Anti-dumping: The Free-Trade Antacid

In the growing nation-family of free trade, everybody brings something unique to the trade table for all others to share. Taiwan brings the (polyvinyl) alcohol and Brazil the orange juice to get the party started. Chile and Norway volunteer fresh salmon, while Italy brings (what else?) the pasta and China adds garlic and mushrooms. France and Germany bring sugar for dessert. Pretty much everyone bakes a batch of steel to pass. Turkey has the aspirin for the collective free-trade hangover.

The United States, for its part, will be bringing a case of anti-dumping—a free-trade antacid served to other countries in hopes of getting relief from the bounty of goods at this "family" gathering. In fact, the United States has an anti-dumping duty order on every item at our free-trade gathering above.

In free-trade shorthand, dumping occurs when an imported good is sold at less than the good's domestic fair market value. Anti-dumping is the legal framework countries use to place duties, or import surcharges, on products determined to be dumped. Anti-dumping's twin brother-countervailing duties—is slapped on imports whose prices are deemed artificially low because of government subsidies.

Ironically, the voice of free trade—the United States—is anti-dumping's largest historical user. But as free trade has expanded, other countries have discovered the utility of anti-dumping laws in protecting home industries from global competition and have copied the U.S.'s recipe.

Open for business

The use of both anti-dumping and countervailing duties has skyrocketed in the last few decades, coincidental with increasing trade liberalization around the globe, and born from protectionist tendencies that most countries have toward their home industries.

Virtually any company or association of companies can petition for anti-dumping protection. The main barrier is legal costs, which can run from six to low-seven figures, depending on an assortment of complicating factors. For many industries, this is a relatively low threshold, given the potential benefits of anti-dumping protection, and industries like steel—by far the largest user of anti-dumping laws—chemicals, sugar and others have become regular users.

The process of anti-dumping and countervailing duty works as such: A company that believes it is being injured by import dumping files a petition with the federal government requesting that protection—in the form of duties—be applied to the imported good in question. Once the petition is filed, an investigation is launched by two federal offices. The Department of Commerce determines whether goods were sold below cost or at less-than-normal market value, and the International Trade Commission (ITC) calculates whether the imported goods wreaked "material injury" on domestic industries. Both have to find in the affirmative for duties to be imposed.

There are three methods—home market, third-country market and constructed market—for calculating whether an imported good has been dumped. Without falling into the black hole of minutiae that accompanies the application and calculation of dumping under each method, numerous sources indicate that each method tilts in favor of the industry petitioner.

"The way they define anti-dumping so broadly, it's almost meaningless," said Thomas Prusa, a professor of economics at Rutgers University. A 1999 paper by Prusa, published by the National Bureau of Economic Research (NBER), states that the ITC rules affirmatively about half the time, but since 1980 Commerce has rejected less than 5 percent of anti-dumping cases because the domestic industry could not show unfair pricing.

Said Bruce Blonigen, an economics professor and anti-dumping researcher at the University of Oregon, "The plaintiffs, the tables are tipped to them."

There oughta be a law

The argument for industry protection in the form of anti-dumping is pretty straightforward: The threat of losing U.S. jobs and companies is a matter of national economic security. But one might be struck by other conclusions when scrolling down the list of 38 imported items from China alone that currently pay U.S. anti-dumping duties: cased pencils, cotton shop towels, paper clips, paintbrushes, sparklers—sparklers!—and freshwater crawfish tailmeat.

The United States is hardly alone in the curious-case category. India has filed for protection from acrylic yarn imported from Nepal and fluorescent lights from China. Australia is fighting "certain A4 ring binders" from Malaysia, and Mexico is doing the same against bicycle tire imports from India. The European Union recently sought shelter from gas-fueled, nonrefillable pocket flint lighters from Thailand.

"If you go down these [case] lists, it's hard not to start giggling," Blonigen said. "It's an open door for anyone to use."

As of April 2001, the United States had anti-dumping or countervailing duties on some 265 items from 40 different countries, making it easily the world's largest user, according to the International Trade Administration (ITA, part of the Department of Commerce). The next closest user—the European Union and its 15 countries—had 154 duties in place last year, according to a July 2001 report by Brink Lindsey and Dan Ikenson of the Cato Institute, a free-market think tank.

U.S. anti-dumping laws date back to 1916, crafted in the same mind-set as antitrust laws of that era. "They were [both] written to prevent predatory pricing," Prusa said. That's still the rhetoric today, but "that's not really what it is anymore. ... That is purely historical legacy."

Prusa, Blonigen and other researchers have shown that the original threshold has been badly watered down. "There's no need to show it had predatory intent," Blonigen said. "You don't have to be even close now."

Broad applicability has made anti-dumping popular among industries facing stiff competition from foreign trade. "The law is used as a substitute for other kinds of protection. [Industries] see it as their last out," Prusa said, and used "to take a breather" from stiff foreign competition. "The problem with that is that is not the intent of the law. They are simply trying to slow down trade."

Much of the growth in anti-dumping can be traced to free-trade agreements themselves. Although the United States and some other countries had anti-dumping laws on the books, the modern history of anti-dumping came with the General Agreement on Tariffs and Trade in 1947, which started setting the ground rules for global trade. In the spirit of compromise, free-trade negotiations often introduced amendments that made anti-dumping requirements ambiguous and open to interpretation, or arcanely technical and difficult to interpret.

Major trade laws have been amended "at least a half-dozen times in the last 25 years," according to a recent NBER paper by Blonigen and Prusa, creating a legal definition of dumping that "is almost completely divorced from any economic notion of dumping." For instance, the Tokyo Round negotiations in 1979 dismissed the requirement that dumped imports be the principal cause of material injury to the domestic industry for duties to be imposed.

In other cases, negotiations didn't try to limit anti-dumping laws as much as standardize them. This was particularly the case with the World Trade Organization's anti-dumping Agreement, which was finalized at the Uruguay Round in 1994. It placed a loose harness on anti-dumping, but patterned the agreement's standards and procedures on the protection-friendly U.S. model.

"I think you could say that in the 1990s, [the United States'] greatest export was its anti-dumping laws," said Eric Emerson, a partner in the law firm of Steptoe & Johnson in Washington, D.C., which has handled more than 100 anti-dumping and countervailing duty cases. "It's exploded."

Growing big and strong

Cases of anti-dumping and countervailing duties are showing three general trends: There are more petitions seeking duties, coming from more countries, with a higher rate of duties ultimately being imposed.

Investigations of anti-dumping and countervailing duties have seen remarkable growth in the last few decades. From 1916 to 1970, for example, there were almost 800 such cases in the United States, or about 15 a year, according to ITA figures. But they crept to an average of almost 23 per year in the 1970s, then skyrocketed to 60 cases a year in the 1980s. The pace then slowed to 50 initiations a year in the 1990s, due to a sharp drop in annual countervailing duty cases.

Worldwide filings have seen a similar pattern, but with a twist. Some 1,600 cases were filed worldwide in the 1980s, twice the level of the 1970s, according to research by Blonigen and Prusa. The rate of case growth worldwide has slowed somewhat and fluctuated during the 1990s, but nonetheless reached 2,500, according to the World Trade Organization (WTO). In 2000, there were 272 investigations.

For decades, much of the growth came from a small group of users. In the 1980s, about 95 percent of anti-dumping cases came from the United States, Australia, Canada, the European Union and New Zealand. [Most research in this area treats the EU as one governmental entity even before its official formation.] But with a standardized framework of dumping laws to work with, Emerson said, "domestic industries [from developing countries] are saying, 'Why can't we seek the same protection'" that U.S. companies have been getting for decades.

Indeed, they can and have done just that. Industries from 37 different countries initiated anti-dumping complaints from 1990 to 2000, according to WTO figures, better than triple the previous decade. The number of annual cases by "new" or nontraditional users has grown on the order of 50-fold since the early 1980s; WTO data show they filed 55 percent of all anti-dumping petitions in 1999 and 2000.

"We shouldn't be surprised, but it's an ominous path. They [other countries] have found religion. There are great loopholes to exploit on behalf of domestic industries, according to Prusa. "But I think we should be worried because our exporters are going to be exposed" to more anti-dumping petitions.

With 89 cases brought by industries in at least 17 different countries from 1995 to 2000, the United States was the third-most targeted country of anti-dumping investigations, WTO figures show. It trailed only China and South Korea, and was ahead of Russia, Japan, Mexico and Brazil—countries commonly perceived to practice unfair trade. The Cato study reported that about 60 percent of cases saw duties imposed on U.S. exports during this time.

In fact, duties are being imposed more often around the world. For the first 50 years after the anti-dumping laws were passed, only about one of every 10 anti-dumping cases—75 in all—brought by U.S. industry resulted in import duties, according to research by J. Michael Finger, an economist with the World Bank. WTO data show that total measures in force grew to almost five of every 10 cases from 1990 to 2000. Data from Commerce and the ITC show a slightly lower duty rate in U.S. anti-dumping cases.

Once anti-dumping duties are in force, they tend to hang around. Thirteen Japanese products have been under duty orders since before 1990, and four date to the 1970s. To address this problem, the Uruguay Round mandated that countries conduct a "sunset review" on all duties that are five years old, which also meant countries had to review a big pile of older duties. Although sunset reviews have greatly accelerated the total number of duty revocations, they have left the majority of U.S. duties in place. Among 277 sunset reviews from August 1999 to July 2001, U.S. duties were continued in almost two of three cases, according to government data.

In 1986, for example, the United States imposed anti-dumping duties of between 1 percent and 31 percent on a total of 10 companies from South Korea and Taiwan for unfair trade in top-of-the-stove (TOS) stainless steel cookware—which Commerce defined as "skillets, frying pans, omelette pans, saucepans, double boilers, stock pots, dutch ovens, casseroles, steamers and other stainless vessels ... except for tea kettles and fish poachers." The petition was filed by the Fair Trade Committee of the Cookware Manufacturers Association.

The year after duties were put in force, TOS cookware exports from these two countries dropped between 50 percent and 75 percent. South Korean exports dropped from 35 million units in 1986 to less than 4 million by 1998, a decline of almost 90 percent, according to a Commerce sunset review in 1999. It ruled that removal of the duties would likely lead to "continuation or recurrence of dumping" at levels seen 15 years earlier, and they were left in place.

Do as I say

One of the more peculiar aspects of anti-dumping is the ability of countries to turn a blind eye to apparent inconsistencies, even double standards.

For example, Mexico has an import duty on corn syrup from the United States to slow its replacement of domestic sugar as a sweetener for soft drinks and other Mexican-made products. Panels from both the WTO and North American Free Trade Agreement found the duty to be illegal, which Mexico has either appealed or refused to recognize. To the north, U.S. corn farmers complain about the duty, despite the fact that they received billions last year (and the year before, and the year before that) in federal emergency aid because of low prices.

Meanwhile, the Mexican government recently bought out 27 sugar mills facing bankruptcy, or almost half the domestic industry. Seeing low-priced sugar coming up from its southern neighbor, U.S. sugar growers are pushing for duties or import quotas on Mexican sugar, despite the fact that U.S. growers enjoy generous and longest-standing subsidies. Waving the flag of NAFTA, Mexico has been fighting import quotas on its sugar, despite the fact that it signed a side agreement to NAFTA that limits sugar exports to the United States (which the Mexican Senate reportedly never signed and has refused to recognize).

In another game of anti-dumping tag, the Cato report found 59 products that were domestically protected by import duties in 29 host countries, but simultaneously faced anti-dumping duties as exports to other countries. The United States had six such products, including 3.5 inch microdisks that were protected from dumped Japanese imports, but were dumping targets themselves in the European Union.

While serious issues—and, indeed, the livelihoods of many—are at stake, some cases border on farcical. Southern lawmakers are pushing for duties on catfish from Vietnam, which compete with catfish grown in several southern states. One U.S. congressman said a dumping duty was justified on the grounds that Vietnamese catfish were unsafe for consumption, thanks to the pollution of the Mekong River and other waterways by Agent Orange, a defoliant used by the U.S. military during the war there more than three decades ago.

Last year, the North Dakota Wheat Commission filed a petition seeking an investigation against the Canadian Wheat Board for alleged dumping of durum. Citing eight similar petitions and investigations by various entities in the past, a Canadian press release was issued the same day stating—almost Monte Python-like—that the "Government of Canada opposes further harassment" of its Wheat Board.

Then there's the Byrd Amendment. "Added in the middle of the night without a lot of debate," according to Emerson, the lawyer, it allows the United States to use the revenue from import duties to reimburse petitioning companies for certain costs. Countries have likened it to double jeopardy, where companies are forced to pay duties directly to their foreign competitors.

"It's not the lottery," Emerson said. "You can't just go over to Commerce with a bucket. ... [But] I think it is contrary to the spirit of the [anti-dumping] law." As of mid-September, 10 countries plus the European Union have asked the WTO to review the legality of the Byrd Amendment, making it the largest dispute in WTO history in terms of total countries involved.

Given the broad and deep support that governments worldwide provide their businesses, one might also expect countervailing duty cases to be going off the charts. But if U.S. figures are any indication, it appears to be the exact opposite. Countervailing duties are imposed whenever government (at the national, regional or local level) confers financial benefit on a company or industry. According to WTO agreements and Title VII of the (U.S.) Tariff Act of 1930, this includes everything from direct funding to loan guarantees to special tax consideration.

Open the floodgates, right? Nope. The United States, for one, has seen its average annual caseload drop from 23 in the 1980s to just six per year since 1993. Again, trade agreements appear to be an underlying reason. Governments are loathe to give up long-standing subsidy programs to domestic industries. Rather than wipe the trade slate clean and face an onslaught of countervailing duty cases, trade pacts often grandfather existing government subsidy arrangements. The WTO, for example, has a green-amber-red code (translate: allowable, please slow and stop) to deal with the many agricultural subsidies provided by different governments.

In other instances, countervailing duties already in place are maintained in new trade pacts. This dampens the number of countervailing duty cases because they don't need to be retried under the auspices of a new free-trade agreement. To meet requirements for admittance to the WTO, for example, China negotiated a trade pact in September with Mexico that maintained countervailing duties on 1,300 Chinese imports.

The consequences of protectionism

Not that anti-dumping laws are without redeeming qualities—indeed, they wouldn't be so popular if they didn't bring something to the table for petitioners. In some cases, import duties offer market opportunities that were previously absent. For example, Iran once dominated the world and U.S. pistachio market. But in 1987, California growers capitalized on tensions between the two countries and convinced the government to slap a 241 percent duty on Iranian pistachios. California growers quickly took over Iran's U.S. market share, providing enough leverage to make U.S. growers the world's second largest producer behind Iran.

More often, however, anti-dumping is used to protect mature domestic industries from foreign competition. More than half of all active U.S. anti-dumping duties target steel and other metal industries. The steel industry is quick to point out that anti-dumping measures save 200,000 good-paying jobs, including those upstream in the production process, like iron ore mining in northern Minnesota and Michigan's Upper Peninsula.

But there are also big consequences to protectionism, particularly for the broader economy. For example, anti-dumping laws force car and other manufacturers using steel products—whose employment is 50 times higher than the steel industry itself—to pay higher prices for steel. That translates into higher consumer prices and the potential to eliminate jobs or push production to lower-cost countries.

Blonigen said the entire protectionist argument is built on a very slippery slope. "Someone who's against free trade is against free markets," he said. "In a sense, we're telling foreign companies, 'Stop selling at low prices,'" because it hurts domestic industries.

"We get worried about, 'Gee, we're losing jobs here, and they're gaining jobs there,'" he said. Such a scenario means you "try and do everything yourself" based on the singular desire to save people's jobs. But the argument for closing trade with countries could easily translate into closing trade between states, and then even neighboring cities. Ultimately, it leads to an economy where "we guarantee that no one will lose their job," Blonigen said. "We now have become a completely static economy ... [ignoring] what made the American economy so great."

Others argue that young industries and companies deserve protection from their more mature counterparts that are willing and able to swipe the legs out from under any future competitor. That makes sense in concept, "but ultimately these companies are going to become dependent on these subsidies," Blonigen said. "Where is the incentive for such firms to ever catch up? It becomes a dependent relationship."

Anti-dumping also distorts markets in other ways. In 1994, university researchers Robert Staiger and Frank Wolak found that the mere investigation into duties was enough to dampen trade, and induced firms into initiating anti-dumping petitions. Building on this work, Prusa found that anti-dumping duties caused the value of targeted imports to fall by 30 percent to 50 percent; even where anti-dumping petitions are rejected, the apparent threat of duties causes imports to fall on the order of 15 percent to 20 percent.

In 1999, Mexico imposed a duty on swine for slaughter. The previous year, U.S. exports in this item totaled almost $18 million; the following year, exports plunged 66 percent to $6 million, according to the Cato report. In 1997, India imposed anti-dumping duties on U.S. acrylic fiber; within two years, exports there went from more than $5 million to zero.

While import duties certainly benefit domestic producers, economic theory and applied research have pretty much confirmed the fact that free trade is a net benefit to national economies—even in light of local, short-term hardships—because ensuing competition lowers consumer prices and provides incentives for innovation and productivity.

University of Toronto economics professor Daniel Trefler studied the impact of the Canada-U.S. Free Trade Agreement from 1989 to 1996 and found that both short-term costs and long-term benefits were "substantial." Trefler found that short-run costs—absorbed mostly by low-end manufacturers—included a 15 percent drop in employment and a 10 percent decline in both output and the number of plants making similar goods. But he also found that long-run labor productivity increased by a "spectacular" 1 percent a year, and doubled (2.1 percent) for those industries most affected.

Runaway train: brake or crash?

Despite evidence of the broader economic harm, anti-dumping's targeted, short-term relief simply appears to be too much to resist, and additional factors also figure to stoke the anti-dumping fire in the future. Developing countries and other newcomers will continue to play catch-up, according to Prusa, and the gradual dismantling of the Multifiber Agreement (a massive system of worldwide quotas for the textiles industry) is expected to trigger a whole new wave of anti-dumping cases.

There is also a "recession phenomenon" to anti-dumping, Prusa said, and the global economic slump is likely to induce industries to blame foreign competitors for their ills. "Mostly it's just a decline in demand, [but] they might as well take a shot" at getting protection from imports, he said. It's this nothing-to-lose mentality that makes anti-dumping and free trade something of a prisoner's dilemma. Everyone wins only if there is cooperation among all players-in this case, unilateral elimination of anti-dumping Once someone defects from that group, the defector actually gains the most benefits (it can apply anti-dumping to others' imports, without retaliation toward its exports). Others will follow a similar rationale, until finally some late-coming countries are virtually forced to use it to simply level the trade playing field.

Such conditions closely mirror the existing scenario and hint at the possibility that many more countries will join the anti-dumping club. Since 1990, about three dozen countries have used anti-dumping laws to impose duties on imported goods, according to the WTO. In contrast, 103 different countries have been anti-dumping targets in the last decade, including 53 last year alone.

Ironically, some have theorized that a full-armament strategy might offer a useful, if maybe unintentional, long-term outcome. Once other countries (and their industries) have the ability to retaliate in kind, the financial rewards of anti-dumping might no longer be worth the effort. Blonigen said this could result in a sort of Cold War equilibrium. "I wouldn't advocate [such a path], but you could have this result that people weren't expecting."

Research has shown that the "retaliation effect" exists, and there also is some evidence to suggest that it might have a cease-fire effect. For example, the United States revoked 130 duty orders from 1998 to 2000, almost as many (132) as had been revoked in the previous 17 years.

Others argue that anti-dumping will not stop until the consuming public better understands the consequences and trade-offs involved. Right now, anti-dumping can be rationalized as a simple byproduct of free trade-a political device to allay the fears of nervous domestic industries and their workers over global competition, what one researcher called "free-trade fatigue."

Blonigen also acknowledged that free-trade enthusiasts often fail to appreciate the downside or short-term costs of free trade, particularly at local and political levels. Free trade, he said, "is not frictionless. It has distributional consequences." Public policy would be better off directing assistance and resources "to switch [the affected parties] into sectors that our economy is competitive in."

In some ways, free trade might not have made it this far without political concessions like anti-dumping law, which Emerson called "a necessary escape clause."

"Free trade is going to generate winners and losers," he said. "In a political context, anti-dumping is a necessary balance between winners and potential losers of free-trade policy."

For anti-dumping data go to the World Trade Organization.

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