Antidumping: The Third Rail of Trade Policy

N. Gregory Mankiw and Phillip L. Swagel

From Foreign Affairs, July/August 2005

Summary:  Although few U.S. politicians will admit it, antidumping policy has strayed far from its original purpose of guarding against predatory foreign firms. It is now little more than an excuse for a few powerful industries to shield themselves from competition -- at great cost to both American consumers and American business.

N. Gregory Mankiw is Professor of Economics at Harvard University and was Chair of the President's Council of Economic Advisers from May 2003 to February 2005. Phillip L. Swagel is Resident Scholar at the American Enterprise Institute and was Chief of Staff of the Council of Economic Advisers from July 2002 to February 2005.

The precursor to modern antidumping law was the seminal Sherman Antitrust Act of 1890. Antitrust laws are intended to protect consumers from predatory pricing and other forms of anticompetitive behavior by firms seeking to establish a monopoly. By the standards of antitrust, low prices are a problem not when they simply harm other competitors, but when they threaten to wipe out competition and thereby ultimately harm consumers. In practice, this situation is rare. Firms usually cut prices as part of the competitive process, not in an attempt to thwart it. Thus, to prove that a firm is seeking a monopoly, it is necessary to show it has taken actions that do not make business sense apart from their stifling effects on competition.

Current U.S. antidumping practice is based on the Antidumping Act of 1921, which followed the example of a 1904 Canadian law that allowed the government to block imports sold at "less than fair value." (The original target of the Canadian measure was U.S. Steel; as a result of it, the company was obliged to raise the prices of the materials it supplied to build Canadian railroads in order to avoid a tariff.) The Antidumping Act of 1921 adopted this notion of "fair value," straying from the idea that antidumping measures were meant strictly to protect consumers and markets from anticompetitive practices. The act grants protection from imports as long as a company can prove that a foreign firm's actions are designed to injure or threaten to injure an American industry. If these conditions are met, the government imposes a tariff worth the "dumping margin" -- the difference between the price of the imported product and its "fair value," defined as a price above the cost of production and at least as high as the price charged in the foreign firm's home market.

From an economic standpoint, selling at prices below "fair value" can be considered normal business practice. If competition in the U.S. market is fiercer than competition in a foreign market, for example, a foreign firm might be able to maximize profits by selling its products in the United States at lower prices than in its home country. Rather than the result of predatory practices by foreign firms, lower prices are often the result of healthy competition; outlawing them denies American consumers the benefits of such competition. Consider as well that within the United States firms are allowed to charge different prices to different consumers. Movie theaters, for example, charge an adult more for a ticket than they charge a child, even though they each take one seat. Likewise, pharmaceutical firms can charge more for drugs in high-income countries than they do in low-income countries.

Predatory pricing is a very different matter, since it harms not only domestic competitors but, in the long run, American consumers as well. Unfortunately, U.S. antidumping law has come to ignore the distinction between the two different kinds of low prices. Since the Antidumping Act of 1921, there has been no requirement to show that dumping is predatory; one need only prove that prices are either below cost or below the price charged for a similar item in a firm's home market.

An unintended consequence of this evolution is that modern antidumping practice actually facilitates the kind of unfair and anticompetitive behavior it was intended to prevent. When a group of firms in a market tries to act in concert to keep prices high, one check on their collusive behavior is the possibility that a competitor will undercut them. Allowing domestic firms to threaten foreign competitors with antidumping action makes it easier for them to keep prices high. And not only do antidumping tariffs themselves restrict trade, but investigations into dumping also have a restrictive effect. Research by Bruce Blonigen and Thomas Prusa has shown that the mere threat of antidumping action is a valuable tool for a domestic firm trying to impede competition from abroad.

KEEPING PRICES HIGH

An investigation of alleged dumping by a foreign firm typically proceeds along two concurrent paths. While the Commerce Department's Import Administration investigates whether the imported product has been sold in the United States at less than fair value, the U.S. International Trade Commission (ITC) investigates whether a domestic industry has been injured or threatened with injury by the allegedly dumped imports. If both dumping and injury are established, a tariff is levied equal to the dumping margin.

These tariffs have a substantial impact on trade, and that impact has grown considerably in recent years. Antidumping tariffs are often substantially larger than other kinds of protection. One study found that antidumping duties are on average 10 to 20 times higher than normal tariffs. And once imposed, antidumping tariffs are not easily removed. Although they can be lifted after a "sunset review" that occurs every five years, they carry no fixed time limit and therefore tend to last for considerable periods. The Department of Commerce lifted tariffs in only two of the 314 cases it reviewed between 1998 and 2000. Recently, the increased use of discretion by Department of Commerce staff in calculating dumping margins has led to an increase in antidumping tariffs -- an increase that has nearly reversed reductions in dumping margins resulting from rule changes agreed to by Washington in 1995 during the Uruguay Round of international trade talks.

These antidumping measures do considerable harm to both American consumers and American business. Research by Michael Gallaway, Bruce Blonigen, and Joseph Flynn found that in 1993 antidumping and antisubsidy tariffs (the latter are meant to counteract the effects of foreign subsidies) had economic costs of $4 billion ($5 billion in today's prices), with most of the harm caused by antidumping tariffs, which outnumber antisubsidy measures by more than three to one. Since then, the economic cost of antidumping laws has likely increased. Although average antidumping tariffs have fallen somewhat since 1993, from 50.6 percent between 1991 and 1993 to 41.9 percent between 1997 and 1999, the value of imports affected has increased substantially. Some $14 billion worth of imports were covered by antidumping tariffs approved between 1994 and 2003, up from $8.34 billion between 1984 and 1993.