Antidumping: The Third Rail of Trade Policy

N. Gregory Mankiw and Phillip L. Swagel

From Foreign Affairs, December 2005 -- WTO Special Edition

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.

Most antidumping tariffs are levied on components used in the production of other goods rather than on items sold directly to consumers. As a result, "downstream" firms using the affected items as production inputs face higher costs. U.S. automakers, for example, must pay more for steel, making their cars less competitive against imports. This is the case even if they use no imported steel, since domestic steel firms can raise prices behind the antidumping barrier. In some cases, the impact is large enough to cause American firms to shift jobs out of the United States. Antidumping tariffs of 62.7 percent imposed in 1991 on flat-panel displays prompted U.S. companies to shift production of notebook computers from the United States to Asia, since imports of whole computers did not face the punitive tariff. Toshiba closed a California production facility to open one in Japan, and Apple Computer set up a facility in Ireland rather than stick to its original plan of assembling laptops in Colorado.

The U.S. steel industry has long been the leading user of antidumping procedures: nearly half of antidumping tariffs imposed since 1970 have been on steel imports, and 158 of the 294 antidumping orders in force as of April 2005 were on steel products. Such tariffs continue despite strong performance by U.S. steel firms and a 45 percent jump in steel prices between December 2003 and March 2005. These higher steel prices help steel producers, but they hurt the much larger number of firms and workers that use steel. Whereas steel producers employed just under 160,000 workers in early 2005, more than 1.5 million employees worked at firms that manufacture metal products, more than 1.1 million at firms that manufacture machinery, and nearly 1.8 million at firms that produce transportation equipment such as cars and parts. One recent study found that each job saved by steel tariffs came at the cost of three jobs in steel-using industries and caused economic distortions equal to some $450,000.

Foreign firms also use U.S. antidumping laws to inhibit competition. In late 2003, imports of Chinese television sets 21 inches and larger were hit with antidumping tariffs of up to 78 percent (5 to 26 percent for most firms) as a result of a case filed by U.S. companies that assemble televisions on behalf of Japanese and Korean television manufacturers. These tariffs exclude newer digital models, affecting instead the lower-end televisions sold mainly in discount stores.

The total effect of antidumping laws probably surpasses these visible costs, because the mere existence of such laws causes firms to change their behavior in ways that are not easily measured. Just knowing that lower prices might trigger antidumping tariffs can lead foreign firms to charge higher prices than they might otherwise in order to reduce the risk of becoming entangled in trade lawsuits. In some cases, antidumping suits are resolved by "suspension agreements," under which foreign firms agree to minimum prices for goods they export to the United States. It is no small irony that the Department of Commerce sets prices in this fashion for steel plates imported into the United States from the former Soviet Union.

Antidumping tariffs change over time in ways that cause additional economic harm. After the dumping margin is calculated, foreign firms are allowed to ask for the duties to be adjusted through periodic administrative reviews that take into account any recent price increases. In theory, they can even request that the antidumping tariffs be removed after showing that import prices have risen by the same amount as the tariff. If they win, consumers face the same bottom-line price, but the U.S. Treasury no longer collects the tariff revenue. Instead, it goes to the foreign firm in the guise of a higher price. In reality, antidumping tariffs are computed so as to make it impossible for foreign firms to raise prices by an amount that precisely offsets the tariffs. Nonetheless, research has found that about half of the economic harm caused by antidumping laws stems from the impact of foreign firms raising prices after tariffs are imposed, thereby depriving American consumers of lower prices and the U.S. government of the associated tariff revenues. (The other half of the harm results from market distortions, as users of the goods affected by tariffs change their behavior in response to the higher prices.)

ABSURDITIES

The harm to U.S. consumers and producers from antidumping law goes well beyond higher prices. U.S. exporters are increasingly hampered by the use of antidumping actions in the rest of the world. Moreover, antidumping policies have become a point of contention in international trade negotiations, threatening to undermine the mission of the World Trade Organization (WTO) and the overall expansion of free trade.

Although the United States and the European Union initiate the largest number of antidumping suits, developing countries are now the heaviest users of antidumping measures per dollar of imports. Argentina, Brazil, India, and South Africa use antidumping laws 5 to 20 times more often than the United States does. Over the last decade, only Chinese and South Korean firms have been accused of dumping more than U.S. firms.

Not coincidentally, American exporters face dumping charges in many of the markets where they have been most successful. Mexico has initiated six antidumping investigations against U.S. exports in the last year, often targeting agricultural products, including ham, beef, rice, and apples. U.S. exports to China have been growing at roughly 30 percent per year, and the number of antidumping cases filed against U.S. firms there has grown even faster. Some $286 million in U.S. exports were subject to Chinese antidumping actions in 2003, up 65 percent from 2002. The vast majority of these cases involve chemical products, with supposed dumping margins ranging from 7 to 112 percent. Research by Thomas Prusa and Susan Skeath has found that the increase in antidumping allegations is motivated, at least in part, by a desire for retaliation against U.S. antidumping actions, not by a change in the trading practices of U.S. exporters.