Antidumping Essay, Research Paper
While antidumping doesn’t get a lot of press, it is certainly one of the biggest
issues that the WTO is dealing with today. During the recent WTO Ministerial
Conference in Seattle, much was mage about protesters who were demanding higher
environmental standards or international labor standards. Little was mentioned
about antidumping. However, In the midst of the many demonstrators there were
steel workers and members of other union organizations like the AFL-CIO who were
there to defend US antidumping laws. Antidumping regulation was a major issue
for Seattle as it is for the organization of the WTO in general. From the
inception of the WTO, there has been controversy over antidumping laws from
diverse groups. Some countries feel that other countries place antidumping
measures on products that have not really been dumped. Since the 1994 Uruguay
Round, many developing nations feel that they have been unfairly targeted for
antidumping penalties by the industrialized nations. Countries such as Japan and
South Korea have also called for reforms. The US, being the largest economy in
the world tends to be on the receiving end of much of this controversy about its
national antidumping laws. Adding to the confusion, not many cases brought to
the WTO panels have been settled as of yet. There are many complaints about
antidumping procedures, and some economic graphs can be used to demonstrate
these complaints about antidumping and the WTO’s antidumping laws. In 1995, the
World Trade Organization was born out of the Uruguay Round of trade talks. The
WTO has upwards of 123 member countries and new members are always in the
process of joining. The WTO is an organization that basically a more formal
extension of the GATT (General Agreement on Tariffs and Trade) which had existed
for around 50 years. However, the WTO agreements also cover trade issues not in
the GATT agreement, such as trade in services and intellectual property rights.
Also, WTO member countries must agree to all the obligations of its agreements.
The WTO also features binding panel resolutions. Countries must accept the panel
rulings; under GATT that was not necessarily true. Still, WTO embodies the same
spirit as GATT. It favors trade liberalization and globalization over trade
barriers. In particular, one main objective of the WTO is to reduce trade
restrictions, and one of the first agreements it reached was a general reduction
in tariffs. (Schott, 1). For all of the WTO’s promise to tear down of trade
barriers, there is some concern that antidumping procedures are a covert way of
hanging on to some of these practices. Since the WTO has come into existence,
antidumping cases have flourished. Between January 1994 and July 1995 there were
238 new provisional or actual antidumping measures were enforced by 19 WTO
members (Schott, 221). Most came from countries such as the United States,
Australia, Canada and the countries of the European Union. Under the WTO
Antidumping Agreement, dumping is generally defined as selling a product in an
export market at a lower price than the product is sold in the exporter’s home
country. It is also associated with selling the product at less than the
marginal cost of production. This action is often called predatory pricing. The
dumping company keeps its price so low that it drives its competition out of
business so it gains monopoly power after a time. A company is able to do this
in the long run because after a time it only has to cover its average variable
cost, once it covers its overhead expenses. Antidumping is the practice where
governments place tariffs or quotas or duties on imported goods that they
believe are being dumping in their in order to prevent their domestic industries
from collapsing due to the importer’s unfair pricing. Examples of goods that
often affected by antidumping measures are steel, computer screens and
supercomputers, and agriculture. If in fact a domestic industry is indeed having
competing products being dumped in its country, it is possible that it could be
injured. The lower price imports could decrease the amount of domestic products
purchased, and domestic companies may not be able to lower their prices in order
to compete with these imports. Thus, antidumping procedures may be prudent in
these cases. Antidumping can be a necessary measure for countries to enforce in
certain cases. However, this paper focuses with the problems of antidumping. One
particular issue is whether or not countries are using the valid methods (by the
WTO’s standards) to determine the presence of antidumping. Since this is such a
controversial issue, this paper often examines the results if there are
antidumping measures placed on products that are not actually being dumped or
that do not severely harm domestic industries. It should be absolutely noted
that this is not all there is to say about antidumping. Rather, it describes
some of the arguments against antidumping. The WTO has in place a very long and
complicated set of agreements on antidumping. This agreement contains some new
additions to the GATT’s antidumping rules. The WTO contains more specific
procedures about how antidumping investigations can be started and how they can
be carried out. There are also more specific rules for calculating the dumping
margin and determining injury. There is a new sunset clause about how long
antidumping duties can be in place. Plus, with the new panel dispute settlement
mechanism in the WTO, new rules had to be formed to accommodate it(Consultations
with Canadians). Some of the key pieces of the WTO agreement can be summed up as
follows. First, an antidumping investigation cannot be started unless the
companies that start the investigation make up more than 25 percent of total
domestic production. The dumping margin is the difference between the
"normal price" (or the fair price, usually comparable to the foreign
company’s home price) and the alleged dumped price. An investigation is not
valid if the margin of dumping is determined to be less than 2 percent of export
price. The amount of dumped goods from a specific country cannot be less than 3
percent of the total imports, unless countries that make up than 3 percent
combined account for more than 7 percent of imports.(Consultations with
Canadians). Currency fluctuations are also be considered when calculating the
true prices. A country must also prove that the dumping injures or threatens to
injure domestic industries. The term injure has a very specific meaning. .
Injury means that there is an unfavorable effect on many different aspects of
the industry, including (actual and potential declines in sales, profits,
output, market share, productivity, return on investments, and capital
utilization. (K & S Law). There is also a new rule called the "sunset
rule." This rule states that antidumping measures should be dropped after
five years once they have been implemented. In order to reapply the antidumping
measures a new investigation should be opened. As a result of the WTO’s very
complex rules on antidumping, there is some confusion as to when antidumping
measures are justified. There have been many questions about whether countries
are using the right methods in calculating the margin of dumping and price
differences. There is also suggestion that these rules need to be even more
specific. It is very difficult in many cases to actually access whether on not a
company is actually violating dumping laws. That company may simply have lower
cost of production than its foreign counterparts. Even if the company sells its
product at a lower price abroad than its does in its home market, it may not
necessary be dumping. Factors such as differences in the cost of advertising and
selling conditions at home may lead to the discrepancy. Also a wide variety of
complex domestic taxes may also cause the domestic price to be higher than the
foreign price. As is the case in many developing nations, skewed market
operations and corruption among buyers in the home country may also lead to an
artificial inflation of the domestic price( Raghavan). In these cases, one can
not simply just compare the face value of the prices in the two countries. The
WTO does mandate that these factors be taken into consideration when determining
whether or not dumping is occurring. However, many developing nations and some
industrialized nations believe that the industrialized nations do not carry out
this obligation in order to gain or keep the political favor of specific groups
of voters. Legal experts in these first world nations unfairly pad the cases in
favor of their domestic producers. Also many countries, not just the developing
nations, contend that the appropriate prices are not be used by [other]
developed nations, especially by the US. According to some Japanese analysts,
the US only uses a few selective (unrepresentative) price statistics of a few
companies in determining the importers’ domestic price. Then, they use this
analysis to enact antidumping measures against firms from that country [Japan]
in related industries. (Dumler) In possible cases of predatory dumping, other
key facts to be looked in to relate to the structure of the industry worldwide
and the number of firms competing in national markets., economist Christopher
Dumler contends. Most antidumping cases involve products and sectors with a
considerable number of sellers, and therefore successful predatory pricing
strategy is unlikely (Dumler). The steel industry has been a very hot topic in
terms of antidumping measures. Historically, the steel industry has been among
the major players in many of the US antidumping litigation. In the past few
years, steel imports from Russia, Brazil, Japan, and a sprinkling of developing
countries have increased by dramatic amounts- by more than 30 percent by late
1998. The US Congress quickly opened up dumping investigations. In March 1999,
the US House voted to allow quotas and tariffs on steel imports from various
countries. In one case, the Congress to impose duties of over 100 percent on
Japanese steel. The US government is also investigating India, Korea, Indonesia,
and the Czech Republic and is also threatening antidumping measures. If the
Japanese claim that they are simply more efficient is true, the losses produced
by the US slapping on tariffs can be shown in the Ricardian trade model. By
having the US produce more of a good that it does not have a comparative
advantage in producing, it and Japan in general will less well-off. Graph 1 and
2 demonstrate this, using steel and wheat as the two commodities. Japan has the
comparative advantage in producing steel; the US has the comparative in wheat.
If there is no trade, both countries ppf would be the solid lines in their
respective graphs and they would produce at point A on indifference curve y0.
But if they specialized in the products they have the comparative advantage in,
their ppf’s will shift outward to the dotted lines. They will produce at point B
and be on a higher indifference curve, y1. Since they are not completely
specialized they cannot obtain the indifference curve y1; they will be on a
curve in between the two. The tariffs and quotas would actually hurt some US
industries; the ones that consume steel. Since the US has mainly considered
placing tariffs or countervailing duties on steel imports (which work much in
the same way that tariffs do), Graph 3 shows the losses and gains for the US if
it slaps a tariff on steel. Pw is the world price and domestic (US) price
without the tariff. Once the US places a tariff on steel, the domestic price
changes to Pd. Pf is the price of steel in the trading partners market so that
the market clears. As the graph indicates, area a is the producer surplus and
area c and area e are gained by the government tariff revenue. But areas a, b,
c, and d are the consumer surplus losses. While one might not think a lot about
the consumer surplus loss, it can have a grave impact on the US economy. The
automobile industry, construction industries, and the food packaging industries
are all other large industries that consume a fair amount of steel. Thus, they
would suffer from the increase in price. Griswold in his article "Industry
Sets Steel Trap for US Economy" feels that domestic car buyers would be
hurt by this increase in steel prices. Also, he believes that an increase in
steel prices would make it tougher for huge industries such as General Motors
and Caterpillar to compete in world markets. Plus, as the graph indicates, the
US as whole incurs a net loss of b and d. This loss may or may not be made up
with the net gain of e, the terms of trade gain. While tariffs might benefit the
steel industry, they hurt steel consuming industries. They may or may not hurt
the US in general. Although most developing countries believe that antidumping
can be legitimate in many cases and would like to use them more for their
benefit, they have been vocal about their beliefs that developed countries
unfairly are targeting them for antidumping measures. Speaking of behalf of
developing countries, trade representatives from Brazil stated in a WTO General
Council meeting: "In the period 1987-1997, developing countries were
responsible for only 31% of investigations opened. At the same time, they were
affected by 62% of the investigations. This situation is even less acceptable
given the concentration of measures in some specific sectors where developing
countries have developed a competitive industry. One major trading partner [a
reference to the USA], for example, in the last ten years, has opened 173
investigations in the steel sector, nearly half of all investigations opened by
this Member"( Raghavan ). Thus, developing countries feel that developed
countries are trying to keep the third world countries out of their markets.
This could result in a stunt of economic growth for these developing countries,
as they are unable to develop secure and stable long term industries. "The
imposition or even the threat of imposition of AD duties has a serious adverse
effect on the functioning of small and medium size firms, resulting in a fall in
production, heavy unemployment and declines in incomes and increases in poverty
levels."( Raghavan). To start the examination of a third world country’s
argument, Graph 4 shows the definite losses that a small trading partner suffers
(like India or another developing nation) when an tariff is slapped on its
exports. Steel is the specific example in this case, though it need not be. Pw
is the world price for steel; Pf is India’s domestic price as a result of the
tariff. The only gain for India is the consumer surplus gain of area 1. But that
gain is more than negated with the producer surplus loss of areas 1,2,3, and 4.
The net loss is 2,3, and 4. Thus, India overall is definitely harmed. The
producer surplus loss is particularly troublesome, since many of these
industries are just starting out. The local economy is more dependent upon their
success. The Offer curves graph shows one major result of a large country
slapping a tariff on a small trading partner (in the specific market)- a decline
in the terms of trade for the small country. In graph 5, the US imports steel
from India and exports food. Line A is the original international price line
with equilibrium achieved at point A. When the US slaps a tariff on steel, its
Offer curve shifts backward to the Offer curve with tariff. Line B in now the
new price line with equilibrium at point B. The relative price pf/ps with a
tariff is greater than pf/ps without the tariff. Thus, the terms of trade for
India have declined for India. And as Ricardian theory shows, a long term
decline in the terms of trade with result in a long term decline in real wages.
This could mean the developing countries could get poorer and poorer. The
specific factor’s model (graph 6) shows how this decline in the terms of trade
leads to a decrease in the wages of all Indian workers. Labor is the mobile
factor in this example. Capital is the specific factor for steel. The original
wage rate is w0. But due to the decrease in the relative price in steel, the
value of the marginal product of labor in the steel decreases to the dotted
line. Thus the wage rate drops from W0 to W1. Less labor is used in the steel
industry, resulting in less production. Graph 7 shows that both the returns to