Antidumping Industrial Policy: Legalized Protection in the WTO and What to Do about It

Antidumping Industrial Policy: Legalized Protection in the WTO and What to Do about It

American Enterprise Institute for Public Policy Research

January 1997

In this book, the authors analyze the claims that antidumping policies are necessary to achieve fairness in trade relations and that such policies are a safeguard against the predatory pricing that leads to monopoly. They describe the current antidumping programs of the World Trade Organization, the European Union, and the United States and offer pragmatic recommendations for reform of antidumping rules and practices. Mr. Hindley is a reader in trade policy in the Department of Economics at the London School of Economics and is codirector of the Trade Policy Unit of the London-based Centre for Policy Studies. Mr. Messerlin is professor of economics at the Institut d'Etudes Politiques de Paris and consultant to the OECD and the European Union Commission.

Under current law and practice, a corporation can be found guilty of dumping if the price of its product abroad is lower than the price in its home country, or if it is alleged that the product is being sold at a price lower than the cost of production plus reasonable selling costs and profit. In addition, so-called predatory dumping is actionable when it is alleged that a producer is attempting to achieve a monopoly by driving foreign competitors out of business.

Fairness, however, is a tricky ground on which to defend economic policy. In fact, invocations of this kind of judgment often work to the advantage of protectionism. Take, for example, the normal situation in which the producers of one country are lower-cost competitors with producers in another country. Even with transportation costs, they may still be able to sell their product at lower prices than the other country's producers'--and even at a lower price than at home, given different marketing conditions and costs of advertisement and selling.

Clearly, the higher-cost producers have a problem, and if they do not drive their prices down, many will go out of business. But there is no obvious unfairness at work, since such a process is crucial to the functioning of a market economy. And if it is accepted that low-cost domestic producers should be permitted to drive high-cost producers out of business, it is difficult to find respectable grounds for describing the same process as unfair merely because the low-cost sellers are foreign.

pcge-cost dumping, the real problem to which both domestic and foreign producers are responding is excess capacity. Given the state of antidumping laws today, although firms in country A face the same conditions as those in country B, governments of either or both countries may institute antidumping procedures against the foreign producer for selling below cost. But the idea of fairness that might support that legal possibility is hard to define. In the absence of antidumping action, producers everywhere face the same conditions. Excess capacity makes those conditions hard, but there is no evident unfairness in the position of foreign producers.

The special case of alleged predatory pricing in order to create a monopoly calls for a more detailed analysis. Although some academic literature has cast doubt on the ability of firms to utilize predatory pricing tactics effectively, the potential for attempted predatory pricing cannot be ruled out entirely. In practice, however, most domestic competition laws make provisions for regulation of predatory pricing. In providing guidance for the rare cases of predatory dumping, the key facts to be established relate to the structure of the industry worldwide and the number of firms competing in national markets. Most antidumping cases involve products and sectors with a considerable number of sellers, and thus, as a technical matter, a successful predatory pricing strategy is inconceivable.

Misconceptions behind Antidumping Policies

The case for current antidumping regulations, and for the antidumping systems in the European Union and the United States in particular, is founded on the argument that antidumping actions are a regrettable but necessary safety valve for the continued advance toward freer trade. This argument, however, proceeds from two faulty assumptions. The first is that anti-dumping actions affect only a very small fraction of trade with the European Union and the United States: 1 percent for the European Union and 0.5 percent for the United States. The second is that antidumping actions follow a fair and open legal process that protects the interests of both domestic and foreign producers.

The first assumption is flawed for a number of reasons. First, total trade (the denominator) includes many goods either not produced or produced only in small quantities by the importing country; in addition, it also includes agriculture, which is so heavily protected that no antidumping action is necessary. Conversely, the total effect on imports (the numerator) is deflated, because it is based on a level calculated after antidumping measures are already in place. In some sectors, antidumping duties run as high as 20 to 50 percent, and thus are quite restrictive. Further, the picture is skewed by the highly discriminatory factor in antidumping measures, through which some countries--particularly in Asia, Eastern Europe, and South America--bear a much higher burden and, consequently, may be having their exports curtailed by much higher percentages than official figures indicate. For the European Union, as much as 25 percent of imports from former states of the Soviet Union may be affected by antidumping duties.

An examination of the industries most often the subject of antidumping actions--chemicals, metals, and nonelectric and electric machinery--reveals strong evidence of a chilling effect in which foreign exporters to the United States and the European Union voluntarily raise prices and otherwise proceed cautiously in their efforts to penetrate these markets. And the problem has gotten worse: over time, average dumping margins have increased, particularly in the United States, where averages rose from 21 percent from 1980 through 1985, to 38 percent from 1990 through 1993. In the United States, imported quantities declined more than 70 percent in sectors with these high dumping margins; in the European Union, with similarly high margins, imports from targeted sectors declined more than 35 percent.

The second misconception, which assumes an objective and fair legal system, ignores a number of factors that stack the deck against importing firms, particularly small and medium-sized firms. These include long delays in proceedings, extensive documentation, large legal expenses, and rigged calculations of costs and prices by government agencies. As a result, in the European Union more than 50 percent of all actions conclude with "undertakings" by the importer--that is, agreements to raise prices. Finally, the rate of success by domestic plaintiffs against importing firms is astonishingly high: in the European Union, almost 75 percent of all cases end with some form of antidumping measure; in the United States, from 1980 to 1992, more than 90 percent of all antidumping determinations by the Commerce Department were affirmative. The record of the past several decades clearly shows a strong protectionist drift in the antidumping regulations in the European Union and the United States.

Urging Bolder Reform

Past efforts to reform antidumping regulations have too often focused on technical, rather than fundamental, changes. In the recent Uruguay Round of multilateral trade negotiations, for example, some advances were made in how dumping margins were calculated, in how injury to a domestic industry was defined, and in how open or transparent the administrative process would be for the importing foreign firm.

A sharper break with the past is needed. First, in the area of alleged predatory pricing--which provides the strongest case for antidumping protection--trade actions should be limited to industries where there are only a few sellers. The problem with current antidumping laws is that they authorize action against a wide range of behavior that is not predatory, and in circumstances in which predatory dumping is inconceivable.

In those few sectors where there are only a small number of producers, there are legitimate grounds for action. Here again, however, the current system should be reformed. The most important change would be to subject both foreign and domestic producers to the same body of law. Whether the allegation is predatory pricing through differential pricing or selling at less-than-average cost, the action should ideally be the subject of just one body of law. Specifically, domestic competition, or antitrust, law should be substituted for the protectionist-biased antidumping laws in individual nations.

When it has been proved that a nation has created a sanctuary market by allowing a domestic cartel to reap monopoly profits and then dump products into other markets, trade action is warranted. In such cases, government-to-government negotiations should aim first to destroy the cartel. If these were to fail, then antidumping duties could be instituted. These narrow grounds and circumstances for retaliation are distant from the current system.

The current antidumping system is so overextended--it allows so many innocent practices to be attacked for so few proper policy aims--that dispassionate examination would likely lead to the conclusion that it should be abandoned. But the reasonable aims of antidumping can be separated from action against innocent practices, and these reasonable aims can be achieved by relatively straightforward reforms. The resulting law would not look much like current antidumping law. But that is a virtue, not a problem.

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