The Effectiveness of Antidumping Laws

Introduction

One of the most recent controversial topics in international trade has been the role of antidumping laws. This paper examines the origins of antidumping laws and their economic rationale. 

The purpose of antidumping law is to protect domestic industries from injurious and unfair dumping practices of foreign firms. Dumping is defined as “…where the price of a product exported from our country to another (a) is less than the comparable price, in the ordinary course to trade, for the like product when destined for consumption in the exporting country, or (b) in the absence of such domestic price, is least of either (i) the highest comparable price for the like product for export to any third country in the ordinary course of trade, or (ii) the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit” (Article VI of the GATT 1994).

Dumping is not a new problem. The first analysis of dumping was explored by JcobViner in 1923. Viner describes ‘price-discriminate’ dumping as above in addition to four other types of dumping: spurious dumping, exchange dumping, freight dumping, and concealed dumping. Spurious dumping occurs when there is a price difference between domestic and foreign countries due to explainable adjustments.1 Exchange dumping occurs when the foreign country depreciates its currency, causing its export prices to become lower on international markets. Freight dumping occurs when preferential transportation rates are given to export freight. Concealed dumping occurs when the exporting country charges the same price in the domestic market as in the foreign market but offers different terms of sale to each market.2 Viner (1923) classifies dumping according to motive and continuity.

Motive Continuity
  • Disposal of a casual overstock
  • Unintentional
  • Sporadic 
  • Maintenance of connections in a market which prices are unacceptable 
  • Development of trade connections and buyers’ goodwill in a new market
  • Elimination of competition in the market dumped on
  • Forestalling the development of competition in the market dumped on
  • Retaliate against dumping in the reverse direction
  • Short-Run or Intermittent
  • Maintain full production from existing plant facilities without cutting 
  • Long-Run or Continuous 

Table 1. (reproduced from Viner 1923: pg 23)

‘Price-discrimination’ dumping requires two conditions to be successful. The first condition is that the producer must be able to split domestic and foreign markets by some barrier, such as protective tariffs in its domestic country; otherwise, the importers would be able to engage in arbitrage and undercut the exporter in its domestic market. The second condition required is that the exporter must be faced with different elasticities of demand between the different markets, such that the exporter’s domestic markets must have a relatively inelastic demand while the importer’s market demand must be fairly elastic (Grimwade 1996). Consider the following model in Figure 1, where the above conditions hold for the exporter. The demand that the exporter faces in its home country, Dd, is more inelastic than that of the demand in the foreign market, Df. The effect of the different elasticities between the two markets causes the exporter to face different marginal revenues, MRi, in each of the two markets. Facing different MR curves, the result is a price differential between the foreign and domestic market (Pd > Pf).

 Figure 1.

In response to this type of dumping threat, the use of anti-dumping laws has become popular among trading countries. Anti-dumping laws provide the importing country to impose tariffs or duties on imported goods that have been “proved” as being dumped by foreign exporters.

Antidumping Laws 

Antidumping law finds its origins in Canada in 1904 when the first antidumping law was enacted3. The Canadian Minister of Finance, W.S. Fielding, introduced the antidumping law4 in an attempt to neutralize the aggressive campaign against the liberal government for higher import duties by Canadian manufacturers. The Canadian manufacturers wanted an increase in tariffs to protect them from the occurrences of foreign dumping within their industry. On the other hand, the Liberal party being in favour of free trade, had failed to carry out its election promises of reducing the level of tariff protection. This failure created more pressure on the government to carry out the election promise and substantially reduce the levels of tariffs.5 The problem with carrying out their election promise was that the manufacturers were an important source of campaign funds and were generally able, at the time, to exercise considerable control over the trends of tariff legislation. On June 7, 1904 W.S. Fielding stood in the House of Commons and stated that to impose a permanent tariff on special or temporary cases of dumping was unscientific, rather special duties should be applied to dumped goods, hence the introduction of the first antidumping law (Viner 1923). 

Since the introduction of the first anti-dumping law, many countries followed suit relatively quickly such as New Zealand (1905) and Australia (1906).6 By 1998, about 60 of the WTO member countries had adopted antidumping laws, while the remaining members rely solely on the WTO/GATT provisions without having their own specific laws.

Niels (2000) found between the two periods of 1969-1974 and 1992-1997 the average number of anti-dumping investigations initiated per year, world-wide, increased from 38 to 244. During 1969-1993 the US, Canada, EU and Australia commenced approximately 90% of these antidumping actions, but decreased to 42% during 1994-1997.7 However, recently more emerging economies are implementing antidumping laws and subsequently antidumping investigations, such as Mexico, Argentina, and Brazil. The most targeted countries have been China 11%, USA 9%, Korea 6%, and Japan 6%. Antidumping cases have mostly involved the primary metals sector (steel) 25%, chemicals 17%, electrical and other machinery 14%, and plastics 11%. The commonality among these sectors is that they all produce intermediate goods and have relatively high capital and R&D ratios.

Economic Effectiveness of Antidumping Laws 

Analysis of the economic effects of antidumping law has found now economic rationale behind the use of such laws. Dixit (1986) examines whether under imperfect competition and behaviour would antidumping laws would be justified. Dixit constructs a general conjectural variation model assuming an oligopoly of domestic and foreign firms selling in the domestic market. Dixit’s research examines two issues: (a) the effects of changing the degrees of the product heterogeneity by using a linear demand function when both domestic and foreign goods are imperfect substitutions; (b) the roles of curvature and elasticities of demand by assuming the product is homogeneous and demand in the domestic market and foreign markets are general. Dixit concludes that there was no theoretical support to use these assumptions for the use of antidumping law.

Webb (1992) examines firms under Cournot behaviour and Stackelberg behaviour. When firms engage in Courtnot behaviour, the impact of antidumping laws reduces imports while increasing domestic production and profits. In Stackelberg behaviour domestic production effects become unpredictable and two possibilities arise (a) the home firm can take advantage of the antidumping law to curtail foreign competition and increase its profits even though the foreign firm is not dumping, (b) antidumping laws improve both foreign and domestic firm’s profits at the expense of the domestic consumers, resulting in an overall loss of welfare for the home country. 

Antidumping may also play a role in the location decisions of firms (Webb 1987). Webb (1987) argues that antidumping laws may be counter-intuitive and result in some imported goods production being switched from one foreign country to another. The imposition of an antidumping law and subsequent duties may lead to another effect such as a decrease in the price of the import goods in the protecting country, an increase in the price of the good in the initial exporter’s domestic market, and a decline in the domestic price of the new exporter’s country. Using a three-country model Webb (1992) assumes that the firm produces in one location, transportation and relocation costs are zero, and the monopoly power foreign firm faces price-taking firms in the home market. Webb finds that if the burden, in the terms of reduced profit, is sufficiently greater when the firm is located in Country 1 than if it were located in Country 2, it is possible that profit 2 > profit 1 in the presence of the antidumping law. 

Anderson (1993) explores ‘domino dumping’8 and found that in the face of antidumping duties and VERs, exporting firms may deliberately dump into the importing market in order to secure a larger VER in the future.9 However, it is worth noting that as of 1994 under the WTO, new VERs are not allowed and existing VERs are to be phased out gradually (Niels 2000).

Another effect antidumping laws have had is on the sensitivity of the foreign firm’s production response (Leidy et al 1990).  Leidy et al (1990) analysis indicates that the purpose of antidumping laws is to recoil foreign firms from the export markets. They present a discovery of the optimal response of a foreign firm to antidumping law in the importing country. In the short run, the foreign firm increases production and dumps it on the domestic market, assuming the foreign firm has domestic market power at home. This dumping response is preemptive in order to decrease the importer’s domestic price and mitigate against any antidumping threats. The long-run strategy is to have production decline or remain unchanged. However, when the foreign firm is a price taker in its domestic market then production remains unchanged. 

Criticism of the economic effects are not the only flaws found in antidumping laws policial economy econometric studies examined the actual decision-making process in outcomes of antidumping/countervailing cases. Tharakan (1991) uses a logit model to examine how the European Communities choose between acceptance of undertakings or the imposition of duties in antidumping and countervailing proceedings.10 Tharakan (1991) found that 72% of the AD/CVD cases between 1980-1987 ended in the ‘alleged dumping’ exporters agreeing to revise their prices or case exports. Other findings suggested that where a number of exporters are involved in an AD/CVD case there was a low probability the case ended in an undertaking. As well, Tharakan found that cases involving newly industrialized countries were highly likely to end in antidumping duties being applied. The significant variables found to impact the outcome of decisions were the lobbying effect, trade tension between the EC and “alleged dumping” country, and the ‘Japan-bashing-binge’ hypothesis.11

In another econometric study, Moore (1992) examined the International Trade Commission’s (ITC)12 anti-dumping decisions using a probit model. Moore found evidence in support that the commissioners reached their decisions based on narrow interpretations of the antidumping legislation and that the rules and legislation guide ITC commissioners but other factors play a role. The evidence supported the claim that less developed countries tend to be at a disadvantage in defending an AD case and US firms with low wages or profit levels were the prominent sectors for AD complaints. Most of the decisions reached by the ITC favour labour intensive US industries that were faced with stiff foreign competition. Moore’s findings also suggest that claims of antidumping have become a process of safeguard measures against injurious but fair imports. Perhaps the most damaging evidence was the systematically favoured outcomes of petitions made by the Senate Trade Subcommittee constituencies.13

Modern dumping theory can be summed into three broad conclusions: (a) domestic firms may use anti-dumping to obtain a strategic shelter from foreign competitors (often a foreign monopoly); (b) antidumping laws may facilitate collusion between domestic and foreign firms; (c) exporting firms strategic behaviour may be influenced by the threat and uncertainty of the application of antidumping measures (Niel 2000).

Both efficiency and fairness arguments are presented by antidumping supporters. Supporters of antidumping laws argue that international price discrimination distorts the efficient allocation of global resources, but as Niels (2000) responds by stating that “… price discrimination may very well improve global efficiency and antidumping duties were merely designed to raise import prices to monopolistic price levels in the exporting country, not to a competitive world price.” Opponents to the anti-dumping laws agree with Niels view and wish to see the extinction of antidumping laws since the use of them has the potential to be more destructive as beneficial. 

Conclusion

Based on evidence found in the literature, regardless of the type of market structure or firm behaviour the use of antidumping law is a result of pressure groups lobbying for protection in the face of fair foreign competition. Therefore the enactment, support, and use of these laws is purely for political gain, protection of votes, and source of campaign funding by politicians. But no economic justification. 

 

References:

Andjerson, J.E. 1993 “Domino dumping II:  Anti-dumping.” Journal of International Economics 35:  133-150. 

Canadian International Trade Tribunal – Research Branch 1991 Canada’s use of the Gatt Anti-Dumping Code Ottawa

de C. Grey, R. 1972 The Development of The Canadian Anti-Dumping System. Montreal, Que.” Planning Association of Canada. 

Dixit, A. 1988 “Anti-Dumping and Countervailing Duties under Oligopoly.” European Economic Review 32: 55-68.

Finger, J.M. ed 1998 Antidumping: How it Works and Who gets Hurt, Michigan: The University of Michigan. 

Grimwade, N. 1996 International Trade Policy: A contemporary analysis, London and New York: Routledge. 

Leidy, M.P. and B.M. Hoekman 1990 “Production effects of price- and cost-based antidumping laws under flexible exchange rates.” Canadian Journal of Economics 4: 873-895.

Messerlin, P.A. and G. Reed 1995 “Antidumping Policies in the United States and the European Community.” The Economic Journal 105: 1565-1575.

Moore, M.O. 1992 “Rules or Politics?: An Empirical Analysis of ITC Anti-dumping Decisions.” Economic Inquiry 30: 449-466.

Niels, G. 2000 “What is Antidumping Policy Really About?” Journal of Economic Surveys 14(4): 467-492. 

Tharakan, P.K.M. 1991 “The political economy of anti-dumping undertakings in the European Communities.” European Economic Review 35: 1341-1359.

Tharakan, P.K.M. 1996 “Political Economy and Contingent Protection.” The Economic Journal 105: 1550-1564. 

Viner, Jacob 1923 Dumping: A Problem in International Trade, Chicago, III.: The University of Chicago Press. 

Webb, M.A. 1992 “The Ambiguous Consequences of Anti-Dumping Laws.” Economic Inquiry 30: 437-448.

Webb, M.A. 1987 “Anti-dumping Laws, Production Location and Prices.” Journal of International Economics 22: 363-368.

Endnotes

  1. Explainable adjustments included: size of unit orders, credit risks, grades of commodities, freight and packing charges, and re-exports. (Viner 1923)
  2. Different terms of sales include credit extension differences between domestic and foreign markets, and charging the same price between domestic and foreign markets but exporting high quality products to the foreign market. 
  3. The Customs Act.
  4. Minister of Finance of the liberal government who was in power at that time in 1916. 
  5. As a result of these complaints gave rise to the agrarian revolt and subsequent development and rapid growth of the Independent Farmers Party (Viner 1923).
  6. New Zealand: “The Agricultural Implement Manufacture, Importation, and Sale Act”, Australia: “The Australian Industries Preservation Act”, see (Viner 1923) for complete development of British, other and US. 
  7. Hong Kong remains the only member of the WTO to not have instituted or initiated any antidumping laws or actions (Niels 2000).
  8. Where exporting firms dump to obtain more import licences in the future when there is a positive probability of a future VER. 
  9. VER:  Voluntary Export Restraint.
  10. Countries that have their own antidumping laws and countervailing duties have their own procedures of investigation and political institutions charged with the responsibility for enforcement of such duties. See de C. Gray 1973 and Finger 1993 for detailed explanations of the antidumping/countervailing investigation process for Canada, USA, Mexico and the European Community.
  11. Japanese Bathing Hypothesis is where Japanese firms were being discriminated against. 
  12. Institutional body in the United States charged with hearing cases involving dumping. 
  13. The subcommittee is to provide an impartial oversight role of the ITC.