protection made to order: domestic industry's capture and reconfiguration of u.s. antidumping...

8/8/2019 Protection Made to Order: Domestic Industry's Capture and Reconfiguration of U.S. Antidumping Policy, Cato Trade

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The Obama administration has pro-posed changing several Commerce De-partment antidumping procedures. Thosechanges would expand the scope for find-ings of dumping and precipitate a surge inantidumping actions.

The evolution of U.S. antidumping pol-icy is marked by distinct inflection pointscorresponding to legal and administrativechanges favorable to protection-seekers. Inthe decades following World War II, theU.S. antidumping apparatus was gradually captured by interested parties, and the law transformed from one predicated on pro-tecting consumers and preserving competi-tion into a tool that suppresses competitionin the name of remedying injury done todomestic producers.

The arcane mix of statutory rules anddiscretionary whimsy that emerged is a farcry from the first antidumping lawinboth practice and intent. No longer areanti-competitive or predatory pricingpractices the laws target. Instead, the tar-get is foreign competition writ large, and,as such, antidumping practice routinely

punishes normal, healthy competition atgreat cost to the broader economy.

Honest debate about the laws purposeand consequences has been stifled by itscomplexity and by the persistence of highly inaccurate rhetoric about the propriety of strong antidumping rules to redress unfairforeign practices. Armed with the pretenseof a noble purpose, representatives of laborunions and import-competing industriesoften cite the number of antidumping initi-ations as evidence of the need for an evenmore accessible and restrictive antidumpinglaw to better protect us from them. Butthe causation implicit in that logic is back-

ward. This paper shows that the increase in

antidumping activity reflects several develop-ments that have nothing to do with foreignbehavior, including a progressive expansionof the definition of dumping, relaxation of evidentiary standards, and a pro-domesticindustry bias in the laws administration.Ultimately, the antidumping remedy is amuch larger problem than the dumping it ispresumed to address.

Protection Made to Order Domestic Industrys Capture and

Reconfiguration of U.S. Antidumping Policyby Daniel Ikenson

Daniel I kenson i s associate director of the C enter for T rade P olic ySt udie s at the C ato I nstit ute and coauthor of Antidumping Exposed: The Devilish Details of Unfair Trade Law (2003).

Executive Summary

L I C Y A N A L Y S I S T R A D E P O L I C Y A N

A L Y S I S T R A D E P O L I C Y A N A L Y S I S T R A D E P O

December 21, 2010 No. 44


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Introduction The Obama administration is proposing to

amend certain aspects of the Commerce

Departments oversight of the U.S. antidump-ing law. Revised methods for estimating majorcomponents of the dumping calculation, high-er thresholds for foreign companies to exceedin order to demonstrate that they are notdumping, tighter rules governing methods of paying estimated antidumping duties, andother changes have been put forward, ostensi-bly to give the law more teeth.

History suggests that if those proposals areimplemented, a surge in antidumping actionsat great cost to the broader U.S. economyis

likely to follow. The evolution of antidumping ismarked by distinct inflection points correspond-ing to legal and administrative changes imple-mented at the behest of certain import-compet-ing industries and their political allies. As theutility of antidumping became evident to thoseindustries, trade negotiators, and politicians inthe decades following World War II, the lawand its regulatory apparatuswas gradually transformed from one predicated on protectingconsumers from collusive or predatory foreigntrade practices into a tool to suppress competi-tion in the name of remedying injury experi-enced by domestic producers. The arcane mix of statutory rules and discretionary whimsy thatemerged as contemporary antidumping policy isa far cry from the first antidumping lawinpractice and intent. Today, antidumping is littlemore than an elaborate excuse for run-of-the-mill protectionism.

No longer are anti-competitive or predato-ry pricing practices the target of the antidump-ing law. Rather, its target is price discrimina-tionspecifically, the act of a foreign firmcharging lower prices in the United States thanit charges in its home market for the sameproduct. But there is nothing inherently wrongor predatory or unfair about such a pricingstrategy. Even if there were, evidence of anti-competitive behavior is never required to initi-ate an antidumping case or to impose restric-tions. Antidumping borrows its rhetoric from

the past, but it presently punishes normalhealthy competition that certain domestic producers find objectionable.

Honest debate about the laws purpose anconsequences has been stifled by its complexi

and by the persistence of highly inaccurarhetoric about the propriety of strong antidumping rules to redress unfair foreign practiceArmed with the pretense of a noble purposerepresentatives of labor unions and importcompeting industries often cite the number oantidumping initiations as evidence of the neefor an even more accessible and restrictive antdumping law to better protect us from themGranted, U.S. antidumping initiations have in-creased considerably over the decades, but nbecause of an increase in anti-competitive behav

ior among foreign producers.Rather, antidumping use has increased because the law has been strengthened by epanding the definition of unfair and grantindomestic industry too much access to the leveof antidumping administration. Meanwhilecollateral damage to innocent victims and thbroader economy continues to mount.

This paper describes the evolution of U.antidumping policy from an obscure offshoot ocompetition law into the predominant instru-ment of contingent protection that it is todayand provides an account of some of the crucistatutory and administrative changes that havoccurred over the decades. Its purpose is tdemonstrate that the increase in antidumpingactivity reflects several developments that hanothing to do with foreign behavior whatsoeveincluding a progressive expansion of the defintion of dumping, relaxation of evidentiary standards, and a pro-domestic-industry bias in thelaws administration at the U.S. Department oCommerce. Ultimately, the antidumping reme-dy is a much larger problem than the dumpingit is presumed to address.

What Is Dumping?In economics, dumping is defined as the ac

of a firm charging lower prices in an expomarket than in the domestic market for the

2

Antidumping borrows its rhetoricfrom the past, but itpresently punishes

normal, healthy competition thatcertain domestic

producers findobjectionable.


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same product. Dumping is a fancy term forcross-border price discrimination, which itself carries a malevolent connotation.

But there is nothing sinister or even unusualabout a firm engaging in price discrimination.

Indeed, U.S. firms charge different prices in dif-ferent regional markets for the same goods for a variety of legitimate reasons. For example, anincumbent firm that has operated in New England for many years and whose brand is wellknown and respected by consumers might beable to charge higher prices in that market thanit can charge in California, where it is an un-known entity attempting to enter the market. InCalifornia, the firm might have to induce con-sumers to try its product by offering lower prices.

The same strategy can be employed without

sinister motive if those markets happen to be indifferent countries. A foreign firm that sells its widgets in the United States at lower pricesthan it charges at home may be trying to reapthe benefits of the brand it has cultivated andnurtured at home by charging higher prices, while simultaneously pursuing a commonmarket-entry strategy of charging lower prices where its brand is relatively unknown. In thatregard, price discrimination is not a problem inneed of a remedy. There are perfectly rational,legitimate, profit-maximizing justifications forengaging in a strategy of price discrimination.Accordingly, dumping is not systemically predatory, anti-competitive, or unfair.

However, in some cases when certain condi-tions are present, dumping can be a cause forconcern. A sustained strategy of cross-borderprice discrimination could prove to be anti-com-petitive and welfare-reducing if: (1) the foreignfirm in question has market power (i.e., can setprices in one or both markets); (2) the marketsare sufficiently segregated to foreclose the possi-bility of price arbitrage; and (3) demand for theproduct in the export market is more price elas-tic than demand in the home market. The pres-ence of those conditions could enable the kindof predatory, anti-competitive practices that arecommonlyalthough mistakenlypresumedto be the target of the U.S. antidumping law.

Without those conditions present, however,a dumping strategy would be unsustainable.

Without sufficient market power to set andmaintain higher prices at home, the firm wouldhave insufficient profits from which to cross-subsidize lower-priced sales abroad. Withouthigh enough tariffs, transportation costs, or

other market barriers to sufficiently segregatethe home market, reimportation of the lower-priced imports into the home market wouldarbitrage away any dumping-enabling profits.And if the demand of customers in the exportmarket is less price elastic than the demand of customers in the home market, the price of thegood in the export market could equilibrate ata level higher than the price at home. In other words, the home-market profits needed to en-able a dumping strategy might in fact requirehome-market prices that are lower than

export-market prices, rendering such a strategy self-defeating or impossible.Although economic theory provides for these

conditions, one would be hard-pressed to findany real-world examples of dumping causingcompetitive markets to become monopolistic.Nevertheless, the U.S. antidumping law is osten-sibly concerned with the kind of internationalprice discrimination that stems from those con-ditions. To be more precise, the antidumping law,according to its defenders, exists to remedy orcountervail the effects of those anti-competitiveconditions, which are presumed to exist becauseof various foreign government policies. A 2002Bush administration submission to the World Trade Organization Negotiating Group onRules put it this way:

A governments industrial policies orkey aspects of the economic systemsupported by government inaction canenable injurious dumping to takeplace. . . . For instance, these policiesmay allow producers to earn highprofits in a home sanctuary market,

which may in turn allow them to sellabroad at an artificially low price. Suchpractices can result in injury in theimporting country since domesticfirms may not be able to match theartificially low prices from producersin the sanctuary market.1

3

One would behard-pressed tofind any real-woexamples of dumping causincompetitivemarkets to becomonopolistic.


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Thus, antidumping is portrayed as a legiti-mate government response to anti-competitiveforeign government policies. However, the firstmajor shortcoming of that justification is that,under the law, no evidence is required to demon-

strate that (nor does the administering authority investigate whether) any of those anti-competi-tive conditions existlet alone that they are theproduct of some foreign government policies. The existence of price discrimination (i.e., somesales that are priced lower in the United Statesthan in the home market) is simply assumed tobe proof positive of the existence of those anti-competitive conditions, and those conditions areassumed to be the product of foreign govern-ment policies, even though there are plenty of legitimate reasons for a firm to price discrimi-

nate.Under U.S. law, dumping is defined as thesale of a commodity in the U.S. market at aprice that is less than normal value.2 Normal value is derived either from the selling price of the same or a similar product in a comparisonmarket (normally the home market of the for-eign producer) or from the cost of producingthe product in question, plus allowances forselling expenses, administrative expenses, andprofit.3 The amount of dumping is calculatedby subtracting the export price from the nor-mal value, and the dumping margin, expressedas a percentage, is that difference divided by theexport price. Thus, if a foreign producer sells aproduct for $11 in his home market and for$10 in the U.S. market, the amount of dump-ing is $1 and the dumping margin is 10 per-cent.

For antidumping duties to be imposed, theadministering authorities must also determinethat the domestic industry is materially injuredor threatened with material injury, or that thedevelopment of an industry is materially retard-ed by reason of the dumped imports in ques-tion.

Thus, an y price discrimination that causesor threatens injury to a domestic industry is thetrigger for imposing dutiesand not just pricediscrimination that arises from anti-competi-tive conditions abroad. Under the law, there issimply no requirement or effort to distinguish

the causes of price discrimination and, as result, perfectly unobjectionable business pratices are routinely punished at great expense tinnocent victims.

A law that once required close examination o

underlying market conditions and the motives oforeign sellers now simply grants the worassumptions without requiring any meaningfuevidence of anti-competitive behavior or thunderlying market distortions that are presumeto give it rise.4

The explosion of antidumping in recedecades is in no small part attributable tchanges in U.S. law and administration that havexpanded the definition of dumping to includroutine and unobjectionable pricing practiceand made antidumping protection increasingl

easy to obtain. Over the course of about eighdecades, antidumping evolved from an instrument of law aimed at preserving competition ta bureaucratic apparatus devoted to restricting i

How did such an obscure policy instrumenevolve into what some economists consider to bthe most prevalent impediment to internationatrade today?5 What explains the continuoubroadening of the scope of U.S. antidumpinglaw? Why does a practice that is so antitheticto free trade have sanction within the rules othe World Trade Organization? What explainsthe near total disregard for the interests of consumers and consuming industries in the contemporary administration of the antidumpinglaw? The complex history of U.S. trade politicsheds some light on these questions.

AntidumpingsOriginal Charter

Prior to the signing of the General Agree-ment on Tariffs and Trade in 1947, antidump-ing laws of the United States were premiseupon the logic of antitrust.6 Like antitrust, thepurpose of the antidumping law was to prevenunfair competition, which could be the result omonopolies engaging in predatory pricing. Fobetter or worse, governments seeking to curtathe exercise of market power by domestic firmcould turn to their antitrust laws. But it was fa

4

Over thecourse of abouteight decades,antidumping

evolved from aninstrument of law

aimed at preserving competition to a

bureaucraticapparatus devoted

to restricting it.


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more complicated for governments to apply andenforce their antitrust laws against foreign firms.And since it was apparent that foreign govern-ments might be less thorough in applying theirantitrust rules to their own firms behavior in the

U.S. market, the U.S. government turned toantidumping.7

Prior to passage of the first U.S. antidumpinglaw in 1916, unfairly traded imports were regu-lated under the Sherman Antitrust Act of 1890,

which declared illegal any effort to combine orconspire to monopolize a particular market,and the Wilson Tariff Act of 1894, which ex-panded the prohibitions of the Sherman Act tofirms outside the United States. The WilsonAct made it unlawful for foreign producers tocombine or conspire to monopolize the U.S.

market.8

By federal statute, violations of theselaws mandated criminal prosecution. Anti-competitive practices concerning imports cov-ered under the Sherman and Wilson Acts werepunishable by substantial fines or imprison-ment.9

In 1904, the Canadian government becamethe first to have an antidumping law, when theparliament enacted legislation authorizing theimposition of a special duty of customs equalto the difference between the fair market valueand the selling price, whenever it appears tothe satisfaction of the minister of customs . . .that the export price . . . is less than the fair mar-ket value thereof.10

The primary purpose of the Canadian law was to enable the government to respond tocompeting demands from two vital constituen-ciesagriculture and steel. Agricultural inter-ests wanted a significant cut in tariffs across theboard, while the Canadian steel industry want-ed protection from its principal competitor,U.S. Steel.11 The government worried that rais-ing tariffs on steel would be too risky, as it

would encourage every other interest to lobby for higher protection of their industries.

By establishing a special duty to be admin-istered separate from the general tariff and at thediscretion of customs authorities instead of thecourts, the Canadian government produced anappealing solution to its dilemmaa mecha-nism to grant contingent protection without

need of revising the general tariff structure. Thatthe first firm investigated for antidumping wasU.S. Steel, a perennial target of U.S. antitrustauthorities, helps explain the lack of indignationon the part of Canadas trading partners.12 And

the discovery of antidumping as a vehiclethrough which protection could be doled outconditionally and at the discretion of politiciansproved internationally appealing. Rather thancondemn the Canadian policy, Australia, New Zealand, the United Kingdom, and Franceadopted antidumping policies of their own.13

The United States joined the antidumpingclub in 1916, when the Wilson administration was under pressure from industry for an increasein U.S. tariffs on the grounds that Germany wasengaged in economic warfare in the form of

predatory dumping. Sympathetic to thoseclaims but averse to antagonizing free traders inthe Democratic Party, Wilson asked Congressto put antidumping provisions into the RevenueAct of 1916. Congress obliged, inserting lan-guage that criminalized the importation of mer-chandise at prices lower than actual market value when such practices are undertaken withintent to injure, destroy, or prevent the estab-lishment of an industry in the United States orto restrain competition.

Like the Sherman and Wilson Acts beforeit, the Antidumping Act of 1916 was a criminalstatute. But unlike the Canadian law of 1904,the first U.S. antidumping law did not grantcustoms the authority to levy special duties ondumped imports. Rather, the U.S. law sought toremedy predatory dumping with severe penal-ties, including punitive fines (triple damages)and imprisonment.14 But demonstrating preda-tory intent under the 1916 Act proved difficult,and few cases were brought.15

In 1919, the U.S. Tariff Commission pub-lished the results of a study on foreign competi-tion, which was informed largely by surveys of domestic manufacturing firms. The study rec-ommended that the Antidumping Act of 1916

be revised and strengthened, and thatsome official body, moving along linessanctioned by Congress in the Federal

Trade Commission Act, may realisti-

5

The discovery oantidumping as vehicle through which protectio

could be doled oconditionally anthe discretion ofpoliticians provinternationally appealing.


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cally be specifically instructed to deal with dumping as a manifestation of unfair foreign competitive methods . . .that in the case of imports, bonds pro- viding for the collection of dumping

duties subsequently assessed may beuseful, and that the President or theSecretary of the Treasury may be em-powered to impose additional duties,or even to refuse entry when industri-ally destructive dumping is proven orimpending.16

Congress adopted the recommendations of the Tariff Commission study in the Anti-dumping Act of 1921, which authorized thesecretary of the Treasury to levy a special

dumping duty equivalent to the differencebetween the exporters sales price and theforeign market value (or, in the absence of such value . . . the cost of production) when-ever an industry is likely to be injured, or isprevented from being established, by reason of the importation into the United States of for-eign merchandise of such class or kind is beingsold or is likely to be sold in the United Statesor elsewhere at less than its fair value.17

With passage of the new act, responsibility for the enforcement of the antidumping law was shifted from the judiciary to the executivebranch, while the object of regulation wastransformed from predatory pricing to injuri-ous price discrimination. Economist J. MichaelFinger characterized the changes to U.S. law between 1890 and 1921: Trust-busting re-mained the rallying cry, but the object of theregulation shifted from trusts to imports, theinstrument from law to bureaucracy.18

The impact of the Tariff Commission study was profound. By elevating injury to U.S. pro-ducers as the primary rationale for having anantidumping lawand in the process marginal-izing concern about the impact of predatory pricing or the imposition of duties on U.S. con-sumersthe report was the catalyst that sparkeda dramatic transformation of the antidumpingregime. The welfare of consumers was no longera concern of the antidumping law. As Fingerputs it: the injury to competition standard

[was] replaced by a diversion of business stdard, the sort of diversion that is a normal parof the competitive process.19

Despite the relative ease of obtaining contingent protection under the 1921 Antidumping

Law, U.S. industry was largely shielded fromforeign competition thanks to the high levels otariff protection afforded by the FordneyMcCumber Act of 1922 and the Smoot-Hawley Tariff Act of 1930. Antidumping wouldbegin to emerge as an attractive alternative afte

World War II, as the multilateral endeavor toliberalize world trade gained momentum.

Antidumping in the GATT

The U.S. government requested that language permitting the use of antidumping bincluded in the GATT. In fact, as noted by eco-nomic historian Douglas Irwin, the Anti-dumping Act of 1921 provided the textuabasis for the initial GATT rules on antidump-ing.20 Indeed, the WTO Antidumping Agree-ment in effect today authorizes member stateto impose antidumping duties when administering authorities find that imports determined tobe sold at less than normal value are causing othreatening injury to a domestic industry omaterially retarding the establishment of aindustry.21

The view widely heldor at least the excugivenby U.S. negotiators during the earldecades of GATT was that the existence ofantidumping made greater trade liberalizatiopossible because it assured Congress that certafallback contingencies were available if genetariff cutting exposed domestic interests to tomuch competition. Without antidumping, theargument went, Congress might not have supported general tariff liberalization.22 That a dis-tinctly protectionist policy should be considerean element of trade liberalization was a bit counterintuitive. However, that assertion was madat least partially credible by the fact that the U.Sgovernment exercised considerable restraint its administration of U.S. antidumping policyBetween 1921 and the end of 1967, over 89 percent (631 out of a total of 706) of all U.S

6

Responsibility for enforcing the

antidumping law shifted from the judiciary to the

executive branch.


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antidumping investigations ended with negativedeterminations of injurious dumping.23

The U.S. argument that instruments of con-tingent protection could facilitate trade liberal-ization was tested during the Kennedy Round

of GATT negotiations (19641967), whenAmerican negotiators found themselves in theawkward position of advocating the expansionof GATT rules to other nontariff trade barriers,

while simultaneously resisting the attempts of their counterparts to bring antidumping understricter multilateral discipline. Those advocat-ing stronger disciplines on antidumping pre-

vailed in the Kennedy Round by agreeing toguidelines for injury determinations that weremore rigid (gave less latitude to the administer-ing authorities) than those applied by the U.S.

Tariff Commission, which had taken overresponsibility for injury determinations fromthe Treasury Department in 1954, under U.S.law.24

Congress did not acquiesce to this en-croachment on its jurisdiction, and madeexplicit in the legislation authorizing theKennedy Round agreements that the UnitedStates would be bound only by those provisionsof the antidumping code consistent with exist-ing U.S. law.25 It would not be the last time thatCongress asserted its authority to shield theU.S. antidumping law from reform.

The launch of the Tokyo Round of GATTnegotiations (19731979) provided U.S. law-makers occasion to once again revisitandexpandthe definition of dumping under U.S.law. Until 1974, dumping was defined as thepractice of a firm selling in an export market atprices lower than those it charged in its homemarket. Price discriminationregardless of itscause or intentwas the target of the U.S.antidumping law. There was no requirement,nor were efforts undertaken, to ascertain

whether the price discrimination in questionhad an innocent explanation. Accordingly, in1974 the deck was already stacked in favor of domestic protection-seekers.

Measuring price discrimination usually en-tailed comparing the net prices of the same orsimilar merchandise sold by a given firm in bothmarkets and calculating an average difference, or

averaging net prices of sales of the same or simi-lar merchandise and comparing those averagesbetween markets. Under either approach,though, all home-market sales made in the ordi-nary course of trade factored into the determi-

nation of the average home-market price. Theidea was to make an apples-to-apples compari-son. But at the behest of various domestic pro-ducer interests, who had been trying for sometime to persuade the Treasury Department of thepropriety of more aggressive dumping margincalculation techniques, Congress amended thelaw to include a provision for a cost test in the Trade Reform Act of 1974.26

The purpose of the cost test was to eliminatefrom determination of the average home-market price those home-market sales made at

prices below the full cost of production. Only those sales made at prices above the cost of pro-duction would now factor into the averagehome-market price, and if less than 10 percentof the sales of a given product model weremade at those prices, then all sales of that model would be disregarded and the home-marketcomparison would be based on a constructed value that included approximations for the costof production, selling, general and administra-tive expenses, and an amount for profit. By elim-inating lower priced home-market sales, theeffect of the cost test was to produce higherhome-market average prices or to necessitateuse of constructed values, both of which inflateddumping margins.

The fig leaf of a legal justification offeredfor the change was that sales made at pricesbelow the full cost of production could not beconsidered sales made in the ordinary courseof trade. If the ordinary course of trade is for afirm to be profitable, then sales below the fullcost of production must be anathema to thatobjective, as they detract from profit. Why would a firm sell below cost if its objective is tomake profits?

But basic microeconomic theory holdsandeconomists, cost accountants, and analysts havenotedthat selling at prices below the full costof production is often the profit-maximizingcourse of action for firms, and that selling below the full cost of production is clearly a practice

7

The launch of the Tokyo Rounof GATTnegotiationsprovided U.S.lawmakers occato once againrevisitandexpandthedefinition of dumping under U.S. law.


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that is in the ordinary course of trade. Many firmsparticularly those operating in highfixed-cost industriesdrop their prices below the full costs of production when facing reduceddemand for seasonal or cyclical reasons. As long

as the price charged is high enough to cover thefirms variable costs, any price above variable costcontributes toward coverage of the firms fixedcosts. If the alternative is to stick to a higherprice and sell nothing, then there are no variablecosts to cover, but there is no contribution tofixed costs either. Under those circumstances,the accounting losses would be higher for thefirm.

Consider the production of hot-rolled car-bon steel, which involves the use of iron ore,coke, and other minerals; electricity; water; and

other variable inputsinputs that are consumedin some proportion to output and consumptionof which increases with output. But steel pro-duction also involves high fixed costscoststhat are incurred regardless of the amount of outputon account of the need for expensiveproduction facilities and the high cost of pur-chasing and operating the necessary capitalequipment. Regardless of whether the factory produces one million tons or nothing at all, thetotal fixed costs are the same. All of the fixedcosts have to be incurred in order to produce thefirst ton of steel, which is also the total amountof the fixed cost necessary to produce one mil-lion tons of steel, or more.

If the per-ton total fixed cost is $100 andthe per-ton total variable cost is $100, then ide-ally, the firm would be able to sell at a priceabove $200 and make a profit. But if econom-ic conditions are such that the market will beara price of only $150 per ton, it is still profit-maximizing for this firm to sell at that price,even though it is below the full cost of produc-tion and even though the firm will incur a loss.If the firm does not sell the steel, it incurs a lossof $100 (the fixed cost). If it sells at $150, thefirm incurs a loss of only $50. In this case,profit maximization means loss minimization.Selling below the full cost of production, aslong as the price is above the average variablecost of production, is the rational course of action.

Prior to the 1974 acts mandate of a costest, the Treasury Department addressed theissue of sales below cost in two different casIn both, Treasury acknowledged the fundamental economic principle that selling below

the full cost of production was sometimes thoptimal decision. Treasury also noted that sale were made at prices below the full cost of production in both the U.S. and home markets

which made for a fair comparison.27

Ultimately, domestic industry prevaileupon Congress to adopt a below-cost provisioin the 1974 Act, which mandated that salebelow the full cost of production be disregardein the calculation of average home-market price(but, unsurprisingly, made no such requiremenon the U.S. side of the calculation). In case

where all home-market sales were at pricbelow the cost of production (and, thus, evidence of a protected, sanctuary home market i

which high profits could be used to crossubsidize cheap export sales entirely absent), thforeign firm would be further penalized by baing the dumping calculation on a comparison oits U.S. prices to constructed value, which wto be the sum of the full cost of production pluthe larger of actual or estimated amounts foselling, general, and administrative expenseplus a minimum of 8 percent for profit.

The effect of the cost test on the dumpingcalculation can be profound. To demonstratein Table 1 there are five hypothetical sales of particular type of widget in the U.S. market aprices ranging from $1.00 to $5.00. Likewisthere are five sales of identical products in thhome market also ranging from $1.00 to $5.00Assuming the volumes sold in each transactioare the same (to simplify the process of weighaveraging the prices), the weighted-averageprice in both markets is $3.00 and the dump-ing margin should be zero because there is nprice discrimination at all.

But the cost test introduces another step tothe calculation methodology, which produces different end result. The cost test restricts theeligibility of home-market sales that can factointo the weighted-average price. Specificallonly sales at prices above the full cost of prduction factor into the average. Accordingly

8

Ultimately,domestic industry

prevailed uponCongress to adopt

a below-costprovision in the

Trade Reform Actof 1974.


9/24

the two home-market sales priced below theunit cost of production, which is $2.50 in Table1, are eliminated, causing the average home-market price to rise to $4.00. This change gen-erates a dumping margin of $1, or 33 percent,despite the fact that there are no price differ-ences between the markets.

If the cost of production were $5.50 insteadof $2.50, then all sales in both markets wouldbe at prices below the full cost of production.

The average U.S. price would still be $3.00, butsince all home-market sales would be ineligiblefor calculation of the average home-marketprice, a constructed value would be calculatedto serve as a surrogate for home-market price.

The constructed value would be equal to thecost of production plus allowances for selling,general, and administrative expenses (a mini-mum of 10 percent under the statute after the

1974 Act) plus an allowance for profit (a min-imum of 8 percent under the statute after the1974 Act).

At a minimum, the constructed value in thisexample would be $6.49 ($5.50 for cost; $0.55for expenses; $0.44 for profit) and the dumpingmargin would be $3.49 ($6.49 minus $3.00), or116 percent. That is a pretty substantial marginof dumpingparticularly for a firm that ischarging identical prices in both markets and isby definition not price discriminating.

A 2002 Cato study exposing the method-ological distortions of the U.S. antidumpingregime included a table of counterfactualsresults that would have been obtained in 18real-life antidumping cases, had particularmethodologies been changed or forgone alto-gether. In 17 of 18 cases, the cost test was em-ployed. Had the cost test not been employed in

9

By mandating acost test under U.S. law, Congrensured thatdumping calculations wouno longer bethe product of pure pricecomparisons.

Table 1Cost Test (U.S. Dollar)

Net Home-market Net Home-market Net U.S. Price Price Unit Cost Cost Test Price (used)

1.00 1.00 2.50 Fail --2.00 2.00 2.50 Fail --

3.00 3.00 2.50 Pass 3.00

4.00 4.00 2.50 Pass 4.00

5.00 5.00 2.50 Pass 5.00

Average 3.00 3.00 2.50 4.00

Table 2Cost Test (U.S. Dollar)

Net Home- Net

Net U.S. market Unit Cost Home-market Sellers ConstructedPrice Price Cost Test Price (used) Cost Expense Profit Value

1.00 1.00 5.50 Fail 5.50 0.55 0.44 6.49

2.00 2.00 5.50 Fail 5.50 0.55 0.44 6.49

3.00 3.00 5.50 Fail 5.50 0.55 0.44 6.49

4.00 4.00 5.50 Fail 5.50 0.55 0.44 6.49

5.00 5.00 5.50 Fail 5.50 0.55 0.44 6.49

Average 3.00 3.00 5.50 5.50 0.55 0.44 6.49


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those 17 cases, the average calculated dumpingmargin would have been 59.7 percent lower.28

In 5 of the 18 cases, calculation and use of con-structed value was necessary. Had the build-upof constructed value not included an element

for profit, the margins would have been 11 per-cent lower.29

By mandating a cost test under U.S. law,Congress ensured that dumping calculations would no longer be the product of pure pricecomparisonsa development that furtherdivorced the legal definition of dumping fromits economic meaning. And, as evidencedabove, it served to inflate dumping marginsand antidumping duty rates, and subsequently heightened the appeal of the antidumpingremedy to importing-competing industries.

Regulatory CaptureIn addition to the technical changes to

antidumping calculation methodology, the Trade Reform Act of 1974 also provided busi-ness a formal channel of access to antidumpingand other trade policymaking. The act man-dated the establishment of a private sectoradvisory committee system to ensure the inclu-sion and incorporation of business viewpointsin the negotiation, monitoring, and implemen-tation of GATT agreements and related poli-cies. The private sector consultation system wasdivided into three vertically integrated compo-nents: the Presidents Advisory Committee for Trade Policy and Negotiations; four policy advisory committees; and 22 industry-trade advi-sory committees, jointly administered by theDepartment of Commerce and the Office of the United States Trade Representative.

As the 1974 Act included language authoriz-ing U.S. participation in the Tokyo Round of GATT negotiations, the Trade Agreements Actof 1979 implemented U.S. obligations commit-ted during the Round. And it made severalimportant changes to U.S. antidumping admin-istration, including transfer of jurisdiction fordetermining the existence and magnitude of dumping from the Department of Treasury tothe Department of Commerce. This seemingly

innocuous change was enormously consequential.

While both agencies have been delegatroles in the administration of U.S. economic policy, the prevailing institutional objectives diver

in many respects. Whereas Treasurys mission one of commitment to the broader macroeconomic well-being of the United States, thebenchmarks of success at Commerce have beealigned historically with firm-specific outcome

Whereas Treasury officials would be moinclined to regard import duties resulting ideadweight economic loss as anathema to themission, Commerce officials are expected to promote the narrow interests of domestic producerIndeed, the mission of Import Administrationthe agency within the Department of Com-

merce tasked with antidumping oversight, is tsafeguard American industries and jobs againunfair trade practices.30 Import Administration

works to enforce effectively the U.S. unfair tralaws (i.e., the antidumping and countervailinduty laws) and to develop and implement othepolicies and programs aimed at countering foreign unfair trade practices.31 In that description,one can detect that Import Administration fan-cies itself responsible for writing, adjudicatinand enforcing the antidumping rules, all o

which should comport with a design to protecU.S. industry.

In the words of Ronald Cass, former vicchairman of the U.S. International Trade Com-mission, Commerce Department officials sethemselves as advocates for domestic business.32

And the advisory committee system establisheafter the 1974 Act provided private-sector stakeholders with direct channels of access to staflevel decisionmakers throughout the CommercDepartments international trade bureaucracy.

A 1994 Congressional Budget Office studof GATT and U.S. trade policy included com-mentary on the shift of antidumping jurisdiction from Treasury to Commerce:

The move reflected a Congressionaldesire for more zealous enforcement of the AD/CVD [antidumping/countervailing duties] laws and for less concernabout their being used in a protection-

10

Import Administration

fancies itself responsible

for writing,adjudicating,

and enforcing antidumping rules.


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ist manner. Its significance goes beyondthe difference in the institutional sym-pathies. One of [Commerce]s func-tions is to serve as an advocate for U.S.firms. Thus, the move placed responsi-

bility for deciding AD/CVD cases inthe hands of an advocate of U.S. partiesto cases.33

The methodologies and procedures adopt-ed by the Commerce Department in adminis-tering antidumping have led many observers toquestion the agencys impartiality. Some of theCommerce Departments curious method-ological techniques and their margin-inflatingeffects have been documented in previous Catopublications.

In addition to the cost test and the use of constructed value (discussed earlier), practicessuch as the arms-length test, zeroing, the asym-metric treatment of indirect selling expenses as adeduction from price, and the deduction of prof-it from U.S. prices in so-called constructedexport-price transactions are some of the mostobvious methodological distortions that pro-duce egregiously skewed results.34

The table of counterfactuals from the 2002Cato study cited above demonstrates that those

various methodological distortions significantly impact the bottom-line result. For example, hadzeroing been precluded from the CommerceDepartments calculation methodology in the18 actual cases reviewed, the dumping margins

would have been 43.6 percent lower.35 Had theasymmetric treatment of indirect selling expens-es been disallowed, margins would have been9.1 percent lower.36

Of course, the standard methodological dis-tortions employed as a matter of course in thecalculation of antidumping margins at theCommerce Department do not cover all of thechannels through which agency bias affectsantidumping policy. The Commerce Depart-ment is granted enormous discretion in itsadministration of the law, and often its actionsare deemed by the courts to run afoul of the law.

As presented in a 2005 Cato study about theexercise of discretion at the CommerceDepartment, IA [Import Administration] rou-

tinely exploits gray areas in the law to favor thedomestic interests that seek protectionand,according to the verdicts of U.S. courts, some-times violates the law in the process. In the18-month period ending in June 2005, IA pub-

lished 19 antidumping redeterminations pur-suant to court orders to revise its assumptions orcalculations to become compliant with the law.In 14 of those redeterminations, the revisedantidumping rates were lower than those origi-nally calculated.37

According to interviews with former con-gressional and Commerce Department staff conducted by the Office of the InspectorGeneral:

This bias is illustrated by the actions of

career Commerce Department officialsthrough whom must pass all Depart-ment of Commerce [antidumping]determinations in steel cases. Themembers and staff of the congressionalSteel Caucus meet with them regularly to discuss ongoing antidumping andcountervailing duty proceedings pend-ing before the Department of Com-merce. At some of these meetings,these officials have shared advance draftinvestigation results with the congres-sional Steel Caucus well before they

were announced in final form, allowingthe Steel Caucus to comment onthem. Time and again high level offi-cials within the agency have exertedpressure on lower level Department of Commerce staff conducting investiga-tions of foreign steel producers to reruncalculations and alter methodologies,resulting in increased AD/CVD tar-iffs.38

Commerce investigators endeavor to sub-stantiate allegations of dumping and measure itsextent through lengthy, English-language ques-tionnaires consisting of five sections and sevenappendices, which are mailed to selected foreigncompanies and their embassies in Washington. These voluminous questionnaires seek fulldescriptions of virtually every aspect of the com-

11

The CommerceDepartment isgranted enormodiscretion in itsadministration othe law, and ofteits actions aredeemed by thecourts to run afo

of the law.


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panies immediate and related business activities,supplemented with databases containing recordsof the costs of producing and selling all subjectmerchandise in the United States, the homemarket, and various third-country markets. Theprocess almost always requires that the foreignrespondents enlist the services of law and eco-nomics firms with expertise in the laws admin-istration. Agency guidelines stipulate that for-eign firms under investigation must respond within 37 days (and that Section A of the ques-tionnaire is due within 21 days).39 If responses tothe questionnaire are late, incomplete, or other- wise deemed unsatisfactory, Commerce investi-gators are authorized by Congress to utilize thebest information available in determining whether dumping has taken place. Since thebest information available to the CommerceDepartment is often culled from the allegationsput forth by domestic competitors in their peti-tions for antidumping measures, this procedureis often punitive and unfair. In an opinionaddressed to the Court of International Trade(the appellate court for U.S. antidumping cases),

Judge R. Kenton Musgrave labeled the practica predatory gotcha policy.40

The data do little to dispel perceptions obias. Between 1980 (when Commerce tooover the administration of antidumping from

Treasury) and the end of 2009, a total of 1,09antidumping cases were initiated in the UniteStates.41 Antidumping orders were imposed in590 of those cases.42 Figure 1 (above) accountfor the dispositions of those 1,091 cases.

What stands out is that in only 46 of those1,091 cases did the Commerce Departmenrender a negative finding of dumping at the preliminary or final stage of the investigation. Iother words, petitioners have had a 96 percensuccess rate at the Commerce Department sincthat agency took over antidumping administration from Treasury. What prevented more ofthose initiations from resulting in antidumpinorders was the International Trade Commis-sion, which issued negative injury determinations in 359 cases.

By contrast, during its oversight of thdumping determination, the Treasury Depart-

12

Petitioners havehad a 96 percent

success rate at theCommerce

Department sincethat agency took

over antidumping administrationfrom Treasury.

Figure 1Disposition of 1,091 Antidumping Initiations, 19802009


13/24

ment was far less likely to render affirmativefindings. Between 1934 and 1954, a total of 146U.S. antidumping cases were initiated and

Treasury rendered negative dumping findings inat least 90 of those 146.43

The Commerce Departments standing asan impartial arbiter is further undermined by a well-documented tendency to calculate exces-sive dumping margins. Foreign producers areroutinely found to be selling at prices so farbelow fair value as to raise serious doubt aboutthe accuracy and fairness of the Departmentsmethodology. As noted by Bruce Blonigen and

Thomas Prusa, the Commerce Department

not only finds dumping, they almostalways find unbelievably large dumping

margins. Any argument that [anti-dumping] law is designed to ensure fairtrade looks ridiculous when confronted with [the Commerce Departments]margins. According to the statute, thedumping duties are designed to makethe dumped imports fairly tradedimports. Yet, the average dumping mar-gin over the past decade is about 60 per-cent.44

Even under the most extreme market condi-tions (i.e., perfect monopoly in the exportingcountry, perfect competition in the U.S. domes-tic market), price undercutting of 60 percent

would be overkill for all but the most aggressiveof predators. But that is often the outcome of aprocess in which dozens of decisions are madeby bureaucrats exercising judgment and discre-tion that may be influenced by the underlyingagency mission.

As noted in a 2005 Cato study:

When IA [Import Administration]publishes its final determinations, itoften includes a list of the issues raisedby the parties concerning methodolo-gies employed, calculations made, anddecisions rendered, along with a sum-mary of each partys arguments and anexplanation for its ultimate judgmenton each decision. In the 18-month

period ending in June 2005, IA issued38 final determinations in originalantidumping investigations, findingdumping in 36 of those 38 determina-tions. In 11 of those final determina-

tions, there were 5 or fewer issues raisedby the parties; in 13 of those determi-nations, there were 10 to 20 issuesraised; and in 14 of those cases there

were 21 or more issues that IA wasrequired to adjudicate. A total of 650issuesan average of more than 17 percasewere presented and requiredadjudication by IA in those 38 finaldeterminations. Thus, dumping calcu-lation involves more than simply plug-ging objective numbers into a comput-

er program. In many cases, IAs judg-ment calls determine the numbersthemselves.45

Relaxing Material InjuryStandards

With an affirmative finding of sales at lessthan fair value by the Commerce Departmentall but assured after 1980, the last best hope forforeign firms (and U.S. importers) facing thespecter of antidumping restrictions was to pre- vail on the injury side of the investigation. If there was no reasonable indication that thedomestic industry was materially injured orthreatened with material injury, or that theestablishment of an industry was materially retarded by reason of less than fair valueimports, then an antidumping order could notbe imposed, regardless of what the CommerceDepartment decided with respect to its dump-ing determination.

During its 25-year oversight of the injury determination function (from 1954 through1979), the Tariff Commission rarely foundmaterial injury to have been caused by dumping.Out of 641 antidumping case initiations duringthis period, the Tariff Commission renderedaffirmative injury findings in 97 cases15 per-cent of the time.46 Of those 97 affirmative find-ings, though, 73 occurred after 1970, a year in

13

The CommerceDepartmentsstanding as animpartial arbiter

is further undermined by well-documentetendency tocalculate excessdumping margin


14/24

which the Tariff Commission rendered a prece-dent decision to consider imports from morethan one countryinstead of imports from asingle country, as had been previous practice when determining whether less than fair value

imports caused or threatened material injury. That decision seems to have sparked anincrease in the number of subsequent anti-dumping filings, as well as the number of affir-mative rulings, because domestic industry peti-tioners learned quickly that if exporters of thesame or similar products from multiple coun-tries were simultaneously the subject of anti-dumping investigations, the chances of obtain-ing an affirmative injury finding were improved. Through the analytical practice now known ascumulation, if multiple countries are subject to

an antidumping investigation of the same subject merchandise, and if exports from any one of those countries, or all in combination, are foundto be a cause of material injury, then all must beconsidered injurious and subject to an anti-dumping order.

Though the practice of cumulation had beendiscretionary in the years after the 1970 Tariff Commission decision, the Trade and Tariff Actof 1984 codified the practice as a requirement of the ITCs injury analysis. It became a matter of law that imports from countries that alone couldnot be demonstrated to be a cause of materialinjury could be subjected to antidumping duties.

This analytical approach would seem to fly inthe face of any legitimate rationale for applyingantidumping measures. Dumping is a firm- andcountry-specific phenomenon. The artificial,unfair advantages that antidumping measuresare presumed to offset are supposed to be mar-ket-specific and the product of particular foreigngovernment policies. If exports from a particularcountry are found to have no competitiveadvantage in the U.S. market, then there are noadvantages to offset with antidumping duties.

But after 1984, the rules changed in a way that created incentives for bringing more casesagainst more countries. Countries from whichimports of subject merchandise accounted forless than 3 percent of total imports of subjectmerchandise were considered negligible andimmune from antidumping duties unless all of

the countries that fell under the 3 percenthreshold cumulatively accounted for mothan 7 percent of total imports of subject merchandise.

As was to be expected, the number o

antidumping initiations increased dramaticallyas the number of targeted products held steadysuggesting that petitioners were aware of thbenefits of the cumulation requirements. Thclarifications of the 1984 Act moved antdumping administration even further away fromits theoretical underpinnings and signaled tU.S. industry and its trade lawyers that the ruleof the game had once again changed in theifavor.

Antidumping was born nearly a century earlier as a mechanism to preserve and defen

competitive markets and ultimately to protecconsumers. The 1984 Act completely transformed antidumping into a tool to supprescompetition in the name of protecting domestiproducers from injury regardless of whether foeign producers benefited from any unfair advantages in their home markets.

Identifying the Determinantsof Antidumping Use

As the foregoing history suggests, U.Santidumping policy evolved in such a way as become more accessible and more rewarding U.S. import-competing industries. That the

volume of antidumping filings and the frequency of affirmative rulings underwent a drmatic and sustained increase in the 1980s suggests that domestic industry was responsive tthose changes.

The definition of dumping had beeexpanded, domestic industry had been invited tplay a greater role in antidumping policy formulation and oversight (through the advisory committee system), and the U.S. government agencmost closely aligned with domestic producinterests was made responsible for investigatindumping allegations. With the legislativchanges of 1984, U.S. firms seeking protectio

were given strong incentives to file even moantidumping petitions to increase their odds o

14

U.S. antidumping policy evolved insuch a way as to

become moreaccessible and more

rewarding to U.S.import-competing

industries.


15/24

obtaining affirmative injury findings at the ITC.Figure 2 shows upticks in usage in years fol-

lowing changes to the law, which would seemto confirm those characterizations. But thereare probably other reasons for the increase inantidumping use over time. For example, it isreasonable to assume that the demand forantidumping protection would be inversely related to the level of general tariff protectionafforded. In other words, firms in import-competing industries might be more inclinedto seek antidumping protection in response toreductions in general tariffs.

Indeed, with the exception of a trend reversalin the 1920s and 1930s, declining tariff rateshave been evident throughout the history of theantidumping law. The average tariff from 1890to 1894 was 48.4 percent; from 1894 to 1897, it

was 41.3 percent; and when Americas firstantidumping law entered into force in 1916, theaverage tariff had fallen to 30.7 percent.47 TheFordneyMcCumber Law of 1922 and Smoot-Hawley Tariff Act of 1930 reversed that down-

ward trend, pushing the average up to as high as

59.1 percent in 1932. On the eve of U.S. entry into GATT in 1947 the average tariff stood at20.1 percent and has fallen substantially in the years since. The average collected rate in 1974 when the cost test was introduced into theantidumping regimewas 7.8 percent. Whenantidumping oversight was shifted from Treasury to Commerce in 1980, the average tar-iff on dutiable imports was 5.6 percent. The ratehad fallen to 5.5 percent in 1984, when cumula-tion was made a statutory requirement. And itstood at 4 percent in 2008.48

The figure reveals an upward trend in theoverall number of U.S. antidumping initia-tions. Given the administrative changes thattook place between 1974, 1980, and 1984, it isnot surprising that the number of initiationsincreased substantially during that period, orthat the number of affirmative injury findingsincreased. Another interesting feature of thedata is that the number of products subject toantidumping investigations has, to a far greaterdegree than either the overall number of initi-ations or the number of affirmative findings,

15

Figure 2Number of U.S. Antidumping Initiations, 19472009

C a s e

I n i t i a t i o n s p e r

Y e a r


16/24

remained fairly consistent over time. That issuggestive of an increasing propensity of par-ticular subsets of U.S. producers to bring morecases. In fact, more than half of all currently outstanding U.S. antidumping and countervailing duty orders (156 of 303) are against

imported chemicals and steel products.49

Theconcentration of protection in these few indus-tries is likely a product of the ITC cumulationrules giving incentive to petitioners to namemore target countries, as well as evidence thatthese industries have learned the ropes of antidumping administration and are no longerdeterred by uncertainty about the process.

In 2004 Douglas Irwin published an analysisof the various determinants of increased anti-dumping use. Using data gathered from U.S.government sources, Irwin conducted a series of

regression analyses seeking to disentangle andmeasure the impact of independent variables,including GDP growth rate, the unemploymentrate, the exchange rate, tariff rate changes, andlegal and administrative changes to the anti-dumping law on the number of antidumpingcases filed per year between 1947 and 2002the dependent variable.50

Irwins analysis found that unemploymenand exchange-rate appreciations were signifcant and positively related to the number oantidumping case filings. That would seem tmake sense, since material injury is more easidemonstrated when workers are let go and whe

there is evidence of sales lost to imports (whichas been historically more likely when the U.dollar is appreciating). Irwin found the averagrate of tariff protection to be significant annegatively related to the number of filings (i.efalling Most Favored Nation tariffs lead tincreased petitions), which is intuitive consideing that import competition tends to increase insectors where protection has been reduced. AndIrwin found the legal and administrativchanges to have had a significant positive impaon dumping filings after 1984a trend likel

attributable to mandatory cumulation, but alssuggestive of a lagged impact of the CommercDepartments takeover of dumping investigations.51

Irwins analysis considered antidumping intiations through 2002. Since then, the predom-inant targets of U.S. antidumping activity havbeen exporters in China. Nearly 39 percent of a

16

Since 2002 thepredominant

targets of U.S.antidumping

activity have beenexporters in China.

Figure 3U.S. Antidumping Initiations against China (% of Total AD Initiations), 20002009


17/24

antidumping initiations since 2003 have target-ed China, and that rate has been increasing onan annual basis, as Figure 3 indicates.52

Certainly, imports from China increasedsubstantially between 2003 and 2009which

might explain some of the increase, as Irwinfound the average rate of tariff protection to beinversely related to the number of petitions.

But are Chinese exporters more likely tobenefit from unfair competitive advantages athome than exporters in other countries, or couldit be that the increase in the number of casesagainst China is driven by the fact that the spe-cial nonmarket economy (NME) methodology reserved for China and just a few other countriesis fertile ground for the exercise of discretion andthe escalation of dumping margins?53 Nonmar-

ket economy methodology is probably animportant determinant of the rising number of antidumping initiations against Chinese ex-porters because affirmative and high dumpingmargins are more likely to be calculated underthis approach.54

Likewise, the change in practice, announced

by the Commerce Department in 2007, to startapplying the countervailing duty law to Chineseexporters is also a likely factor in the rise in casesagainst China over the past couple of years.Since material injury (or the threat of material

injury) is a necessary condition of both anti-dumping and countervailing duties, there is lit-tle to lose and a lot to gain for U.S. industries by filing both kinds of petitions simultaneously. The added incentive for doing so in Chinesecases (as opposed to cases where the traditionalmarket economy methodology is employed) isthat the combined duties can be especially puni-tive. Under NME methodology, home-marketprices are disregarded entirely and normal value is determined by estimating all of theinputs necessary to produce the good (labor,

material, energy, overhead, etc.) and then assign-ing an estimated value to those inputs based ontheir prices in another, similarly sized, similarly developed economyusually India, in Chinesecases. The dumping margin is then calculated asthe average difference between the surrogatescreated and the U.S. prices.

17

The applicationthe countervailiduty law to Chinexporters is also

likely factor in trise in cases agaChina over the pcouple of years.

Figure 4U.S. Antidumping and Countervailing Duty Initiations against China, 20002009


18/24

As woefully inaccurate as the surrogate may be at approximating the Chinese home-marketprice, it is in fact a subsidy-free price. The costbuild-up is based on market-oriented prices,and any subsidized prices or factors are elimi-

nated from consideration. In other words, if one accepts the NME methodology as valid,then the margin calculated is sufficient to rem-edy the dumping margin and the subsidy mar-gin. The difference between the two capturesthe full distortion. Nevertheless, the Com-merce Department still separately calculatesthe benefit of the alleged subsidy and applies aseparate countervailing duty on top of the anti-dumping duty, resulting in a double countingof the subsidy, thereby creating an extra incen-tive for domestic industry to file an antidump-

ing petition to supplement its countervailingduty petition.As Figure 4 demonstrates, there has been an

increase in antidumping initiations against Chinasince the Commerce Department changed itscountervailing duty policy in 2007. Indeed, for 22of the 23 countervailing duty cases initiatedagainst China between 2007 and 2009, a com-panion antidumping case was initiated simulta-neously.

Congresss Turf Irwins statistical findings confirm what is

apparent to the naked eye from Figure 1 andFigure 2: legal and administrative changes af-fecting the antidumping law have been signifi-cant determinants of subsequent antidumpinguse. That finding is important for several rea-sons.

First, it provides a powerful rejoinder toassertions that the antidumping law needs to bemade more accessible and trade restrictive so asto close loopholes in the battle against unfairtrade. When the laws ease of use and its effec-tiveness at producing protection are more signif-icant determinants of antidumping use than any other factor, it is reasonable to conclude that thelaw need not be made more user friendly.Second, Congress should seriously considerreform of the antidumping law to rein in the

abuse that its permissive rules and Commercefox-guarding-the-henhouse oversight have engendered. No longer can the global economy bcharacterized as a competition between ouproducers and their producers. Numerous U.S

interestsretailers, manufacturers, consumerlogistics providers, financial service provideand moreare adversely affected when antdumping measures are imposed. Yet, under thlaw, the costs imposed on these groups are noeven permitted to be considered by the administering authorities when rendering decisionabout the propriety of antidumping measures.

So far Congress has been loath to acknowledge this reality. Instead, Congress considerany presentation of the economywide costs oantidumping, any discussion of antidumpin

reform, or any indictment of U.S. antidumpingpractices from the WTO or other trade disputesettlement bodies to be an affront to its author-ity and an encroachment on its jurisdiction.

Efforts in 2002 by thenU.S. trade representative Robert Zoellick to get antidumping ruleon the agenda of the Doha Round of multilat-eral trade negotiations (an absolute condition ogetting the Round launched) were made notoriously difficult by a Congress that insisted olanguage that committed the USTR to not

weaken the antidumping law. When Zoellicreturned from the meeting that ultimately pro-duced the Doha Declaration, he was summoneto Congress to explain why he had agreed tinclude negotiations on antidumping on theagenda, even though the language did not commit anybody to any reform.

In the debate over fast-track trade negotiat-ing authority in 2002, Congress strongly considered unbundling negotiations over antidumpinfrom that authority, as proposed in the so-calledDayton-Craig Amendment. That rule wouldhave given the president the authority to bringback trade agreements for an up- or down-vot

without amendments, but with the exceptiothat those same fast-track rules would not applto any changes to antidumping rules, whic

would require the full congressional treatmentAnd to this day, there is continued resis

tance in Congress to implementing the find-ings of the WTO dispute settlement body ove

18

It is reasonable toconclude that the

law need not bemade more

user friendly.


19/24

the issue of zeroingthe controversial methodfor calculating antidumping duties.55

One cannot help but acquire the impressionthat Congress and the Department of Com-merce are unwilling to relinquish what they con-

sider a back channel for special favors to con-stituent interests that may find themselves inneed of assistance.

Emboldened by this institutional resistanceto curbing antidumping abuse, import-compet-ing interests have taken the initiative to push forsome new reforms of their own. However, thosereforms would make antidumping measureseasier to obtain and more difficult for foreignexporters and their U.S. customers to escape.

Based on a solicitation of comments fromthe public, the Commerce Department

recently announced its intention to strengthenthe enforcement of U.S. trade remedies laws.56

Among the various reforms under considerationis one that would make it impossible for indi-

vidual companies to get themselves out fromunder a dumping order even when they demon-strate that they are not dumping. Currently,individual companies from a foreign country canbe excused from an antidumping order by demonstrating that they are not dumping for acertain period of time (usually three consecutive

years). The new proposal would eliminate thatchannel and force all exporters from a givencountry to remain subject to the antidumpingorder for as long as it exists.

Another facially innocuous proposal thatexperts see as a cunning effort to makeantidumping regulations even more restrictive

would change the process by which theCommerce Department selects foreign respon-dents in antidumping investigations andreviews. Usually, Commerce chooses to investi-gate or review the producers accounting for thelargest volume of exports to the United States.But the proposal on the table would requireCommerce to use random sampling in selectingthe respondents, which would increase theresource burdens on smaller firms that might beunable to afford the legal and economic repre-sentation that antidumping proceedings entail.Accordingly, Commerce would likely see lesscompliance with the arduous requirements of

the proceedings and would likely find itself resorting to Facts Available findings withgreater frequently. Facts Available findings, which usually substitute figures alleged in thedomestic industrys petition for the exporters

actual data, almost always produce higherdumping margins for the company in ques-tionand for all the other companies that werenot individually investigatedbecause theirexports are subject to the average duty calculat-ed for all investigated companies.

Economists Michael Moore of George Washington University and Thomas Prusa of Rutgers University summarized the problem with this recent example:

Suppose three large firms account for

90 percent of the subject imports while20 others account for the remaining10 percent. Under current rules theDepartment of Commerce samples thebig three firms. Under the proposedrules, it can instead sample the pricingby firms with, say, 1 percent of theimports. What is the logic of focusingon such small firms? The reason is thatsmall firms may not have the resourcesto spend the $2 million (or more)required to participate in a proceeding.Failure to respond to all questionsallows the Department of Commerceto use facts available (i.e., domesticfirms allegations) when computingmargins. Blonigen (2006) finds thatusing facts available increases theaverage computed margin by 30 per-centage points.57

If these kinds of changes are implemented,there should be little doubt of the impact onthe number of case initiations. As has beendemonstrated, episodes of relaxation of stan-dards and rules over the years have been fol-lowed by increased usage. And with any causallink between a foreign firms prices in theUnited States and anti-competitive practices inthe home market entirely severed by the pro-gressive lowering of evidentiary standards andthe expansion of the definition of dumping,

19

Episodes of relaxation of standards and ruover the years hbeen followed bincreased usage the antidumpinglaw.


20/24

antidumping measures will be even more dis-ruptive of trade and progress, benefiting only aselect few politicians and well-connected firms.

ConclusionU.S. antidumping law no longer seeks to

advance the pro-competition objectives of itsoriginal charter. What began as an outgrowth of antitrust intended to discipline predatory pric-ingand, therefore, to safeguard competition was gradually transformed into a mishmash of rules and discretion that enables inefficient,uncompetitive behavior on the part of domesticfirms at great cost to other domestic entities.

Antidumping has done little, if anything, to

focus the spotlight on the alleged sources of unfairness that presumably give rise to cross-border price discrimination. By systemically disregarding that kind of inquiry, antidump-ings overseers have blurred any distinctionsbetween possibly objectionable price discrimi-nation and the kind that is the product of profit-maximizing decisionmaking. Further-more, market access barriers and transportationcosts have fallen precipitously since the estab-lishment of antidumping policy, removing theimpediments to arbitrage necessary for cross-border price discrimination to occur withoutundermining the market power of the foreignproducer.

Although the real-world economic rationalefor the antidumping status quo is virtually extinct, political support for this favor-dolingmachine remains strong and bipartisan. Thatantidumping did a lousy job living up to itsrhetoric did not stop policymakers from ex-panding the definition of dumping and loweringthe evidentiary requirements necessary forindustry to obtain antidumping protection. Thenumerous legal and administrative changes,such as enabling the attribution of materialinjury to competitors in multiple countries, anddisregarding home-market sales at prices below the full cost of production, further underminedthe rationale for antidumping and blurred itsdistinction from run-of-the-mill, everyday pro-tectionism.

This paper has presented a historicaccount of the events punctuating antidumpings metamorphosis and provided some numbers explaining the increasing resort to antidumping. The data seem to support the

hypothesis that increasing demand for antidumping protection corresponds not withincreased dumping, as defined by economistbut rather with the increased flexibility oantidumping, as defined by politicians. Anongoing efforts to make antidumping evemore flexible are likely to induce more abuseat great expense to the U.S. and global economies.

NotesThe author owes a debt of gratitude to Todd Fox,whose excellent December 2009 graduate paper,Changing the Definition of Fair: The EconomicHistory of Antidumping in the United States,submitted to Johns Hopkins School of AdvancedInternational Studies, was the inspiration for thispaper and, indeed, the model for its structure.

1. Basic Concepts and Principles of the TradeRemedy Rules, communication from the UnitedStates to the WTO Negotiating Group on Rules,TN/RL/W/27, October 22, 2002.

2. The antidumping statute is codified at 19U.S.C. 16731677n. The DOCs antidumpingregulations may be found at 19 C.F.R. 351.

3. In cases involving so-called nonmarket econo-mies, the DOC calculates constructed value, notwith the foreign producers own cost data, but withdata from surrogate market economies. For a comprehensive treatment of nonmarket economy methodology, see Daniel J. Ikenson, NonmarketNonsense: U.S. Antidumping Policy towardChina, Cato Trade Briefing Paper no. 22, March 7,2005.

4. The antidumping regimes failure to discernthe causes of price discrimination represents a fatal blow to its legitimacy. But beyond that, themethodologies employed to determine and calcu-late the extent of price discrimination (i.e.,dumping margins) are egregiously tilted infavor of finding larger margins. For a comprehen-sive critique of those methodologies, see BrinkLindsey and Dan Ikenson, Antidumping 101:The Devilish Details of Unfair Trade Law, CatoTrade Policy Analysis no. 20, November 21, 2002.

5. Michael P. Galloway, Bruce A. Blonigen, and

20

Although the real- world economicrationale for the

antidumping status

quo is virtually extinct, political support for this

favor-doling machine remains

strong andbipartisan.


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Joseph E. Flynn, Welfare Costs of the U.S. Anti-dumping and Countervailing Duty Laws, Journal of International Economics49 (1999): 236.

6. Douglas Irwin, The Rise of U.S. Antidumping Actions in Historical Perspective, NBER Work-ing Paper 10582, June 2004, p. 4.

7. Ian Wooton and Maurizio Zanardi, Trade andCompetition Policy: Anti-Dumping Versus Anti-Trust, Department of Economics, University of Glasgow, Working Papers 2002_6, October 2002,p. 2.

8. Irwin, p. 3.

9. J. Michael Finger, Antidumping: How It Works andWho Gets Hurt (Ann Arbor: University of MichiganPress, 1993), p. 21.

10. Ibid., p. 21.

11. Ibid., p. 14.

12. Ironically, U.S. Steel would emerge in subse-quent decades as one of the prime users of anti-dumping.

13. Finger, p. 16.

14. Ibid., p. 19.

15. Irwin, p. 4.

16. Joshua Bernhardt, quoting the United StatesTariff Commission Report of 1919, in The Tariff Commission, Its History, Activities and Organization(New York: D. Appleton and Company, 1922), p.

35, http://books.google.com/books?id=M-9AAA AAIAAJ&printsec=frontcover&dq=Joshua+Bernhardt+The+Tariff+Commission,+Its+History,+Acti vities+and+Organization+1922&source=bl&ots=_XIb-PzaK0&sig=1d6792tLq4y4_46gLCSx81KLWGY&hl=en&ei=ZQn9TJP8L8H7lweNpLyMBQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBgQ6AEwAA#v=onepage&q&f=false.

17. Congressional Budget Office, The Evolution of U.S. Laws: An Economic Perspective, 1994, p. 21.

18. Finger, p. 21.

19. Ibid., p. 22.

20. Irwin, p. 6.

21. World Trade Organization, Article VI, GATT1994.

22. Finger, p. 26.

23. Ibid.

24. Per the Final Act of the 19641967 Trade Con-

ference Section B, Article 3: In order to establishwhether dumped imports have caused injury, allother factors which, individually or in combina-tion, may be adversely affecting the industry shallbe examined, for example: the volume and pricesof undumped imports of the product in question,competition between the domestic producers

themselves, contraction in demand due to substi-tution of other products or to changes in con-sumer tastes.

25. Irwin, p. 7.

26. For a more detailed accounting of domesticindustrys lobbying of Congress on this issue, seeWilliam H. Barringer and Kenneth J. Pierce, Paying the Price for Big Steel (Washington: AmericanInstitute for International Steel, 2000), p. 75.

27. Barringer and Pierce, 75n93.

28. Brink Lindsey and Dan Ikenson, Antidumping

101: The Devilish Details of Unfair Trade Law,Cato Trade Policy Analysis no. 20, November 21,2002, p. 14.

29. Ibid.

30. Import Administration website, http://trade.gov/ia/.

31. Ibid.

32. Michael Anthony Lawrence, Bias in the Inter-national Trade Administration: The Need forImpartial Decisionmakers in United States Anti-dumping Proceedings, Case Western Reserve Journal of International Law, Winter 1994, p. 3.

33. Congressional Budget Office, How the GATT Affects U.S. Antidumping and Countervailing-Duty Policy, September 1994.

34. For a detailed discussion of several of thesemethodological distortions and their impact, seeDaniel J. Ikenson, Abuse of Discretion: Time toFix the Administration of the U.S. AntidumpingLaw, Cato Trade Policy Analysis no. 31, October 6,2005; and Brink Lindsey and Dan Ikenson,Antidumping 101: The Devilish Details of UnfairTrade Law, Cato Trade Policy Analysis no. 20,November 21, 2002.

35. Lindsey and Ikenson, p. 14.

36. Ibid.

37. Daniel J. Ikenson, Abuse of Discretion: Timeto Fix the Administration of the U.S. Antidump-ing Law, Trade Policy Analysis no. 31, October 6,2005, p. 1.

38. Barringer and Pierce, p. 81.

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39. U.S. Department of Commerce, Office of AD/CVD Enforcement.

40. Lawrence, p. 3.

41. Compiled from databases available on theImport Administration website at http://ia.ita.

doc.gov/stats/iastats1.html.42. The 599 antidumping measures include 25suspension agreements that are effectively settle-ments involving the agreement of the foreignexporters to sell above a certain price in theUnited States.

43. Cited in Irwin at p. 24, U.S. House of Represen-tatives, Committee on Ways and Means, Hearingson Amendments to the Antidumping Act of 1921,as Amended, 85th Congress, 1st Sess., 1957, p. 15.At least 90, and probably more, negative determi-nations were rendered because the data included inthe cited report aggregate de minimis findings of

dumping with complaints withdrawn and otherreasons for non-affirmative findings. But de min-imis findings are akin to negative finding of dump-ing and should have been counted as negatives.

44. Bruce A. Blonigen and Thomas A. Prusa, Anti-dumping, in E. K. Choi and J. Harrigan, Handbookof International Trade(Oxford, UK and Cambridge,MA: Blackwell Publishers, 2003), p. 267.

45. Ikenson, October 2005, p. 3.

46. Tallied from Irwin, Appendix, p. 22.

47. Calculated as the ratio of duties collected overthe value of imports for consumption.

48. United States International Trade Commis-sion, Value of U.S. Imports for Consumption, DutiesCollected, and Ratio of Duties to Values 18912008,ITC Statistical Services Division, April 2009.

49. Compiled from AD/CVD statistics availableon the website of the U.S. International TradeCommission, http://info.usitc.gov/oinv/sunset.nsf/0a915ada53e192cd8525661a0073de7d/96da

f5a6c0c5290985256a0a004dee7d/$FILE/orders%20August%2012%202010.xls.

50. The legal and administrative changes testedwere those made pursuant to the Trade Reform Actof 1974 (the inclusion of the cost test), the 1980shift of oversight from Treasury to Commerce, and

the codification of cumulation pursuant to theTrade Agreements Act of 1984. Irwin used dummy variables corresponding to the first full years of thenew policies: 1975, 1980, and 1985, respectively.

51. Irwin, p. 25.

52. Compiled from AD/CVD statistics available onthe website of the U.S. International Trade Com-mission, http://info.usitc.gov/oinv/sunset.nsf/0a915ada53e192cd8525661a0073de7d/96daf5a6c0c5290985256a0a004dee7d/$FILE/orders%20August%2012%202010.xls.

53. For a detailed discussion of non-market econo-my methodology, see Daniel J. Ikenson, Nonmar-ket Nonsense: U.S. Antidumping Policy towardChina, Cato Trade Briefing Paper no. 22, March 7,2005.

54. Ibid., p. 6.

55. For a detailed discussion of this issue, seeDaniel J. Ikenson, Zeroing In: AntidumpingsFlawed Methodology under Fire, Cato Free TradeBulletin no. 11, April 27, 2004.

56. U.S. Department of Commerce, Press Re-lease, August 26, 2010, Obama AdministrationStrengthens Enforcement of U.S. Trade Laws inSupport of Presidents National Export Initia-tive, http://www.commerce.gov/news/press-releases/2010/08/26/obama-administration-strengthens-enforcement-us-trade-laws-support-pr.

57. Michael Moore and Thomas Prusa, StraightOut of Mad Mend: US Markets Import Protectionas Export Prompotion, Vox Commentary, No- vember 8, 2010, http://www.voxeu.org/index.php?q=node/5751.

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Trade Policy Analysis Papers from the Cato Institute

The U.S. Generalized System of Preferences: Helping the Poor, But at What Price? by Sallie James (no. 43; November 16,2010)

Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete by Daniel Ikenson (no. 42; December2, 2009)

A Harsh Climate for Trade: How Climate Change Proposals Threaten Global Commerce by Sallie James (no. 41;September 9, 2009)

Restriction or Legalization? Measuring the Economic Benefits of Immigration Reform by Peter B. Dixon and Maureen TRimmer (no. 40; August 13, 2009)

Audaciously Hopeful: How President Obama Can Help Restore the Pro-Trade Consensus by Daniel Ikenson and ScottLincicome (no. 39; April 28, 2009)

A Service to the Economy: Removing Barriers to Invisible Trade by Sallie James (no. 38; February 4, 2009)

While Doha Sleeps: Securing Economic Growth through Trade Facilitation by Daniel Ikenson (no. 37; June 17, 2008)

Trading Up: How Expanding Trade Has Delivered Better Jobs and Higher Living Standards for American Workers by Daniel Griswold (no. 36; October 25, 2007)

Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade by Daniel Ikenson (no. 35; August 28,2007)

Freeing the Farm: A Farm Bill for All Americans by Sallie James and Daniel Griswold (no. 34; April 16, 2007)

Leading the Way: How U.S. Trade Policy Can Overcome Dohas Failings by Daniel Ikenson (no. 33; June 19, 2006)

Boxed In: Conflicts between U.S. Farm Policies and WTO Obligations by Daniel A. Sumner (no. 32; December 5, 2005)

Abuse of Discretion: Time to Fix the Administration of the U.S. Antidumping Law by Daniel Ikenson (no. 31; October 62005)

Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers by Daniel Griswold, StephenSlivinski, and Christopher Preble (no. 30; September 14, 2005)

Backfire at the Border: Why Enforcement without Legalization Cannot Stop Illegal Immigration by Douglas S. Massey (no. 29; June 13, 2005)

Free Trade, Free Markets: Rating the 108th Congress by Daniel Griswold (no. 28; March 16, 2005)

Protection without Protectionism: Reconciling Trade and Homeland Security by Aaron Lukas (no. 27; April 8, 2004)

Trading Tyranny for Freedom: How Open Markets Till the Soil for Democracy by Daniel T. Griswold (no. 26; January 6,2004)

Threadbare Excuses: The Textile Industrys Campaign to Preserve Import Restraints by Dan Ikenson (no. 25; October 15, 2003


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Board of Advisers

James BacchusGreenberg Traurig LLP

Jagdish BhagwatiColumbia University

Donald J. Boudreaux George Mason University

Douglas A. IrwinDartmouth College

Jos Piera International Center forPension Reform

Russell RobertsGeorge Mason University

Razeen Sally London School of Economics

George P. Shultz Hoover Institution

Clayton Yeutter

Former U.S. TradeRepresentative

T he mission of the Cato Institutes Center for Trade Policy Studies is to increase publiunderstanding of the benefits of free trade and the costs of protectionism. The centepublishes briefing papers, policy analyses, and books and hosts frequent policy forums aconferences on the full range of trade policy issues.

Scholars at the Cato trade policy center recognize that open markets mean wider choiceand lower prices for businesses and consumers, as well as more vigorous competition thencourages greater productivity and innovation. Those benefits are available to any counthat adopts free-trade policies; they are not contingent upon fair trade or a level playifield in other countries. Moreover, the case for free trade goes beyond economic efficien The freedom to trade is a basic human liberty, and its exercise across political borders unitpeople in peaceful cooperation and mutua

protection made to order: domestic industry's capture and reconfiguration of u.s. antidumping...

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