unions in the United States.

 Few key issues with antidumping that can be summed up from various studies are

Antidumping has long been part of the rhetoric of protection.

Manipulation of customs valuation has long been part of the arsenal of ant-import weapons.

Antidumping is, in substance, another clever way to use customs valuation procedures as a weapon against imports.

Antidumping preserves all the old tricks against reform of customs valuation, reforms that now constrain value for assessment of fair value of products.

Antidumping makes these tricks even more powerful. As increases of the “dumping margin” they are fully added (100 percent rate) to import charges; as increases of the “customs value” they would be added to the tariff rate, which even in high-tariff countries is seldom as high as 100 percent.

Tarriff and Anti Dumping Measures

A tariff is seen as a measure to protect local industry but at the same time sending a message a message to local manufacturers to be competitve globally. In any country with a tariff, the home market price would be the tariff-inclusive price, while the export price would be the lower, tariff-exclusive price.

While for the past twenty years the world has seen a drastic fall in tariff barriers, trade protection is still around – albeit in a different form. As shown in Figure 1, the fall in tariffs has coincided with a spectacular increase in the number of antidumping measures, which have become the most frequently used instrument of trade protection. While there has been a downward trend in the number of Antidumping measures since 2003, since the beginning of the global financial and economic crisis, Antidumping measures and investigations have increased rapidly and this seems to continue in 2009.

Under the WTO agreements which aim at promoting free trade, by reducing barriers to trade among its members, a number of exceptions are specified, such as the possibility to impose Antidumping measures in case of unfair trade. However, current antidumping rules are not well equipped to distinguish between “fair” and “unfair” trade. When foreign producers produce goods more cheaply, their prices are bound to be lower, especially when they export to a large market like the US or the EU where they are likely to face more competition than in their own domestic markets. What appears to be unfair trade may well be an indication of foreign comparative advantage, this would then imply that it is the less efficient firms that have an interest in filing for and receiving protection so to get sheltered from international competitive pressure.

South East Asian countries are at the helm of many developing nations in count of Anti-Dumping measures. In the following part of the paper we can clearly see how many investigations have been initiated towards China, Chinese Taipei, Malaysia, and Thailand.

After loosing around 70% of the antidumping lawsuits in 2009 Vietnam has introduced a new online warning system that will help local companies avoid anti-dumping cases being filed against their products.

ANTI-DUMPING: NUMBER OF INVESTIGATIONS INITIATED (1995 – 2008)

Source: WTO website

The Members reporting the highest number of new initiations during July-December 2008 were India, reporting 42, followed by Brazil, reporting 16, China (11), Turkey (10), Argentina and the European Communities (9 each), Indonesia (6), Ukraine (4), Pakistan and the United States (3), Australia and Colombia (2 each), and Canada, Korea and Mexico (1 each).

China was the most frequent subject of the new investigations, with 34 new initiations directed at its exports. This was a 17 per cent decrease from 40 new investigations opened in respect of exports from China during July – December 2007. The European Communities (including individual member states) was next with 14 new investigations directed at its exports, followed by Chinese Taipei, Thailand, and the United States (6 each), Indonesia, Korea and Malaysia (5 each), India and Saudi Arabia (4 each) and Iran and Turkey (3 each). These were followed by Australia, Belarus, Hong Kong, China, Japan, Russia, South Africa and Ukraine (2 each), and Argentina, Armenia, Brazil, Chile, Ecuador, Israel, Kazakhstan, Kuwait, Peru, Philippines and Sri Lanka (one each).

Concerning the products affected by these new investigations, the most frequent subjects during the second half of 2008 were in the base metals sector (43 initiations), the chemicals sector (22 initiations), textiles sector (19 initiations) and plastic and rubber sector (14 initiations). Of the 43 reported initiations relating to the base metals sector, 24 were reported by India, 8 by the European Communities, 3 by Indonesia, two each by Australia and Colombia, and one each by Argentina, Canada, China and Mexico.

Some key disputes of the past which can help us understand why antidumping measures are bad for good companies and good for bad companies are highlighted below.

The Sony case

In 1968, Japan surpassed West Germany and became the second largest producer of goods and services in the world after the United States. In that same year, the U.S. Electronic Industries Association (EIA) brought an anti-dumping lawsuit before the Department of the Treasury, claiming that Sony and ten other Japanese manufacturers were selling televisions in the US at prices lower than in Japan, causing U.S. manufacturers to record severe losses. At about this time, economic friction between Japan and the United States came to a head.

Since many U.S. consumers at the time considered Sony color televisions too expensive, it seemed contradictory to include Sony’s name in the lawsuit. However, Sony was included because of a US policy classifying products by their country of origin. Basically, Japan as a country had been named in the anti-dumping suit so all Japanese manufacturers of color TVs were automatically included.

In 1971, soon after the Treasury decided that the case against Japanese makers had merit and that they would have to face anti-dumping charges, Sony received a letter stating that it was not under suspicion for any illegal activity. Sony was the only Japanese maker to receive such a notice. A provisional announcement confirming Sony’s status was subsequently made in August 1974 and a formal announcement was made in February of the following year.

Even with this reprieve, Sony recognized that the potential for trouble existed, and quickly took preventative measures. They collected evidence that clearly showed that anti-dumping allegations against Sony could not be substantiated, and presented their case directly to the US government.

Sony received notice from the Treasury in 1975 officially absolving it of any wrongdoing. It had been seven years since the filing of the anti-dumping suit and despite the notice; Sony had been dragged into the proceedings with the other Japanese makers. Eight more years would pass before the case against them was finally settled.

Few more important cases against known organizations are

The Ukrainian Interpipe Group with the successful annulment by the European Court of First Instance of the regulation imposing anti-dumping duties on seamless tubes and pipes.

ArcelorMittal Belgium and ArcelorMittal Kazakhstan involvement in a Russian anti-dumping procedure.

European steel manufacturers association Eurofer on several cases with a cumulative value of over USD10 billion, including an anti-dumping investigation into hot-dipped metallic-coated steel from China.

United States – Canada softwood lumber dispute

The United States – Canada softwood lumber dispute is one of the most significant and enduring trade disputes in modern history. The dispute has had its biggest effect on British Columbia, the major Canadian exporter of softwood lumber to the United States.

The heart of the dispute is the claim that the Canadian lumber industry is unfairly subsidized by the federal and provincial governments. Specifically, most timber in Canada is owned by provincial governments. The price charged to harvest the timber (the “stumpage fee”) is set administratively rather than through a competitive auction, as is often the practice in the United States. The United States claims that the provision of government timber at below market prices constitutes an unfair subsidy. Under U.S. trade remedy laws, foreign goods benefiting from subsidies can be subject to a countervailing duty tariff to offset the subsidy and bring the price of the product back up to market rates.

The Canadian government and lumber industry dispute the assertion that Canadian timber is subsidized on a variety of bases, including that the timber is provided to so many industries that it cannot be considered sufficiently specific to be a subsidy under U.S. law. Under U.S. trade remedy law, a subsidy to be countervail able must be specific to a particular industry. This requirement precludes imposition of countervailing duties on government programs, such as roads, that are meant to benefit a broad array of interests.

Since 1982, there have been four major iterations of the dispute. This dispute is of utter importance because the 1904 Statue Act of Canada was brought in to counter dumping of steel by American Companies and this time Americans wanted to put down the Canadian Softwood lumber industry (primarily owned by Canadian Government) by raising the subsidy issue.

Antidumping: good for bad firms, but bad for good Firms

While the average firm’s efficiency seems to be different between protected and unprotected firms, it may hide important differences between firms. Furthermore, not all firms that receive protection have the same level of initial productivity. The majority of protected firms have a relatively low productivity level prior to the protection. But at the same time the productivity of protected firms has only a small number of firms have a high initial productivity.

Various research studies has shown that while antidumping protection appears to raise the productivity of the lowly efficient firms it reduces the productivity of the highly efficient ones. This result suggests that antidumping protection is “good for bad firms but bad for good firms”.

Several explanations have been accounted for this. A first explanation is that the threat of exit is higher with the least efficient firms and therefore once they receive temporary protection they have a higher incentive to restructure before being exposed to international competition. But this does not explain why the most efficient firms lose out when they face protection. A more likely explanation is related to the global nature of the firm, i.e. the extent to which firms are active in international trade. A prominent fact is that typically the most efficient firms are the ones that are also able to be active in international markets, due to the transaction costs involved with international trade. In particular, antidumping protection may adversely affect those exporters that outsource part of their production to the countries targeted by the antidumping protection. Outsourcing entails a fixed cost which only more efficient firms can cover. Since exporters tend to be more efficient than non-exporters, exporters may engage more in outsourcing than non-exporters.

Imagine a French exporting firm that outsources bicycle assembly to China for the purpose of importing these bicycles into France, while performing activities such as branding, labeling and other types of distribution activities in France. French exporters that outsource their bicycle production face more expensive imports since they have to incur the antidumping duty imposed on bicycle imports from China. Current antidumping law does not automatically exempt outsourcers from paying an import duty, not even when the majority of the value added is created domestically. This puts outsourcers at a serious disadvantage over domestic bicycle producers which do not have to pay the import duty which may negatively affect their domestic demand and exports. As a result this may undermine the competitiveness of firms exporting domestic varieties that are refrained from setting a lower price in extra-EU export markets in order not to be accused of dumping practices by others. In addition, exporters may experience reduced market access abroad if domestic trade protection results in retaliatory action whereby trade partners protect themselves in turn.

Conclusion

Examples studies has shown that with globalization local organizations find it tough to compete with multinationals and Anti-Dumping policies are has shifted the focus from antitrust to anti import regime. Examples of Sony ArcelorMittal show us how various countries use antidumping policies show how good companies can be pulled in Anti-Dumping traps to protect their local industry

Some of the well known economist in western countries has started to use the term “Antidumping: The Third Rail of Trade Policy”, the way antidumping measures are used for satisfying their political goals by various countries , the United States – Canada softwood lumber dispute is an example of how trade can be used to affect an industry in another country .

We can also conclude that anti dumping measures are good for bad firms typically the least efficient firms receive antidumping protection and that it helps them to restructure. However, they are not able to close the efficiency gap with firms that do not receive protection, which sheds a different light on the effectiveness of antidumping measures in protecting domestic firms. Furthermore, the effects of antidumping protection on domestic firms depend on firms’ initial conditions in terms of productivity and on their exporting status. Not taking the interests of exporters into account when deciding to protect a particular industry is bound to have detrimental long run effects which need to be considered before deciding to impose protection.