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.

NOT FAIR

It did not take long for the newest class of U.S. senators to pledge its allegiance to one of the few trade policies that politicians of both parties overwhelmingly support. In February, seven of nine newly elected senators publicly endorsed the Byrd Amendment, a provision that encourages American companies to file antidumping lawsuits by awarding the revenues collected from the resulting tariffs to the litigating companies. The ostensible purpose of antidumping law is to help ensure competition by punishing foreign firms that sell their products at "unfair" prices in U.S. markets. In practice, however, antidumping has strayed far from this purpose, becoming little more than an excuse for special interests to shield themselves from competition at the expense of both American consumers and other American companies.

Antidumping is the "third rail" of U.S. trade politics, with few politicians of either party willing to point out its broadly negative impact. Antidumping statutes are extremely complex, and few voters understand how they work and what effect they have. Advocates of antidumping measures claim that they guarantee that international trade is competitive and fair. And who, they ask, could be against fairness? But such rhetoric bears little relation to economic reality. Rather than promote fairness and competition, the American producers who petition for antidumping tariffs -- a powerful and often unrecognized lobby -- use them to thwart foreign competition. In essence, "antidumping" means little more than "antibargain." If a foreign firm sells its product in the U.S. market at too attractive a price, domestic firms can threaten it with an antidumping suit that will lead to hefty tariffs and higher prices.

What is especially perverse is that the impact of antidumping tariffs falls most harshly on two groups whose interests members of Congress should be working to protect: the least well-off of their constituents and the vast majority of American producers. All Americans pay higher prices for food and housing as a result of antidumping tariffs, but the burden is likely greatest on the poor, because these necessities make up a larger share of their spending. U.S. producers are affected because most items hit with antidumping tariffs are not finished goods but components that are used to make other items. Since 1989, for example, imported ball bearings have been subject to tariffs ranging above 50 percent. U.S. manufacturers of ball bearings surely benefit, but there are many more buyers of ball bearings in the United States than there are producers -- and all of them end up paying significantly more than they should and than their foreign competitors do. Antidumping practice has also become a growing obstacle for U.S. exporters.

Firms that benefit from antidumping and their allies in Congress hotly contest any change that weakens antidumping law. Yet for all their claims that antidumping policy ensures that trade is fair, it is little more than an opaque way of protecting favored industries that have powerful lobbies -- doing, in the process, significant damage to everyone else.

GOING ASTRAY

Free trade benefits the world economy by pushing countries to specialize in the goods and services they produce most efficiently. Just as a shopper benefits from a sale, each nation benefits from paying less for products it buys on the world market. Antidumping law was created to address an exception to this principle: when a foreign company uses temporary low prices to drive its competitors out of a market and then raises prices, a practice known as "predatory pricing." Antidumping statutes purport to defend against this by preventing the sale of foreign goods "at less than fair value."

But defending against "predatory pricing" and enforcing "fair value" as it has come to be understood are two very different things -- a distinction that is crucial for understanding how U.S. trade law has gone so far astray. As soon as one tries to define what a "fair" price is, it quickly becomes apparent that the idea is elusive. In a competitive system of world trade, where resources are allocated by the invisible hand of the market and prices are untainted by either government intervention or the exercise of monopoly power, prices are determined by supply and demand, and the voluntary nature of commerce ensures that trade benefits both parties. The debate over fair prices begins with deviations from this ideal: What if a government subsidizes a particular industry? What if a country has a single large producer that charges lower prices in more competitive markets and higher prices in less competitive ones?

Such deviations make prices seem less natural. But do they make commerce undesirable for either party? Not necessarily. If a country is a net exporter of a product, high prices are generally good; if a country is a net importer of a product, low prices are generally good, even if those prices are the result of practices that might be viewed as unfair. The notable exception to this rule is a situation in which, thanks to predatory pricing, lower prices today will reduce competition in the future. If, to use one of David Ricardo's examples, a wine supplier uses lower prices to drive competitors out of business and new firms are slow to enter the market, consumers lose out -- the harm of the ensuing higher prices outweighs the initial benefits of low prices. On the other hand, if the price war lasts long enough or if the would-be predator is unable to raise prices in the end because of the entrance of new competitors, consumers are net winners. The possibility of new firms entering a market is thus a crucial constraint on anticompetitive behavior.