Antidumping

2

Contents

1.  Introduction  Introduction

2.What  is dumping  

2.1  Definition of dumping  

2.2  Forms of dumping  

2.3  Antidumping in the GATT  

2.4  The history of the use of Antidumping  

2.5  Recent developments in the case of antidumping measures  

2.6  Countervailing duty vs antidumping duty  

3  Antidumping investigation in the United States  

4  Trade Welfare effects of dumping and antidumping actions  

4.1  Effects for the domestic economy  

4.2  Named versus non-named countries  

4.2.1  Import of named countries  

4.2.2  Imports of non-named countries  

4.2.3  Overall  imports

4.3  Net country effect of U S antidumping actions  

5.  The effect of antidumping actions on foreign direct  investment

6.  Conclusion  

3

1. Introduction

During the last decades antidumping has been become one of the most, if not the most, controversial practices in international trade. It emerged as the most widespread impediment of trade. Whereas other trade barriers, like quotas, tariffs and voluntary export restraints have been brought under greater GATT/WTO discipline, the widespread of antidumping actions have increased rapidly. There is a large gap between the interest of economists and politicians, who mainly support trade restriction in order to protect the domestic economy and, of course, what the political economy taught us: to be reelected. On the other side are economists and trade reformers who support the minimizing of barriers in international trade. According to the importance of antidumping to international trade and the recent controversial discussion about antidumping at the meeting of the WTO in Doha, Qatar, this paper addresses same significant issues about the use of antidumping measures. First the important and many-sided trade effects that occur when dumping take place and the reaction of the dumped product importing country, namely antidumping actions. The process of the antidumping investigation and the process of filing a petition are discussed as well as the influence of antidumping on foreign direct investment in the United States.

4

2 What is dumping?

2.1 Definition of dumping

In general, dumping is the situation of international price discrimination, where the price of a product when sold in the importing country is less than the price of that product in the market of the exporting country. So the comparison of the prices in the two markets is the simplest way to identify dumping. However, usually the case is more complex than this simple situation. In most of the situations complex analytical steps are necessary to determine the appropriate price in the market of the exporting country (known as the "normal value") and the appropriate price in the market of the importing country (known as the "export price"). Thus, in1922, Jacob Viner defined dumping as “price discrimination between national markets” 1 . Other writers define dumping as followed: “Loosely defined, dumping occurs when similar products are sold by a firm in an export market for less than what is charged in the home market. Alternatively it may occur if the export price of the product is less than total average costs or marginal costs” 2 .

2.2 Forms of dumping

Dumping takes place under different circumstances. The well-known economist Jacob Viner distinguishes between three types of dumping situations. First of all there is sporadic dumping. Here the motivation to sell goods below cost for the short-run is to get rid of surplus shock. Sporadic dumping results only in damage to either the importing country or exporting country. Secondly, there is intermittent or short-run dumping. In this not continuous case the motivation is to enter the market, retain the market share or drive away 1 Viner, Jacob “Dumping: A Problem in International Trade” (Chicago, 1923) 2 Hoekman, Bernard M. and Michael P. Leidy, “Dumping, Antidumping and Emergency Protection”

5

the competitors. The third form of dumping is continuous or long run dumping, which is driven by the intent to reach or maintain a large-scale economies-production. The only case in which antidumping authority may protect domestic consumers is predatory dumping. Here the foreign company tries to drive away the domestic competitors to establish a monopoly and hence to increase the price 3 . “Predatory Pricing refers to the use of short-run price cutting in an effort to exclude rivals on a basis other than efficiency in order to gain or protect market power. …Predatory pricing, however, is a complex form of anticompetitive conduct. It requires the perpetrator to incur substantial losses or at least to forego present profits in the hope that those losses can be more than recouped in the future through the exercise of market power. Thus, market conditions play a key role in determining whether price predation is a feasible tactic for a firm to employ. The predator must have a very substantial share of the market or at least the capacity to acquire such a share” 4 .

2.3 Antidumping in the GATT

The Article VI of the General Agreement on Tariffs and Trade (GATT) 1994 was implemented to set anti-dumping measures for the members of the World Trade Organization (WTO). After a successful investigation and determination by a member, that an imported good is dumped by a foreign firm and that this good is causing material injury to a domestic industry producing the like-product (product that is object of antidumping investigation) , this anti-dumping measures can be applied by that member. 3 Staiger, Robert and Wolak, Frank “The Effect of Domestic Antidumping Law in the Presence of Foreign Monopoly”, NBER Working Paper Series, Working Paper 3254 (February 1990).

4 OECD, Predatory Pricing (Paris, 1989).

6

The above-mentioned requirements, which must be met in order to impose an antidumping measure, are set by Article VI of the GATT.

2.4 The history of the use of Antidumping

The history of Antidumping begins with the GATT agreement of 1947. Dumping was defined as the practice whereby the “products of one country are introduced into the commerce of another country less than the normal value of the products” and it was only permitted to levy dumping duties in cases of “material injury” to a domestic industry. This determination of dumping leaded to high standard for permissions to levy a dumping duty. During the 1950s there was not even one Antidumping case of levying duty in the United States and in the 1960s only 10% of U.S. antidumping cases resulted in duties. Actually there was just a little antidumping protection. Indeed, less than 5 percent of antidumping cases resulted in duties until the 1970s. Thus, the trade impact of antidumping was not worth mentioning until this time. At the Tokyo Round in1979 many amendments for a better dumping protection were contained. Most important was the definition of “less than fair value” sales, because it included not only price discrimination, but also selling below costs. After this definition cost-based antidumping petition became the “dominant feature of United States antidumping law” 5 and in the rest of the world. Table 1 in the appendix presents a brief summary of antidumping actions by reporting countries. More than 1500 cases were filed worldwide during the 1980s; twice the cases compared with in the 1970s. In the 1980s nearly 99 percent of all filings were accounted by Australia, the European Union, Canada and the United States. But with the 5 Horlick, Gary “The Unites States Antidumping System” 1989 (p.136)

7

time gone by more and more cases were filed by developing countries, which lead to more than half of all antidumping complaints in the mid-1990s. Now the United States and the European Union were the subject of more dumping complaints by developing countries than any other countries. The sharply increase of antidumping complaints can be traced back to several reasons. First of all the increasingly weak antidumping standards, that made the determination of a dumping case easier than before. Secondly, the further liberalization in trade, which increases the trade volume and, hence, the complaints.

2.5 Recent developments in the case of antidumping measures

At the recent meeting of the WTO in Doha in November, there was not really consensus in the case of antidumping actions. One important challenge of the negotiator of the United States, Zoellick, was to protect the domestic industry from the ravages of the global marketplace by maintaining the agreement of antidumping measures. But unfortunately most of the developing countries are not satisfied with the current situation of antidumping measures, because the developed countries are using these “weapon against trade” quite often and levying mostly disproportionably high duties. The negotiations are not finished yet and it will be interesting to see how the developing countries are acting against the developed countries. A statement by Max Baucus, Senate Finance Committee Chairman underlines the explosive effect of this topic: "Why would we agree to this? What do we gain?"

8

2.6 Countervailing duty vs. antidumping duty

Antidumping measures and countervailing duties are related closely, but there are also fundamental differences. These two issues are mostly handled in a single law by many countries, because of its similarity. In both cases the result is an offsetting import tax; a countervailing duty in the case of a subsidy and an antidumping duty in the case of dumping. Both duties are levied on a special product from a certain country that breaks the GATT principles, so the levying of both duties is a protection of the domestic industry. But there are also the already mentioned differences. In the case of subsidies a government is paying a certain amount of money to the exporting company, whereas in the case of dumping the foreign company is acting directly. Because of the fact that the WTO is an organization of countries that cannot deal with companies directly, there is only a special agreement of antidumping measures.

9

3 Antidumping investigation in the United States

An investigation of antidumping is conducted on the basis of a petition or by the own initiative of the U.S. International Trade Commission (ITC). Producers, manufacturers, or wholesaler that are in the like-product industry can file a petition for an antidumping investigation. The ITC and the U.S. Department of Commerce (DOC) administrate the U.S. antidumping laws. When a petition is filed, the DOC has to determine that the foreign subject merchandise is being, or is likely to be, sold in the United States at less than fair value. The ITC has to determine that an industry in the United States is materially injured or threatened with material injury, or that the establishment of an industry is materially retarded, by reason of imports of that merchandise. Just if these two conditions are met, an antidumping duty will be imposed.

When the petition is filed or the DOC initiated the investigation, the ITC begins to investigate, if the above-mentioned condition is affirmative. Meanwhile the DOC has to investigate within 20 days, if the other condition is affirmative. If it is in one of the case not affirmative the investigation ends. If both cases are affirmative, the ITC makes its preliminary determination within 45 days after the beginning of the investigation. If the preliminary determination of the ITC is affirmative, the DOC makes it preliminary determination. Now the DOC has to estimate the amount by which the normal value of the foreign like-product exceeds the export price. This is known as the weighted-average dumping margin. After this the importer of the dumped product must post a cash deposit or a similar security for each entry to the United States equal to the preliminary dumping margin. After further investigation the DOC and ITC makes their final determinations. If

10

one of the determinations is not affirmative, the proceeding ends. If both are affirmative the DOC gives an order to levy an antidumping duty equal to the estimated dumping margin on the certain product. Annually the DOC asks for a request by interested parties for an administrative review of the antidumping case. An interested party is either the foreign importer or a U.S. firm of the like-product industry. This review takes place to newly determine the dumping margin if there was any changes in the foreign firm’s U.S. prices and the normal value.

11

4 Trade/Welfare effects of dumping and antidumping actions

4.1 Effects for the domestic economy

Lower import prices are the direct effect of dumping. This lower import prices harm the domestic producers of the like-product industry and at least there are short-run gains for domestic consumers, because of the lower price they have to pay for the certain product. It is difficult to estimate the size of these gains and losses and the possible long- run harm to consumers in the case of predatory dumping, because it requires to know the elasticities of the supply and demand in the foreign country’s market and the domestic market, the foreign firm’s distribution of production between its domestic market and exports and the shape of cost curves. The import price would be at unit cost if dumping is cost-based, but in the case of predatory dumping, the short-run reduction of the import prices would benefit domestic consumers and harm domestic producers. But in the long run, assumed that the predatory dumping was successful, the domestic consumer has to pay monopoly prices because of the driven out of the domestic producers. If predatory dumping were not successful, both the foreign and the domestic producers would be harmed, while domestic producers gained due to the lower import prices for a certain period of time.

Figure 1 presents the effects of dumping to the domestic economy. S represents the domestic supply and D the domestic demand for a given product. P f is the price level without dumping; the total supply (domestic production and import) is represented by the line from S up to the price level of P f , where it gets horizontal. The output that is produced within the borders is Q f and the quantity that is imported is represented by Q f Q’ f . When dumping by a foreign company occurs, the price level falls to P u and the

12

the lower prices. The price decline from P f to P u increases consumer surplus by the rectangle P u fdP f and results in a net welfare gain to consumers, whereas domestic producer loses most of their producer surplus.

Usually in this case an antidumping measure will take place to protect the domestic producer, so that the dumping becomes ineffective. The price level and quantity produced within the borders without dumping is restored again and the domestic producer and its investment, employment und profits are saved. The overall net welfare effects due to the antidumping measure are the yellow and gray triangles, while the rectangle in the middle is the tariff revenue for the domestic government. Gallaway et al. (1999) estimated in a model the net welfare losses to the U.S. economy from antidumping and countervailing duties that occurred in 1993 is only $209

13

million per year. But when you take into account how much the antidumping duties fell

over time from the administrative review process, the welfare loss ranges from $2-4

billion per year.

4.2 Named versus non-named countries

This is a comparison of effects of a dumping investigation between named countries

and non-named countries. A named country is a country that is named on the petition as

the origin of dumping. A non-named country is a country that is not mentioned on the

petition, but also exports the dumped product, which is investigated, to the country, that

investigates the case. As you can imagine there are large differences of the volume of

trade for the dumped like-product between these to groups of countries.

4.2.1 Import of named countries

14

the decline in value of imports is even 16%. This number increases to 25% in the year t 2 . But in the year t 3 the value of trade is already on its pre-petition level, which teaches us that the largest restrictions of trade occurs in the short-run.

The measure of restriction of trade is related to the size of the levied duty. As you can see in figure 2 the value of trade between cases with low duties (duties less than 7% of the fair value price) and high duties (duties greater than 36%) are compared. The most restrictive period occurs in the case of a high duties in the first year after the antidumping measure, when value of imports decreases by 47%. This large decrease is even more extreme compared to the case of low duties. Here the value of imports is not declining, but growing by almost 10% during the first year.

This surprising fact that imports are growing after a low duty was levied must be addressed further. This result underlines a unique characteristic of antidumping protection. After the duty is levied the exporting country raises its prices in the foreign market to the full extent of the duty, so that the duty is never paid effectively. In this case the antidumping duty creates a “price floor” for the named country’s products. Another reason for the increase in imports is the fact that competing firms are forced to cut their prices because of the intensified competition. So, if they could reduce the incentive to undercut their rivals, they would benefit from higher prices. This case proves that antidumping measures can also be positive and trade creative for named countries.

4.2.2 Imports of non-named countries

An antidumping measure has not just effects for the named country on the petition but also non-named countries, which export the same product to the investigating

15

are growing by 22% on average. The difference between cases where the duty was levied

and where it was rejected are pretty big, but the difference between low duty and high

duty cases are rather small. Whereas imports were grown by 45% on average to the third

year when the case was rejected, import had just increased by 30% on average at the

same period. Import is increasing by 30% in year t 2 and 40% in year t 3 in the case of

imposed high duties and imports are growing 15-20% each year in low duty cases.

16

4.2.3 Overall imports

from the named countries declined by 11% when duties were levied, whereas overall

imports increased by 15%. In the year t 2 you can see a comparable trend. This trend is

also tenable for cases that were rejected. Overall imports increased by 19% in the year t 1 ,

but imports from named countries increased just by 5%. Secondly, diversion does not

imply that antidumping duties have no effect on overall import trade. In the first few

years import growth for rejected cases is 5-10 percentage points higher than in cases

where duties were le vied.

4.3 Net country effect of U.S. antidumping actions

The United States is one of the countries that have a pretty aggressive use of

antidumping measures. In general, countries that are not named on the petition will

17

benefit of this aggressive policy, whereas named countries will lose. Because of the fact that most named countries of antidumping actions are also importers of products that are object of other investigations or countervailing duties, but where they are not named, the country benefits overall. So the U.S. company, that complaint about the dumping, spent a lot of money for lobbying, selecting information and assembling the form and gains just a little bit, if at all.

18

5. The effect of antidumping actions on foreign direct investment

In August 1993, the Eastman Kodak Company filed a U.S. antidumping petition against U.S. imports of photographic paper originating from plants owned by Fuji Photo Film in Japan and the Netherlands. Two months later the preliminary decision in this case had found dumping margins of over 300% against the Fuji plants and ruled that the imports were injuring the domestic industry. While this led to an ensuing suspension agreement that led to substantially lower imports for a brief period, Fuji soon located a photographic paper manufacturing plant to the United States that was operational by March 1996. Less a year after the U.S. plant opening, Fuji’s share of then U.S. photographic paper market had surpassed the market share Fuji had enjoyed before the U.S. antidumping petition was filed by Kodak.

This is an example of foreign direct investment (FDI) of a foreign firm in the United States caused by the antidumping petition filed by an U.S. company against this foreign firm. In order to avoid the antidumping duty Fuji built a plant in the protected industry and also gained from the protection. The results of the example above are that the competition within the protected industry increases and the domestic consumer gain from lower prices, whereas the antidumping duty levied government loses the revenue of the tariff.

There were 485 antidumping cases filed form U.S. companies in the period of 1980 to 1990. 189 (39%) of these cases led to affirmative determinations, 183 (38%) led to negative determinations, 109 (22%) were terminated and 4 (1%) were suspended. These 189 affirmative cases led to firm-specific margins for 431 firms. Whereas table 2 presents

19

the FDI activities in the United States of these firms in an empirical way, table 3 presents FDI activities for nonaffirmative cases in special.

Noticeable in table 2 is that especially Japan has a very high FDI compared to the other countries or region, although it is the origin of most of the antidumping duty receiving firms. Japanese firms are the source of 50 out of the 80 total tariff-jumping FDI cases. More than half (51.5%) of the Japanese firms are “tariff-jumped” the antidumping duty by investing in the United States. The only region that has also a worth mentioning FDI activity is Europe. Here 24.7% of all firms that were object of an antidumping duty invested in the United States. In the other regions and countries the FDI during the cases and after it are almost zero. Notice also that the tariff-jumping FDI takes place mostly (82%) during the case or within 3 years of the case. These can be traced back to the fact that the antidumping duty receiving firms have to be fast to invest in the protected country in order to gain an attractive profit, because other foreign firms that were following the case could also try to get a piece of the cake.

Table 3 examines the data for possible tariff-jumping responses by firms involved in U.S. antidumping investigations that were suspended, terminated or determined negative. As you can see there is only low response of the mentioned firms in case of negative, determined or terminated cases, namely between 1.6% and 6.4%. But suspended cases have a relatively high response for tariff-jumping FDI. From the 15 mentioned cases 7 led to FDI activity (46.7%). This is obviously, if you know that cases will be suspended when there is an agreement between the foreign and domestic firm or a voluntary export restraints (VER) takes place.

20

All in all tariff-jumping FDI occurs manly between the U.S. and other developed countries or regions, like Japan or Europe. Especially Japan has a very high response. The response of firms form developing regions is almost zero. Another characteristic that seems to be constant is that FDI takes mostly place during the case or within three years of the case, whereas the tariff-jumping FDI decreases rapidly after this period.

21

6. Conclusion

This paper should have made clear that antidumping is one of the most restrictive trade impediment of all trade restriction. Antidumping duty has not only effects for the protected industry and the foreign firms that receives this duty, but also for firms of the like-product industry in the protected economy and in countries that also have trade relationships to the protected economy. First, there is the lower foreign direct investment between the named country and the country that filed the petition. Secondly, the government revenue of the antidumping duty, which is dependent on the volume of trade after the antidumping duty was levied. This is the reason why antidumping policy has also a high political influence, which makes the handling with the whole topic even more difficult. Antidumping law in theory and practice are still quite different. Because of the political influence the antidumping margins are much higher than necessary. Another reason for this is that the antidumping law has evolved over time to become more effective and so the trade barriers increased constantly during the last decades. This development can be mostly traced back to the almost paranoid attitude of the developed countries to protect their economies from the dumped products of the developing countries.

The alarming increase in antidumping measures by developed countries as well as developing countries has caused concern among economists and trade advocates. Now it is up to the politicians to bring these developments to a standstill in the near future. In this point I am very optimistic, because the recent negotiations of the World Trade Organization in Doha were a good beginning. The developing countries are growing in

22

their number and their influence and so it is up to the developed countries to come to a

consensus and to give up their exaggerated trade protection.

23

References

- Boltnick, Richard “An Economic Analysis of Dumping” (1987)

- Ellingsen, Tore and Warneryd, Karl “Foreign Direct Investment and Political Economy Of Protection” (1999)

- Harrison, A. “The New Trade Protection: Price Effects of Antidumping and Countervailing Duty Measures in the United States” World Bank Working Paper

- Hoekman, B. and Leidy, M. “Dumping, Antidumping and Emergency Protection”

- Hooland, Jan and Wootan, Ian “Antidumping Jumping: Reciprocal Antidumping and Industrial Location”

- Horlick, Gary “The united States Antidumping System” (1989)

- Lindsey, Brink “ The U.S. Antidumping Law: Rhetoric versus Reality” CATO Institute for Trade Policy Studies Working Paper No. 7 (1999)

- Mirande, Jorge and Torres, Raul and Riniz, Mario “The International Use of Antidumping 1987-1997” (1998)

- OECD, Predatory Pricing (1989)

- Reitzes, James “Antidumping Policy” (1993)

- Stiglitz, Joseph “Dumping on Free Trade: the U.S. Import Trade Laws” (1997)

- Palmeter, David “The Antidumping Law: A Legal and Administrative Non-tariff Barrier” (1991)

- Staiger, Robert and Wolak, Frank “The Effect of Domestic Antidumping Law in the Presence of Foreign Monopoly”, NBER Working Paper 3254

- U.S. Department of Commerce at http://www.doc.gov

- U.S. International Trade Commission

- “The Economy-Wide Effects of Outstanding Antidumping and Countervailing Duty Orders” at http://www.usitc.org

- Antidumping and Countervailing Duty Handbook (1999)

- Viner, Jacob “Dumping: A Problem in International Trade” (1923)

Table 1: Antidumping actions by reporting countries

25

Table 2: tariff-jumping FDI responses of firms involved in affirmative U.S.

antidumping cases filed from 1980 to 1990

Table 3: tariff-jumping FDI responses of firms involved in nonaffiramtive U.S.

antidumping cases filed from 1980 to 1990