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.

Recent antidumping tariffs applied to U.S. chicken exports to South Africa illustrate the frequent absurdity of the proceedings. Chicken eaters in the United States prefer white meat; chicken eaters in South Africa prefer dark meat. Since chickens come with both white and dark, this would seem to present an ideal opportunity for trade. In 1999, however, the South African Board of Tariffs and Trade (BTT) initiated an antidumping case against U.S. chicken exporters for selling below fair value. The BTT approached the question of fair value by comparing the sales price of exports to the computed costs of production (a method that has become increasingly common in recent years). But how to determine the cost of producing dark chicken meat versus the cost of producing white chicken meat? Since a "scientific" approach to this question is impossible, the U.S. exporters offered one calculation of the cost of producing dark meat while the BTT used another. In the end, the BTT judged that the two U.S. exporters involved were dumping dark meat by margins of 209 percent and 357 percent. As a result, U.S. exports of poultry to South Africa fell to a mere $307,000 in 2001, a decline of 80 percent from the previous year. These duties remain in force.

Antidumping has also become an increasingly frequent subject of WTO disputes, and the United States has fought vigorously to preserve its right to use antidumping policies. Although trade agreements offer general guidelines for acceptable antidumping practices, WTO members implement them very differently. One ongoing dispute concerns the U.S. practice of "zeroing," which allows officials to disregard instances in which foreign firms charge prices over fair value, thus offsetting supposed instances of undercharging. Consider, for example, a foreign firm that sells a product in its home and U.S. markets. Six months a year, the firm charges $10 in its home market and $8 in the United States; the other six months a year, it charges $8 at home and $10 in the United States. On average, the firm charges $9 both overseas and in the United States. But under zeroing, a U.S. official can define this as dumping, with each sale in the first half of the year assigned a dumping margin of $2 and each sale in the second assigned a dumping margin of zero (rather than -$2). Instead of letting the overpricing offset the underpricing, which would mean no tariff, the average dumping margin -- and the resulting tariff -- is $1. Europe's version of zeroing was recently found to be contrary to its WTO obligations. The U.S. government has asserted that its version differs from the Europeans' and is attempting to defend its practice before the WTO. The WTO is unlikely to accept Washington's defense, hinting at yet another defeat for the United States in the WTO dispute process.

Another dispute before the WTO involves the Byrd Amendment. The provision, first proposed as the Continued Dumping and Subsidy Offset Act, became law when it was attached to appropriations legislation in 2000. Even while signing the measure, President Bill Clinton noted that it was contrary to U.S. obligations at the WTO and called for its quick repeal.

U.S. antidumping law requires that a filing must have the support of a significant portion of the domestic industry in question, and the Byrd Amendment gives all firms in the industry a financial incentive to support a case by determining that a firm only receives a share of the collected tariffs if it backs the initial filing. It also gives petitioning industries a double serving of federal assistance: they benefit first from the increase in prices when antidumping tariffs are applied and then from a subsidy when the revenues are distributed. Through 2004, payments under the Byrd Amendment totaled more than $1 billion, and the Congressional Budget Office estimates that such payments will exceed $5 billion between 2005 and 2015.

A WTO panel ruled against the Byrd Amendment in September 2002, allowing countries in the European Union and several other nations to apply retaliatory tariffs against U.S. exports. The decision was upheld on appeal in January 2003. The Bush administration has repeatedly called for the Byrd Amendment to be repealed, but Congress has so far failed to act. In the meantime, the retaliatory tariffs took effect in May.

A BETTER WAY

Addressing the excesses of antidumping policy could well play a critical role in the Doha Development Agenda talks now being conducted under the auspices of the WTO. Outright repeal of U.S. antidumping laws would certainly be the best policy for the United States' well-being, but it is politically infeasible. The Trade Act of 2002, which granted trade promotion authority to the president, requires that he provide Congress with at least 180 days advance notice before signing a trade agreement that affects U.S. antidumping law or other trade remedies. A principal objective of the act was to "preserve the ability of the United States to enforce rigorously its trade laws," including antidumping and other laws regulating unfair trade.

A second-best compromise that recognizes these political constraints could still improve on current trade law. Antidumping has two objectives: to protect U.S. firms against predatory pricing and to give them time to adjust to new levels of competition. Today's policy is not well suited to either goal. Fortunately, there are better ways to meet both. To be sure, free trade remains the ideal, but the best should not become the enemy of the good in designing and implementing trade policy.

Concerns about predatory pricing could be met by revising antidumping law to address the antitrust concerns that inspired it. Government should be able to protect against those rare instances when a foreign firm does approach the U.S. market with the intent of establishing a monopoly. But it does not need current antidumping law to do so; this can be effectively achieved by giving the Department of Justice an enhanced role in antidumping proceedings and reducing the role of the Department of Commerce.